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Maintaining a Credible Threat

2013 May 1
by Victor Matheson

Great article today at Slate from Matt Yglesias about the Sacramento Kings proposed move to Seattle. It appears as if the NBA will try to force the current Kings’ ownership to take a lower bid from a Sacramento group that includes a new publicly financed stadium than a higher bid from a Seattle group that proposes to build a largely privately financed arena. As noted by Yglesias,  “The Seattle bid, in other words, would have set a good precedent for the future of American public policy. And the owners didn’t want that.” I’m not sure Yglesias is exactly right here. There are plenty of examples in the NBA of largely privately financed arenas including those in Chicago, New York City, Boston, Toronto, Philly, and Salt Lake City.

His point about using Seattle as a blackmail threat, however, is spot on. He states, “The owners want to be able to make this move over and over again. ‘Give us a new publicly financed stadium or we’ll move to Seattle’ is a threat that works as well in Portland or Milwaukee or Minneapolis or Salt Lake City or Memphis or New Orleans or Phoenix as it does in Sacramento.” Seattle is a much more credible threat for franchise relocation than Sacramento, so unless the Seattle bid is a whole lot better than the one in Sacramento, having an open city in Seattle is worth a whole lot more to the league than having an open city in Sacramento.

One can see the most obvious example of this in the NFL. While it may seem odd that the NFL doesn’t have a team in Los Angeles, the nation’s second largest media market, in fact, Los Angeles is a credible relocation threat for just about every team in the country. The open market in LA just got the normally quite parsimonious citizens of Minnesota to cough up about $500 million for a new Vikings stadium. The Indianapolis Colts and the New Orleans Saints almost certainly have LA to thanks for their new or upgraded stadiums as well. All in all, LA is probably worth more to the NFL without a team than with a team.

“42″ and the Intangible Impact of Sports

2013 April 22
by Brian Goff

Baseball is life, or so the saying goes. The release of “42” brings back to light a story that, among its many angles and nuances, turns that saying around — life is baseball. Sports not only mirrors life but also acts as a vehicle to influence and change it. Measured solely by revenues, sports rates a relatively minor player as industries go. Summed together, professional football, baseball, basketball, hockey and auto racing generate only about $30 billion per year. Even with the major football and basketball revenue producers among college teams lumped in, the total is well under $50 billion. That’s nowhere near the $100 billion-plus figures for the heavyweights among individual companies, much less entire industries. Yet, for enormous sales figures and cult-like following surrounding a company like Apple, its ongoing buzz does not come close to sports. Steve Job and Bill Gates have enjoyed about as much celebrity as any corporate figures, but the events involving Jackie Robinson, Branch Rickey, and the Brooklyn Dodgers took place over 75 years ago and continue to inspire. Babe Ruth’s exploits in Major League Baseball will soon be 100 years old, but his name is still widely known. After 100 years, I would expect very little public awareness of names like Jobs or Gates, unless it happens through the naming of some institution.

A reply might be, the Jackie Robinson episode lives on because it centers on an important period of American history — breaking down racial barriers. Yes, but among all the individual stories that paralleled that of Robinson, it’s his that emerged into and has survived in the common public consciousness. This kind of influence, however, goes beyond Robinson and race. Sports is one of the few areas where revenues so radically understate the social impact and awareness of the business. The very existence of substantial merchandising revenues for sports teams is a tell-tale indicator of this non-monetary interest. ExxonMobil may generate $400 billion in revenue but hardly anyone walks around wearing caps, jackets, and shirts displaying their attachment as fans do for the Yankees, the Cowboys, the Crimson Tide, or Dale Jr. In this respect, sports fits with movies, vacations, special romantic moments, and a few other activities where individuals relive, retell, and rehash memorable events over and over, making the initial “consumption value” very durable. The involvement of thousands of other people in the initial enjoyment offers a relatively unique opportunity for social networking that long preceded the advent of the internet.

It’s an interesting exercise to try to add up the non-revenue value of sports to fans. The amount of time alone, whether at reliving the game in the break room or at home, reading newspapers, blogs, or other sources is not trivial. Further, the time spent on fantasy sports ultimately derives its value from the sports themselves. With even modest estimates the number of people involved in these activities along with the time spent and at average wage rates, it’s easy to double the revenue value. Such estimates vastly understate the impact of sports as “42” once again demonstrates.

