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Evaluating the economics of the MLB offseason

in Sports by

When it comes to trading, signing, and acquiring players in general, baseball might be the most complex game in the country. The rules and laws that surround the mere process of building a roster can not only bring people headaches, but may also take several hours to explain to anyone not already familiar with them.

At this very moment, the process of acquiring players during this offseason has been made further complicated by a serious economic issue: an unusually high supply of quality players coupled with low immediate demand for these said players. As a result, the 2017-2018 offseason is one of the coldest and most stagnant in baseball history, even with a strong free agent class.

Some of the best players in the game, including Jake Arrieta and Mike Moustakas, and some non-elite but still strong players like Alex Cobb, Lance Lynn, and Logan Morrison, still remain unsigned headed into Spring Training. Had I written this article last week, top-of-the-class players J.D. Martinez and Yu Darvish would still have been free agents. Even then, both Martinez and Darvish received what some considered “undersized” contracts given their skill level. Darvish’s contract is especially undersized compared to his pitching counterpart David Price. Two years ago, Price inked a deal with the Red Sox worth $217 million over 7 years, averaging $31 million per year. Darvish’s contract is $126 million over 6 years, averaging $21 million per year. The difference is not reflective of talent, as many feel Darvish is a much better pitcher than Price.

The question everyone has been asking is why is this offseason so slow and why are players signing contracts that some may feel don’t reflect their true value? As I said, there is a serious economic issue at hand. The answer can be found in the holy grail of economics: markets.

Many people argue that the reason the offseason was so slow is because the pay grade for players in currently inflated — the market needed to eventually correct itself. In 2000, the average player made about $1.9 million, with that number more than doubling to $3.9 million in 2015. Although revenues for teams is also increasing at a similar rate, the increase in salary will outpace the increase in revenue, if it hasn’t already yet. A significant portion of revenue comes from ticket sales. As teams purchase more expensive players, they need to compensate with higher ticket prices. The higher prices have already begun to drive people away from attending games. As a result, attendance has declined the past several years. One can hypothesize that the attendance rate will dip to the point where growth in revenue will slow. To search deeper into the problem, we need to ask what has driven this inflation.

The answer is in the comparative nature of contracts. When players become free agents, they need to carefully negotiate their contracts so that they can maximize their payday without using high price to drive teams away. Like any market, you lose buyers at higher prices and gain buyers at lower ones. However, for sports in general, the price of a player is heavily dependent on the player’s skill and supply at his position. So how do players determine a proper asking price? In the past, their agents compared them to contracts of similar players, then let teams go out in a bidding war. As a result of the winner’s curse, the winning bidder needs to overpay to win the player. A good recent example is the Albert Pujols contract. In 2012, the Angels signed him for ten years at $240 million. Although a surefire hall of famer, Pujols is not worth that much as a player, but the cost of signing him is worth that much. Notice the difference in wording.

Further complicating the matter is the supply of players at any given offseason. Because of competitive balance rules, we rarely find dynasties in baseball anymore. Baseball teams are more likely to experience 2-3 of powerhouse play, both followed and preceded by 2-3 years of being terrible. The San Francisco Giants are an excellent example. They won the World Series in 2010, 2012, and 2014, but have since been one of the worst teams in baseball. An even better example is the Royals, who had the best farm system in baseball earlier in the decade, then capitalized on that by winning a World Series in 2015, only to fall back to the bottom of the pack. Because teams are constantly fluctuating between being in the “win now” or “win later” states, their demand for players is volatile.

Let’s consider J.D Martinez’s situation this offseason. The power hitting outfielder is coming off a career year, and has posted excellent numbers the past several years. Unfortunately for him, nearly all of the teams in baseball that are in a “win now” state are loaded with outfielders. Although an elite player, the Dodgers, Yankees, Cubs, Indians, and Astros declined to express interest in Martinez due to their currently strong outfielders. These teams would only be interested in Martinez at a bargain price, which Martinez was unwilling to accept up until now. Only two teams, the Red Sox and Diamondbacks, expressed interest in him at all. Even then, the Red Sox are stocked in the outfield with Betts, Bradley Jr., and Benintendi, and thus intend to use Martinez as as a designated hitter. However, due to the Diamondbacks being a small market team, they could not financially compete with the Red Sox, leaving a lonesome one-buyer-one-seller market.

Some experts blame the sudden decrease in demand as a result of next year’s free agent class being one of the strongest of all time. The hypothesis is that teams would prefer to trade for players this offseason as opposed to sign them because they want to save money for next year’s class, which features Bryce Harper, Manny Machado, and Clayton Kershaw (if he opts-out). Either way, Martinez’s smaller contract was more a product of poor timing and bad luck than anything else.

However, there is even more economics at hand than so far discussed. Like any market, willingness to pay is heavily determined by income. In the case of professional baseball teams, many of them make enough to pay good player’s a substantial amount, but the luxury tax threshold severely deters teams from just doling out cash. The issue is that the increase in the average salary for players has not matched the increase in the luxury threshold. Thus, the cost of signing a player goes beyond his contract. Teams pay heavy taxes when they go above the threshold. In 2016, the Dodgers paid the most in taxes, forking over almost $32 million. To put that into perspective, Clayton Kershaw is the highest paid player in baseball per year at $33 million. The Dodgers could have added another all-star with that money.

