Shadow Pricing

It’s time for Jose Melendez’ KEY TO THE GAME.

For the next month, Jose is working as a teaching assistant in a class designed to teach international development officials how to do cost-benefit analysis (CBA). The idea behind CBA is that in analyzing a project, one should calculate the total benefit and costs derived from the project over time, and then use a discount rate to account for the time value of money, how one values 10 dollars in a year versus 10 dollars today.

At first it seems quite simple, like all one has to do is project the revenues and expenditures calculate the net present value and rejoice.

But it’s not that easy. In order to do an economic analysis, not just a financial analysis, one must calculate all of the costs and benefits, not just those that are obvious. For example, in the case of a project that causes some pollution, one has to include the cost of pollution in the equation. One must also include the opportunity cost of the project. What is not getting done because this project is going forward? As Professor Robert Conrad put it, “Never let anyone tell you that sitting on a milk crate on your front porch drinking a Pabst Blue Ribbon beer, is not a socially productive activity.”

This endeavor has made Jose wonder if we are really valuing our baseball players correctly. Sure, the Sabermetrics crowd has developed lots of new statistics that measure what players are doing, but is that enough? What about what players aren’t doing? There are some statistics that have captured assess some of the things players don’t do, such as making outs, but Jose knows that isn’t enough.

For example, with Jacoby Ellsbury replaced by Daniel Nava, we know what we’re missing in terms of actions—we’re losing so many hits, so many stolen bases and so on, but what are the inactions we’re missing? What is the added value of the time in front of the mirror that is opened up because Ellsbury isn’t standing in front of it working on his puppy dog eyes?

We know that with Josh Beckett’s injury we have lost so many strikeouts, innings pitched and so on, but we have also gained valuable hours of our lives that are no longer being squandered watching Beckett wait 20 seconds between each pitch. From the perspective of the total economy, it is possible that Josh Beckett’s injury is a net positive.

CBA can be at its most useful in measuring projects where benefits are relatively clear, such as the construction of a bridge. Thus, Jose hopes that it might be useful in assessing what Jose regards as the Red Sox’s most urgent project need, constructing a bridge to the closer.

Given that Jonathan Papelbon is under contract for two years, Jose regards this as a two-year project. That is not enough. If we have to expend $X in talent and salaries this year and next to build and sustain the bridge, then we must derive enough benefit from that bridge this year and next year (note: at a discount rate of let’s say. 03 because that is the standard in health projects, and health is clearly the biggest issue here) if the project is worth doing. Jose doesn’t see this having a positive net present value. We’re going to have to invest a lot up front to get a benefit that will last a maximum of two years, and even that is speculative. Since the bridge is built to a shaky terminus (note: Papelbon) it seems completely possible that we may not even be able to enjoy the full life of the project. Therefore, if the Red Sox are to invest in a project, investing in the terminus, a closer, seems to be a wiser choice than investing in a bridge to the closer. And that’s if one doesn’t calculate a shadow price that accounts for externalities like pollution. If one includes the noise pollution from the nonsense coming out of Papelbon’s mouth, there’s absolutely no doubt that this bridge project is a dog.

I’m Jose Melendez, and that is my KEY TO THE GAME.

Tha Spanish Flu

It’s time for Jose Melendez’s KEYS TO THE GAME.

1. With Victor Martinez joining Dustin Pedroia, Jacoby Ellsbury, St. Josh Beckett, Jeremy Hermida, Mike Cameron, DJ Dru, Daisuke Matsuzaka and others among the sick and wounded, more and more people are suggesting that an epidemic comparable to the Black Plague has broken out in the Red Sox clubhouse. Jose thinks that this analogy is false, or worse, inapt. The Black Death wiped out about a third of the population of Europe and Jose is fairly confident that this particular epidemic will ultimately strike well over a third of the Red Sox clubhouse.

Jose suspects that the better analogy is the Spanish flu of 1918. There are three reasons that Jose draws this analogy. First, since a significant chunk of the injuries are caused by Hispanophone third baseman Adrian Beltre, comparing it to a Spanish germ seems appropriate. Second, in 1918, the Red Sox won the World Series, as they will this year. Finally, as Jose has sadly learned from associating with women in their 30s who are a little too in to abstinent vampires, the Spanish Flu marks the origin of America’s sexiest vampire. This current Red Sox epidemic has given us Daniel Nava who is definitely sexy and, thanks to his fixation on the unattainable Erin Andrews, possibly abstinent. Moreover, while Nava is not over 100 years old, he is, like the high school vampire, far too old to be doing what he’s doing. On the other hand, it is not at all clear that he is a vampire, as thus far he has shown no evidence of sucking.

2. Jose is really tired of economics, of the dismal science of dollars and cents, ruining sports. Jose tried to forgive Manny Ramirez. He really did. Actually, he succeeded. Jose wasn’t there for Manny’s return, but had he been, he would have stood and cheered until a mild fatigue set in and he decided to sit down and/or get another beer.

But no more.

Jose learned last night while watching ESPN News that Takeru Kobayashi has opted out of this year’s Nathan’s Famous Hot Dog eating contest due to a stall in contract negotiations. Do you remember where you were when you lost your innocence? Jose does. The Federal on Main Street in Durham, NC sucking down an Iron City Beer. It was one thing when money ruined baseball, basketball, football, hockey, billiards, bowling and scrabble. But competitive eating? It’s supposed to be about the love, man.

Kobayashi being Manny?


3. Whenever Jose’s brother Sam sees Darnell McDonald, he thinks about Darnell from My Name is Earl, aka the Crab Man. Ergo, Jose wants to call McDonald “the Crab Man.” This is not to be confused with the promiscuous Wade Boggs who was, of course, known as “The Crabs Man.”

I’m Jose Melendez, and those are my KEYS TO THE GAME.