Organizational Architecture of College Sports Behind the Scandals

2013 April 10
by Brian Goff

Another college coach engages in reprehensible activities and the supervising athletic directors and university presidents do nothing until external investigations and public awareness force their hand.    While not involving incidents nearly as disturbing, the bumbling of the Rutgers situation echoes of many of the same issues as the Penn State scandal.  Some writers have pondered how Rutgers’ Athletic Director and President could have fallen down the same hole with the PSU scandal so fresh. 

The head scratching takes a very narrow view.  The problem is, fundamentally, not one of university officials who are unaware or without ethical standards (although one wonders at times).  Its endemic –  flowing out of the very fabric of college sports and the incentives supplied by its organizational architecture.  (See the McCormick-Tollison TSE post on Subversion of the Academy for similar views).

I’m not an academic who dislikes sports, who has a gripe because a coach makes more than I do, or who thinks the football program drains funds from my department.  The fundamental point is that big time college athletics, football and men’s basketball, are professional entertainment operations clumsily bundled with academic institutions and shrouded in archaic language and restrictions of amateurism.   College athletics started as truly amateur enterprises not very different from intramural athletics on campuses today.  By the 1950s, fan interest had already turned them into something very different.  Sixty years later, with billion dollar basketball tournament TV contracts and major football programs hauling in $50-$100 million revenues each year, and 100,000 seat stadiums filled to capacity, the difference between these activities and their professional sports counterparts is one of semantics and organizational structure  – not basic economics. 

With the sizable revenues at stake, dollars will try to work back into the hands of players whether by illicit cash payments or through “legal” in-kind inducements.  But that’s not my point here.  It also means that university officials whose positions and salaries correspond to governing academic institutions will also be tasked with overseeing operations that only nominally fall within the scope of their other duties.  It’s not the dog chasing its tail as some think about college academics and athletics, it’s a wholly different dog (or elephant) trying to fit into the same doghouse. 

Why is it that the top coaches for the best programs make salaries several times above their “supervisors”?  It’s not an outrage or evidence of athletics out of control.  Instead, it vividly illustrates that something is amiss.  It grows out of the imbalance of stuffing a distinct professional entertainment operation underneath the organizational umbrella of another, unrelated entity.  It’s a bit like cramming a Hollywood movie production within the organizational confines of a local car dealership and placing the general manager of the car dealership in charge of the film’s producer, director, and actors.   How well would that work? 

The Penn State and Rutgers cases are just the most egregious examples of the silliness that transpires when someone who is economically subordinate is put in the position as supervisor.   Bob Knight had a long history of (largely ignored) incidents at Indiana before his dismissal, again only after a video goes public.  In IU’s case and those like it, the running joke is that the AD calls up the coach and asks, “what punishment do you want?”  More recently, the Sports Illustrated story on now-fired Ben Howland, Not the UCLA Way, offers up similar themes.  Stories of these kinds, whether true or apocryphal, dot the landscape of college sports.  So, the next time a story breaks about a coach out of control whose behavior is smoothed over by university officials, or when a player has received payments, loans, or better grades, there is no riddle – the system is built that way. 

NCAA Seeding — A Rejoinder to Brian Goff

2013 April 3
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by Victor Matheson

In his latest post Brian Goff notes that top seeds in this year’s tournament had some trouble putting away their lower ranked opponents and that seed wasn’t a strong predictor of final win margin. While I must agree that I certainly didn’t have FGCU making it to the Sweet Sixteen or Wichita State in the Final Four, at least historically, the people at the NCAA who put together the brackets have done a remarkably good job seeding the teams. Obviously, there is always uncertainty of outcome in any sporting event – that’s quite a bit of the allure of spectator sports – but higher seeds tend to do better than lower ones and beat lower seeds by higher margins. Here’s the data since the men’s tournament went to a fully seeded 64-team tournament (minus the last couple of years I haven’t gotten around to updating yet.)