As a result, teams have less purchasing power than their revenues might suggest, especially smaller market teams that simply can’t afford to go over the threshold.

The market corrected its inflation. Teams were no longer willing to overpay, since it simply wasn’t worth it (duh). The effect of the winner’s curse was erased. Because of this, many feel that the contracts Martinez and Darvish received were “what the market could bear” and were thus fair contracts.

But what inspired this to happen now?

Teams were done getting burned by bad contracts. Reconsider the Pujols contract. Pujols posted a -1.8 wins above replacement last year. In layman’s terms, he statistically made the Angles worse off by playing, a tough pill to swallow after being paid $24 million per year. Pujols has only gotten worse since signing, and the Angels are still on the hook for another four years.

Consider Jason Heyward. After never batting above .300 and only hitting more than 20 home-runs once in his career, the Cubs wrongly deemed him an elite player. They fell for the winner’s curse and over-signed him at $184 million over 8 years with a $20 million bonus. Since then, he has been absolutely atrocious both in the regular season and in the postseason. The Cubs will be forfeiting $23 million for the next six years for a player that didn’t hit his own weight in 2016.

As I mentioned before, teams all across baseball are simply tired of being burned by bad contracts. The lack of demand for the current free agent class was just the bubble finally bursting.

This will surely not happen next year, as the players in that free agent class are younger, better, and more primed to take on heavier contracts. Some say Bryce Harper may net a $400 million dollar deal over 10+ years. Only time will tell, as the market for talent appears to be a volatile one.

Why the president should take Introduction to Economics

in Columns/Opinions/Uncategorized by

One of President Trump’s favorite activities is bragging about how great his administration has been for the economy. While the economy is currently on an overall upswing, Trump has no business taking credit for all of the gains he and his administration claim were due solely to their takeover of the executive branch.  In addition, these gains aren’t nearly as great as he makes them out to be, and anyone who has taken Introduction to Economics would quickly realize these claims are not entirely grounded in fact.

In September, Trump tweeted that “virtually no President has accomplished what we have accomplished in the first 9 months,” describing the economy—his economy—to be “roaring.”  

Claiming that the, at the time, nine month duration of his presidency saw the highest stock market growth in history, Trump hit a wall. Market Watch claims the best nine-month period for stock market growth was actually between April and December 2009, when the S&P soared 46.7 percent.  

Additionally, according to MarketWatch, “the market was better than it is now about 46 percent of the time while Bill Clinton was president, 34 percent under Barack Obama, and 14 percent under George W. Bush.”

Over the summer, Trump announced that “we have our most jobs ever in our country” and that “we have the highest employment numbers we’ve ever had in the history of our country.” Both of these claims are meaningless due to the fact that population has more than doubled in size since 1950.

Instead of expounding statistics that can be explained away by population growth, economists would rather consider the ratio of employment to population.

As the population continues to increase, the labor force does as well. However, the labor force is actually growing more slowly than it in the recent past due to the lack of baby boomers in the workforce. According to the Washington Post, “In 2016 the labor force participation rate for Americans ages 25 to 54 hovered around 81 percent, but it peaked in 1997 at 84 percent. Economists frequently analyze this rate as an indicator of the health of the job market. The higher the number, the healthier the market.”

There are many nuances the Trump administration chooses to ignore when referencing statistics related to employment. For example, one could choose to analyze the labor force participation rate for people ages 25 to 54, which measures the number of people who are both employed and unemployed against the entire U.S. population. There is also an overall labor force participation rate. This includes all Americans ages 16 and up while also incorporating both people who might be unemployed while in school and people aging out of the labor force.

Recently, Vice President Pence has been taking his cues from Trump, regurgitating his boss’ statements, and claiming the transfer of power to their leadership to be the cause of some unprecedented economic upswing.

During a speech at the Tax Foundation on Nov. 16, Pence, as evidence for his braggart statements about the Trump administration’s supposed great economic success, claimed that “there are more Americans working today than ever before in American history.”  

The American economy has been recovering from the Great Recession since 2009, yet Trump and Pence enjoy publicizing the idea that their administration has single handedly turned it all around.  Additionally, instead of acknowledging the Federal Reserve’s role in getting the economy out of the recession, spurring the highest period of economic growth in history, Trump chooses to criticize the organization and its leader. During the campaign, Trump claimed that “the Fed [created] a ‘very false economy,’” whatever that means. However, now that this “false economy” is having some success, he is now claiming it to be his own, taking credit for the effects of Fed policies and those of the Obama administration which he relentlessly mocked and attempted to refute.

