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Patriots vs. Redskins

From the Magazine: Friday, November 17, 2006

Who has it right, and who has it wrong? KEVIN HASSETT on the economics of managing an NFL football team.

Economists optimistically dub their field a social “science” because they hope that immutable fundamental laws of the economy like Isaac Newton’s laws of physics lurk underneath it all. But economics depends on human behavior, and Newton was never tempted to study man. “I can calculate the motion of heavenly bodies,” he wrote, “but not the madness of people.” Good decision. People are different from particles, and there is mounting evidence that, thanks to the vagaries of humans, a lasting, unified economic law book is beyond our grasp. Consider the National Football League.

PatriotsFootball teams have a relatively simple economic problem to solve. They have to fill their rosters with players, and have to pay the entire collection of players an amount fixed by the league. They can add players in two main ways: sign veterans as free agents or hire new players out of college in a league-wide draft. Veteran free agents get a salary set in the free market. Most draftees receive a relatively lower salary set by collective bargaining. What they are paid depends on the round in which they are drafted.Economics has a very clear prediction for optimal team behavior. Firms should load up on draft picks, especially from the inexpensive late rounds. Every team has the same cumulative salary to pay, so, to outperform the other teams, you must receive higher value relative to salary from your players than your opponents receive from theirs. If, for example, you select a Pro Bowl (all-star) receiver in the fifth round of the draft, that player may well receive a salary one-tenth that of a veteran Pro Bowl receiver of roughly equal talent who has had his salary set on the market. So your team gets a huge surplus.

It is nearly impossible to derive surplus from the veteran free-agent market, since you are paying market wages. While injuries and emergencies might require some veteran signing, the draft is the only place to build a winning team.

Belichick keeps winning because so many others in the league behave so strangely.

So economics would predict that teams would uniformly put an enormous effort into perfecting their drafts, and avoid sinking excessive dollars into costly free agents. In fact, this model predicts very well the behavior of one team, the New England Patriots. Their head coach, Bill Belichick, who received his undergraduate degree in economics from Wesleyan University in Connecticut, has been an artist at squeezing value-added out of his draft picks, and has won three of the last five Super Bowls.

This economic brilliance was on display in September, when Belichick traded disgruntled receiver Deion Branch to the Seattle Seahawks for a first-round draft pick. The Seahawks gave Branch a $39 million contract, guaranteeing that they would achieve little value-added at that position. So Belichick burdened the salary cap of a rival with a fat obligation, and took home a valuable draft pick for his own team.

Belichick keeps winning because so many others in the league behave so strangely. Two economists, Cade Massey of Yale and Richard Thaler of the University of Chicago, studied years of draft history and found that teams make systematic errors that reflect a serious economic illiteracy. Coaches and general managers place too high a value on the top few picks, and too low a value on picks a bit further down.

The Washington Redskins are perhaps the leading exemplar of this tendency toward irrationality. Last spring, for example, the Redskins gave up key draft picks for high-priced veteran players. An especially silly trade gave the Jets three Redskins’ picks: in the second and sixth rounds this year and in the second round next year. The trade left the Redskins with only one pick in the first three rounds this year.

RedskinsTo compound this error, the Redskins filled their roster with mediocre, high-priced veterans, dropping $35 million on safety Adam Archuleta, $32.5 million on defensive lineman Andre Carter, $31 million on wide receiver Antwaan Randle El, and $25 million on wide receiver Brandon Lloyd—none of whom has ever been in the Pro Bowl.

The problem for economics is that teams like the Redskins continue to exist, and are not driven out by competitive forces. They confound our ability to model for two reasons. First, it is impossible to conceive of what foolish thing the Redskins might do next. Second, their behavior can alter the decision framework for the fully rational teams. If the Redskins are going to bid up the prices of all wide receivers, for example, then a team like the Patriots has to adjust (as they did) and load up on cheaper pass-catching tight ends.

The Redskins are not driven out of business because there is a high demand for football in Washington, and the NFL has a monopoly. A wisely run team cannot enter Washington and compete for Redskins fans.

Results like Massey’s and Thaler’s have revealed unusual irrational behavior, not just in the NFL but throughout the economy. Why? Because many firms exist in areas that are walled off from competition by regulation, by patents, or by their own large scale. Since the entire economy is just the sum of such pieces, its ebbs and flows will, as Newton long ago concluded, forever be a mystery.

Economics will always be helpful at identifying the answers to narrow questions, like how firms on average respond to a change in tax policy. But, as for a unified theory of everything…better forget it.

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