Seed

Men’s Tournament, 1985-2011

Win Margin

Win %

1

25.84

100.0

2

16.77

96.2

3

11.53

84.6

4

9.49

78.8

5

4.54

66.3

6

3.94

68.3

7

2.20

58.7

8

-0.16

48.1

The margin of victory uniformly falls with the seed and win percentage is fairly uniform as well with the exception of the 5 and 6 seed where there isn’t an observable difference. There is a slight anomaly in the 8 vs. 9 game with 9s winning more often, but call that one a coin flip. Overall, I would give a great deal of credit to the bracket makers for their overall success.

That being said, it is possible that these results are being driven by good seeding in earlier decades, and an examination of whether seeding accuracy or competitive balance has changed over time would be of interest.

NCAA Seeding — A Lot of Noise

2013 April 1
by Brian Goff

The 2013 NCAA tournament has afforded another experiment on whether the seeding process incorporates much more noise than signal.  For those following the tournament, it should come as no surprise that this year offers more confirmation of the suspect seeding process.

I collected scores and seed differences for all 48 games from the first two rounds.  Using a common statistical technique (regression analysis), I examined the relationship between seed differences and score differences.  Seed differences explain a paltry 6 percent of score differences.  When the 1-16 and 2-15 are dropped, this percentage falls to only 3 percent.  Even as a predictor of win-loss rather than score, seed differences fare poorly.  For many of the games, plucking scores from a lottery hopper would come close to providing as much information on outcomes.

Is seeding really intended to predict score differential?  Obviously, not directly.  However, seeding reflects a gauge of team’s in-season performance quality – wins and losses adjusted for quality of competition.  If this gauge has much meaning to it, better seeds indicating higher quality teams, differences between them should show up in scores.  Instead, games with large seed differences wind up close or in upsets and games with narrow seed differences result in some blowouts.

It’s not just the NCAA Selection Committee that struggled with finding meaningful differences between teams.  Vegas point spreads, direct estimates of score differences, predicted only about 17 percent of score differences.  That’s a stunningly low number given that these spreads incorporate information such as injuries and best guesses about team specific matchups.

The 1 and 2 seeds are still very likely to win their opening round games, but even these games have become much more contested.  Based on this year’s tourney, I might amend original suggestion to select seeds 1-4 with everyone else randomly selected to just selecting the 1 seeds and randomizing from there.  Yes, that would lead to some seemingly strong teams facing other strong teams in the first round, and weak versus weak, but, that’s already happening.  The setup just puts a different face on it.

What Are the Falcons Worth to Atlanta?

2013 March 18
by Skip Sauer

“WHEREAS, due to the continuing economic benefits to be derived from the New Stadium Project by the citizens of the City of Atlanta and the State of Georgia…”  Thus begins the latest diversion of revenue from a city’s coffers to a professional sports franchise.

Various reports indicate that the negotiations between Atlanta and the NFL’s Falcons over a new stadium are nearing a conclusion. A story in Friday’s Atlanta Journal and Constitution presents a number of basic facts.  The estimated construction cost is an eye-popping one billion dollars.  The public will contribute two hundred million dollars up front through a bond issue, with the Falcons responsible for the rest.  The deal appears to fit the contemporary norm for stadium building and funding.  As in Dallas and New York, a building costing a billion bucks will doubtless be a super spruced-up sports palace.  But along with the higher price tag, the public’s share of the costs is below the norm for the mid to late 20th century.  Raymond Keating’s 1999 survey of stadium costs (“Sports Pork“) estimated the public share of construction costs at about 75%, roughly three times the public share in the present case.  

Neil deMause presents a detailed breakdown of other elements in Atlanta’s “New Stadium Project Financing Proposal,” along with a valuable link to the 200 page proposal itself.  To the construction costs, add $24 million in land costs and $30 million in construction sales tax rebates.  This pushes the subsidized share of full construction costs to about 25%.  That’s not the end of public support however.  In addition, the Falcons will receive  revenues from the city’s 7% Hotel Motel Tax.  This tax, which would sunset under current law in 2020, is extended another 30 years to 2050.  (The extension of this distortionary tax is perhaps the most inefficient aspect of the agreement).  deMause reports that the Falcons’s share of this tax currently runs about $17 million.  These funds are designated for operation and maintenance of the stadium — costs that in the absence of public involvement would be charged to the Falcons (or the Atlanta Falcons Stadium Company, a separate legal entity).  

There are a number of offsets in the various flows of costs and revenue, but deMause’s back of the envelope estimate is that the total public subsidy in this deal is on the order of $554 million.  The costs are spread out through bond issuance, and flows from the Hotel Motel Tax which accrue in the year they are incurred.

