Monday, July 23, 2012

Thoughts on Penn State

I figure that after the huge announcement about Penn State football (and growing up a mild Penn State fan in Northwest-Central Maryland, mostly stemming from our high school QB taking over the helm at PSU in 2001) I should write something here.

As someone who in the past found Joe Paterno to be one of the most interesting and respectable coaches in sports, this whole event is a huge shame.  I can to some extent understand a relatively passive reaction to the idea that a good friend is doing terrible acts.  That is a very tough situation, but still one that seems clear what should be done.  I cannot, however, understand actively ensuring that others don't find out about this when I know the truth.  If this is really what happened, I have no sympathy for anyone involved.  Period.

However, I don't find the NCAA sanctions particularly comforting or useful.  There are a few reasons why.  I'll list them below, then talk about what I mean one by one.  I'll first preface this with: there is no penalty that can make up for the awful things that took place in the PSU locker room.

So here are my issues:

1) Nearly all of those people responsible for these events and its cover up are either dead, in jail, or have been fired.  In a situation like NCAA penalties, the idea is to ensure there is a strong incentive not to participate in certain behaviors.  If there is no punishment, then one could argue that they are encouraging this to happen.  So there should be punishment, but it should be punishing those responsible, not someone else.  I'll expand on this in Point #4.

2) Some feel that punishment is solely punitive, but I don't find this particularly relevant from the standpoint of the NCAA.  We should leave these decisions up to the criminal justice system in a situation such as this.  The NCAA's interests lie in incentivizing certain behaviors for their organization as a whole.  They have a right to fine, sanction, punish, etc. in the name of these goals.  But the acts here are not a case relevant to NCAA operations as an organization (leaving aside the moral obligations of people working with children--which here is a PSU oversight issue).  I'll expand on this in Point #3.

3) I am not convinced that there is a realistic moral hazard issue here in a specific sense.  I do believe there is a moral hazard issue of not punishing PSU in a general sense.

In this case, the idea is that allowing PSU to go unpunished for their lack of oversight will show that there are not consequences to covering up child molesting in the future.  That may be true, but I don't know that this, specifically, is a realistic concern (others may disagree).  The large majority of people, including coaches, find these acts abhorrent, disgusting, immoral, and so on.  I would like to believe that most would report, or at the very least not actively cover up, these issues if they are occurring.  I fail to see an upcoming epidemic of covering up rampant child molestation in college football locker rooms in the case where significant punishment does not take place...

This, of course, does not preclude issuing consequences for lack of oversight in a general sense.  There are many other issues which a coach or athletic department could decide to cover up that have less certain moral implications than something like child abuse.  If the NCAA wants to remove incentives for covering these things up, it should come down hard on PSU as an institution.

Which leads me to my most important concern...

4) The NCAA--if looking to punish Penn State and those responsible for "oversight"--did not choose some of its punishments particularly well.  This is the case with respect to their own (the NCAA) interest as well as the interest of the innocent football players at Penn State (and as a whole in NCAA).

In order to minimize collateral damage, the NCAA should have chosen to institute a larger lump sum fine (or "morality tax" if you will) in place of bowl and scholarship penalties.  Why you ask?

**Note: I am fine with vacating all of the wins while the cover-up was going on.  This is part of a lump sum fine/tax and can go along with monetary fines.**

Well, first and foremost, the players currently on the team had nothing to do with the events that took place in the 1990s.  By instituting football-specific penalties in the future, they are punishing these players who have already borne a large cost from being tied up in this whole mess thanks to a deceitful Paterno ("Come to Penn State...because I ensure moral character and academics and blah blah blah").  By instituting bowl and scholarship penalties, these players pay an even larger cost.  Yes, that cost is somewhat reduced by allowing them to transfer without penalty.  But this is really a red herring: the rule is essentially a way for the NCAA and its coaches to reduce the competitive labor market for playing football in the first place.  Gee thanks, guys.

Additionally, assuming that the cost of picking up and moving colleges is minimal is a real fallacy.  We're talking about very young people who have put roots in social (and future career) networks in State College.  Losing these is a high cost, not to mention the uncertainty clouding their future in football (what's to say they'll play somewhere else?).

