Salary Caps: Good for the NBA, Good for Us

I would like to take the conversation in different direction. Earlier this year, I, like Richard, had a chance to read Ed’s review of Tom Friedman’s book where he, like Richard, worried about the possibilities of extreme income inequality in a post-industrial, creative class world. From what I can tell, both Richard and Ed are assuming that this is the market outcome and we just have to live with it.

In reality, we are always willing to restrain the market when the situation suits us. Consider professional sports. A free market league would allow any team spend what it wanted with predictable results: with rare exceptions, only big city/big market teams would be competitive and the league would be a joke.

To avoid this result, the NBA, the NFL, and most recently the NHL have adopted salary caps and the leagues utilize some degree of revenue sharing (e.g. television revenue) as well.

My colleague Peter Temin and I suspect that something very much like this described the U.S. economy in the 1950s and 1960s. The translation of that period’s rapid productivity gains into broad-based income gains was not a pure market outcome. Rather, it was a market tempered by a number of institutions. While many of those institutions do not exist today, they will return if public sentiment is strong enough.

If the U.S. were the size of Monaco, we would, of course, have to live with the market and the fact that the biggest creators would leave town. But the size of our markets gives us a certain ability to extract rents and my guess is that rent extraction will become one brake against unbridled inequality.

Also from this issue

Lead Essay

  • The Future of the American Workforce in the Global Creative Economy by Richard Florida

    In this month’s lead essay, Richard Florida, bestselling author of Rise of the Creative Class, argues that the old industrial era has given way to a new creative era. Science and technology, art and design, and culture and entertainment have superceded natural resources and industrial infrastructure as the key to economic success. Talent is now the key factor of production and winners in global economic competition will be those who can best deploy and attract it. However, the creative economy is a source of increasing inequality both within and between nations. Florida argues that the key to bridging the gap between the creative and service sectors is to harness the creativity of service sector workers to make their jobs both higher-paying and more satisfying.

Response Essays

  • Reality and Fantasy in Economic Revolutions by Robin Hanson

    In his reply to Florida’s lead essay, George Mason economist Robin Hanson argues that creativity matters less for economic growth and the future of work than Florida thinks. According to Hanson, Florida’s emphasis on creativity distracts us from the prospect of a truly revolutionary change to work and economy just over the horizon: rapidly exponential growth driven by smart machines. “An economy with intelligent machines could grow very rapidly indeed,” Hanson argues, “and induce rapidly falling human wages.” Will we be prepared if we’re busy making the Creative Class comfortable?

  • Education and Inequality in the Creative Age by Frank Levy

    MIT economist Frank Levy agrees that creativity is more important than ever in a world where computers and foreign workers can do routine work less expensively than domestic workers. This shift, Levy says, requires better education in problem-solving. But education can only do so much. The gains from rising labor productivity are going largely to the wealthy, Levy argues. Unless policies and norms are reinstated that spread those gains more widely “all of the nation’s institutions will be at risk.”

  • Wealth and Power in the 21st Century by Edward E. Leamer

    While agreeing with much in Florida’s essay, UCLA economist Edward Leamer suggests that the key to understanding the future of work isn’t creativity, but talent. “Is a personal computer like a forklift or a microphone?” Leamer asks. Forklifts are forces for equality, washing out individual differences in ability. Microphones, on the other hand, amplify difference in ability and talent. If training cannot create talent, but can only enhance it, the gains to training will be highest for the talented, and it will not be possible to close the talent and wage gaps by offering more training to the less talented.

The Conversation