There are two possible scenarios at play here. The first is that Trump, despite his continuous boasts about being an expert in the field of business, needs to brush up on his Economics 001 and should enroll in an introductory course at a local university; DC has plenty of options. The second, and admittedly more likely, option considering our President’s impeccable and proven track record as a liar, is that he comprehends the basic economic concepts that his statements clearly violate, and is operating under the impression that the American public does not, that he believes only a very small percentage of the words coming out of his mouth, and refuses to admit otherwise.

A comprehensive analysis of athletes and their majors

in Columns/Sports by

Do all athletes really major in Economics? Conventional wisdom at many Division I schools might lead us to believe that yes, they do. Economics at most colleges and universities is perhaps the most popular major among athletes, with many Division I athletes following traditional business paths. A 2015 study in the Bleacher Report of the “Big Five,” the five power Division 1 Conferences for football (ACC, Big 10, Big 12, SEC, and the Pac-12), found that an overwhelming number of football players participated in business and related majors. Other popular majors included sports administration, communications, and kinesiology and exercise sciences. However, some famous Division I athletes have followed much more non-conventional paths. For example, Dikembe Mutombo, the former NBA star, majored in Linguistics and Diplomacy in his time at Georgetown. Michael Jordan majored in Geography during his time at the University of North Carolina. This is all to say that particularly in the Division I sphere, majors are more often centered around pre-professional tracks: those that create a direct path into a job in finance, sports administration, consulting, or for athletes like Michael Jordan, a side-career in mapmaking!

What is different about the Division III scene, particularly Swarthmore College? Are there discernible differences between a student-athlete at Swarthmore College and their educational experience versus a football player at the University of Michigan? The Phoenix Digital Ops team put together a comprehensive analysis of male and female athletes in the 2015-16 sports season, and their declared majors. We aimed to hypothesize what a top-tier liberal arts education pushes for our student-athletes. Do our athletes follow similar tracks to the ones Division I athletes are on, or does Swarthmore push a different type of academic creativity that transcends the traditional pre-professional tracks?

For the ten varsity male sports in the 2015-16 season, there were 103 declared majors among the juniors and senior classes of each team, which includes double majors. For example, if a Men’s Varsity Tennis athlete double majored in Engineering and Psychology, this would be counted twice in our tally. 26% of male athletes majored in Economics. Men’s Lacrosse had the highest percentage of Economics majors on a single sports team, with 52% of the players having declared Economics majors. The second highest declared major for male athletes was Engineering, at 14.5%. This was followed by political science, computer science, psychology, and math. Majors that were not represented among men’s athletes during the 2015-16 year included Environmental Studies, Greek, German Studies, and Gender and Sexuality Studies (many being regularized special majors).

Ian Cairns ’20 responded to the data compiled by the Phoenix Digital Ops Team, and added his own experiences as an athlete choosing his prospective major.

“I’m from Detroit, Michigan and I’m a member of the Men’s Varsity Soccer team. Currently, I’m an intended Economics major, with an undecided minor. I’m not surprised by the amount of Economics majors on some of the male sports teams. That being said, at a place like Swarthmore, there are a lot of abstract and non-traditional majors that are offered too.”

Cairns went on to comment on the difference between a Swarthmore education and once at a bigger university.

“I would definitely say at Swarthmore, there is encouragement for athletes to go outside the traditional majors. I know at larger institutions, it is common to apply to a certain school within the university for your major. I had a lot of friends who went to the engineering school at the University of Michigan, where the distribution requirements make it much different from a liberal arts school like Swarthmore. That being said, both have their benefits; I don’t really have a bias to either.”

This sentiment reflected by Cairns is largely backed up in the data. Some varsity athletes end up going outside the traditional majors, while many do major in traditional majors like Economics, Biology, Engineering, etc.

For the ten women’s varsity sports in the 2015-16 season, there were 85 declared majors among the junior and senior varsity athletes. Interestingly enough, the data compiled was vastly different in comparison to the male athletes results. The most popular major among female athletes was biology, which accounted for 14% of the declared majors. This was followed by psychology at 11%, political science at 10%, education at 8%, and economics and history at 7%. Majors that were not represented among women’s varsity athletes included cognitive science, and Chinese.

The data shows us that Swarthmore varsity athletes are really not that much different than the average Swarthmore student. The most popular majors across gender were Economics, Engineering, Biology, Psychology, Political Science, Computer Science, and Math. This almost directly mirrors the most popular majors among the Swarthmore student body as a whole. The largest majors discrepancy for athletes versus the student body was Economics, as 18% of athletes majored in Economics, as opposed to 13% for the student body, which isn’t particularly  significant. Is there something about a Swarthmore education that differs from a larger institution? For one, our data shows us that while Swarthmore varsity athletes follow many of the traditional majors that athletes and students across the country declare, there also exists a diversification in the data that we might not necessarily see at a non-liberal arts school. Out of every major in the school, every single one is represented by at least one varsity athlete. From gender studies to economics, a critical analysis of the data reveals that the varsity athletes at this school are just as academically diverse as the rest of the school. While many traditional majors are represented, athletes are declared majors in every single major on campus. It is clear that the stereotype that all athletes are some type of Economics or business major is transcended at Swarthmore. Our academic mission promotes intellectual curiosity and the liberal arts as a tool to discover your passion. Swarthmore varsity athletes and the student body at large embody just that.

