It’s time for another round of discussing whether star athletes are overpaid or not. This article aims to bring some economic theory into the conversation and shed light on this well-debated topic. Your stance on the matter will reveal more about your own values and beliefs than it will about the athletes themselves.
While the debate about athletes’ salaries is never-ending, it’s particularly timely at the moment. Recent contracts, worth hundreds of millions of dollars, given to sports figures like Kylian Mbappé, Tiger Woods, Jaylen Brown, and Justin Herbert have sparked controversy. The money involved has been described as “grotesque” and approaching “a new level of obscenity” by sports fans.
The age-old question remains: why do star athletes earn so much more than doctors, scientists, architects, nurses, schoolteachers, and firefighters? Critics argue that society has gone astray if it values athletic performance over life-saving and essential professions. Economists offer a common explanation: supply and demand. There is a limited supply of star athletes, which allows them to demand exorbitant fees for their nonessential services. This phenomenon mirrors the diamond-water paradox outlined by Adam Smith in “The Wealth of Nations.” Although water has more intrinsic value, it is significantly less scarce than diamonds, which makes diamonds more valuable in exchange. This logic can be applied to the rare skills possessed by athletes, making them more valuable in the marketplace.
Economists contend that the free market is functioning as it should in professional sports. Star athletes earn astronomical sums due to their rarity. The number of individuals capable of performing at the level of someone like Mbappé is much smaller than the number of competent doctors and teachers available. This argument typically concludes the debate, satisfying economists while leaving dissenters dissatisfied. But let’s dig a little deeper.
Star athletes work hard, but they also benefit from luck. They are fortunate to possess genetic gifts such as strength, speed, and coordination. Additionally, these attributes are highly valued in modern society. Athletes who possess these gifts are more likely to win, and fans naturally gravitate towards winners. The growth of televised sports has further increased the number of fans who are willing to pay, directly or indirectly, to watch these extraordinary athletes succeed.
Economists Sherwin Rosen and Allen Sanderson wrote an influential article in The Economic Journal in 2001, stating that a star player is worth only a few more dollars per spectator than an ordinary player. While there may be many spectators, there are far fewer star athletes.
Dr. Stefan Szymanski from the University of Michigan, in an interview, highlighted how these athletes were reaping the benefits of their genetic endowments. This evokes the image of fertile fields in agriculture. Just as someone with the most fertile land will earn more money due to increased demand for food, star athletes are generating “scarcity rents” for their physical attributes. By taxing these rents, society can generate revenue without distorting behavior. Unlike wage or capital income, which individuals attempt to evade through reduced work effort or avoidance strategies, the inherent skills possessed by athletes cannot be taxed away.
Dr. Szymanski noted that these high taxes would mainly impact a small group of athletes. He estimated there are approximately 130,000 professional male soccer players today, many of whom earn less than $50,000. Female athletes, currently showcased in the FIFA Women’s World Cup, are paid even less.
Implementing high taxes on athletes could also address the excessive pursuit of advantages in sports. Athletes often resort to extreme measures, such as performance-enhancing drugs, to overcome their natural limitations. However, spectators are primarily interested in relative performance rather than absolute performance. For example, they care more about which team wins rather than the speed of pitches or the distance of home runs. This suggests that athletes may be expending unnecessary effort in an attempt to outperform their competitors. Rosen and Sanderson argue that arms limitation treaties, or in this case, taxing winners’ gains, could curb this wasteful pursuit of skills.
In conclusion, Dr. Szymanski proposes an approach that allows athletes to earn their scarcity rents unrestricted but imposes high taxes on their resulting income to ensure societal benefit. He suggests applying these tax rates not only to athletes but to individuals in other professions who also earn scarcity rents. Recalling the top marginal tax rates of the 1950s, which exceeded 90%, he believes this would address the issue of excessive rents in society.
Outlook: Marc Chandler
Marc Chandler, chief market strategist of Bannockburn Global Forex, cautions currency traders who are betting against the dollar, stating that they may be getting ahead of themselves. Chandler argues that if the Federal Reserve continues to tighten monetary policy to combat inflation, the dollar could actually strengthen against other currencies.
Quote of the Day:
“The Heart wants what it wants.” – Emily Dickinson, in a letter to Mary Bowles (1862)
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