In an article on Baseball Prospectus last week, Nate Silver said he believes baseball is on (or in? I don't know the terminology) a financial bubble right now, one that he thinks will burst in the foreseeable future. The gist of the article was, teams lavish huge contracts on some of these players that make no financial sense.
Take the Astros' signing of Carlos Lee to a 6-year $100 million deal. This year, and for the next 5 years, they will be paying him about $16 million. How much has he made for them this year? Well, if they had signed a replacement level player, according to BP, they would be a 65ish-win team as opposed to a 70ish-win team. First off, this shows some poor baseball decision-making, as they certainly wanted more than a 5-7 win boost for $16 million.
It was also a poor financial decision. Those 5 extra wins likely did not put many extra fans in the seats - perhaps the very presence of a big-money free agent sold some tickets and maybe they sold a lot of "Lee" t-shirts, but it's hard to imagine Carlos Lee added $16 million in revenue to the Stros.
The deal gets worse than that. What if instead of a defensively-retarded, slow corner outfielder with little plate discipline, the $16 million had gotten the Astros Babe Ruth? They would probably be an 80ish-win team instead of 70ish. And guess what. That wouldn't be worth $16 million either.
There is a very simple idea that BP illustrated very eloquently in Baseball Between the Numbers that essentially says that the wins that get you into the post-season are worth a ton of money; those that do not are not. Wins #87-93 bring you from a slight chance of making the postseason to an excellent chance, so they are worth a ton of money because there is so much money to be made from a playoff appearance (the extra sellouts, the boost in fan support, TV ratings). Wins #65-80 raise you from bottom-feeding to mediocrity, which is undoubtedly worth some money, but those 15 wins don't nearly stack up to just a handful of wins in the high 80s or low 90s.
For a bad team to spend lots of money on a free agent, especially one that's not very good, is financial foolishness. The Lee deal along with the Zito deal are probably the most extreme cases, but they are part of a larger problem of teams not doing a good job of understanding how much money these players are really worth.
Every other industry measures a business's success in monetary profits. Baseball teams are measured in wins. If only this were true, but the money being given to these players and the money needed to advertise and run the stadiums is not Monopoly money - it's real. That means that for the sport to function, teams have to earn sufficient revenue, but as we've seen, big free agent signings, along with many post-arbitration free agent signings, don't earn the money back. Perhaps a World Series championship is enough to erase some big contracts, but too many teams do too much spending without enough winning.
One day, an ownership group is going to try to sell its team and find that potential investors have run some numbers and have valued the franchise far below the asking price. If you expect someone to pay the last 5 years of a declining Carlos Lee's contract, you can count on them asking you to knock a lot off your asking price. And what if your team is paying wheelbarrows-full of money to Barry Zito, Randy Winn, Pedro Feliz, and Bengie Molina?
Is this evidence of a need for a salary cap? That's hard to say. It's very objectionable to allow a limit to be set on how much a firm has to pay its laborers. Thus, I'd like to say that a bubble burst would be the owners' own damn fault and that they have to be able to restrain themselves from bidding salaries up beyond the point that's economically efficient. They should be able to determine how much a player can be worth to them and just firmly decide not to go above that figure. Perhaps even structure contracts so that the incentives have to do with team performance, not individual performance, so that a team could ensure that it only pays out the full salaries when it is making a lot of money.
But I'm not sure teams can restrain themselves. If the Phillies decide they want a given starting pitcher for 3 years @ $10 mill/year, but then it turns out their choices are to sign him for 4 years @ $12 mill/yr or not sign him at all, can we blame them for overpaying? The scarcity and volatility of baseball players puts the owners at a lot of risk, so perhaps they are worthy of protection via salary cap.
The way I see it, though, the really dangerous parts of bad contracts are the late years of long deals. How bad might Carlos Lee be in 5 years? There's a decent chance he won't be qualified for a starting role, yet the Astros will be paying him $16 million. As bad as the deal turned out this year, it will actually be like Drayton McClane flushing money down the toilet in 2012.
I think that rather than imposing a regular salary cap, MLB needs to limit the length of free agent contracts. All costs are variable (and thus correctable) in the long run, so if we shorten the duration of the short run, from 5-7 years to 3 years, baseball teams will be able to be much more efficient. This of course would hurt the players, whose big moneymaking time would be shortened, but if the bubble bursts and nothing is done to correct it, the implications would be far worse. The fact is, players are making far more than they should. They should quit while they and their industry are ahead and accept creative ways to lessen their contracts. I believe that in limiting contract length, you could allow players to continue to make a pretty penny while helping the owners cut costs. The only losers would be those players who earn a lot in unproductive seasons that teams got suckered into committing to.
If MLBPA agrees now to changes that will help owners out, even at the short-term expense of the players, it will help foster a much stronger business which will ultimately lead salaries back up again, even with various constraints.
