Year: 2023

The Decline of Working Hours, in the Long Run and Recently

Jeremy Horpedahl1 Comment

If you look at the long-run trends in labor markets, one of the most obvious changes is the decline in working hours. The chart from Our World in Data shows the long-run trend for some countries going back to 1870.

Hours of work declined in the US by 43% since 1870. In some countries like Germany, they fell a lot more (59%). But the decline was substantial across the board. One thing to notice in the chart above is that for the very recent years, the US is somewhat of an outlier in two ways. First, there hasn’t been much further decline after about the mid-20th century. Second, average hours of work in the US are quite a bit higher than many of developed countries (though similar to Australia).

But the labor market in the US (and in other countries) is in a very unusual spot at the present moment after the pandemic. So what has happened really recently. Many economists are looking into this question of hours and other questions about the labor market, and a new working paper titled “Where Are the Workers? From Great Resignation to Quiet Quitting” presents a lot of fascinating data about the current state of work in the US. The paper is short (just 14 pages) and readable for non-experts, so I encourage you to read it all yourself.

Here is one table and one chart from the paper that I will highlight, which shows that hours of work have been falling, but in a very specific set of workers: those who work lots of hours, and those with high incomes. For workers at the high end of hours worked, the 90th percentile, they have dropped from 50 hours to 45 hours of work per week just from 2019 to 2022. But workers at the median? Unchanged at 40 hours per week. (The data comes from the CPS.)

The figure below is only for male workers, and it shows a similar decline in hours worked for those at the high end of the earnings distribution. For those at the bottom, hours of work at mostly unchanged.

Bank for International Settlements: $70 Trillion Dollars Is Missing from Official Global Financial Accounting

Scott Buchanan2 Comments

Seventy trillion dollars is a lot of money. It is nearly three times the size of the U.S. GDP, and approaches total global GDP (around $100 trillion). That is the amount of funds that are missing from normally reported financial statistics, according to a December, 2022 report from the Bank for International Settlements. That report caused a bit of a flurry in financial circles.

It’s not that this money has been stolen, it’s just that it is not publicly known exactly where it is, i.e., how much money that which parties owe to whom. Here is the Abstract of this paper:

FX swaps, forwards and currency swaps create forward dollar payment obligations that do not appear on balance sheets and are missing in standard debt statistics. Non-banks outside the United States owe as much as $25 trillion in such missing debt, up from $17 trillion in 2016. NonUS banks owe upwards of $35 trillion. Much of this debt is very short-term and the resulting rollover needs make for dollar funding squeezes. Policy responses to such squeezes include central bank swap lines that are set in a fog, with little information about the geographic distribution of the missing debt.

Much of this money is in the form of currency swaps, especially foreign exchange (FX) swaps. Even though the U.S. economy no longer dominates the whole world, the U.S. dollar remains the premier basis for international trade and even more for foreign exchange:

As a vehicle currency, the US dollar is on one side of 88% of outstanding positions – or $85 trillion. An investor or bank wanting to do an FX swap from, say, Swiss francs into Polish zloty would swap francs for dollars and then dollars for zloty.

Who cares? Well, the incessant demand for dollars periodically leads to a dollar funding squeeze in international trade, which in turn reverberates into world GDP.

Currency Swaps as Lending Events

In many cases these currency swaps effectively amount to short-term lending /borrowing (of dollars). Much of the financial world is utterly dependent on smoothly flowing short-term funding to cover longer term debt or investments. Borrowing short-term (at usually lower interest rates) and investing or lending out longer-term (at higher rates) is how many institutions and funds exist. For instance, depositors at banks effectively lend their deposits to the bank (short-term), in return for some pitiful little interest on their checking or savings accounts, while the banks turn around and make say 5 year or 30-year loans to businesses or home-buyers. Banks earn profits on the spread between the interest rates they receive on the funds they loan out, and the typically lower rates on the short term funds they “borrow” from their depositors.