Swarthmore implements a Carbon Charge, but what will be its effects?

in Around Campus/News by

This year, the Office of Sustainability is implementing a carbon charge on each department at the college. Swarthmore and Yale University are currently the only two institutions of higher education to impose such a charge for carbon use. The charge will be equivalent to 1.5 percent of each department’s budget and will raise about $300,000 this year.

The charge is being implemented after a group of faculty recommended creating an internal cost for carbon last year. The money from this fund will be spent on projects to improve sustainability at the college. A Carbon Charge Committee will be formed to determine how the money will be spent.

The sustainability office hired Nathaniel Graf ‘16, as well as two student sustainability fellows, to research the implementation of the carbon charge and suggest future directions for the college to take to increase its environmental friendliness. The sustainability office has grown from one to three full-time staff members in the last year. However, it is unclear who will be on the carbon charge committee and  how the money raised from the charge will be spent.

Professor Stephen Golub of the economics department explained that the carbon charge came out of informal discussions with a group consisting mostly economics professors, including himself.

“The original idea was to have some sort of a shadow price. That is, when you build a building, you look at the costs of productions of building the building and you also include the cost of carbon emissions.”

Golub explained that idea of a carbon charge grew out of that cost, and the administration picked up the idea and implemented this year.  

Chair of the engineering department Carr Everbach said that the carbon charge would have a small but not unfelt effect on the department’s budget.

“Engineering will have to pay about $800 this year out of our budget.  While this is a relatively small fraction, it is a lot of money to a student we might pay to work as a grader or lab assistant.  We will probably just shuffle our money around slightly differently this year; for example, we may not upgrade some equipment as quickly,” said Everbach.

Everbach explained that the department’s budget has not increased since 2010, which meant that even small cuts put some strain on the department.

While Everbach noted that the new Biology, Engineering and Psychology building would have more efficient heating and cooling systems, he said that the department was limited in its ability to reduce its carbon footprint when it did not have data on its own electricity usage.

“We have no idea how much electricity we use annually… If we knew the carbon costs of our actions and had immediate feedback, we could make better decisions.  Another example:  all faculty travel should be logged in regardless of how booked, and a carbon estimate made and tallied by the college.”

The carbon charge is being implemented and studied by the sustainability office. Graf, who graduated last year with degrees in biology and chemistry, was hired specifically to study the carbon charge. He explained he would have several different roles in his job.

“Broadly, my job will be to support the Carbon Charge Committee in their work, mentoring and working with the President’s Sustainability Research Fellows on the carbon charge, and helping other colleges and universities explore internal carbon pricing at their own institutions.

When asked about possible uses for the funds, Graf offered a number of possibilities: “The funds from the Carbon Charge may be used for renewable energy installations, energy efficiency projects, improved metering, and education/behavior focused initiatives.”

Graf also brought up the idea of a “green revolving fund.” This fund would be a pot of money that departments could draw from to offset the cost of making purchases of more sustainable goods-for example L.E.D. light bulbs, which are more efficient but also more expensive than regular light bulbs. Graf also emphasized that a big goal of the sustainability office was to increase knowledge among students about what they could do to combat climate change.

The lack of data on the electricity usage of individual departments is a problem the Sustainability Office is also examining. Sustainability Coordinator Melissa Tier, ‘14 explained that, while the office has some data on electricity usage, it would not be enough to implement a carbon charge that was based on the actual greenhouse gas emissions of individual departments.

“Metering is currently used for facilities and sustainability staff to keep close track of energy data. We don’t have the metering to analyze [individual departmental emissions] yet,” said Tier.

Tier explained that more comprehensive metering would be critical to developing a more rigorous carbon charge in the future. “We don’t have a one to one ratio of buildings to departments. Because our metering is very high level, we can’t make distinctions between departments in the same building. The Science Center has a lot of high energy users in the building, so how do we distinguish between, say, physics and CS?”

In addition to the carbon charge, the college also purchases so called “carbon credits” to offset greenhouse gas emissions. These purchases are not funded by the carbon charge and go towards things like planting trees, which reduce the amount of carbon in the atmosphere. Without the purchase of carbon credits, the college’s total carbon emissions have actually been increasing in the last few years. Tier explained that the sustainability office was aware of this issue.

“We are aware that purchasing RECs to offset our emissions is not sufficient by itself.”

Some students expressed the belief that while the carbon charge was an appropriate measure, it was not enough. Stephen O’Hanlon, a leader in the Mountain Justice movement, thinks the college can and should do more.

“The carbon charge is a step in the right direction but it is nowhere near enough and not in line with the scale and scope of the climate crisis …in order take the climate crisis seriously as an institution we need to do everything we can to create political change.”

While the college is clearly devoting significant resources to sustainability efforts, data shows that Swarthmore’s carbon emissions have actually been increasing in the last several years. It remains to be seen if the efforts by the college will actually translate into real reductions in emissions of greenhouse gases.

