Baseball Crank
Covering the Front and Back Pages of the Newspaper
March 13, 2001
BASEBALL: Fixing Baseball's Economic Problems

It’s hard to imagine that anyone in their right minds enjoys writing – or reading – about the economics of baseball. Frankly, even though it can be fun to poke some humor at the big numbers, I don’t give two hoots whether Alex Rodriguez makes $252 million or $252 a month. Nor do I care whether George Steinbrenner makes more money from his baseball team than Jeffrey Loria and David Glass put together. And, I suspect, neither do you. The game on the field – and, for that matter, the financial disputes off it – would be exactly the same if you took every dollar figure in baseball and cut it by 95%.

Nonetheless, it seems you can’t scan the newspapers for a single day without seeing dollar signs, salary disputes and sky-is-falling warnings about the game’s fiscal health. Reporters report this stuff and columnists write about it because (1) they need something to talk about; (2) their sources are obsessed with this issue, which is pretty much the same reason why political reporters wind up wasting so much space on polls instead of ideas – you tend to assume that whatever matters to the people you spend all day with must be important to just everyone; and (3) journalists generally tend to be armchair socialists who love to rail against economic inequality.

All of this can have a rather corrosive effect on any fan’s attempt to just enjoy the competition on the field; we would all be better off if more journalists remembered former Chief Justice Earl Warren’s dictum that “I always turn to the sports pages first, which records people's accomplishments. The front page has nothing but man's failures.”

Nonetheless, economic issues DO affect the game on the field; increasingly, they have affected the way we look at the game. It’s worth taking a closer examination at some of the ideas being mooted about by baseball’s powers-that-be to see if the cures are likely to work – or are as bad as or worse than the disease. I profess no great expertise in baseball finance, and unlike professional sportswriters I don’t feel compelled to pretend otherwise, so I’ll mostly stick to generalities here. If you get the big picture right – fixing the incentive structure, that is – the details can usually be worked out anyway.

PART A: WHAT’S THE PROBLEM?

As usual, experts moan about the game being in trouble without specifying exactly what’s wrong. The usual lament is a variant on the idea that, under the current structure, the richest teams constitute a permanent “winning class” (Yankees, Braves, Yankees, Indians, Yankees, Mets, Cardinals, Yankees, Dodgers, Yankees, Orioles, Red Sox, and Yankees) that goes to the playoffs every year. The poorest teams (Pirates, A’s, Twins, Expos, Royals, Reds, Marlins, Brewers) are a permanent underclass that can’t pay their own young players to stay, can’t sign free agents, can’t draft the players they want due to “signability” issues, and therefore needs handouts to have an occasional chance at the postseason, let alone any hope of beating the Yankees.

(If you look at this politically, by the way, it’s ironic: New Yorkers screaming for the right to keep the fruits of their labors, Midwesterners crying for redistribution of income to the heartland. Not your usual tunes from either camp).

Obviously, there are problems with this view of the world, not least of which is that its entire foundation would have crumbled had the A’s beaten the Yankees in the 2000 ALDS. The owners would have been totally screwed in their bargaining position for the coming lockout if it happened... and Oakland came fairly close. "Of course, the series was cleanly played and this isn't David Stern's NBA (the home of a million and one conspiracy theories), so I'm not suggesting it was fixed; just that the owners and their allies in the newspapers breathed a huge sigh of relief when the Yankees preserved their justification for redistribution.

But let’s pick this apart, because there are really two separate complaints – the good teams are too good, and the bad teams are too hopeless – and a lot of reasons advanced why this is so.

1. ARE THERE HUGE DISPARITIES IN OWNER PROFITS?
Who cares? The "big market”/”small market” distinctions tend to change based on the standings; notice how nobody complains much about Peter Angelos’ money anymore. If you are going to measure the markets, though – a task for the owners, not you and me – it’s vastly important to examine the potential market and not just fannies in the seats. That means three things: (1) population; (2) competition (how close the nearest team is) and (3) tradition (e.g., the Mets aren’t even with the Yanks just because they’re in an arguably better location; the Cardinals have a bigger market than it looks on paper because of the fanaticism of their fans; the Expos have a smaller one because French-Canadians are just less likely to be interested in baseball).