This “mismatch” between the maturities of borrowed funds (especially dollars) and invested funds can cause a complete melt-down of the financial system if holders of dollars stop being willing to lend them out, or to lend them out at less than ruinous interest rates:

The very short maturity of the typical FX swap/forward creates potential for liquidity squeezes. Almost four fifths of outstanding amounts at end-June 2022 in Graph 1.B matured in less than one year. Data from the April 2022 Triennial Survey show not only that instruments maturing within a week accounted for some 70% of FX swaps turnover, but also that those maturing overnight accounted for more than 30%. When dollar lenders step back from the FX swap market, the squeeze follows immediately.

Financial customers dominate non-financial firms in the use of FX swaps/forwards. Non-bank financial institutions (NBFIs), proxied by “other financial institutions” in Graph 1.C, are the biggest users of FX swaps, deploying them to fund and hedge portfolios as well as take positions. Despite their long-term foreign currency assets, the likes of Dutch pension funds or Japanese life insurers roll over swaps every month or quarter, running a maturity mismatch.  For their part, dealers’ non-financial customers such as exporters and importers use FX forwards to hedge trade-related payments and receipts, half of which are dollar-invoiced. And corporations of all types use longer-term currency swaps to hedge their own foreign currency bond liabilities .

It is really bad if pension funds or insurance companies get starved of needed ongoing funding. Central banks, especially the dollar-rich Fed, have had to repeatedly jump in and spray dollar liquidity in all directions to mitigate these “dollar squeezes”.  The BIS authors’ main concern is that these big public policy decisions are currently made in absence of data on what the actual needs and issues are.  Hence, “Policy responses to such squeezes include central bank swap lines that are set in a fog.”

This all is part of the murky “Eurodollar” universe of dollar-denominated bank deposits circulating outside the U.S. (more on this some other time).  Investing adviser Jeffery Snider offers the “Eurodollar University” on podcasts and on YouTube, in which he explores the many dimensions of the Eurodollar scene. He likens the Eurodollar system to a black hole: we cannot observe it directly, but we can estimate its size by its effects.

In his YouTube talk on this BIS paper, among other things Snider notes that this short-term lending associated with currency swaps functions much like repo borrowing, except the currency swaps (unlike repo) do not appear on bank or other balance sheets as assets/liabilities. That is part of the attraction of these swaps, since they are effectively invisible to regulators and are not constrained by e.g., capital requirements.

What the Fed does in a dollar squeeze is largely lend dollars to large dealer banks. But unless those other banks then lend those dollars out into the private marketplace of manufacturers and shippers and pension funds, having trillions of dollars in central bank reserves has little effect. It is not the case that “the Fed floods the world with dollars”  — actually, mainstream banks get those dollars, and then lend out at high rates to the dollar-starved rest of financial world, where they can actually do something.

The result, according to Snider, is that the Eurodollar is the only functional reserve currency in existence. This is the real, effective banking system (not “reserves” sitting on some bank’s balance sheet), even though the current accounting system doesn’t show it.

On Costco, Defector Media, and the Illusion of -Isms

mdmakowsky3 Comments

I’m fond of telling my wife that most people wouldn’t call us rich, but sometimes Costco makes me feel like I am. By the standards of the past, including both of our upbringings, the goods that our Costco membership makes accessible to us is something that never ceases to amaze. I’ll look at our cart some months and find myself astonished at the goods we are about to casually purchase. It really goes to show you how far solidarity can take you within a proper union.

Sure, its probably better described as a consumer’s union, but the principles are largely the same and the value of the outcome is undeniable. Consumers rarely find themselves with significant bargaining power. Its not terribly problematic most of the time – competition pulls prices towards a market clearing level and everyone walks away sufficiently happy. But the fact remains that bits get taken out here and there. The world is full of little price markups where markets get thin, where consumers face a tradeoff – either pay the premium of shallower local tributaries or swim back to the well-populated seas of the median consumer.

What Costco offers is a memberhip in their union. Pay your dues and let us bargain on your behalf. The solidarity of your consumer dollars will grant you leverage like you will rarely experience in your consumer life. It’s not a democratic union, but you can costlessly exit at any time, which is more than I can say about every democratic people’s republic. You can only count on the incentive of retaining your membership to motivate your buying representatives, but that as it turns out is a $28 billion incentive. They serve their members through two purchasing streams: massive amounts of the stuff nearly everyone buys (produce, milk, eggs, chicken, etc) and a rotation of goods each of which maybe only 1 to 2% of their members buy. Those goods are the real miracle, the stuff that where markets would be so thin that a member might find their buyers union negotiating 30 to 50% lower prices. Most of the goods on any day don’t match their needs but over the course of the year are fundamentally changing the standard of living for a household.