I find MLB owners to be a pretty odious bunch, but I think we need to look out for them and ensure them some financial stability, because the game they run is very dear to a lot of people.
Take the Astros' signing of Carlos Lee to a 6-year $100 million deal. This year, and for the next 5 years, they will be paying him about $16 million. How much has he made for them this year? Well, if they had signed a replacement level player, according to BP, they would be a 65ish-win team as opposed to a 70ish-win team. First off, this shows some poor baseball decision-making, as they certainly wanted more than a 5-7 win boost for $16 million.
It was also a poor financial decision. Those 5 extra wins likely did not put many extra fans in the seats - perhaps the very presence of a big-money free agent sold some tickets and maybe they sold a lot of "Lee" t-shirts, but it's hard to imagine Carlos Lee added $16 million in revenue to the Stros.
The deal gets worse than that. What if instead of a defensively-retarded, slow corner outfielder with little plate discipline, the $16 million had gotten the Astros Babe Ruth? They would probably be an 80ish-win team instead of 70ish. And guess what. That wouldn't be worth $16 million either.
There is a very simple idea that BP illustrated very eloquently in Baseball Between the Numbers that essentially says that the wins that get you into the post-season are worth a ton of money; those that do not are not. Wins #87-93 bring you from a slight chance of making the postseason to an excellent chance, so they are worth a ton of money because there is so much money to be made from a playoff appearance (the extra sellouts, the boost in fan support, TV ratings). Wins #65-80 raise you from bottom-feeding to mediocrity, which is undoubtedly worth some money, but those 15 wins don't nearly stack up to just a handful of wins in the high 80s or low 90s.
For a bad team to spend lots of money on a free agent, especially one that's not very good, is financial foolishness. The Lee deal along with the Zito deal are probably the most extreme cases, but they are part of a larger problem of teams not doing a good job of understanding how much money these players are really worth.
Every other industry measures a business's success in monetary profits. Baseball teams are measured in wins. If only this were true, but the money being given to these players and the money needed to advertise and run the stadiums is not Monopoly money - it's real. That means that for the sport to function, teams have to earn sufficient revenue, but as we've seen, big free agent signings, along with many post-arbitration free agent signings, don't earn the money back. Perhaps a World Series championship is enough to erase some big contracts, but too many teams do too much spending without enough winning.
One day, an ownership group is going to try to sell its team and find that potential investors have run some numbers and have valued the franchise far below the asking price. If you expect someone to pay the last 5 years of a declining Carlos Lee's contract, you can count on them asking you to knock a lot off your asking price. And what if your team is paying wheelbarrows-full of money to Barry Zito, Randy Winn, Pedro Feliz, and Bengie Molina?
Is this evidence of a need for a salary cap? That's hard to say. It's very objectionable to allow a limit to be set on how much a firm has to pay its laborers. Thus, I'd like to say that a bubble burst would be the owners' own damn fault and that they have to be able to restrain themselves from bidding salaries up beyond the point that's economically efficient. They should be able to determine how much a player can be worth to them and just firmly decide not to go above that figure. Perhaps even structure contracts so that the incentives have to do with team performance, not individual performance, so that a team could ensure that it only pays out the full salaries when it is making a lot of money.
But I'm not sure teams can restrain themselves. If the Phillies decide they want a given starting pitcher for 3 years @ $10 mill/year, but then it turns out their choices are to sign him for 4 years @ $12 mill/yr or not sign him at all, can we blame them for overpaying? The scarcity and volatility of baseball players puts the owners at a lot of risk, so perhaps they are worthy of protection via salary cap.
The way I see it, though, the really dangerous parts of bad contracts are the late years of long deals. How bad might Carlos Lee be in 5 years? There's a decent chance he won't be qualified for a starting role, yet the Astros will be paying him $16 million. As bad as the deal turned out this year, it will actually be like Drayton McClane flushing money down the toilet in 2012.
I think that rather than imposing a regular salary cap, MLB needs to limit the length of free agent contracts. All costs are variable (and thus correctable) in the long run, so if we shorten the duration of the short run, from 5-7 years to 3 years, baseball teams will be able to be much more efficient. This of course would hurt the players, whose big moneymaking time would be shortened, but if the bubble bursts and nothing is done to correct it, the implications would be far worse. The fact is, players are making far more than they should. They should quit while they and their industry are ahead and accept creative ways to lessen their contracts. I believe that in limiting contract length, you could allow players to continue to make a pretty penny while helping the owners cut costs. The only losers would be those players who earn a lot in unproductive seasons that teams got suckered into committing to.
If MLBPA agrees now to changes that will help owners out, even at the short-term expense of the players, it will help foster a much stronger business which will ultimately lead salaries back up again, even with various constraints.
I find MLB owners to be a pretty odious bunch, but I think we need to look out for them and ensure them some financial stability, because the game they run is very dear to a lot of people.
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