If you want a more detailed look at market sizes, here are two thoughtful
attempts to make sense of the question: Baseball Prospectus and Market Size.

2. DO SOME TEAMS PAY THEIR PLAYERS TOO MUCH?
Another bogus issue. At any given time, a team with a $25 million payroll can be better than a team with a $100 million payroll. If you don’t believe me, compare the best players making $1.5 million and under to the worst ones making more than $6 million. Big payrolls alone don’t cause victory; small payrolls alone don’t cause defeat. Then again, I think that most of us would agree that it’s not a good thing to have some franchises that regularly have $100 million payrolls and others that never have more than $30 million payrolls; over the long haul, the odds of keeping up become too steep.

3. IS OVERALL COMPETITIVE BALANCE OUT OF WHACK?
Certainly not. Last season set a record for the smallest gap ever between the record of the best and worst teams in baseball. NFL purists bemoan “parity” that puts two uninspiring teams in the Super Bowl, but has the NFL ever been close to a season where nobody won or lost 10 games? The only other time there was anything close to this in baseball was 1958-59, and there were probably plenty of articles written then about the competitive imbalance too. Why? Because in 1958 the Yankees won the World Series for the eighth time in 12 years and the pennant for the tenth time in 12 years.

Face it, the real driving force here is Yankee-hating. Now, I hate the Yankees probably more than is healthy, but if anyone else – even the Mets or Braves – won the World Series last year we wouldn’t hear half of this. And the fact is, the Yankees aren’t invincible, and do have some problems of their own. It’s not like they win 110 games every year, they’ve just learned how to build a team that’s both good and well-suited to short series.

4. ARE THE BAD TEAMS TOO STUCK IN THE CELLAR?
Nope. There are 30 major league teams; 24 of them have been to the postseason in the past 10 seasons, which is unprecedented. Of the remaining 6, one (the Devil Rays) is an expansion team entering its fourth season. A second (the Angels) is a perennial contender that lost a 1-game playoff in 1995. A third (the Expos) had the best record in baseball in 1994. That leaves only 3 truly desolate franchises, the Tigers, Brewers, and Royals. The Tigers have a new stadium and shelled out plenty of payroll last year, although they did cut back this season by dumping high-salaried players and being forced to accept younger, better players in return. The Brew Crew also just launched a new stadium. But let’s be generous and assume that these three teams are, in fact, hopeless basket cases.

5. ARE THE QUALITY TEAMS INVINCIBLE?

Now we're getting closer. The same teams seem to fighting for the pennant every year, don’t they? Well, that’s true of the Yankees and Braves, and a few other teams like the Mets and Red Sox are regular contenders. But the Indians, one of the teams most frequently cited as the epitome of the ruling class -- they lorded over a weak division of supposedly small-market Midwestern teams -- have seen their franchise decimated by free agency and ill-advised trades (like the donation of David Justice to the Yankees). The Orioles were another "big market" team that collapsed after a series of head-scratching moves. In fact, there have always been good teams that stayed competitive for years on end – if the financial resources were completely equal, good management would do that. And there have always been wealthy teams that stank.

Also, the fact that some teams reach the postseason every year (and, in fairness, the reason so many different teams have been there lately) is the wild card, which rewards the constant retooling that a big budget makes possible. For a 90-win goal, that's fine; it's much harder if your object is to win 100 games.