Advice to Mountain Justice supporters

in Letter to the Editor/Opinions by

Last week’s editorial was a ringing endorsement for Mountain Justice’s calls for escalation. The Phoenix’s editorial board joined in the popular criticism of the Board of Managers, describing Mountain Justice as a group of students who have “invested substantial time in learning about the issue of divestment” and the Board as “wasting [Mountain Justice’s] time in meetings where Board members don’t even pretend to negotiate terms of divestment.” This subjective description of the goings-on feeds into the narrative of the Board as the obstinate “bad guy.” The criticism of the Board only serves to continue the bifurcation of the discourse surrounding divestment. In addition, the editorial board’s cursory explanations of their support of Mountain Justice failed to present or debunk the most prominent arguments against divestment.

The Board of Swarthmore College is familiar with the data, they keep up with the news of peer institutions, and they have demonstrated a plan to combat climate change in many forums. Yet, the editorial claims, “leading members didn’t bother to show up to recent negotiations.” This statement is a one-sided perspective that discounts the substantial influence of each Board member. Conjecture may lead a reader to believe that the Board is comprised of ambivalent individuals who are determined to rebuff any proposal offered by students or professors. This is an example of the continued polarization of the issue of divestment that is not only alienating the Board, but also students who don’t fall into one camp or another. Further, the attitude that both sides argue with simple facts makes it impossible to ask questions in the pursuit of greater individual understanding. The overarching question one must consider is whether the endowment should be used as a platform for social justice.

The simple narrative goes something like this: Swarthmore and its peer institutions agree to mutually divest from the fossil fuel industry (or some subset of it as last week’s editorial suggested) which serves as a signal to companies as well as local, state, and federal government that change is necessary. This union of institutions would benefit from increasing returns to scale and synergies. That is economic jargon for increased political clout that is greater in magnitude than the number of institutions added. The focus of this argument is that divestment serves as a complement, not a substitute, for additional measures that will protect our environment.

Perhaps this is what the editorial board meant when they cited Stanford University’s decision last year to divest from their direct holdings of coal companies. Swarthmore College could have taken advantage of mutual divestment without being the trailblazer, or as it could be portrayed, giving into the demands of the students. The act of divestment seems socially, ethically, and politically responsible. But that isn’t where the conversation ends, because it doesn’t directly address all concerns relevant to the endowment.

The Board of Managers decided against divestment for a host of reasons. One of them is an inherent belief that galvanizing public officials to change behavior is not within the realm of possibility. The college believes that the costs of divestment (both explicit and implicit) outweigh the social, moral, or political benefits. Thinking about the issue from an institutional perspective, Harvard University President Drew Faust stated that conceiving of the endowment as a tool to “inject the university into the political process” would jeopardize the mission of the University. Faust was insinuating that the endowment’s purpose is not to serve as an interest group to promote social causes. This is a point where individuals fall into different camps. Before unilaterally placing oneself on a side of the argument, one must also consider the economics of investing and generating revenue.

How does an endowment generate returns as to maximize spending and saving for the college? What is definite is that the market is as unjust as it is fickle. Consider the SINdex Fund, an ETF that invests exclusively in tobacco, gambling, and alcohol stocks. That fund has returned 16.1 percent annually since 1998, while the S&P 500 has returned 5.8 percent. That isn’t to say these companies are perennial outperformers, just that the market rewards capital allocation and timing rather than social justice. I would venture to guess that most endowments own companies from this index. Consider cigarette giant Philip Morris. The company’s strong stock performance and dividend offering are both essential for college revenue, which translates to, among other things, greater financial aid. Is there a necessary call to action to address this? Is the next step to follow the University of California at Berkeley’s student council and vote to divest from Brazil, Egypt, Indonesia, Israel, Mexico, Russia, Turkey, Sri Lanka and the United States for what they declare to be human rights violations? Although the editorial staff believes this “slippery slope” argument against divestment is baseless, it is a legitimate concern of the Board. As a result of divestment, all parties must consider where the line would then be drawn for social action or inaction. These questions and implications cannot be ignored. Picking and choosing arguments while discarding the rest is simply a means of generating support rather than an illumination of the larger issue.

Chair of the Board Gil Kemp wrote an op-ed this past November outlining the board’s stance against divestment. The op-ed contended that an actionable stance against climate change needs to focus on the demand side and not the supply side. Exxon Mobil is not the enemy. They are simply responding to consumer demands for energy. The perpetrators are you, the Board of Managers, the faculty, and everyone around you. Consider that mini-fridge you have in your room that you never unplug, the fan that you never turn off between the months of March and May, or the airplane you take. If you want to combat climate change, then solve our dependency and usage problems. Although a popular campus cause, divestment is largely symbolic. Divestment does not directly change the behavior of fossil fuel companies or change consumer demands for energy. Distracting from these long-term solutions by vilifying the Board of Managers, while publicly discounting the difficulties associated with their task at hand, is neither equitable nor efficient for achieving success as Mountain Justice has defined it.