This is a significant subsidy, one that the Falcons’ ownership will take happily to the bank.  But it’s standard operating procedure in the monopolized world of North American professional sport.  Monopoly control over the number of franchises creates potential competition from a host city without a team, and through that an exit threat for which citizens in towns with current teams must compensate.  As an economist, with my normative hat I decry the system which generates this diversion of funds between now and 2050 to a sports entity, rather than projects which would truly help develop Atlanta’s economy.

But given the rules of the game, the price tag doesn’t strike me as one that the citizens of Atlanta will get all worked up about.  The subsidy amounts to about $20 million per year — a significant but not massive fraction of ticket revenues.  With about 5 million people living in the Atlanta MSA, the per capita cost is about $4 per year.  I suspect that if the question were asked, “Falcons for $4″ versus “no Falcons”, the people would fork over the $4.  I’m not a fan of this process at all, but must say “well played, Arthur Blank.”

Conference Realignments: (Some) Order out of Chaos

2013 March 8
by Brian Goff

The poaching of past Big East schools by the ACC and Big East and similar events in other conferences has engendered accusations of greed, disloyalty, and nastier things.  Jilted institutions and league officials have sounded a lot like spurned lovers.  While soap operas have appeared as little more of than a mad scramble for cash, a degree of order has emerged.  In fact, the latest headlines pointing toward Xavier and Butler joining  the “Catholic 7” Big East basketball schools demonstrate a sorting out apples with apples and oranges with oranges – call it the “eHarmony” model of relationship matching where “underlying compatibility” matters.

Money, of course, has driven decisions.  That’s not exactly a bombshell, and it didn’t start in the last decade as the initial formation of the Big East in 1979 bears witness.   The landmark 1984 Supreme Court decision striking down NCAA restrictions on televising football started a snowball moving that has gained speed and size over time.  Prior to that decision and for a while after, the formation of conferences like the Big East, Metro, and Sun Belt reflected basketball-centered schools coalescing and seeking market shares.   Ultimately, the unleashed football genie began to dictate alignments and re-alignments.  The 1991 Notre Dame contract with NBC marked a watershed.  It nudged other broadcasters into more lucrative contracts with conferences, enhancing major conferences as key bargaining units and making them more attractive to major independents like Penn State, while encouraging existing conference members to explore new relationships.

The affinities in the new relationships reflected underlying similarities in the size of the fan base (or potential base), sport of emphasis, academic standards, and geographic settings.  Arkansas and South Carolina went to the SEC.  The SWC married the Big 8.  These seemed like big shifts at the time, but the matching process was just getting rolling in the 1990s.  Many potentially advantageous relationships went undeveloped.  Texas A&M, for instance, while in many ways fitting much better with the SEC than the Big 12 did not make the move until 2012.

Assorted political obstacles and school-specific interests, such as longstanding rivalries and local interests, restrained movements as with Texas A&M.  In other cases, these obstacles persist and won’t likely vanish anytime soon.  A fortunate few institutions benefit from “grandfathering.”  For example, if the SEC were starting from scratch today, Vanderbilt would be looking for an association with other private schools, and it’s very doubtful that two Mississippi schools would be invited.  Northwestern would not be in the Big Ten.  In other cases, the mix of football and basketball influences decisions.   The basketball-rich tradition of North Carolina has kept it linked to other ACC schools when it could likely have jumped to a more prosperous league.  Turf protection keeps some schools out of conferences where they would seemingly fit well.   Some of the current matches reflect conferences picking from the leftovers to fill out their roster such as the Big 12 picking up West Virginia.  Why the Big 12 hasn’t gone for BYU (or the other way around) or Florida State is hard to understand.

Yes, outcomes in big revenue college sports will always be convoluted.  After all, the structure couples essentially professional sports entertainment enterprises with not-for-profit academic institutions wrapped in the antiquated vocabulary of amateur sports.  Nonetheless, business relationships are most stable when the objectives, revenues, and cost structures are more in line with each other.

The 7 Big East, urban campus, private, basketball-centered schools gravitating toward each other and a couple of other similar schools and away from football-centered, large state universities makes sense.  It makes a lot more sense than these schools adding another dissimilar institution from across the country like Boise State.