The core complaint here, it seems, is that the best teams operate at a level that “small-market” teams simply can’t reach – they can make the playoffs, maybe they can get lucky in one series, but sooner or later they will get stomped by a team that adds depth that poor folks can’t match. And there IS at least some validity to that – the Yankees and the A’s may look even (or better than that, for Oakland) right now, but at the trading deadline this season, the Yankees can go out and add another big salary if they want to. The A’s might add another low-paid guy who’s about to be a free agent (like Johnny Damon), but they can’t pay a Sosa or a Sheffield if they need one to keep up, particularly if it’s a guy with more than a few months on his contract.

So we’ve diagnosed one problem: the big-market teams can add salaries to put them over the top, and the small-market teams generally can’t.

6. DO THE GOOD TEAMS HAVE A BETTER CHANCE AT STAYING GOOD?
This, I think, is the more serious concern. The Yankees and Braves rarely lose free agents they want to keep (Jeff Nelson being a recent example) and never make trades for economic reasons. This is what really bugs small-market fans: if I were a Royals fan, I wouldn't lose that much sleep over not being able to sign A-Rod... but losing Johnny Damon, that would stick in my craw. The A’s may well be the best team in baseball this year; entering the season they certainly have that chance. And they might even luck into re-signing Jason Giambi a bit below market after the season. But Damon will walk, and there are sure to be some others among the young A’s who will want to test the market. A small-market team CAN beat the Yankees – but it can never BE the Yankees. You need to expand your payroll just to keep the guys you have. That’s why salary caps murder homegrown teams – you hit it big and suddenly can’t afford to keep the whole gang around.

7. WHAT ABOUT YOUNG PLAYERS?
Most serious fans prefer to a home-grown team -- players to whom you become attached as they develop from struggling rookies to arrogant superstars. Home-grown players are generally the prescription offered by those who argue that there isn’t a problem at all. But the fact is, big-revenue teams really do have a growing advantage in signing players here and abroad. And that means that the Yankees aren't just buying talent on the open market, they're buying youngsters and foreign players nobody else can get. Not too hard to look smart with that advantage. Evening the score on farm systems is in many ways more important than fixing free agent problems.


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So we’ve identified the specific issues. Smaller-revenue teams have more difficulty with three things relative to teams with the biggest revenue streams:

--A) Paying their existing players to stick around once they are free-agent eligible.
--B) Adding players that other teams can’t afford to pay.
--C) Drafting the best talent.

Moreover, it would be better if more teams had at least the ability to match the top payrolls in the league. Any solutions offered should look to even the score, at least partially, on these four counts.

The few solutions that have been tried so far -- banning cash sales of players, the amateur draft, limited revenue sharing, etc -- have either failed or produced unintended consequences. For example, revenue sharing failed because cheapo owners like Carl Pohlad in Minnesota and Claude Brochu in Montreal preferred to pocket the money they begged off of Steinbrenner instead of investing in players.

As for other solutions, it is generally agreed that salary caps are bad for many reasons: they’re either inflexible, discourage trading, and ruin existing teams, or they’re laughably ineffective, or both. Most of the owners’ options would either (i) cause war with the players’ union (e.g., salary caps), (ii) devalue existing franchises (e.g., Rupert Murdoch would never have paid so much for the Dodgers if he thought there would be comprehensive revenue sharing) or (iii) require owners to open their books to detailed examination of their finances and/or encourage cooking the books to look poor.


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PART B: MY SOLUTION

So... how do we fix this?

The Deep Thought that came to owners during the offseason was to hold an annual “competitive balance draft,” in which the teams with the 5 or 8 or so worst records would select players (beyond a core protected from drafting) from the 5 or 8 best teams. This was obviously triggered on the notion that there is too much imbalance between the top and bottom of the scale, and specifically that the top teams need to be brought down as much as the bottom teams need to be brought up. As I said before, I don’t really buy it, but there’s a point in trying to get the richest teams to at least have SOME constraints in how they try to spend the opposition out of the water.