Costco is a miracle of socialism. We can only hope they will be ruthlesslessly copied in other channels of our consumer lives.

My favorite sports blog was Deadspin. Sure, it was filled with some sophmoric politics, but it was also the most reliably uncompromised takes on sports that were available. Then it got bought out. Their corporate overlords tried to reign them and their union in, but it all fell apart, culminating in a massive staff walkout. In a moment of shining glory, several of the former staffers and editors decided to take the plunge and start their own site as a subscription based enterprise.

They organized their structure as a partnership, based in both a more democratic ownership structure and a committment to making their simple enterprise one built to serve their writers. Not quite a workers cooperative, but not a component of a broader media company either. If anything, it’s structure probably more closely resembles a medium sized legal or accounting partnership (I don’t actually know, I’m just speculating based on tidbits from stories and podcast discussions including some of their writers).

They wrangled together a team of talented, often incredibly talented writers. Does some third-year college English major politics creep through the writing sometimes? Sure, but if that’s too much of a burden you should probably just go ahead stop reading anything, in any medium, on any internet, ever again. Do I think the economics of some of their very best writers to be absolutely silly? Yes again, but I actually find it a healthy reminder that incredibly smart people can be incredibly wrong about things outside (or inside) of their expertise. I would do well to remember this myself.

What they do have, however, is Ray Ratto, who’s voice of crushing condescension I hear in my head whenever I watch someone do something obviously stupid with the well-lubricated confidence of a professional sports person. They have David Roth, whose casual vocabulary of metaphor is unmatched in my life. They have a score of writers who are confident they don’t just have to chase down every scandal around the next catfished college player or the indiscreet unsolicited selfies sent by future embezzlers. They can just do their job and be confident that it is what their subscribers are paying them to do. It also means that freelancers and intermitter writers can work for Defector and know that the paycheck will reflect the market rate for competence and not the market rate for new college grads living at home and telling their parents the real pay was the exposure.

Defector can do all of this for their partners and employees because they have cut out the media middlemen without having to give up the scale of each going independent on Substack. They have essentially found a way to pull off the dream of every failed new magazine of the 90s – they made their own thing and found customers to pay them for it. They leveraged the internet in all the ways we hoped, unburdened with phystical printing, untethered to a single regional labor pool, and unbeholden to corporate ownership whose revenue ambitions could never be aligned with the best way to serve the employees and the readers those employees actually want to serve.

Defector media is a miracle of capitalist entrepreneurship. We can only hope they will be ruthlesslessly plagiarized in dozens of other media subjects.

Which of course brings it back to one of my favorite hobby horses. Capitalism and socialism are no longer a useful dichotomy, if they ever were. It’s all just competition, there are always prices. The only things that change are the currencies and the rules. Sometimes you bargain with dollars and contracts. Sometimes with favors, promises, and threats. Sometimes power comes from resources, other times from which end of the sword you’re holding. Unions, cooperatives, corporations. They are all just different ways of organizing, of solving a collective action problem. The rewards to organized solidarity can be enjoyed by anyone, whether it’s members of a private buyers club or electricians in a federated union. The fruits of entrepreneurship, of producing a good in an innovative way that better connects producers of sports content to the consumers of that content, will always be available to those willing to take a risk in a competitive marketplace.

To be clear, Costco doesn’t solve the externalities of wide varieties of consumption any more than Defector Media will cure inequalities of wealth. They don’t offer miracle cures. What they offer is steps taken towards a better world that don’t conveniently align with the typical political allegiances and policy mascots of a middle class suburban consumer or Brooklyn-based blogger. Because they’re not politics. They’re something that actually has to work.

Chesterton on Prohibition, and Game Theory

Joy Buchanan1 Comment

English philosopher G.K. Chesterton traveled to America for a lecture tour. His observations are recorded in What I Saw in America (1922).

