Freelance Friday: Inequality in the NBA

Freelance Friday is a semi-regular series at Nylon Calculus featuring submissions from around the web. Today’s piece is from Daniel Frank, and concerns the always hot-button topic of parity in the NBA. Daniel is starting his legal career in Toronto. When he isn’t applying economic insights to the NBA, he can normally be found lost in a 30 minute Phish jam. Daniel writes about culture, sports and economics at www.DanFrank.ca. 

Freelance Friday pitches, comments or questions can be directed to us on twitter @NylonCalculus or via email to TheNylonCalculus at Gmail dot com.

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Why did Milwaukee Bucks fans create a billboard demanding that their team lose as many games as possible? After earning one of the worst records in NBA history and being forced out by his owners, why did Philadelphia fans make a billboard thanking Sam Hinkie? After making the Eastern Conference Finals for the first time in franchise history, why did a contingent of Toronto Raptor fans want to blow up their roster? The answer is that fans no longer think their team can win an NBA championship, and they’re not wrong.

As American politics gets consumed by discussions on income inequality, a similar problem is developing in the NBA. The NBA has created a hierarchy; super teams with multiple superstars competing for a championship, and everyone else, just watching on the treadmill.

I created a metric to evaluate the success of NBA teams over the past ten years. I gave teams one point for making the first round of the playoffs, two points for making the second round, four points for making the conference finals, six points for making the NBA finals and ten points for winning an NBA championship.

Think of it as a hypothetical mental trade-off: would you rather make the first round two years in a row, or the second round in year 1 and nothing in year 2? How about making the NBA finals in year 1, opposed to the Eastern Conference finals in year 1 and the second round in year 2?

The black line represents what a uniform distribution of NBA success would look like, with each team earning 13.3 success points. The top 3 teams over the last decade (Miami, San Antonio and Los Angeles), have earned 30% of all of the possible success in the NBA over that time span. The top 6 teams (+ Boston, Dallas and Cleveland) have accumulated close to 50% of NBA success. Meanwhile, the bottom half of the league has earned only 20% of the possible NBA success.

The Gini Coefficient is a number frequently used to represent the level of inequality in a nation’s wealth. It shows how wealth is allocated to different segments of a population. If the NBA were a country, its Gini Coefficient at 42% would surpass that of the United States.

By reducing its inequality, I believe that the NBA will become both more entertaining and equitable.

Equity

While there are some NBA teams that are very bad as a result of terrible decisions (and yes, some NBA teams are great because of smart decisions), most of the variation in NBA success stems from luck. Specifically, luck in in the development or acquisition of star players, that through path dependency, lead to the creation of an elite team.

LeBron James has been to the NBA finals six years in a row. Does this represent some sort of skill by Miami and Cleveland, putting them above the rest of the league? Have they done something deserving of this massive level of success? Or are they just lucky to have Lebron James sign with their team. In most cases, the acquisition of elite players is largely dependent on luck.

The counter argument for this is that NBA success is based on the team’s general manager, but upon inspection, this seems unlikely. Yes, there are some better and some worse GMs in the NBA, but aside from the Billy Kings of the world, I believe that luck plays the biggest role in the success of a GMs tenure.

Consider:

• Even the highest paid NBA GMs get paid a few million dollars per year. This is less than the average NBA coach. Even more telling, NBA GMs make substantially less than below average NBA bench players.
• Almost every single GM in NBA history has been fired, and at the time of the dismissal, disliked by the team’s fan base.
• The variation in GM salary is quite small, indicating that there is not a large difference between the quality, and demand of NBA GMs as seen by team owners.

If NBA GMs had an identifiable measurable way of making their teams elite, they wouldn’t get fired so often, paid so little and sought after so rarely.

Entertainment

A league with greater equality will be more entertaining for two important reasons.

1. Fans of bad teams appreciate equal levels of success more than fans of great teams do. The Minnesota Timberwolves have missed the NBA playoffs for the last ten consecutive seasons. Can you imagine how excited Minnesota and their fan base would be if they made even just the first round? Conversely, the San Antonio Spurs have made the NBA playoffs for 19 consecutive seasons. Will making the first round next season bring San Antonio new fans? Will it give the current ones excitement?. 
2. Fans will be able to fully embrace their team, with the confidence that they have a chance of winning a championship. No longer will fans have a preference for tanking, or only half committing themselves to their team out of a belief that the team can never turn the corner. In a league with more equality, NBA teams of all backgrounds will have the ability and potential to compete for an NBA championship on a routine basis. The extension of this is that the NBA playoffs will also become much more exciting for fans around the league as upsets and Cinderella runs become possible.

Fixing Inequality

Inequality in the NBA can be attributed to one primary cause; the max contract. While there are other issues at play such as the lack of a hard cap and the current NBA draft lottery system, the maximum contract is by far inequality’s biggest contributor.

Superstars are invaluable, not because they are so much better than other players in the league, but because they get paid disproportionately less. LeBron James is the NBA’s second highest paid player this season, earning close to $23 million, but according to FiveThirtyEight, his real value is more than double this at $53 million. When a player is paid less than they are worth, it creates an inefficiency in the NBA.

LeBron James has been to the NBA finals six years in a row. Many people attribute this to him being one of the best players in the NBA, but this misses the bigger picture. Give LeBron James a $53 million dollar salary and he won’t be in a position to be surrounded by stars like Kyrie Irving and Kevin Love (or Dwyane Wade and Chris Bosh) anymore. The max contract allows great players to team up with other stars, making these lucky teams elite.

By limiting how much a player can get paid, there is also no incentive for a player to join a bad team. If a superstar has the choice of getting paid the same amount of money and going to an elite team, all things being equal, they will always choose the better team. Without the max contract, there will be a true open market for star players. This will have the effect of migrating superstars away from the current elite teams, to non-contenders, essentially making the best teams worse, and the bad teams better. Furthermore, bad teams having a chance to acquire superstars through free agency will also have the effect of making tanking a lot less appealing.

The inefficiency created by the max contract also serves as an important Schelling point for free agency in the NBA. When a team acquires a superstar below their fair market value, they gain a huge advantage. Take for example the San Antonio Spurs and Kawhi Leonard. If Leonard is in a position to get paid his fair market value, he either leaves the San Antonio Spurs or is signed to a much larger contract (FiveThirtyEight projects his value at $45 million per season). Once he is signed to a cheap contract, there is increased incentive for a player like LaMarcus Aldridge (who is also getting paid less than he is worth) to sign with the Spurs. With such a large advantage already, other players are likely to gravitate towards this team on undervalued contracts as well (i.e. Manu Ginobili at $2.8 million, Tim Duncan at $5 million and David West at $1.5 million). Without a limit on Kawhi’s contract, the Spurs are no longer in a position to create a superteam.

The max contract leads to the creation of superteams and an unequal NBA; abolishing it will make the league more both more equitable and entertaining.