The competitive balance draft has been widely pillored, and justifiably so. The owners’ reasoning, given the benefit of the doubt, runs something like this: there are many ways to address the specific imbalances in revenue or spending, but rather than open themselves up to the kind of gamesmanship that separates revenues from success on the field, the owners have decided to look at the ultimate bottom line – winning – to determine who’s rich and who’s poor and in need of help. The obvious problem is that this confuses cause with effect, poverty with foolishness and bad luck; as many critics have pointed out, it would be ridiculous to let the wealthy but dim-witted Orioles draft from the poor but clever A’s. Talk about “corporate welfare.”

One other problem: this draft does nothing to stop top teams from signing people like Alex Rodriguez, since nobody’s going to draft the most expensive player, and once you’re good enough there’s no extra penalty for piling on. In fact, the fear of losing key role players would likely lead teams like the Yankees to spend more on free agents, since they know that part of what they spend is being taxed to help the Twins.

Still, it’s worth asking exactly what is wrong with the diagnosis and how the owners could structure such a draft in a way that would, at least, be directed at the actual problem. I propose that there’s a better way to conduct the same draft, one that would not be nearly as bad and might have the positive effect of imposing some hesitancy on teams who want to spend, spend, spend.


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Before we attack my idea, here are some essentials for how a better mousetrap might work:

--1. Instead of drafting from teams with the biggest revenues or records, target teams with the biggest and smallest payrolls. That’s sort of what’s done in today’s “luxury tax” system anyway. Anybody with a minor league contract would be excluded, but foreign free agents and draftees with salaries above a set scale would be counted in, so as to alleviate the signability issue.

--2. Instead of allowing teams to protect a certain number of players, teams would be allowed to protect a certain amount of salary. That way a team that signs an A-Rod-type market-busting contract would have to make tougher choices about which players to protect. Also, teams would have to choose between protecting more of their young, low-salary players or the high-salary veterans.

--3. Instead of picking a certain number of teams at the top, the eligibility for losing players would arise from being a certain percentage above the average or median payroll. The fact that this would be a floating target is a good thing, because teams would be kept guessing a bit about how far they want to stick their necks out. On the other hand, the number of teams at the bottom would be fixed, so as to discourage artificial suppression of payrolls.

--4. Of course, bad teams wouldn’t draft guys with $8 million salaries unless the teams that lose them are required to keep paying them. This sounds awful, but it’s really no different from the luxury tax or the “Steinbrenner tax” (how Steinbrenner often has to pay teams to take guys like Kenny Rogers off his hands). On the other hand, the salary would be transferred to the acquiring team for draft purposes, so that teams can’t play the same poverty game year after year.

(I know some of the free-marketers in the audience are gagging at this point, but remember, baseball is not intended to be a free market; equality of opportunity to compete is part of the product).

This may be both too draconian and too complicated, and as a practical matter such a draft’s depressing effect on the top salaries would likely trigger a labor war. Also, how thrilled do you think Paul O’Neill or Andy Pettite would be about getting drafted onto the Twins? The prospect might result in good teams losing scads of young players because their veterans would all demand contracts providing for protection in the draft. But at least the solution would be aimed at the right problems.

Still, we need something more tangible. Baseball agent Scott Boras proposed giving teams a financial incentive for the number of plate appearances (and, presumably, innings, although as Rick Ankiel’s agent he might want to reconsider encouraging teams to work their youngsters harder) they give to home-grown players. He also proposed giving teams a financial bonus tied strictly to the number of games they win. The problem with the first solution is that nobody wants to see teams giving playing time to stiffs just because they came from the farm system. The second is even more objectionable – the game has worked too hard to avoid having money change hands on the basis of particular regular-season games. The incentives for fixing games are too serious to put in such a system.

But Boras’ ideas gave me some pause, and ultimately gave me an idea that I like much more than re-jiggering the competitive balance draft. What we're really concerned about here is giving low-revenue teams an incentive to retain their players while putting them on sounder financial footing to compete in other ways? That's it in a nutshell.