The book is not primarily about Prohibition nor is it mostly critical of America. He wrote one of his essays on Prohibition, which begins as follows:

This was 100 years ago, so start with this summary of the facts from Britannica:

Prohibition, legal prevention of the manufacture, sale, and transportation of alcoholic beverages in the United States from 1920 to 1933 under the terms of the Eighteenth Amendment. Although the temperance movement, which was widely supported, had succeeded in bringing about this legislation, millions of Americans were willing to drink liquor (distilled spirits) illegally…

Chesterton clearly is not a teetotaler, and I will not argue for or against temperance here. What was counterproductive about Prohibition is that elites passed a law that they would not abide by themselves.

Consider the decision by an individual to drink or not drink. For many people, drinking is social. If your friends are meeting at a bar, then you will drink at the bar to be with them. If your friends are going hiking with water bottles, then many people can pass the day without alcohol happily. We can model a game called Meeting Friends that has multiple equilibria.

Borrowing from Myerson (2009):

In such games, Schelling argued, anything in a game’s environment or history that focuses the players’ attention on one equilibrium may lead them to expect it, and so rationally to play it. This focal-point effect opens the door for cultural and environmental factors to influence rational behavior.

There was an opportunity for American elites to move social life to a new focal point after the 18th Amendment was passed. They could have led by example. Laws that do not follow norms cause problems, such as a large prison population arrested for drug offenses today. In 2021, I wrote about why attempts at drug prohibition helped the Taliban defeat the US coalition in Afghanistan.

Here’s my tweet thread last week about Chesterton and the American work ethic.

Myerson, R. B. (2009). Learning from Schelling’s strategy of conflict. Journal of Economic Literature, 47(4), 1109-25.

Concentrating on Housing

Zachary BartschLeave a comment

Housing has become more expensive. Below is a figure that illustrates the change in housing prices since 1975 by state. By far the leaders in housing price appreciation are the District of Columbia, California, and Washington. The price of housing in those states has increased about 2,000% – about double the national average. That’s an annualized rate of about 6.7% per year. That’s pretty rapid seeing as the PCE rate of inflation was 3.3% over the same period. It’s more like an investment grade return considering that the S&P has yielded about 10% over the same time period.

Continue reading →

ASSA 2023: New Orleans!

James Bailey1 Comment

Today the largest annual gathering of economists begins, in-person for the first time in 3 years. It won’t be as big as the pre-Covid conferences, but I’m excited to spend a few days in New Orleans for the first time since I moved away in 2017. I lived there for 4 years; in the eventful 5 years since my knowledge likely became somewhat out of date, but I hope I can still provide some guidance for those new to the city.

For most people the main destination is the French Quarter. People are right about this; it is great to walk through to see the old colonial buildings, hear the street music, and eat the food. Some of the ASSA hotels are in the Quarter, but for those staying downtown or in the Warehouse district its definitely worth the walk. The Quarter is a big, diverse place, not only for tourists. Bourbon Street is the tourist trap. It is probably worth seeing once, but be prepared for crowds, loud music, and touts trying to get you into bars and strip clubs. The standard advice now is to skip Bourbon St and hang out on Frenchman street instead- which is in the Marigny, just east of the Quarter. There are two blocks entirely packed with bars / jazz clubs. Any evening you will have at least 5 shows to choose from, usually jazz, usually with no cover. Café du Monde is the other Quarter attraction that everyone does, and with good reason. They have decent coffee, and great beignets (a donut / fried dough sort of thing drowned in powdered sugar). There is often a long line to get a table or to get to-go, but usually not for both at once. There is a river walk just south of Café Du Monde, and the Jackson Brewery building is just east- there is a good place to sit and look at the river beside their food court.

In a short trip it would be entirely reasonable to just stay in the Quarter. But if you’d like to get out, the main attraction of New Orleans to me is the parks. Audobon Park is west of the Quarter in Uptown. It stretches from the Mississippi river to the Tulane and Loyola campuses. City Park is north of the Quarter in Mid-City, and is home to the Art Museum and Sculpture Garden. Both can be reached by trolley, and both are full of lovely ponds and interesting waterfowl. At the big lake in city park you can rent kayaks, or get a ride in a gondola.

