Tuesday, December 30, 2008

Salary Cap? Count Me Out

With the Yankees' shopping spree stealing headlines and disappointing the fans of 29 other teams, the perennial call for a salary cap in baseball is once again gaining traction. It's an idea I wish would go away.

The main argument for the cap is that it's needed to increase competitive balance. If teams can only spend a certain amount of money on player salaries, the logic goes, then smaller market teams will have a better opportunity to sign big time free agents.

Of course, baseball already has a "soft cap"--teams that go over a certain level in total payroll (in 2008 the cap was $155 million) have to pay a "luxury tax," also known as the competitive balance tax. Teams pay a 22.5% tax rate for their first "offense," and 40% for repeat offenses. It doesn't have much of an impact though because it hardly ever comes into play for any team but the Yankees. This year the Yanks had to pay almost $27 million. The Tigers were the only other team affected, getting charged just $1.3 million.

Baseball also has a system of revenue sharing that theoretically is supposed to help small market teams compete. The "poorest" teams regularly get checks of $30-40 million that is supposed to go into their payroll but often just goes towards team profit.

The reality is that today's system provides every team with a great opportunity to compete and win. Under the collective bargaining agreement, players play for the major league minimum (or very close to it) for their first three seasons. Players have no say in where they play or how much they earn. Then in seasons 4-6 teams retain control over their players but if they can't come to agreement on a salary they can enter into binding arbitration, which generally results in a below-market salary for the player.

Some teams (well, really just the Florida Marlins) are so cheap that they eschew even arb-eligible players, but no team can honestly say they can't afford to pay these players as a matter of competitive imbalance.

So for six full seasons, every team has a more or less equal chance to get any good player they want. If you draft him, with only rare exceptions, you got him till he's at least 27 years old. Most players who enter the league never get those six years under their belt, and of those who do they usually don't make it till age 29 or older. And throughout that time teams also have exclusive negotiating rights, and with some savvy foresight can sign their best players into their 30s at a discount, at which point all but the most special players are in decline.

There are some exceptions to this, like international free agents, who are not subject to the draft and typically get signed by the highest bidders. Some would say that draft bonuses have started to price the top players out of the smaller markets, but I think that's a pretty facile claim, especially when you consider that the poorest teams are getting tens of millions of dollars in revenue sharing explicitly for the purpose of helping them pay for good players.

For the most part every team has equal chance to get any player until they are past their peak.
At worst, you have a class of teams that go through boom-and-bust cycles while a few teams that can avoid those dry periods by spending on premium free agents while their young talent gets ripe. But there's no excuse for teams simply staying bad forever because of player salaries.

And even free agency is a limited advantage for the big market teams, since free agents are by definition older, declining players. Not only is it not necessary to spend to win (as the Rays, Twins, A's, and Indians have shown), spending is no guarantee of anything (as the old Chuck LaMar Devil Rays, Giants and Tigers proved).

The other argument for the cap that I hear most often is that players are "overpaid" and that something needs to be done to get salary inflation under control. While the parity argument isn't totally without merit, this one is.

Now I of course agree that if people were paid based on the value of their contribution to society, teachers and firemen would make millions and pro athletes would play for tips like subway buskers. Oil company executives would have to pay for the right to do their jobs, since their net social impact is decidedly negative. But our economy doesn't work that way. Baseball players make a lot because baseball fans are willing to spend a lot for the entertainment value of the product. If you don't like it, stop going to games and donate your disposable income to your local PTA.

In fact, I would argue (as I have before) that baseball players--especially young players in their pre-arb years--are underpaid. According to Street and Smith's Sports Business Journal, Major League Baseball players' share of their sport's revenue is just 52%, the lowest share of any of the four big American team sports and down from 63% as recently as 2003. NHL players got 56.7% last season, NBA players about 57% percent, and NFL players about 59% percent. The rest of that revenue goes into other operating costs and then whatever's left from that into the owners' pockets.

