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The Economic Problem with LIV Golf

* This is a bit off topic, but as a casual golfer/watcher and economic nerd I think it’s an interesting topic.  

The creation of the LIV Golf tour has shaken the world of golf to its core. LIV is the Saudi Arabia backed league designed to “compete” with the PGA Tour and other world tours. As a pragmatic capitalist, I obviously love competition, but this isn’t competition. In fact, I think it’s likely to hurt golf because it is anti-competitive.

This situation is a really interesting one from the perspective of market based competition because the PGA, like many other sports leagues, essentially has a monopoly. But can a private monopolist compete with a government funded entity? In this case, the real monopolist is LIV because LIV is being funded by a very wealthy national government. And they’re throwing money at this project like it’s manna from heaven. Which is the primary problem with this situation. Why is a national government, that represents the interests of their taxpayers, involved in trying to create a golf league? It’s a bizarre situation when you think about it. How is it in the national interest of Saudi Arabia to pay billions of dollars out to foreigners playing most of their tournaments in foreign venues? The economic evidence on funding domestic sports is mixed at best, but this isn’t even funding domestic sporting infrastructure.

Imagine if the US government started a golf league to compete with the PGA – we would be outraged. And no, this has nothing to do with the moral stance of the Saudi government. That, to me, is an empty talking point because if you follow the paper trail from any government you’ll find abuses. The important point is that the US taxpayers would in no way benefit from the US government paying millionaires hundreds of millions of dollars to play golf.

And this is where the LIV league is problematic for golf more specifically. Not only are they a government funded entity misusing taxpayer funds, but they’re creating an anti-competitive situation that hurts golf. The reason this hurts golf, from a competitive perspective, is that the players moving to LIV have no incentive to play well. For instance, Dustin Johnson signed a guaranteed $125 million deal for 4 years. Not only is he guaranteed this huge payout, just for showing up, but if he finishes in last place in this week’s Portland event he’ll make a guaranteed $120,000. In other words, there’s no skin in the game here. Johnson has nothing to lose. He just needs to show up, hit 180 shots into a Portland forest and go spend a week on a yacht until he does it all again in a few weeks. One of golf’s most exciting players has no incentive to play good golf in the future. He has no need to practice, improve or really do anything. How is this a good thing?

This all raises the issue of government spending and its net present value. In my opinion most government spending should be on public policy projects that the private sector cannot or will not do because they have an inherent negative net present value. For instance, the private sector doesn’t want to fund a military because it’s not profitable to blow things up and kill your workforce. Wars are perfect for public policy because they have a financial negative net present value and a social positive net present value (assuming you don’t lose entirely). But what does this golf league provide for the taxpayers of Saudi Arabia? It not only has a negative net present financial value, but it has a negative net present social value because it erodes the quality of global golf by watering down the competition and diminishing the incentive structure to play good golf.

From the player’s perspective you can’t really blame these guys for taking the money. If a national government were willing to pay me hundreds of millions of dollars to give people financial advice I would certainly jump at the opportunity. It would be an obvious abuse of taxpayer dollars, but Saudi Arabia doesn’t seem to care about that. And as I said above, the moral issue is a non-issue. All governments are involved in bad stuff of varying degrees. Sure, the Saudis might be worse than others, but that’s not the real issue here. The real issue is that national governments shouldn’t be paying millionaires billions of dollars to play a game that won’t benefit the citizens of Saudi Arabia. But from a player’s perspective they’re just taking advantage of this government misuse of funds. Yes, the players should probably care more about the well-being of golf, but that’s a more personal issue that each golfer has to consider at a micro level based on their potential personal contribution to the game and personal financial needs.

The creation of a government funded golf league makes me very uncomfortable because the economic incentives are not in the interest of domestic taxpayers AND because it erodes the quality of the entertainment by creating an anti-competitive playing field. In my opinion the entities that care about the history of golf and the competitive nature of golf, need to pushback against this. This is especially true of the entities that operate golf’s most important historical events like the British Open and The Masters. Augusta National, which operates The Masters, for instance, could ban any player so long as they are playing in the LIV league. In doing so, they protect the competitive nature of golf and support the long-standing history of the game. I am all for competition and none of this is to say that the PGA is a perfect altruistic entity, but it appears pretty clear to me that this is not a good situation for the long-term well-being of the game or taxpayers.

NB – Someone raised a good point that other sports have guaranteed money and players still perform at a high level. But I think this is different because golfers are independent contractors, not employees of a team. If a player in the NBA decides not to practice he hurts his entire organization. He’s held accountable by the team even if he has guaranteed money. If a golfer decides not to practice he only hurts himself and is accountable to no one.