People associate New Orleans with Cajun food, but most of the Cajuns settled to the west. The traditional New Orleans cuisine is Creole- a blend of the Italian, French, and other settlers. When I think about what makes restaurants attractive, I think about three things- food, prices, and everything else (service, wait times, ambience). In New Orleans it is very easy to find places with great food at good prices, but rare to find good places that also have short wait times and good service (Commander’s Palace, the best restaurant in the city, is already booked solid). My restaurant recommendations are the thing most likely to be out of date, so I’ll keep it short:

  • Central Grocery- original home of the Mufalleta, a creole sandwich. In the French quarter. 
  • Dat Dog- fancy hot dogs (mostly sausages) with more toppings than you could ever want to choose from (including crawfish etouffee). One location is on Frenchman St- you can often hear live jazz from the bars by while sitting on their balcony. Cheap.
  • Hotel Monteleone- classy bar, often with live jazz, home to the rotating Carousel bar. One of many good places to try old New Orleans cocktails like the Sazerac. I’ll be staying here trying to get a spot on the Carousel.

New Orleans is unlike anywhere else in the US, almost like a Caribbean island (it practically is an island, surrounded by lakes, rivers, and swamps). The highs (food, music, knowing how to have a good time) are higher than just about anywhere else here, though the lows are also lower. One of the most special things about it is Mardi Gras. Mardi Gras day isn’t until February 21st this year, but Mardi Gras is really a whole season in New Orleans- and the first parade, Krewe of Joan of Arc, starts right in the Quarter on Friday January 6th (Twelfth Night).

Enjoy the city, and let me know if you’d like to meet up.

Air Travel Prices Have Not “Soared” Since 1980 — They’ve Been Cut in Half

Jeremy Horpedahl3 Comments

Winter holiday travel is notoriously frustrating. This year was especially bad if you were flying on Southwest. But that frustration about delayed and cancelled flights seems to have caused a big increase in pundits criticizing the airline industry generally. Here’s one claim I’ve seen a few times lately, that airline prices have “soared” as airlines consolidated.

Reich’s claim that there are 4 airlines today is strange — yes, there are the “Big Four” (AA, United, Delta, and Southwest), but today there are 14 mainline carriers in the US. There have been many mergers, but there has also been growth in the industry (Allegiant, Frontier, JetBlue, and Spirit are all large, low-cost airlines founded since 1980).

But is he right that prices have increased since 1980? Using data from the Department of Transportation (older data archived here), we can look at average fare data going back to 1979 (the data includes any baggage or change fees). In the chart below, I compare that average fare data (for round-trip, domestic flights) to median wages. The chart shows the number of hours you would have to work at the median wage to purchase the average ticket.

The dip at the end is due to weird pandemic effects in 2020 and 2021, so we can ignore that for the moment (early analysis of the same data for 2022 indicates prices are roughly back to pre-pandemic levels, consistent with the CPI data for airfare).

The main thing we see in the chart is that between 1980 and 2019, the wage-adjusted cost of airfare was cut in half. Almost all of that effect happened between 1980 and 2000, after which it’s become flat. That might be a reason to worry, but it’s certainly not “soaring.”

Of course, my chart doesn’t show the counterfactual. Perhaps without several major mergers in the past 20 years, price would be even lower. Perhaps. But research which tries to establish a counterfactual isn’t promising for that theory. Here’s a paper on the Delta/Northwest merger, suggesting prices rose perhaps 2% on connecting routes (and not at all on non-stop routes). Here’s another paper on the USAir/Piedmont merger, which shows prices being 5-6% higher.

There are probably other papers on other mergers that I’m not aware of. And maybe all of these small effects from particular mergers add up to a large effect in the aggregate. But, as my chart indicates, even if the consolidation has led to some price increases, they weren’t enough to overcome the trend of wages rising faster than airline prices.

One last note: the average flight today is longer than in 1979. I couldn’t find perfectly comparable data for the entire time period, but between 1979 and 2013, the average length of a domestic flight increased by 20%. So, if I measured the cost per mile flown, the decline would be even more dramatic.