The focus should be on the policymakers that deserve to have the finger pointed at them. Perhaps a small victory, only one senator shot down a 2015 amendment declaring that climate change is real. Yet, our campus news outlets, students, and faculty continue to point the finger at the Board of Managers under the premise that we were founded on social justice. Pounding the table in the name of social justice while making inaccurate or misrepresented statements is not a recipe for garnering support. In fact, the opportunity cost of this is a distraction from the real decision makers who are failing the current and future generations of Swarthmore students; the United States policymakers as well as ourselves. The link between the endowment and addressing climate change is loose, whereas the relationship between climate change, the consumer and the policy maker is much more direct. My advice to Mountain Justice and its supporters is that in order to strengthen your case, while simultaneously advocating for the support of the Board of Managers and students, is to avoid driving them further away through public appeals with incomplete information.

To save Main Street, Paulson saved Wall Street

in Columns/If It Moves/Opinions by

In preparation for the recent midterm elections, many news publications polled their readers for opinions on various current social and economic issues. One of the most interesting statistics that came to light this month was published by the Washington Post-ABC News poll. When asked to describe the state of the nation’s economy, over 70 percent of people replied that it was either “Poor” or “Not so good.” Even more intriguing, less than 30 percent think it is going to get better anytime soon.

What makes this skew in perception particularly concerning is that the economy, by all quantifiable gauges, is in a boom time that easily rivals that of the Roaring ’20s and has already outperformed some of the best known bull markets in American history. The public perception, however, is obviously not unjustified. The damage caused by the Great Recession has left deep scars in the American psychology and, more to the point, has bred a deep mistrust between Wall Street and Main Street

But while it is easy to see why there is so much resentment toward the Wall Street executives who walked away with millions during the height of the crisis, it is more difficult to understand the distaste the public continues to have for the economic policies the government adopted during that time.

Henry Paulson, the acting Secretary of the Treasury for the majority of the recession, took the brunt of the people’s criticism. According to public perception, Paulson’s tenure consisted of three primary failures: his reaction to the crisis was negligently delayed, his decision to allow Investment Banking giant Lehman Brothers to fail worsened the market situation enormously and the bailout bill he forced through Congress in 2008 ended up being an extremely wasteful use of the government’s capital.

However, before passing such harsh judgment on a man who near single-handedly steered the country through the second-worst financial calamity in American history, I think we must analyze the reasons for his decisions more closely by looking at his so-called shortcomings individually.

In 2006, before any of the major downturns in the market, Secretary Paulson was due to make a presentation on entitlement reform. However, seeing the large excesses that had been building up in the American economy for decades, Paulson requested for permission to speak on his concerns over some of the fundamental issues he saw in the markets and, in fact, did state that he thought there could be a financial crisis at some point during President Bush’s tenure. Though he didn’t address the specific issues in the housing market, Paulson was indeed prepared and well aware that a major crisis was an immediate possibility.

The delay in action when the crisis reared its head in August 2007 was a problem due to the extreme indecision displayed by the members of Congress. If anything, Paulson was only at fault for not being able convince Congress of the severity of the crisis at hand and the fact that truly unprecedented action needed to be taken to have any meaningful impact.

The next criticism, concerning the failure of Lehman Brothers, is simply not one that makes logical sense to direct at the government. The Fed had no authority to guarantee debt or to put in the United States’ capital to rescue Lehman Brothers. Essentially, a loan in the midst of a run from the investment bank would have no chance for success and would have been an entirely wasteful use of taxpayers’ money; the problem needed a solution from the private sector. The fact that Barclays’ U.K. regulator prevented the company from buying Lehman Brothers hours before the deal was set to close was unfortunate, but clearly not an indiscretion on anyone’s part. At that point, there was simply nothing that could be done to save Lehman.

Finally, despite the negative public perception on the bailout bills, they were by far some of the most empirically successful government programs in history. The actions that Paulson and his team were able to convince Congress to undertake were nothing short of extraordinary. It would simply be impossible to argue that the bailout of Fannie Mae and Freddie Mac and the relief that the Troubled Asset Relief Program provided weren’t critically instrumental to averting a catastrophic collapse of both the American and international economies.

Though the majority of these programs had the most direct consequence to Wall Street giants, their true goal was to provide relief to a struggling Main Street. Preventing the collapse of these financial giants was absolutely essential to keep millions of Americans in their homes. Perhaps Paulson identifies his own greatest failure best: “When I’m looking back at criticisms and some of the things I could have done better, the first one I come to is that I was never able to convince the American people that what we did with TARP was not for these banks; it was for them. It was to save Main Street. It was to save our economy from having a catastrophe.”