NBA Centers Facing Extinction

2013 February 20
by Brian Goff

Russell, Chamberlain, Jabbar, Lanier, Walton, Gilmore, Malone, Olajuwan, Ewing, O’Neal.  Over decades, these and other “centers” dominated the NBA.  The “association” conducted its annual All-Star game on Sunday.   For the first time, the league did not list “Center” as a separate position for fan voting.  Yes, some of the players in the game still carry the label, but only one of the starters, Dwight Howard, possesses the physical characteristics or style of play historically attached to the position.  In altering its All-Star ballot, the NBA merely officially recognized the trend in the game – centers have been trending toward T-Rex’s fate along with “Sky Hook,” “Dream Shake,” and “up and under.”

These trends can be quickly seen through scoring statistics.  Whether looking at yearly leaders or career leaders, only Dwight Howard appears in places where the centers of the sixties, seventies, and eighties did, and there are no emerging players of this sort.  The data support extends far beyond points.  It’s also observable in rebounding and shot blocking statistics.  Whether “center” or “low post” player is the label, the type of players associated with the positions are vanishing.

The devolution of the center position reflects a series of indirect effects and outcomes rather than  direct managerial choices.  The adoption and popularization of the 3-point shot made a big impact.  Ostensibly, the shot would open up play in the middle, but over the long run it devalued size and interior skill.  Prior to the 3-pointer, closer shots tended to be better shots, and highly skilled big players excelled at making close shots.  The 3-point shot slowly changed team offensive strategy as well as the long player development.

Along with the 3-point shot, the ratcheting up of physical play in the middle rendered low post play less effective.  By the mid to late 1980s players such as Rick Mahorn and Kevin McHale wrestled for post position.  In earlier eras, court position was ceded based on first to a spot.  By the 1990s, the low post wrestling morphed into all out body-to-body combat.  Centers with fade-away shots such as Olajuwan or Ewing and O’Neal with his brute force could survive but the die was cast.  The same forces bubbled up at the collegiate level.  I sometimes hear fans and analysts express dismay at the “lack of low post skills,” but low post skill is impossible to employ when defensive players are permitted, literally, to shove offensive players.     With high school and college post player becoming increasingly less effective, coaches at these levels adjusted their offensive schemes.  By the 2000s, few players emerge into the professional ranks with low post skills.

Is the extinction of center play a part of NBA brand management?  I can’t say for sure because I have not sat in on NBA executive meetings, but I doubt it.  Brand management in sports is unique in many respects.  Mrs. Smith’s apple pies follow the recipe and packaging decisions of management.  In the film industry segment of entertainment, movies and their marketing display the choices of producers, directors, and screenwriters with a little bit of discretion of actors thrown in.  In contrast, sports entertainment executives exert much less control over their product, at least the on-the-court (or field) aspect.  They can influence it through choice of  rules regarding eligibility, scoring, and fouls (to some extent), but the final combination on display on NBA courts mixes these choices with the unintended consequences of them along with team methods and with the long run evolution of player skills.

This lack of direct control also makes reversing these trends problematic.  In part, the league faces difficult tradeoffs.  The league values the 3-point shot and the the athleticism of  Michael in his era and and LeBron today.  Yet, promoting these aspects of the game may come at the expense of low post play.  Reducing physical play offers an opportunity for positive impacts on both perimeter and low post play, but significantly diminishing aggressive defensive tactics is not an easy task – that’s a topic from my recent Super Bowl post, and one that deserves its own discussion.

Baseball Arbitration Bats 1,000 For the Year

2013 February 18
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by Phil Miller

For the first time ever this year, no baseball player went to arbitration.  From ESPN.

Reliever Darren O’Day completed a $5.8 million, two-year contract with the Baltimore Orioleson Monday, becoming the 133rd and final player to settle without a hearing among the 133 who filed for arbitration Jan. 13.

This was the first year since arbitration began in 1974 that no player who filed went to a hearing.

Link via my former student David Dicks.

Baseball uses a form of final offer arbitration in which an arbitrator is restricted to selecting either the final offer submitted by the player or his team (although technically speaking, the offers aren’t final since negotiations can continue even after offers have been submitted).

