Baseball, TV, Refrigerators and Other Stories

[From Baseball, TV, Refrigerators and Other Stories (with illustrations) by Craig H. Collins, 2019]

clemente-armI grew up in Western Pennsylvania, which in the 1960s was all about high-school football and Pirates baseball. Back then, baseball stars like Willie Mays, Hank Aaron and Roberto Clemente not only played for but virtually belonged to the same teams, year after year, until they were traded or released or retired.

This began to unravel in 1976, the year owners and players agreed to terms on free agency. While I have fond memories of the practically cast-in-stone Pirates lineups of my youth (Clemente always batted third), I must endorse in abstracto the concept of free agency.  Ballplayers — and all other employees — should be empowered to negotiate their salaries based on their talents and what the market can bear.  You and I would demand no less for ourselves or our children.

But free agency encourages players, and their agents, to seek the highest salaries; as such, only large-market, deep-pocket teams are able to sign the best players, which has forever changed the competitive balance of the major leagues.  To cite only the latest example, the New York Yankees just signed pitcher Gerrit Cole, once a Pittsburgh Pirate, to a nine-year, $36 million-per-year contract.  Cole’s new salary with the Yankees is nearly half the entire 2019 payroll of the Pirates.

Competitive balance in sports is not, however, the point of this article.  Rather, it is how free agency served to rouse a much larger giant: the now-relentless drive by all involved to inject more and more money into the system.  The chart below shows how team payrolls, television revenue, ticket prices and average cable bills have skyrocketed since free agency began and cable was deregulated.  Note that all figures in this chart are expressed in terms of 2019 dollars — inflation has already been accounted for!

As players became superstars and their salaries soared, teams raised their ticket prices and negotiated ever-larger local and national television deals.  To pay for it, sports networks raised the price of carrying their basic cable channels, and cable/satellite providers added those costs to the price of our packages, whether we watched sports channels or not.

Weren’t these companies afraid of losing customers when they raised their prices?  Well, not necessarily.  The figure below sums up the economics of a hypothetical cable company:The Customers curve (top left) shows the number of customers willing to pay a given price for monthly cable service.  In this example, most people are willing to pay $50 a month but only half as many are willing to pay $100 and almost no one would be willing to pay $300, according to this company’s market research.

The Revenue curve (bottom left) shows the income (price times customers) that would be generated at various prices, based on the data in the Customers curve.  Note that revenue would be greatest if the company sets the monthly price to $80, despite the loss of some potential customers.

Subtracting fixed costs and per-customer costs (top right) from the Revenue curve yields the Profit curve (bottom right).  The Profit curve shows that the company will make money if the monthly price is anywhere between $60 and $170 (green area) but it will maximize its profit if it sets the price to $100 per customer.  And so it will.

Sorry for the Economics 101 lesson, but my intent here is to show that businesses do not care how many customers they have, and they specifically do not care if you are one of them.  Businesses, if they are smart, set their prices to whatever yields the most profit — and if that price is too high for you, too bad.  Capitalism may be prevalent in democracies, but democracy has no seat of honor in capitalism.  As such, cable companies will never offer a la carte (pay per channel) service, no matter how many of us may prefer it.

At one time, the family-room TV was one of the “big purchases” a household would make and it was expected to last for years.  But today, what most of us pay for one year of cable costs more than the set we watch it on.  The media/entertainment megaliths have got us right where they want us.  How did we not see this coming?

All Else Being Unequal…

This brings us to income inequality.  Businesses love it when more money sloshes around, especially when it sloshes toward the well-to-do.  This is because it increases the pool of price-insensitive customers, whom every business covets.  How does income inequality factor into the rise in ticket prices and cable bills?  Let’s look.  The graph below shows how income was distributed across U.S. households for the years we considered earlier.  Again, amounts are stated in constant dollars — inflation has been taken into account.

Each point on a curve shows the percentage of U.S. households whose annual income was the given amount or less.  For example, the proportion of households earning $100,000 or less was 82% in 1984 (green dot), 73% in 2001 (red dot) and 70% in 2018 (blue dot).

If every household had the same income, the curve would be a vertical line — so a flatter curve on this graph indicates less equally-distributed income.  We see that the cumulative income curve flattened markedly from 1984 to 2001 and has continued that trend since.

