econlife - Why Superstar Salaries Are So High by Elaine Schwartz

During a Sunday evening, in a brief news release, we learned that LeBron James was going to the LA Lakers. His price was $154 million.

Why so much money?

Superstar Qualities

Two sports economists tell us that NBA (National Basketball Association) superstars have certain characteristics. As a top draft pick, the player needs to have been touted by the league from the beginning. Reflected by countless achievements, the person has to be considered a premier talent. And looking at a career, that excellence should have lasted for many years.

On the table below, you can see the credentials of five NBA superstars. (VORP is Value Over Replacement Player):

Large Audience

A second ingredient in the recipe for a superstar salary is the size of your audience. To get more of a feel for what that means, let’s start with the nineteenth century diva economists like to cite. As the Luciano Pavarotti of her era, Elizabeth Billington was a superstar. Yes, she earned a whopping £10,000 to £15,000 in 1801. But still, her income was limited by the size of her audience at Covent Garden or Drury Lane.

Not LeBron’s.

Through TV and radio, online and at the stadium, his audience and its positive externalities are almost unlimited. Modern technology has vastly inflated what big stars can earn.

Talent and/or Popularity

Finally, we can contemplate a debate between two academics. One says the key to the superstar salary is talent while the other says it is a combination of talent and popularity. After all, you can have people with equal talent but then popularity kicks in to create the superstar status.

Discussing each side, one paper suggest it depends on the person. Larry Bird, they say, is a superstar because of his talent. But with LeBron, they say his popularity helped to fuel his salary.

Our Bottom Line: Supply and Demand

So, with limited supply and the huge (adulatory) audience that technology facilitates, 21st century markets for superstar basketball players generate salaries as high as a four-year deal for $154 million.

My sources and more: First, thanks to Sophie B. for reminding me that it was time to return to superstar salaries. Naturally, our first stop was the NY Times discussion of James’s salary and his accomplishments. Then, although this paper from the Peterson Institute provides insight, the classic study has been around since 1981. And finally, for the best detail and analysis, I suggest this recent paper on superstars and attendance and an interesting rationale for not calling Charles Barkely, Shaquille O’Neal, Kareem Abdul-Jabbar, or Kobe Bryant superstars.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

econlife - Fracking and India’s Guar Bean Bubble by Elaine Schwartz

Like me, you might have seen guar gum in the ingredients list of a pint of ice cream. Who knew it was crucial for fracking?

The Guar Bubble

Around Lordi, in India’s Rajasthani Desert, farmers grow the guar bean. For centuries it was a dietary staple. But then Western food processors and pharmaceutical companies realized that guar’s ability to absorb water could come in handy. (It’s the guar gum that keeps the ice cream thick.)

For fracking also, guar is a thickener. Because of guar, the water becomes stiff enough to shoot sand sideways through rock. Once the shale fractures, sand particles keep the cracks open for oil and gas to seep through.

We all know that fracking vastly increased U.S. oil and natural gas production. In addition, it spiked demand for guar and pushed prices skyward. However, with acreage increasing, substitutes emerging, and then fracking demand subsiding, after 2013 (see below) guar markets reversed:

It is rather amazing that more than 13,000 miles from the fracking fields, India’s guar bean farmers, traders and processors thrived like never before. FT called it a bean bubble. Farmers built stone houses and bought tractors. There was more money for trips, for dowries, for elaborate weddings.

Our Bottom Line; Supply and Demand

Like peanut butter and jelly, fracking and guar seeds have a complementary relationship. When the demand for peanut butter goes up, we want more jelly. So too, with fracking and guar seeds.

And as you would expect, when price popped, the supply side had the incentive to produce more and develop cheaper alternatives. Supply (and quantity supplied) increased, demand decreased and guar prices dropped. When oil prices crashed in 2014, the boom truly became a bust.

Now? Guar prices are rising again as fracking activity accelerates.

My sources and more: For all you could ever want to know about the guar bean, do go to the NY Times, here, and here, and to Quartz. Then, for the price update, Business Standard data is here and here. Perhaps most interesting though is seeing how guar’s ups and downs resemble fracking’s sand suppliers.

Ideal for the classroom, econlife.com reflects Elaine Schwartz's work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.