Mr. President, Don't Toy With The Truth

By Russ Roberts

From the St. Louis Post Dispatch

What if there really were a toy shop at the North Pole where elves made toys and gave them away?

And suppose you were dictator for a day. It's up to you to decide whether to let those free toys into America. You're a nice dictator, the kind that inhabits fiction and op-ed fantasies. So you ask your people how they feel about free toys. The American toy manufacturers tell you that it's a ruse—part of a conspiracy to take away jobs from Americans. But most of the people you hear from are parents. They're pretty pleased at the prospect of free toys. More smiles for the kids. And with less money spent on toys, there will be more money available to spend on clothes or vacations or books or piano lessons.

Is it a tough choice? Would you preserve the status quo and stop the world of free toys? Or would you bring it on and let people have the free toys with all the changes that would entail?

We're actually getting close to a world of free toys. How? By letting China make them. China is the toy shop of the world.

I was thinking about free toys when President Bush came to St. Louis promoting his economic stimulus package. He came to JS Logistics, a warehousing and delivery operation, and posed in front of a bunch of boxes to talk about how small business would benefit from his economic proposals.

There was one problem. The boxes behind the President said "Made in China." So in advance of the photo ops, White House aides replaced them with boxes saying "Made in USA." (Bigger letters, too.) And they took the boxes that said "Made in China" and taped over the offending words and pushed them aside. In the New York Times photo, a few of the offending boxes could be seen in the foreground. The tape was clearly visible. So were the words "Build a Bear."

The Build-a-Bear Workshop was started in St. Louis five years ago by Maxine Clarke, entrepreneur extraordinaire. Build-a-Bear now has over 100 stores. Over a hundred stores where kids can have the thrill of creating their own bear. You choose a skin, stuff it, drop in a heart, sew it up, and if you want, you can buy clothes for it.

You can get a basic bear for $10. You'd think for such a low price, it would be a little palm-sized creature. But it's 14 inches high. And if you want to go crazy, you can have a two-foot high Panda, for a mere $25.

How can Build-a-Bear cover its costs at such low prices? Part of the answer is in those "Made in China" boxes. The skins come from China. If they had to be made here in the U.S., they'd cost a lot more.

It's good for China that they've become the toy shop of the world. It's allowed millions of Chinese to escape from rural poverty. And it's good for America, too.

If Build-a-Bear bought its skins in America, there would be more jobs in America making bear skins. But there probably wouldn't be 100 Build-a-Bear stores any more. And they'd have to let go of some of their 4000+ employees. Because if we didn't buy things made in China, the bears would cost more and Build-a-Bear wouldn't sell as many. That also means fewer jobs at JS Logistics and all the other American companies that Build-a-Bear works with. And the smaller number of customers who pay the higher prices at Build-a-Bear would have less money to spend on something else. So there'd be fewer jobs in other industries outside of toys. We'd be poorer as a nation if we tried to be self-sufficient and make everything for ourselves.

There'd be one more change to think about if we stopped buying things made in China. Fewer bears sold means fewer smiles from grandparents and their kids, fewer birthday parties. I wish President Bush had proudly stood in front of those "Made in China" boxes and explained how international trade creates jobs in America and makes the world a better place. He'd have saved some masking tape, some embarrassment and created a little more economic literacy.

Disorder on the Court

By Russ Roberts

From Ideas on Liberty

What does Adam Smith have to do with basketball? You will not find the word in either The Theory of Moral Sentiments or The Wealth of Nations. Yet Smith has much to say about the game played with the round ball on a hardwood court. Consider the following quote from The Theory of Moral Sentiments:

The man of system, on the contrary, is apt to be very wise in his own conceit.... He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously.... If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder.

Chess is not basketball, you mutter, and you are correct. And yet, and yet. Consider the National Collegiate Athletic Association, the NCAA, the governing body of college sports. The NCAA rule book governs how universities treat their athletes and how athletes must behave if they wish to retain their eligibility. The main function of the NCAA is to prevent people from doing what comes naturally. But of course Adam Smith understood that those chess pieces want to move in the ways that they want to move. Trying to place them where they do not want to go is ultimately going to lead to disorder.