The further impact is to football players in general.  While a small change, reducing Penn State's scholarship offers DOES reduce the opportunities for lower income athletes to have their college paid for at the margin.  Players that are good enough to play at Penn State can play at institutions equal and lower than PSU in a football sense, but of course that pushes out spots for guys that would have played at those places, and so on.

Another view comes from the NCAA: other than PR, they don't have much incentive to have Penn State become completely irrelevant.  As we've seen over the past year, they have a rabid (and yes, sometimes irrational and misguided) fan base.  No, I'm not saying the NCAA should choose $$ over child molesters.  But the NCAA will lose out on significant total revenue by reducing their competitiveness over the next 5, 10, maybe 20 years.  There are ways to lay down a hammer on PSU without these ancillary value reductions.  In other words...

A larger lump sum fine in place of these penalties could improve things for everyone.  First, the value of the scholarships to Penn State's athletic department (and the whole school) could be estimated.  We can include that in our fine.  The same goes for the bowl appearances.  By doing this, Penn State still pays the full cost of the sanctions.

Doing this reduces the cost passed on to the players that had nothing to do with the tragic events.  This is different than when coaches and players agree to compensation or other violations.  In these cases, there are explicit agreements that include players to break the rules (yes, players have lots of incentives to do so and I am not condoning players working for free for the NCAA).

Could PSU just pass on the cost to the players?  Yeah, it could.  But it's much less likely for a number of reasons.

First, the marginal cost of scholarships is near $0 for a large university.  We're talking about 10 extra students in a population of 40,000.  That's, say, one extra kid in a class of 30 to 500 that is being taught anyway.  The professors' time is already being taken up by the class, so there isn't much additional cost to having 31 (or 501) students instead of 30 (or 500).  The opportunity cost is somewhere near $0 as well.  Without a scholarship, it's not likely that the university would have collected tuition dollars from that student anyway (they would have gone elsewhere).  These guys aren't really 'taking a seat' of another student.  The admission process is almost completely separate.

If Penn State's athletic department is looking to maximize revenues (profits?...we'll leave aside moral arguments about college athletic departments for now), given whatever constraints they have, then they'll issue these scholarships to deserving football players up to the marginal value of these players (or the limit of scholarships, which likely comes first) despite being hit with such a huge lump sum fine.

So why also allow them to participate in bowls?  Well, by reducing their potential revenue, you reduce their incentive to invest in the program.  This is what happens with revenue sharing in some cases in Major League Baseball (or so, much of the literature goes).  If you can't get the $6 million bonus, then you won't be investing as heavily in your product.  This cost is borne by players through facilities that aren't up to par, or other perks when they arrive as a football player at PSU.

Once the lump sum is paid, it is seen as a sunk cost.  It does not enter into their decisions for future revenues and costs (but not being allowed in bowl games certainly does).  This is Economics 101.  They'll pay for facilities up to the point that the marginal value it attracts (players) equals the marginal cost (scholarship and facility upgrades).  They'll probably be cash strapped depending on where the money comes from, but it won't reduce their future earning potential and their football revenues can continue to help fund other sports within the department.  In this way, it doesn't distort decision making in a way that punishes those not responsible.  PSU can just snatch this out of their endowment (and I am told that their donations from alumni are at an all time high at PSU as a whole since this all started last year).

(Note: Stacey Brook has an explanation of a lump sum tax vs. one described by Nick Saban here.  I tend to agree with Dr. Brook on this as well.)

Maybe for some of you, a $100 or $200 million penalty (or more) just isn't enough.  But the truth of the matter is that nothing will be enough as retribution for ruining childrens' lives.  There seems little reason to increase the costs to people that have nothing to do with this tragedy.  Really, the loss of scholarships and bowls amount to a loss of revenue for Penn State.  A loss of stature due to these results in a loss of revenue.  Fire those involved.  Put them in prison.  Let them pass away in disgrace.  Calculate what you think they should pay, and have them pay it.  Don't push it on to innocent parties.

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