Derek Carr has just signed the most lucrative deal in NFL history, receiving a five-year extension worth $125 million with the soon-to-be Las Vegas Raiders. At $25 million per year, Carr edges out Indianapolis Colts quarterback Andrew Luck (though Luck’s contract did reward him with over twice as much in guaranteed money). Carr also becomes a big winner in the Raiders’ taxpayer-funded escape from Oakland, with his contract scheduled so most of the money kicks in after the franchise moves to income-tax-free Nevada.
While the structure of Carr’s contract offers another opportunity to discuss the “jock tax,” it also serves to illustrate a more important issue: why Wall Street wins whenever the Fed expands the monetary supply.
After all consider this: while Derek Carr has certainly proven to be a promising young player at perhaps the most important position in professional sports, he is by no means the most accomplished player at his position or in the NFL. He’s been selected to the Pro Bowl twice, once as an alternate. His career QB rating is beneath players such as Chad Pennington, Carson Palmer, and Colin Kaepernick. Meanwhile, he’s led his team to the playoffs only one time–unfortunately breaking his fibula before he could make a start in the post-season.
So why, then, is he being rewarded with the NFL’s largest contract?
The answer itself is fairly obvious: he was due a new deal at a time when the salary cap has never been higher. As such, NFL salaries have more to do about the size of the salary cap when a contract is signed than it is about the merit of the individual player. Of course, Carr’s yearly salary will be used throughout time as a starting point with other more accomplished quarterbacks, and the average for the position will gradually rise over time. Matthew Stafford, for example, is likely to sign an even larger contract in the coming months. Salaries league-wide will rise with salary cap inflation.
But at the moment, Carr is the biggest winner of the NFL’s salary cap moving from $155M to $167M in the past year. A player like Aaron Rodgers, considered a bonafide star and a lock for the hall of fame, may feel underpaid with a salary averaging only $22 million a year.
A similar dynamic plays out in the “real economy” as well.
Now, the relationship between all economic actors and the Fed isn’t as simple as players and their teams. Neither businesses nor consumers constantly renegotiate contracts with their country’s central bank, trying to lock up their relative value compared to everyone else on the market. Instead their earnings are decided, for the most part, based on a never ending series of transactions on the market.
Like the NFL increasing its salary cap, the economy sees constant increases to the money supply due the monetary policy of the Federal Reserve. While the Fed wrongly views this monetary expansion as vital to maintaining economic growth, there are always consequences to their actions that are often overlooked.
For example, monetary inflation doesn’t impact everyone at the same time. There is no magical helicopter dropping money evenly across the country. Money is created by the Fed and either spent into the economy by the government, or loaned out through the banking system. By having first access to these previously unavailable funds, Wall Street has a competitive advantage—relative to the rest of the economy—before the new money works its way throughout the rest of the economy.
Clearly, this access to new money has nothing to do with the merit of the financial industry relative to other sectors; it’s simply a byproduct of their proximity to the central bank. The same is true for the industries that are the first to receive the newly created money from Wall Street, which itself plays a role in inflating asset bubbles and spawning business cycles.
This phenomenon was first discovered by Richard Cantillion, and is an issue often completely overlooked in the debates over growing income inequality. While the elimination of “income inequality” should never be the aim of government policy, it is useful to illustrate the ways government enriches Wall Street at the expense of the rest of the economy; especially when the politicians who fundraise off income inequality are the same ones cheerleading for the Fed’s inflationary policy.
All of this is not to say that Derek Carr should be looked upon with the same disdain American’s should hold for the Federal Reserve. In fact, I would strongly oppose the Raiders replacing Carr with any amount of gold. Obviously, the big difference between the quarterback and Wall Street is that the former doesn’t have a unique, privileged relationship with the source of new funds. Every quarterback, over time, will have the chance to renegotiate their contract and, as such, they will all have the opportunity to benefit from an ever growing salary cap.
Unfortunately, the same cannot be said for the economy as a whole. While various sectors may take turns in being the prized investment of financial markets—dot-coms in the late 90s, housing in the 2000s, tech companies and auto loans (among other things) today—it is always the financial sector that wins first.
As such, until we abolish the Fed, Wall Street will continue to dominate the economy even more than Bill Belichick has the NFL.