The economists in the TSE audience may be interested to know that final offer arbitration was originally proposed by the economist Carl Stevens in this 1966 paper.  Up to that time, the main type of arbitration that was used, commonly called “conventional arbitration”, was one where arbitrators could render any decision in a case, and it was not at all uncommon for the judgment to be right between what each party wanted, basically splitting the difference.  Some observers felt that this supposed splitting-the-difference would chill bargaining.  Why go through the trouble of negotiating when the arbitrator will just split the difference?

Stevens wanted a type of arbitration that would lead to more negotiated settlements, believing that settlements arrived at in that manner are superior to those imposed by third parties.  In theory, final offer arbitration should lead to more negotiated settlements than conventional arbitration because FOA makes losing a case more costly to both sides.

This year baseball arbitration batted 1,000.

Here’s a 1990 Chicago Tribune article that has some quotes by Stevens on what he originally called “either-or arbitration”.

Fans Care about PED Use — Sometimes

2013 February 14
by Brian Goff

What spurred the public’s negative view of the use of PEDs?  Why have MLB and pro cycling received much more attention than the NFL?  Some would say fans don’t care, even in the MLB and cycing cases, that it’s really just a media-generated series of events.  No doubt, media writers and talking heads can get worked up over things that create yawns among most fans.  In the case of the steroid stories, their long-lasting legs suggests that they resonate with the sporting public to some extent.

The MLB Hall of Fame voting  supplies the explanation — not the details but its very existence.  When PED-fueled performances start encroaching on cherished legacies, fans start to pull back.  In the mid and late 1990s, the baseball-watching public shrugged at  whether Mark McGwire or Sammy Sosa were bashing on higher octane additives.  McGwire’s 57 homers in 1997, just a pinch below Maris’ 61, promoted fan interest rather than probing questions.  By 2001, McGwire, Sosa, and Barry Bonds had surpassed the landmark six times.  Players from the mid 1990s to early 2000s climbed  the 50 homer plateau 23 times, more than in all of the years prior combined.  Beyond the yearly marks, Bonds surpassing Mays, Ruth, and even Aaron raised more fan eyebrows along with eight players from this era who wound up among the top 15 home run hitters of all time.  Former players whose achievements were being devalued raised voices in protest as Hall of Fame voters and fan views soured.  As a fan myself, when Bonds passed the 660 home runs of one of my first sports heroes, Willie Mays, it sickened me.

Of course, the attacks on legacies also invited more media attention and investigation, leading to more revelations and negative publicity to foment fan distaste.  This avenue seems especially apparent in the Lance Armstrong case.  Had Armstrong won 2, 3, or even 4 Tours, he may well have escaped with his long run reputation somewhat in question but relatively intact.  That’s how it worked out for Miguel Indurain, who, ironically, was still publicly touting belief in Armstrong’s innocence as late as October in this Guardian article.  Rising up to the hallowed 5 wins and then blowing past it put Armstrong in the bulls-eye of many European writers as well as international doping regulators.  While his return to the sport, by his own estimation, may have led to his successful prosecution, his smashing of legacies of riders like Indurain and Hinault made him both popular and a popular target.

The other side of legacy effect on fan backlash is the lack of it in sports where legacies are not impacted so much, such as the NFL.  At first glace, one might conclude that football fans don’t care as much as baseball fans, when the underlying difference may be the lack of legacy effects.  In part, the lack of testing may, ironically, play a role.  Cycling has been stung the most, in part, because of its rigorous attempts to get rid of PED use.  MLB has been less diligent, and the NFL has lagged behind even MLB.  In addition, the team nature of these sports and their outcomes has shielded players from the kind of scrutiny given in individual sports or in a “individual sport with a team score” as baseball is described.  In recent years, quarterbacks and receivers have run roughshod over many passing achievements of the past, but this can be attributed to changes in rules and enforcement that make passing easier and promote more sophistication in passing, not to QB or wide receiver PED use.

Widening out the lens from sports and sports legacies, similar outcomes can be observed with companies.  Extraordinary success invites extraordinary scrutiny, whether justified or not, and whether it applies to athletes like Lance Armstrong, or companies like IBM in the sixties and seventies or Microsoft, WalMart, and Google in more recent years.  How a limited supply of scrutiny is doled out or, more to my point, gets traction among the public is more puzzling.