The power and promise of divestment

in Columns/Opinions/Rethinking Green by

As Arjun Raghuraman ’16 wrote in his column last week, climate change is causing grave harm to millions around the world, and it has similarly an incredibly devastating potential for future destruction. The humanitarian organization DARA estimates that our fossil fuel economy and the resulting climate change led to five million deaths in 2010 alone. However, Raghuraman missed a critical challenge of the climate crisis — the immensely short timeline in which unprecedented action must be taken. If we are to have a chance at avoiding a two-degree Celsius rise in global temperatures, which the United Nations set as the highest allowable level of warming, we must peak global emissions by 2020 and then decline emissions by at least three percent a year thereafter. In other words, the fossil fuel industry must leave 80 percent of its known fossil fuel reserves in the ground to avert irreversible climate catastrophe. Since UN climate agreements take several years to go into effect, the UN’s 2015 climate conference is likely the world’s last chance to create this type of vital change.

For decades, we have known the science and have been seeing the effects of climate change. For every month of my life, global temperatures have been above average; every year, world leaders have met to unsuccessfully develop climate agreements. For decades, scientists and environmental groups have lobbied politicians and tried to create change from within companies. These tactics are failing our generation and people around the world living with the impacts of climate change every single day. We are going in the wrong direction. Last year, global greenhouse emissions rose by 2.3 percent worldwide — for comparison, US emissions rose by 2.9 percent. There is no longer any excuse for inaction. Sweden generates 48 percent of its energy from renewable sources, and Denmark plans to obtain 70 percent of its energy from renewable sources by 2020. The debate on climate science is over, and we know the solutions. The greatest obstacle we face now is not a lack of solutions, but a lack of the social and political power necessary to keep the carbon in the ground and transition to a fossil-free economy.

We have failed because we were trying to beat the fossil fuel industry at its own game. We thought we could beat its insider-game politics, but the fossil fuel industry is one of the wealthiest industries on the planet. Climate groups simply will never be able to out-lobby or out-spend industry groups. We thought we could beat them through the market by shifting consumer demand away from fossil fuels, but these are immensely well-capitalized, oligopolistic firms that receive billions in subsidies and shield themselves from market competition. In 2013, one industry-backed group, ALEC, pushed 70 state-level bills to hinder the development of renewable energy. Even during the non-election year, the industry spent $156 million on lobbying efforts alone. They have the money, the lobbyists, and the infrastructure, but they do not have a monopoly on legitimacy. The most important social movements of the past century — civil rights, women’s suffrage, environmentalism — did not transform society by bankrupting or out-lobbying the segregationists, the patriarchs and the industry barons. They won because they delegitimized an unjust status quo, they shifted an entire political culture and opened the door to previously unwinnable change.

That is precisely the power and promise of social movements — and it is the only chance we have to stop the fossil fuel industry from dramatically altering life on Earth as we know it. Critics of divestment decry its symbolic nature, but our ability to transform what is legitimate and what is unacceptable — the power to make fossil fuel extraction politically unthinkable — is the most powerful tool we have in this fight. Indeed, it is our only hope against an industry that can out-lobby and out-spend anyone.

More than any climate campaign before it, the divestment movement has strengthened the climate movement and has allowed it to begin turning the tables on the fossil fuel industry. Hundreds of institutions have formed an unprecedented, diverse coalition, collectively declaring that continued investments in fossil fuels are antithetical to a just and sustainable future. The movement has been able to shift the thinking of the largest asset managers in the world — Blackrock, which created a fossil-free index option, and the Rockefeller family, which recently divested their endowment built off oil fortunes. As Donald Gould, an investment manager and the chair of Pitzer College’s Investment Committee, which divested last spring, described, “Acts of symbolism evolved from a dream to a possibility to a reality to an inevitability.” He uses the example of women’s suffrage — “We look back now and say, of course women have the vote, how could it be otherwise? The idea that we can as a planet come up with public policy on energy that helps mitigate the worst effects of climate change — we can’t give up hope that we can achieve that.” Just as the women’s suffrage movement transformed women’s suffrage from the unthinkable to the status quo, the divestment movement has the potential to do the same: transform the vision for a future free of deadly fossil fuels from the unthinkable to a political mandate.

Raghuraman’s suggestion that Swarthmore and other colleges actually invest more in the fossil fuel industry to “pressure the boards of fossil fuel firms” to reform provides a perfect example of exactly why current strategies are not working. Raghuraman suggests that this would allow colleges and universities to use shareholder resolutions to convince fossil fuel companies to “increase research and development in sustainable energy or adopt any other appropriate reform.” This type of strategy is useful in cases where the company can make simple reforms, such as improving labor practices. However, SEC Rule 14a-8(i)(7), states that corporations can throw out any resolution seeking to change their basic business models. The basic business model of the fossil fuel industry is to burn five times the amount of carbon that is allowable. If we are to stay below two degrees Celsius of warming in the future, that business plan must change. Exxon successfully threw out a shareholder resolution merely asking it to prepare a report considering the financial risks presented by the social and environmental costs of tar sands oil extraction because it related to the company’s “ordinary business operations.” Even the Rockefellers, who are heirs to the fortune of Standard Oil, the predecessor of Exxon, chose to divest after unsuccessfully attempting to convince Exxon to reform its environmental policies.