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So here's my grand idea...

Why not CREATE A FUND from which ALL teams – rich or poor – would be able to draw matching funds for the purposes of re-signing their own players? The matching-fund concept is widely used by government programs and corporate benefit programs; it’s a well-recognized way to subsidize something without just giving handouts. The more teams spend on their own players, the more they would get back, so this wouldn’t just be welfare or a Steinbrenner-fleecing scheme.

The fund could be financed by a levy on local TV revenue, which is the single largest source of economic disparity between franchises (Bob Costas lays out the numbers on this in his book Fair Ball, which offers a mixed bag of good and bad ideas about reforming the game’s economic structure; Costas proposes sharing local TV revenue). I don’t have numbers on how big a bite such a fund would take out of that pie, if, for example, you had a 50/50 match for all free agents and all contract extensions beyond the date of eligible free agency.

The NBA has long recognized, with the so-called “Larry Bird rule,” that teams should have a financial advantage in re-signing their own guys. My idea for a matching fund would go even further, by putting actual dollars (not just “cap room”) in teams’ pockets. Players would love it, since it would exert an upward pressure on salaries by putting more teams in the market to re-sign their own guys and requiring suitors for free agents to offer a bigger premium. Also, many players would be happy to stay where they are for the right money, particularly guys with families and/or close friends on the team. The only downside is that mid-level free agents (unlike the A-Rods and Mussinas of the world who aren’t really replaceable) would find demand for their services drying up because it would be cheaper for teams to keep their own guys than shop through the market.

Obviously you would need to have restrictions to curb abuse of the rule by jerks like Roger Clemens who (1) demand a trade, and (2) use the automatic free agency that comes after being traded under certain conditions to demand fat contract extensions from their new team. Such a rule would be easy to devise, simply requiring that players would be eligible to be signed with matching funds only if they either had their rookie season with the team (under the Rookie of the Year eligibility standard) or had been with the team for two years, or three years, or something like that.

One of the virtues of the matching fund concept: it would fix the problem Steinbrenner gripes about of owners taking handouts and pocketing them. Owners would only receive help in proportion to how much they help themselves. The flexibility of the fund concept beats some of the alternatives suggested for policing the owners, like requiring them to spend a certain amount on payroll. And in the end, it would give fans what they want most: to keep the guys they have. Teams don’t have to look like roto squads, after all.

As for the high school draft, the owners actually seem to be headed in the right direction as far as extending the amateur draft to foreign players. Not perfect, but a good idea. Some scouts have complained that the signing of foreign players is too chaotic to be subjected to the amateur draft, but teams will still pick the players they want, and if it was really that much of a crapshoot, teams wouldn’t spend their money on foreign players. Yeah, there will be risks, but those risks are part of the business already.

The amateur draft isn’t a cure-all, since teams with shallow pockets often pass over the best players (or the ones represented by Scott Boras) because they can’t sign them; perhaps the matching fund I described above should be extended to the draft as well (although the issues would be more complicated). Allowing trades of draft picks would also be a good idea --this would give teams more leverage over draftees and enable teams to benefit from a high placement even if they don’t have the cash to get the best player.

Anyway, these are just a few of the ideas kicking around. The game’s problems are real, but they aren't as bad as they look; there aren’t nearly as many teams in trouble as many people think. And solutions are not that hard to imagine. The real problem is that players and owners don’t always have incentives to fix them; they certainly don’t have sufficiently similar incentives to reach agreements. And that’s a shame.


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QUOTES OF THE WEEK

On Kevin Brown’s contract, in the winter of 1999:

“People say it's monopoly money. That's wrong. When we were kids we never had that much monopoly money."
--John Boles

"Parity is not the American way. The American way is to dominate somebody
else."
--Davey Johnson.

Posted by Baseball Crank at 11:45 AM | Baseball Columns | Comments (0) | TrackBack (0)
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