A heated interaction between the two reserve bigs.
CBA Talk: Words from the Genius
The smartest economist working for the NBA players’ union is a genius. As in, University of Chicago economist Kevin Murphy has received a genius grant. Furthermore, Freakonomics economist Steven Levitt has called him the smartest person in the field. He knows a thing or two about some things, basically. (Here’s a great profile on Kevin Murphy from if you’re interested in reading more about him.)
He sat down yesterday for an interview — his first during the lockout — with NBA.com’s Steve Aschburner. Obviously, we need to keep in mind that he works for the union and is clearly going to highlight the points that the players want highlighted. But in discussing the supposed contention over the league’s financial (something that has been overblown … both sides had auditors sign off on the figures), he raised some interesting points. Or, perhaps more accurately, he articulated the positions the league has been discussing since July in a better way than anyone else has.
NBA.com: Even at this late date, from interviews given by Hunter, Fisher and others on the players’ side, there seems to be skepticism of the league’s financial numbers, as if the audited figures aren’t to be believed.
KM: I would say the primary disagreement is not over the accounting numbers. It’s what you include and how you interpret the numbers. For example, the accounting picture of the NBA isn’t very different from what it was five years ago or 10 years ago in terms of ratio of revenues to costs and all the rest — it’s changed very little. Which immediately tells you, wait a minute, if the underlying financial picture is similar today to what it was five years ago or 10 years ago, and people are paying $400 million or whatever for franchises, and you’re telling me that these things lose money every year, something’s missing, right? These people aren’t stupid, right? These guys are worth billions of dollars. So why did they pay all this money for franchises that, it looks like, lose money?
Well, the answer is pretty clear. There are a couple of things that are really attractive. One is, historically, you’ve seen franchises appreciate in value and that appreciation has more than outstripped any cash-flow losses that you’ve had. And if you’re in the right tax position, it’s actually pretty good because you’ve got a tax loss annually on your operating and you’ve got a capital gain at the end that you accumulate untaxed until you sell it and then pay at a lower rate. So you get a deferred tax treatment on the gains and an immediate tax treatment on the losses, that’s not a bad deal.
Let’s say the NBA is a $4 billion revenue business — that’s not exactly right but it’s close enough. Then let’s say you lose $200 million. That’s 5 percent. OK, my franchises are worth — let’s make it simple, 2½ times revenue, which is well below Forbes [valuations] — that’s $10 billion. Now let’s say it’s appreciating at 4 percent a year. I’m getting $400 million in appreciation even though I only have $200 million in losses. I’m getting better tax treatment on the $400 million that I’m making, and I deduct at a higher rate the $200 million that I’m losing. Suddenly this picture doesn’t look so crazy any more.
Secondly, it’s a lot of fun to own an NBA franchise…
NBA.com: The “psychic benefits” Malcolm Gladwell touts.
KM: The psychic benefits are not trivial. Third, there are benefits outside basketball. Like who got a casino? Who got a land deal? Who got real estate? You start looking around, you say, ‘There’s a lot of benefits to being an NBA owner.” You put all those pieces together, it explains why those people spent all that money for those franchises.
What I keep coming back to as an economist is, “Look, you tell me this is a lousy investment. The No. 1 way to tell if something’s a lousy investment, it ain’t worth anything.” There are a lot of firms that are losing money and are going to go bankrupt, look at what their stock is worth — it’s not worth nothin’. But when you tell me these things aren’t worth a lot of money and they don’t make money, you immediately hold onto your wallet. You say, “There’s a disconnect here. Smart guys, a lot of money — well, why are you buying it? Why are you buying something that loses money every year?”
NBA.com: The owners will say there’s been a franchise bubble not unlike the housing bubble. A number of them bought high and don’t think they’ll see the equity growth.
KM: The fact is, guys have not done well over the last few years as asset prices generally have gone down. I don’t doubt that. But to say that you lost money in the worst asset crash in memory — and franchises haven’t gone down nearly as much as many assets have gone down — that’s not telling you you need concessions going forward.
If you go back before the last 3-5 years, these guys did incredibly well. Their franchises weren’t going up by 4 or 5 percent, they were going up by 8 or 9 percent a year. They were making money hand over fist. Should [the players] get credit for that? Should we get that money back? Now those are different people in some cases. They need to go get their money from the guys they bought the franchises from. That’s the guy who has all your money. Not us.
But who bought anything in ’07 that they’re happy with the price they paid? If you bought a house in ’07, if you bought stocks in ’07, if you bought bonds in ’07 — I don’t care what you bought, you’re not happy with the price you paid. When you buy at the top, you don’t make your money. That’s not unique to the NBA, that’s everywhere in life. But by and large, NBA franchise ownership has been a good investment. You can’t base long-run projections on how you did in the biggest financial downturn of the last 50 years. On that basis, there are no good investments out there. But we know that’s not true.