My question is this: why should any of the money go to the owners? Why are owners necessary at all? Think about it. The role of a baseball owner is roughly comparable to that of a recording company executive. They don't produce anything, but they control the means of distribution. And theoretically they provide investment dollars for new innovations and talent. If you're a hot new artist, you need the money guys to get started. If it wasn't for that, I would want all $16 that I spent on my new Bruce Springsteen CD to go straight to the Boss himself.

But Major League Baseball owners take no risk. Branch Rickey had to take risk and innovate, but these days all owners have to do is stay out of the way and cash checks.
Yes, new players have to be developed, but that's not the same as bankrolling a hot new movie or start-up business. It's more like restocking the shelves of the hardware store.

The Green Bay Packers are the real-world example of why sports teams in established leagues like the NFL and MLB don't need owners. The Packers are a non-profit organization run by an appointed board of directors and team president. They hire a GM who makes football decisions. And the team goes on its way making money and winning games.

So if you really want to force more competitive balance, get rid of the owners. Since that's not really realistic (though I truly believe this would be the most common sense and effective reform), the other way to do it would be to institute a salary floor. Force teams to spend let's say at least $70-80 million in player salaries. A team like the Nationals would have to find the smartest way to get over the floor--I'd suggest re-signing Zimmerman, signing draft picks like Aaron Crow and Sean Black, and maybe going after a good free agent or two. But skinflints would no longer be able to just cash in on cheap losing teams. Poorly run teams would still be perennial losers, but not because of payroll.

Bottom line, my opinion is that there's already considerable competitive balance and upward mobility in the system, and that's good. I don't see any real reason why the rules need to be changed at all. Fans should recognize that this balance comes on the backs of their favorite young players who aren't paid anywhere near what they're worth. To institute a cap just to keep a few players away from the Yankees and Red Sox would be putting even more undeserved money in the pockets of owners at the expense of the players. Any efforts to increase balance should be done on the backs of the owners, not the players.


James Bjork said...

I've always thought that Steinbrenner had a point when he would complain about small-market team owners pocketing the proceeds of the luxury tax (invariably primarily paid by HIM) instead of spending the money to make the small-market teams more competitive. I agree that there should be some kind of salary "floor," but I would limit this to any franchise that chooses to accept the proceeds of the luxury tax.

I know that an emerging meme of your blog is that MLB owners are a good-old-boys club of reptiles who machinate in smoke-filled rooms on new ways to screw players and fans. I tend to agree, especially considering how they have extorted DC and other cities' taxpayers into paying for stadiums for *their* product.

That said, I do think that owners take on considerable financial risk with large free-agent GUARANTEED contracts. I have yet to see a player refund money to ownership when his skills unexpectely plummet ahead of his time, such as when he eats himself into a part-time DH role, or when an elbow or shoulder blows out.

Sure, there's Lloyd's of London and its expensive premiums for covering injuries, but there's no insurance for when Manny decides to Be Manny, and opts to pout or sit out when the market has moved beyond his current salary structure-- or for whatever prima donna reason.

I also agree that the current system does in fact allow a window of opportunity for small-market clubs to compile a critical mass of youngish talent to make a run at the World Series every few years. A huge reason some small market teams like the Pirates haven't is because of a devastating series of bone-headed decisions. ESPN.com had a great chronology a few months back about all the boneheaded moves the Pirates have made since their most recent heyday of 1991.

However, small-market GMs will, to a man, tell you that their margin for error is critically small compared to the big-market clubs. The latter can (and do) patch up holes from injuries and draft picks not working out in a way that the Kansas City Royals cannot.

Finally, for all the exultation about the supposed "parity" in MLB with regard to World Series winners, no one seems to mention that much of this is flukish luck, where 100-win teams from large markets get eliminated in best-of-five series due to the vagaries of chance, where they lose three games of out five as they have probably done at several points in the season-- only at the worst possible time. The 2006 Cardinals picked a great time to get hot.