Can Central Banks Go Bankrupt?

Scott Buchanan3 Comments

Finnish crisis researcher Tuomas Malinen has for some time been predicting the collapse of the Western financial system, starting with the melt-down of the European Central Bank. Malinen, an associate professor of economics at the University of Helsinki, offers his views on his substack and elsewhere. He correctly warned in early/mid 2021 of coming inflation, which would present central bankers with severe challenges.

Among other things, by raising interest rates (to counter inflation), the banks necessarily cause the value of bonds to drop. However, a lot of the assets of the central banks consist of medium and long term bonds, especially those issued by sovereign governments. We have come to the point where some central banks are technically insolvent: the current cash value of their liabilities exceed their assets.

Is that a problem? Most authors I found did not seem to think so. For a normal private bank, as soon as the word got out that it was insolvent, customers would rush to withdraw their funds, in a classic “run on the bank”. Customers who waited too late to panic would simply lose their money, since there would not be enough assets on the bank’s balance sheet to cover all withdrawals.

However, no one seems to be in a hurry to beat down the doors of the Fed and demand their money. Most of the liabilities of the Fed are (a) paper currency in circulation, and (b) “Reserve” accounts of major banks at the Fed.

Bandyopadhyay, et al. note that negative equity in central banks (including those of smaller countries) is not uncommon; at any given time, about one out of seven central banks worldwide in the 2014-2017 timeframe suffered operating losses, some of which were large enough to wipe out their capital. However, most central banks are owned by, or have some other synergistic  relationship to , the governments of their respective countries. For instance, there is a standard contractual relationship between the Bank of England (BOE) and the British government. Thus, when the BOE recently fell into arrears, the government provided them with additional funds. This was apparently a routine non-event. (I don’t know where the government came up with those additional funds; did they just issue more bonds, which in turn were purchased by the BOE?)

The Fed, as a privately-owned public/private hybrid, technically has a more arms-length distancing from the U.S. Treasury. For instance, the Fed is not supposed to buy government bonds directly from the government. Rather, the government sells them to large banks, who in turn sell them to the Fed (if the Fed is buying). It is possible for the U.S. Treasury to transfer funds to the Fed to recapitalize it; but for now, the Fed is just booking losses as a “deferred asset”. Voila, the magic of central bank accounting. The presumption is that sometime in the future, the Fed will receive enough net income to overcome these losses.

The biggest debate is over the fate of the European Central Bank (ECB). Its relation to sovereign governments is even more arms-length; it is difficult to see all the European countries, with their own budget issues, agreeing to cough up money to give to ECB. As Malinen sees it, this likely leads to the “deferred asset” accounting scheme to handle negative equity for the ECB. He worries, “Will the markets or the banks trust the ECB after losses starts to mount forcing the Bank to operate with (large) negative equity? We simply do not know.” This is a weighty issue. As we noted earlier, “money” is in the end a social construct, an item of trust among parties for future payments of value. Central banks are the lenders of last resort, the source of money when it has dried up elsewhere; they regularly have to step into financial liquidity crises to inject more money to keep the system going. If people stopped accepted the keystroke-created money from central banks, the whole economy could freeze up.

A more sanguine view of central bank negative equity issues from MMT proponent Bill Mitchell. In his “Central banks can operate with negative equity forever” Mitchell heaps scorn on the very idea that central banks could run into solvency problems. He states that a “government bailout” is an inconsequential paper operation, merely transferring money from the left pocket to the right pocket of the government/central bank joint entity (as he views it). Furthermore, central banks have the capability of creating money out of thin air, so they can always meet their obligations and therefore can never be deemed insolvent:

The global press is full of stories lately about how central banks are taking big losses and risking solvency and then analysing the dire consequences of government bailouts of the said banks. All preposterous nonsense of course. It would be like daily news stories about the threat of ships falling off the edge of the earth. But then we know better than that. But in the economic commentariat there are plenty of flat earthers for sure. Some day, humanity (if it survives) will look back on this period and wonder how their predecessors could have been so ignorant of basic logic and facts. What a stupid bunch those 2022 humans really were.

