Bernard Madoff, Ponzi Schemes and Ulysses S. Grant (New Word No. 7)

Economic historian John Steele Gordon has a fascinating article in the WSJ entitled "Pyramid Schemes Are as American as Apple Pie." In it, he defines "Ponzi scheme," a word I've heard a lot but never had a clear understanding of.

Ponzi schemes are scams where "early investors are paid dividends out of the money put in by later investors." No real capital is created, however, so it eventually falls apart. It's more commonly referred to as a pyramid scheme, which WordNet defines as "a fraudulent scheme in which people are recruited to make payments to the person who recruited them while expecting to receive payments from the persons they recruit; when the number of new recruits fails to sustain the hierarchical payment structure the scheme collapses with most of the participants losing the money they put in." Ponzi schemes are named after Charles Ponzi, who cooked up such a pyramid in 1919.

As for Ulysses Grant, read the whole thing for how he found himself an anachronistic victim of Mr. Ponzi. It's a great story.

[EDIT: Can anyone help me? Is their a difference between ponzi schemes and pyramid schemes? Can a pyramid scheme be legitimate, like selling Mary Kay cosmetics?]

Why Do College Coaches Get Paid So Much?

An economics lesson from the WSJ's Mark Yost:

Academic types have long lamented that coaches at many public universities make millions more than their schools' professors and presidents, not to mention the governors of their states. That much is true. Mr. Saban's eight-year contract will pay him $4 million a year -- $5 million if he earns all his performance bonuses. That dwarfs the salary paid to Alabama President Robert Witt ($611,000) and Gov. Bob Riley ($105,000).

But there are two fundamental problems with comparing teaching and coaching salaries. The first is simple supply and demand. With all due respect to the many great teachers, it's easier to replace them than Mr. Saban, Ohio State's Jim Tressel or Penn State's Joe Paterno (who makes a paltry $500,000 a year).

"The talent that Saban, Tressel and other coaches have is relatively scarce," Phil Miller, an assistant professor of economics at Minnesota State University, Mankato, wrote on The Sports Economist blog. "On the other hand, the talent it takes to teach effectively, for example, at the collegiate level is more abundant. So the price of coaching talent is much higher than the salary obtained by most professors." Or, as legendary Ohio State football coach Woody Hayes once told an antisports prof: "I can do your job, but you can't do mine."

The other problem with the salary comparison is that Alabama taxpayers aren't paying Mr. Saban, and so his salary doesn't take any money away from professors. One of the benefits to come out of the rampant commercialism of college athletics is that media conglomerates and sneaker companies are willing to pay huge sums for the broadcast and apparel rights. Thus, Mr. Saban will be paid out of Alabama's $70 million athletic budget, with little or no impact on academic departments.

What about rising tuition costs? Mark Yost has another potential culprit. Read the whole thing and find out.

[EDIT: Eric Gibson agrees with some of Yost's conclusions in "Pleading Poverty: Colleges Want Parents to Foot the Bill for Their Largess."]