I DO think there's a competitive imbalance of sorts, but adding a salary cap (which would probably require owners locking out players for years in a Pyhrric "victory" over the union) might very well be a case where the cure is worse than the disease.

ckstevenson said...

You've outed yourself, you're a sports communist! ;-)

You're missing a "not" in this sentence: "Not only is it << NOT >> necessary to spend to win (as the Rays, Twins, A's, and Indians have shown), spending is no guarantee of anything (as the old Chuck LaMar Devil Rays, Giants and Tigers proved)."

James Bjork said...

If taking a hard look at the ramifications of media and markets on franchise revenue streams, and how this challenges competitive balance (i.e. the glass half-EMPTY), then by Lenin, pass me that hammer and sickle!

A cartographer friend of mine looked at population density patterns and concluded that for the New York/New Jersey metropolis to have the same media and fan share as most of the rest of MLB, the region would have to have FOUR teams, not just the Mets and Yankees. Lo, the $1 billion stadium.

I was basically agreeing with Steven, but pointing out that there is grist for both sides of this argument.

OK, making a total mockery of my workday, I entered into my statistical software, the correlation between 2008 payroll and number of wins of all MLB franchises. The correlation between payroll and wins was r = .33, which was marginally statistically significant as a trend. A rank-order correlation, which minimizes the effects of outliers was r = .37 and was statistically significant. When I last did this, about 2001, the correlation was > .60 !

To see whether this is more of a trend, I repeated this with 2007 data, and the correlation was still up there at a very statistically-significant r = .49

Clearly, it seems as though the relationship between wins and payroll has degraded in the last year.

But it is still there.

So, I guess it leaves me where I where I was before. Teams that spend more seem to win more, but slightly, such that a salary cap is overkill.

Greater variance in wins is likely attributable to being savvy with what dollars you have.

James Bjork said...

Oh Gawd, I can't stop myself. On a lark, I revisited the correlations between payroll and wins in 2008, breaking it down by league.

Turns out, the deterioration in the relationship between payroll and wins was driven by the AL, where the rank-order correlation was only r = .16. In the NL, it was still up there at r = .61!

Seems the AL arms race has led teams to spend recklessly for nada... Hmm Detroit and Seattle mebbe?

Steven said...

@James--the risk you cite is real, but it's the risk between making a massive profit and making a little less of a massive profit. Sign me up for that kind of investment opportunity!

I just think that if you're talking about fairness--who "deserves" the fruits of MLB's bounty--I think the players clearly have the better argument. It's their talent that is creating the wealth. The owners had a fairer claim back in the 30s, 40s, and 50s when there was a real risk of losing money, but today there is no such risk and most of the teams have changed hands so many times that you aren't talking about those old time owners reaping the rewards of their smart investments. And the sales of teams today (as we saw here first hand) is a totally political process. It's really not that different than a private sector version of no-bid contracting. Lerner = Halliburton, and Bud = Cheney.

The rest of your comment I agree with pretty much 100%.

Steven said...

@ck--thanks for the edit. I'll fix now.

And I'm no more of a communist than Theodore Roosevelt. I ahbor the trust, and MLB is a closed, country club monopoly. If there was real competition and risk, I would have little gripe with the owners' profits.

Steven said...

@James--cool analysis on the correlations between spending and winning. Thanks for sharing.

Hendo said...

Another reason for the diminution in owners' importance is that MLB has a formidable -- if belatedly developed -- marketing machine of which any team can take advantage. That simply didn't exist in the days of Branch Rickey, or for that matter even in the early days of George Steinbrenner save in rudimentary form.

It would certainly make sense to maximize the amount that goes to the players, taking into account that the machine has to be fed. (I certainly want as much as possible of the $26 I spend on Bill O'Reilly's latest book to go to the author, but the publishing and promotional infrastructure also need to be maintained.)