Your happiness is why your sports team stopped being good

mdmakowsky1 Comment

Equities are an excellent long-term investment in part because they offer nearly zero value outside their prospect to grow in value. Ownership of a share of a publicly traded firm exists as nothing more than byte in a digital ledger, asbsent any aesthetic or collectible value. In contrast, a beautiful painting or a bottle of whiskey offers consumption value. You can speculate on the future value of such assets, but the prospective consumption value will always be baked into the market equilibrium price. If you want to maximize the expected growth in the market value of your holdings, focus on investment assets that have near-zero consumption value. It is because of your sports team’s failure to invest solely in assets based on their value as inputs into the production of wins that they suck and should immediately fire everyone.

Yes, in years past your sports team used to be bad. They were bad for many reasons. They were poorly managed. Fewer resources were invested in your team. They existed in a less attractive city to live for prospective players and other employees. They were badly coached and never listented to you.

But then a miracle happened.

I can’t speak to the specific miracle(s) that happened to your team, but it likely includes one or more players undervalued by the market that came into your team’s employ only to subsequently reveal their true value through the quality of their play. They were outstanding and, in turn, your team started regularly winning at a rate previously considered unachievable. Supporters grew emotionally attached to their outstanding players. They hung banners, wore jerseys, gifted bobbleheads to wide-eyed children. Being a fan of your team began to pay emotional dividends that went beyond simply cheering for a winning team. It meant being a part of something emblematic of teamwork, a source of collective joy.

And that’s where it all began to go wrong.

Players are employees. They signed contracts reflecting their market value which was itself a collective estimation of their future output. Your team benefited from employing this underpriced input, freeing up resources otherwise constrained by either finances or a cartel…I mean league-mandated salary cap. Contracts aren’t forever, though, and those contracts are starting to run out. You beat the market once, but those assets are now properly valued. Furthermore, the uncertainty discount that applied before is long-gone, replaced by the premium that applies to a sure thing. Whether or not you can afford them, they will no longer offer any advantage, in terms of freed up resources, relative to any other player in the market.

But that’s not your biggest problem.

Your team’s biggest problem is you, the fan. You are emotionally attached to this cohort of players that brought you previously unknown levels of success. Success you’ve grown maybe just a bit accustomed to. Returning to past, lower, standards of quality, of winning, will not return you to your previous level of contentment. You’re gonna complain. Gripe. Call in. Tweet. Boo. You demand they retain these players you’re emotionally attached to so you might maintain the standards of winning you are entitled to.

We haven’t even gotten to the bad part yet.

There’s going to be a de facto auction for the players whose contracts are up. A bidding war. And in that bidding war the team that values them the most is going to get them. Which is obviously the team whose fans are desperate to retain their beloved heroes. Congratulations, you’re now a textbook example of the the winner’s curse. You’re going to win an auction already buoyed, not by the average value in the market but by the teams that have overestimated their future value. That certainty premium probably got a little too big because at least one poorly managed team doesn’t seem to appreciate that playing thousands of minutes of professional level sports takes a grinding toll on the body and that eventually leads to injuries at worst, athletic decline at best. But you’ve paid even more for these players than that the team that over-valued them the most because the team used to be so bad for so long and then they showed up and the team stopped being bad and you love them for it.

The rest of the market is evaluating them as inputs into the production of wins. You’re getting additional consumption value out of having their specific last names on your jerseys. Of seeing their faces and hearing their voices and remembering the good times. You’re getting the warm fuzzies of a good hang. And every dollar you pay for that hang is one less dollar to spend on other players. Other inputs into the production of wins.

So you need to ask yourself, next time you’re mad that your team isn’t good anymore, why are they bad? Is it bad luck? Limited resources? Poor management? Or is it because of you and your insistence on getting more out of supporting a sports team than just victories accumulated within a ledger that accounts for competitive success that you in no way contributed to?

Maybe your sports team is bad because you were part of a fanbase that wanted more than just wins. A fanbase that wanted to let the emotional investments they made in specific humans pay out for just a little bit longer. Your sports team is bad because you are rationally maximizing the emotional consumption value out of supporting them. It’s your fault and that is totally ok.

But if this goes on much longer they probably should fire everyone.