Feb. 28 (Bloomberg) -- Over the past few decades, economics has been the chief driver of success in the National Football League. Teams that best understood the limits and opportunities of the salary cap enjoyed an advantage on the field. You could call it the Age of the Nerd.
When a new collective bargaining agreement is finally reached, that age seems certain to end. The NFL is about to undergo its most significant change since overall team salaries were capped in 1994.
Even while players are running the 40-yard dash tomorrow at the NFL’s annual draft combine, representatives of team owners and the NFL Players Association will resume meeting with a federal mediator on a new collective-bargaining agreement.
The most important piece of the new agreement in terms of the league’s future may be the restructuring of first-year wages. The old scale turned NFL management into a contest of applied economics. The few teams that got the economics right -- the New England Patriots and Pittsburgh Steelers among them -- have excelled for years. Teams struggling with the concept --the Washington Redskins come to mind -- likewise struggled on the field.
Economists Cade Massey of Yale University and Richard Thaler of the University of Chicago analyzed the economics of the NFL draft in a seminal paper that I have written about before. Since the NFL salary cap means all teams have roughly the same amount to spend, a winning team must get production from its entire roster, not just from a few highly paid stars. The teams that win do so because they get surplus value from their players -- that is, performance above salary.
Under the old system, the way to get surplus value was through the draft. This was because the rookie wage scale was structured to throw tremendous riches at the unproven players at the top of the draft and relatively little money to those picked later. So the top picks each year, while coveted for their strength, speed and talent, were bad risks from an economics standpoint. Even if Sam Bradford, last year’s first overall pick, becomes a star, it’s unlikely that he would exceed the value of the six-year, $78 million contract he signed with the St. Louis Rams.
By contrast, later picks -- especially those late in the first round, and throughout the second round -- were paid little enough to be high in surplus value. The few teams that understood this regularly outperformed the others by piling up these high-value picks. The Patriots, to choose one example, wheeled and dealed so that they would have three second-round picks in 2010. Then they went out and posted a 14-2 regular-season record.
In the old world, it wasn’t that the better teams identified potential superstars better than the losers did. They just understood the economics better.
This point is easy to demonstrate using NFL draft data from 1970 through 2010, with selection to the Pro Bowl -- football’s all-star game -- as the gauge of excellence.
The first pick is substantially more likely to make a Pro Bowl than the 10th, the 10th substantially more likely than the 20th, 30th or 47th. Fully 56 percent of first picks have gone to the Pro Bowl during their careers, versus 46 percent of the 10th picks, 34 percent of the 20th picks, 26 percent of the 30th picks and 5 percent of the 47th picks.
What teams don’t all seem to understand is that when you consider salary and excellence together, the most valuable picks of all are at the end of the first round -- exactly where the very best teams are assigned their place in line. The worst teams, meantime, have to pay huge salaries to sign each draft’s top picks. Massey and Thaler refer to the first overall pick -- ostensibly a huge opportunity bestowed on the team most in need of help -- as “the loser’s curse.”
Rational on Rookies
That may change this year.
The new collective bargaining agreement will likely include a rookie wage scale in line with the lessons of the Massey-Thaler research. This could have dramatic implications for the NFL, not to mention sending a whole squad of football-loving nerds in search of new jobs.
If the new pay structure is more rational, as it seems sure to be, surplus value will become more difficult to find anywhere in the draft. Teams seeking value won’t find it in unsigned veterans either, since a free agent’s salary is set in the market and therefore should be about equal to his expected production.
In this new world, NFL teams should become much more evenly matched. Imagine an automobile race with all drivers in identical cars. The only way to win consistently will be to regularly get more out of your players.
A great coach may be able to do that -- where’s Vince Lombardi when we need him? -- but since most players deserve the title “professional,” it seems unlikely that sideline leadership can provide much enduring advantage. In that case, we might expect fewer dominant teams and fewer awful ones, with more teams clustered right around .500, at least when viewed over a period of many years.
Get ready for the Not-So-Super Bowl.
(Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. The opinions expressed are his own.)
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