Dave Nichols said...

the bottom line is that MLB is a federally protected monopoly, and, as such, can act fiscally any way they desire without impugnity. the only time in recent memory congress got involved (the only police agent for MLB now that the Commish is a puppet) was for the steroid hearings and that was a "public health" issue, not a financial one.

if ANY business were to operate in the manner that MLB has become accustomed, they'd have the DOJ breathing so hard down thier necks you'd think they were going steady.

it's ludicrous that the Yankees pay the luxury tax each year, while the Pohald's and Glass's and Lurie's pocket the change then sell off their young stars when they get to arbitration. if any adjustment needs to be made to the payroll structure in MLB, it a salary floor, not a cap.

but still, you have to have skilled talent evaluators spending the owners' money. and as most Nats fans can tell you, those folks are either hard to come by, or are buried in/by the system.

Steven said...

@Dave--I bet one benefit of a salary floor would be to weed out some of the less competent talent evaluators. I can't guarantee JimBo would be gone, but thinking rationally if you know you HAVE to spend X dollars, you have a greater incentive to ensure that it's spent well than if you have the option of just not spending at all.

Of course it's already in the financial interests of the teams to put a winning product on the field, but I just think you're more inclined to focus on it if you're talking about hard dollars out the door rather than opportunity cost, which some of these codgers might not perceive.

@Hendo--O'Reilly deserves every dime.

Ironic Goat said...

I think I read somewhere that MLB.com earned each team 20 million last year. I have no idea how that is distributed.

Dave Nichols said...

Steven, i don't think it is in all the team's best interest to try to win. if they are receiving luzury tax money and keeping payroll down, that's free money. the more they spend in players salaries, the less luxury tax money they get.

there are definitely owneers out there pocekting the luxury money and not putting it into their teams, ergo, they don't care that much about fielding a winning team.

Which, if this were not a federally protected monopoly, would be illegal.

Steve Shoup said...

Steven one thing you forget to mention is that MLB has a much more complex minor league system than the other major sports. The percentage of revenue you mentioned only takes into account what Major league players make not what the additional 150+ minor league players per team make. Yes the NHL has a minor's system and the NBA has the D-league but its not comparable to the Minor league system. I realize that there is a larger process there b/c minor league teams make money as well but I don't believe they have to pay for one cent of their minor league player contracts. Also the bonuses given to International players and drafted players wouldn't be counted towards that percentage as well. My guess is when you add those 2 factors the percentage becomes much closer to the rest of the pack.

I would also go on to say (though I don't know this for sure) that MLB teams do have more operating expenses than the other major sports. The travel more, and/or spend more nights on the road than the other sports. Baseball teams also have to hire more coaches, trainers, front office execs, and scouts given their vast minor league networks. I think if you really wanted to look at whether or not owners are just hoarding profits compared to their counterparts in other leagues you'd need to look at 2 things; 1. percentage of profits that owners take home at the end of the year among the major sports, and 2. actual amount of money they take home as well. Outside of that I think its hard to say that baseball players are getting screwed while other sport stars are getting a better deal. Are some owners greedy sure, but thats the case in any sport or any business.

As for the whole 'salary cap vs. salary floor' debate I think they both have their pros and cons. For instance, why should the Rays have to spend between $70-80 million when they can do a more efficent job for $10 million less (i'm figuring a rough average of minor league salaries and draft bonuses would put them around $60 million). Even the year before when they were the worst team in the league they probably spent under $45 million in player salaries but it allowed their young talented players the chance to develop on a big league level. If they had had to pay and then play big leaguers in some of those roles so they could meet the 'payroll floor' the Rays probably wouldn't have been in the WS this year. Now that is an extreme example there are plenty of instances where teams have cheaped out and not signed draft picks and FA's when they obviously needed help but the point remains you should never punish efficentcy. As for the 'Salary cap' I think it should be a bit more of a hard cap but not a true hard cap like the NFL. For instance in the NBA if you go over the luxary level it is a dollar tax for ever dollar you are over, here its just .27 or .40 cents on the dollar. The Yankees spent about $70 million over the Luxary level in 2008 but only had to pay 40% of that. If they'd had to pay the full $70 million maybe they would be more discerning on their spending.