Divestment is now in the public eye, and there is no neutral choice here. As the college where the movement began, we are particularly in the spotlight. If we, Swarthmore, continue to invest in fossil fuels, then we implicitly deny climate science and signal to the world that fossil fuels are an acceptable investment, compatible with our values of justice and sustainability. This is the wrong message being sent at the worst time. These next five years are pivotal; the window for action is closing rapidly. As an institution, we should ask how we can maximally leverage our resources to meet the demands of the planet: to significantly reduce fossil fuel extraction and immediately begin a transition to renewable, green energy. Divestment is one of our most powerful tools toward that end.

Is divestment the only solution?

in Columns/If It Moves/Opinions by

I wanted to begin this column with a brief characterization of the enormous harm the fossil industry has already had and, if left unchecked, will continue to have on our environment. But Swarthmore Mountain Justice does a better job than I can in their “Fossil Fuel Divestment 101”: “The climate is changing because we’re burning fossil fuels… record temperatures, extreme weather events, desertification, displacement of communities, and countless [other issues]. Climate change is already causing 400,000 deaths a year by some measures — more than 100 million people are expected to die by 2030 if we don’t stop runaway climate change.” The dire picture portrayed here probably understates the problem. Ironically, however, it raises the question: is divestment really the best, most appropriate response we have?

Stephen O’Hanlon clarified, in what was one of the most convincing pro-divestment articles I’ve read, the true goal of the divestment movement in his last column: “[To counteract] the distortion of our political system by the fossil fuel industry’s injection of billions of dollars into our democracy, industry funding of climate denialism, and lobbying efforts to maintain fossil fuel subsidies.” To claim these goals, however, and then to concede “the impact of divestment movements, past and present, has little to do with the stocks themselves” is a serious conundrum. The fact is, if divestment cannot do anything to drive down the fossil fuel industry’s profits — a strong proxy for share price — it will in no way be able to limit the industry’s ability to “inject billions, fund, or lobby.”

The stigmatization of fossil fuel companies that the divestment movement hopes to accomplish does have, I hope, the ultimate goal of driving down demand for these firms’ products, profits and share price. Looking at any successful “stigmatization” movement in history — e.g. apartheid, cigarettes, diamonds — shows us that this is indeed the case: the effects of divesting accumulate, profits within the affected industry decline, share prices erode and, finally, companies either burn out or are forced to adopt meaningful reforms.

That blueprint, although promising at first glance, is unlikely to hold true for the fossil fuel divestment narrative. The reason will likely be self-evident after analyzing why stigmatization and divestment was successful in remedying the negative effects of apartheid and the tobacco and diamond industries. In the case of the boycott on South Africa to abandon apartheid, I would argue that the moral imperative to the public was far more clear and convincing. Moreover, the effort required to divest from a single country that provided no unique essential good pales in comparison to what it would take to divest indiscriminately from a global industry. Similarly, stigmatizing the tobacco and diamond industries was a viable option primarily because price elasticity of demand for the two products are relatively high in the long run — i.e. people did not see the goods as strong necessities.

Unfortunately, the political opposition to major climate control reform does not stem only from fossil fuel companies. The stigmatization of fossil fuels is an unprecedentedly difficult task precisely because of the deep reliance that virtually the entire public has on the products of the industry. Consequently, measures like the carbon tax will ultimately drive costs up for everyone. As Phillip Decker pointed out in his latest column, however noble the cause, it will prove immensely difficult to convince the American public that they need to voluntarily increase their own financial burden without any readily available alternative.

Even if we are to suppose the success of fossil fuel divestment, the change that it will affect is simply too far in the future. Given the unprecedented rates at which global climate is deteriorating and extrapolating from the over half-century it took to appropriately stigmatize a product like tobacco, it is clear that we cannot wait or hope for divestment from fossil fuels to be a realistic solution to the issue at hand.

Other solutions exist. Ivo Welch, a finance and economics professor at the University of California, Los Angeles’ business school, suggests one possible idea: petition a consortium of schools committed to climate control to, in fact, pool their resources and increase investments in the fossil fuel industry. Leveraging the voting rights derived from these increased holdings, the group could then directly pressure the boards of fossil fuel firms to revise their harmful extraction processes, increase research and development in sustainable energy or adopt any other appropriate reform.

Another option would be to take the profits from investing in fossil fuel companies — or even the liquidation from divesting — and re-invest them in ourselves. Higher education in America has provided numerous revolutionary solutions to technological and scientific problems in the past. We could leverage this largely untapped ingenuity that still thrives in our country today by providing conditional grants for research in renewable energy, purification methods, alternative extraction methods or any other novel pollution-controlling solution.  Both these strategies will be just as expensive, if not more so, to universities than divestment, but the chance for meaningful, successful change is far greater.

The movement for fossil fuel divestment has gained so much traction in the past three years that it would be asinine to abandon or even discount the progress it has made. But given the ultimately slim chance for success it seems to have, we have both a moral and self-interested obligation to begin exploring new, creative and more direct solutions to the crisis at hand.

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