Businesses look at this data and see something tantalizing, namely, that the percentage of households making more than $100,000 (current dollars) has climbed 250% since 1984.  This income group grew from 15 million households in 1984 to nearly 40 million today, recently surpassing the number of households making $50,000 to $100,000.  (The latter group also grew in number, just not as rapidly.)  Naturally, media giants prefer to target higher-income households because (a) these are the people willing to pay $120 – $150 a month for home entertainment and (b) they are now plentiful.  As a result, those of more modest means feel increasingly ignored.

Income inequality works out even better for enterprises that deal in limited-quantity goods like concert tickets, big-city apartments and private college degrees.  All of these cost more (in real terms) than they once did, because more people can afford to pay the upscale price and they are lining up to do so.  Middle-income folks are left to window-shop.

Cold Reality

I promised you a refrigerator and now I’m going to deliver.  I’ll be heading your way sometime between 8 AM and 3 PM, unless I run late, in which case I’ll call you about 6:30 or so to say I’ll be there in an hour, and then I’ll show up at 9:00.  Hope you don’t have anything important to do tonight.

But I digress.  The refrigerator in this story was our own.  Like most people, we called it The Fridge (to distinguish it from The Other Fridge).  We bought The Fridge when we built our house — it was a white side-by-side, counter-depth Frigidaire Gallery with separate ice and water dispensers and nice produce bins.  It was well lit inside.  It didn’t have fancy electronics, and the freezer was a little cramped, and once in a while we would have to turn the breaker off and on to reset it, but all in all The Fridge served us well…

…until one fateful day last year, when the freezer temperature began to rise, and it became evident that something important (and expensive) was wrong with The Fridge.  Perhaps it was the thought of all our food spoiling that clouded my reasoning — because I decided the best solution was to buy a new refrigerator.  “The Fridge is 13 years old!  If we get it fixed today, some other part could fail tomorrow!  Why throw good money after bad!

And so I consulted Consumer Reports and shopped the online appliance stores and found, hmm, there’s not a lot of white, side-by-side, counter-depth refrigerators to choose from. Frigidaire offered plenty of models in stainless steel but no longer made any counter-depth refrigerator in white.  Same deal with LG.  Samsung had one but I crossed them off the list due to poor reliability and service reviews.  That left Whirlpool and GE, each of which had exactly one model that checked all of our boxes.  Based on ratings — never having seen the item in person, of course, because that’s the way people buy things these days — I selected the GE GZS22DGJWW and ordered it from Home Depot.

The GE seemed to cost enough that I figured it must be well-built.  Hah!  I began to have  regrets the minute the delivery truck drove away.  The light was dim, the produce drawers were flimsy and had no dividers, and freezer layout was a total afterthought.  Bottles and jars in the door clunk around whenever you open or close it.  The hyperactive ice dispenser likes to give you a little crushed even if you selected cubed, and we routinely have to collect ice cubes off the floor as if we had won a frozen jackpot.

I dislike the GZS22DGJWW so much that I have talked to my wife about donating it to Habitat for Humanity and switching to stainless steel appliances, just so that we can have a decently-made refrigerator.  (This may be idle talk, but I haven’t dismissed it.)

What if anything does this have to do with income inequality?

Many years ago, almost everyone had white (or perhaps almond) appliances, save for some unfortunate dalliances with turquoise, avocado and harvest gold from the 50’s to the 70’s.  For the most part, stainless steel appliances were reserved for upscale kitchens. But with the rise in high-end incomes, the demand for stainless steel surged due to its perception as a status good, while white became associated with downscale.  Appliance makers found it less profitable to make full-featured models in white, because people who could afford the premium models preferred stainless.

All right, so what?  Unpopular products are discontinued all the time — no one owes me the perfect refrigerator.  But I see this as a specific case of how increasingly undemocratic American capitalism is.  The widening income spread invites businesses to divide us into consumer classes, where quality and selection are found only in luxury goods, while the masses must put up with whatever transpacific mass-production produces.  In white.

For their tireless efforts to promote income disparity, we can raise our glass to Wall Street, Newt Gingrich (1997), Dick Cheney (2001), Mitch McConnell (2012) and Donald J. Trump (2017).  They went to bat for their business friends — and all I got was this lousy ice maker.