Having a successful college basketball team is very lucrative. It leads to attendance at the NCAA Championship tournament held every March. That in turn leads to money. And glory. Publicity. So a 18-year-old high school graduate who excels at basketball is a highly valuable and highly scarce commodity. Scarce valuable resources usually get paid for the employment of their services. In a normal competitive environment, talented basketball players would receive a salary in return for their work at the University. And Universities would be happy to pay to get those students just as they pay to attract high-quality coaches and high-quality chemistry professors. Competition among universities would determine the market price for such students.

But universities are even happier getting those resources for free. That way, the university can capture the profits from athletic success rather than having to share them with so-called student/athletes. So the NCAA bans all payments to students other than tuition and room and board, books, fees and a very modest stipend often referred to as laundry money.

That might seem generous enough, but alas, you have not reckoned with those chess pieces. Evidently, it is not generous enough. We know that tuition and room and board are less than the market clearing price because every once in a while, a scandal emerges that highlights the competition that is going on underneath the placid waters of universities complying with NCAA rules.

Such a scandal is unfolding at the University of Michigan. A fan of Michigan basketball was caught "lending" some of the players some money. A large sum of money. A very large sum of money. Eddie Martin has pleaded guilty to giving four University of Michigan players $616,000.

The scandal was uncovered after a car accident—a basketball player on the Michigan team crashed his new $35,000 Ford Explorer after a party for a new recruit.

Cars, cash and "loans" are ways that wealthy fans and sometimes coaches compete to get the best players. The NCAA may try to stop such behavior, but it's very hard to get those chess players from moving in the directions that come naturally. And of course even "clean" athletic programs compete in non-monetary ways. They build luxurious training facilities for their students. They hire talented coaches and trainers.

The University of Michigan has announced a self-punishment in hopes of averting more serious sanctions from the NCAA. Five years of victories have been wiped off the books. Championship banners have been removed. The basketball team will refrain from post-season competition for two years. And they have returned $450,000 in tournament money form previous NCAA Tournament experiences.

That's a lot of disorder, to use Adam Smith's phrase.

After scandals like the one at Michigan, there always are calls from the sports pages for colleges to clean up their act and play by the rules.

Yet the rules imposed by the NCAA are not natural. They are designed to inhibit the movement of the chess players. And the real source of the problem isn't the players who take the money. The real source of the problem is you and me, the fans. The people who care about how our schools perform. The people who fill the stadiums and crowd in front of the TV set on those March nights. It is that enthusiasm that creates the pot of money at the end of the NCAA Tournament, driven by TV revenue and advertising revenue. All driven by fan interest.

As long as fans care intensely about how their teams do in March in the NCAA Tournament, there are going to be scandals.

But the real scandal is the exploitation of players who would normally receive some of the largesse that such fan interest generates. Only the NCAA keeps that largesse largely in the hands of its member institutions rather than in the hands of the players.

There's an interesting footnote to the University of Michigan story which also relates to Adam Smith and those chess pieces. The story broke after a grand jury indictment of Eddie Martin, who was bankrolling those basketball players with hundreds of thousands of dollars. Martin is a former worker at a Ford automotive plant. What was a grand jury doing investigating NCAA violations? How did a Ford worker have $616,000 dollars to spend on players?

Martin ran a illegal gambling operation out of the Ford plant—a lottery, a numbers game. The money he gave those players came out of those illegal winnings. He was indicted for gambling and money laundering. He probably has a few tax problems too.

So all of this really began with illegal gambling—an attempt on the part of the state to keep people from engaging in behavior that is harmless to the gamblers. Behavior that the state bans because it competes with the government's take in its lottery monopoly. Oh, those chess pieces. So hard to keep them from moving the ways they want to move on their own.