Shifting the Curve

Some in the middle-class don’t believe, or can’t see, how income inequality affects them.  Perhaps it is because the issue is too often conflated with wealth-resentment, which is a separate complaint and which isn’t helped by Bernie Sanders railing on about billionaires.  While billionaire businessmen did play a part in dismantling the middle-class and have reaped the spoils from the same, just clawing back those gains is not enough.  We need to restore cultural and economic power to the middle class.

Ninety percent of American workers are employees.  I was an employee my entire earning lifetime and never seriously embraced the risk-reward world of entrepreneurs, creatives and solo practitioners.  I somehow made a decent living through competency, reliability, diligence and luck, in contrast to the entrepreneur’s success formula of passion, vision, risk-taking, branding, marketing and luck.  Relatively few of us are entrepreneurs at heart; most of us will remain employees, no matter how many Tony Robbins lectures we attend.  Nonetheless, our culture enshrines self-made money-makers — and it often seems like the rest of us are just here to help them make it.

It is time that we value everyday workers as highly as we do entrepreneurs and capitalists. That’s where the road to greater equality has to start.  We will not automatically rebuild the middle class by tearing down billionaires — we need to take positive steps to shift the entire income distribution curve to the right and stop doing things that make it flatter.

Donald Trump won several Rust Belt states with a lot of empty promises to reopen mines and bring back auto and steel industry jobs.  Clearly this never happened, and it was not a viable way to revitalize the middle class in any case.  I largely agree with Andrew Yang that automation (plus globalization and digitalization) will continue to erode the traditional labor landscape and that there is not much we can do to stop that.  So what do we do?

Identifying problems is not the same as solving them.  Yang thinks that worker retraining programs are inefficient, and he may be right, but his plan to hand out $1,000 a month to every adult citizen strikes me as unfocused and wasteful.  Yang would have us believe that giving $12,000 a year to 225 million people will deliver a better result than if we directed that $2.7 trillion to large-scale endeavors.  It might make an interesting social experiment but as a middle-class rescue mission I don’t buy it.

If we go to all the trouble of collecting $2.7 trillion in taxes, we should use it to promote the general welfare, and the place we should start is education.  I would provide subsidies to make community college or trade-school certificate programs free for all middle-income citizens.  I would replace Yang’s Freedom Dividend with an Education Dividend, which would be paid on a per-student basis to every public school system to raise teacher salaries, bring tech up to date, and cover the school supplies that teachers pay for now.

I would repeal Trump’s corporate welfare and replace it with an incentive more in the public interest: for every $1 that a corporation donates to nonprofit post-secondary and/or vocational programs, it would receive $2 in tax credits.  And I would impose a 20% tax on stock buybacks and earmark the proceeds for low-income vocational and STEM education.

To restore tax fairness, I would ensure that no corporation pays less tax than a household that has similar income.  Executive pay in excess of 25 times the company’s median wage would not be deductible as a business expense; and compensation in excess of 100 times the median wage would be subject to a non-deductible 40% luxury tax.  On the other side of the ledger, I would broaden the definition of employee so that fewer businesses can call their steady workers independent contractors and thus avoid paying their Medicare and Social Security taxes along with other benefits.

Instead of giving tax breaks to those who buy and sell stocks, I would tax capital gains at the same rate as other income.  This is a fair and straightforward principle — and the way our tax law worked from 1986 to 1997.

I would make the national minimum wage $15 per hour for all workers, including those in the restaurant and hospitality industries.  Restaurants can simply print “service included” at the bottom of the tab as is done in Europe.  We will all survive.

The other major initiative I would pursue is rebuilding our long-neglected infrastructure. According to Brookings Institution, “Infrastructure [jobs] often provide more competitive and equitable wages compared to all jobs nationally, consistently paying up to 30 percent more to low-income workers.”  Even self-driving cars and trucks need roads and bridges to get to their destinations, and robots do not (yet) repair roads.  We can certainly afford to spend more on infrastructure once we abolish welfare for corporations.

But our infrastructure needs go beyond transportation.  Information goes hand-in-hand with education in terms of advancing the middle class, and information pipelines need to serve everyone.  While 98% of urban residents have access to fixed-location high-speed internet service, only 76% of rural residents do and their service can be much more costly. I would do two things to address information inequality: I would make internet service a regulated low-profit utility; and I would form a public/private entity to deliver affordable, fixed-location broadband service to all rural and tribal areas.  Such steps would help create and sustain middle-class jobs in the face of increasing digitalization.

I don’t know whether these proposals would do anything about cable bills or ticket prices or refrigerator colors, but they would do more for the middle class than anything that our current twit-in-chief has twittered about.

The fact is, there is no easy way to reverse income inequality and restore economic power to our middle class, as we unwisely dismantled much of our manufacturing supply chain over the last few decades.  We certainly won’t rebuild the middle class by designating our dilapidated town squares “historic districts” and renting out rooms on Airbnb.  Nor will we make the middle class stronger with middle-class welfare.  Instead, we need leaders who will (a) correctly identify the causes and effects of income inequality, (b) articulate a clear vision of the future of our middle class, and (c) propose practical, structural remedies.

I have read what the 2020 Democratic presidential contenders have to say about the issue and frankly I am underwhelmed.  Sanders, Warren and Yang seem to be preoccupied with redistribution.  Biden and Buttigieg come closer to checking the boxes but their passion and energy leave something to be desired.  One of the above had better quickly step up to the podium and paint a better picture than Trump does, or the Democrats will lose again and the income curve will continue to skew ever richward.

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7 Responses to Baseball, TV, Refrigerators and Other Stories

  1. Stephanie Velsmid says:

    Excellent review of the current state of our economics. Craig if you aren’t busy for the next 8 or so years maybe you should jump into the race and run for president!!!!! In lieu of a run by Craig Collins, I’m looking at Michael Bloomberg. I’m clearly worried about another term of our twit-in-chief!!!!!

  2. Rick says:

    I agree with you on Biden but Trump is so destructive anyone is better. I will vote for Biden. Let him have a young vice President like mayor Pete.
    Your economic ideas are very interesting. Creative ideas. Send them into Biden. Seriously.
    I still do not understand why intelligent friends and relatives of mine are Trump supporters. It is like a cult.

  3. Pete says:

    Nice economics lesson! Now I see what you were working so hard on while you were visiting!

    I’ve been pointing out very similar points to your refrigerator analogy for several years now when it comes to the real-estate market. The young middle class is essentially getting priced out of homes.

    Rental units are built as “luxury” units, where the landlord can make the most profit per square foot possible. Old units are “remodeled” and then have the rent increased on them. This leaves middle class and lower middle class in a situation where they end up paying too much of their income for housing. Your middle class renter doesn’t want to live in the slums, and in many markets their only choice for a decent location is somewhere that comes with granite countertops they really don’t want to pay for.

    The same thing is true for normal housing. If you’re a real-estate developer, why parcel out land for starter homes or mid-tier homes when you can cram McMansions into the same space?

    This leaves future generations in a perilous predicament. They end up graduating college with tons of student debt, spending too much money on rent, trying to save money for a home, only to be priced out of home ownership, unless they’re willing to buy a home with substantial fixing required that they likely won’t have the money for.

    Maybe they can afford to have kids by the time they’re 35, if they’re lucky.

  4. Guy ENGLISH says:

    Like your analysis; not sure its “only” the middle class that needs attention, though its often seen as a better route to general wellbeing than poor old trickledown. But check out Marianna Mazzucato. If that doesn’t lead you to a four-page article by Joao Medeiros, tell me and I’ll scan it.

    Or: for a on-hour dialogue with Martin Wolf.

    Happy new decade. “Hope beyond Reason”

  5. Bruce says:

    I came for Baby Yoda but stayed for the economics. You managed to weave a gripping and educational story out of things I care little about: baseball, cable bills, and appliances. Your analysis and suggestions seem right on to me, and you never mentioned the S-word (the 9-letter one). But unfortunately, in addition to the Cult of Trump, we also have the Cult of No Socialism. And what is socialism? Anything that changes the status quo of welfare for corporations and wealthier people, of course. Social Security and Medicare? “Let’s be clear” (LOL). Those are rights, not socialism. Right? It’s very hard to change things to be more fair when so many in the middle class have been convinced to vote against their own interests because of the evils of liberalism which is really the same as socialism which might as well be communism. Stay away from that stuff, kid! Besides, Baby Yoda is so adorable. I can’t believe the first season of The Mandalorian is over already!

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