For the fun of it, let’s start by looking at 1994 numbers, to get a feeling for the salary cap proposed back then by baseball’s management. (The payroll numbers below are from Baseball Archive; the estimated cap effect is based on my own calculations.)
(Before we examine the cap numbers, look at the 1994 payroll numbers! Not surprisingly, the Yankees are at the top of this list, and Pittsburgh, Florida and San Diego are towards the bottom. But there are teams in unexpected places on this list. Perhaps we should not be surprised to see Toronto as the third biggest spending team in 1994 – they’d just won two World Series and the Rogers Centre was only 5 years old at this point. But aren’t you surprised to see Cincinnati with the fifth-highest payroll, and the Royals – the Royals! – with the seventh highest payroll? Can you imagine that the Royals’ payroll might have been almost 20% above the cap proposed by the owners? It goes to show that the big spending teams of one generation may not maintain their big spending ways in future generations. Except for the Yankees, of course.)
Let’s explain the chart above. To refresh your memory (it has been 16 years), the owners proposed a salary cap based on 110% of projected player payroll, and a floor of 84% of this payroll. To sweeten the deal (or to poison it, if you’re looking at the deal from the perspective of the players), the owners projected total player payroll at 50% of then-existing team revenues, even though players were receiving salaries about equal to 54% of team revenues at the time of the proposal.
From the chart above, you can see what the owners were trying to accomplish. The proposed cap would have affected 13 teams – nearly half of the teams in baseball. Over $91 million in player salaries would have been above the cap. In contrast, the proposed floor would have added only $30.5 million in new player salaries. The net effect would have been to reduce the amount paid to the players by around $60 million annually – that is, if the teams at the bottom of the chart were somehow able to increase their payrolls by the 20%, 30%, 40% and more required to meet the salary floor.
Is this clear enough? The cap and floor proposed in 1994 had nothing to do with competitive balance. The proposal was a poorly disguised attempt to drive down player salaries. Of course the proposal was opposed by the Major League Baseball Players Association. It was never designed to be acceptable to the Players Association. No self-respecting Players Association could have possibly accepted this proposal.
Based on what we’ve seen in the 1994 proposal, let’s draw up our first rule of thumb for the design of a baseball salary cap and floor: (1) In order for a proposal to be potentially acceptable to the players, the amount of salary affected by the cap cannot be greater than the amount of salary affected by the floor.
Let’s apply this rule of thumb. Let’s look at the same style chart as above, only let’s move forward to the present day, using 2010 salary numbers from Biz of Baseball. This time, let’s apply an NBA-style cap and floor, where the floor is set at 75% of the cap:
The above chart represents what is arguably a fair proposal: the amount affected by the floor is about equal to the amount affected by the cap. But it shouldn’t take long to realize that the cap and floor proposed above are completely unworkable.
First, note that more teams are affected by the floor than by the cap. This rule holds true regardless of where you set the cap or floor (so long as the amounts affected by cap and floor are required to be equivalent). There’s a lesson here: if you try to design a salary cap and floor for baseball in 2010, the primary issue is the floor, not the cap. Or another way to put it: the bigger cap/floor problem is not getting the Yankees to spend less; it’s getting the Pirates to spend more.
Next, note that 18 of the 30 teams in baseball – 60% of all teams – would be affected by this proposed cap/floor. I think it’s reasonable to expect that any team affected by a proposed cap or floor would object to the proposal — proponents of a cap want to affect the other guy’s spending, not their own. To get a cap or floor adopted, I think we need a second rule, to match our rule about matching cap effects and floor effects: (2) To get the baseball teams to adopt a proposed salary cap and floor, the cap/floor can affect no more than 1/3 of the teams (leaving a 2/3 majority that might support the proposal).
Finally, note the extent of the floor’s impact on the poorest teams in baseball. Under this proposal, 12 teams would have to come up with substantial additional money to meet the minimum payroll required by our proposed floor. A couple of teams, San Diego and Pittsburgh, would be required to more than double the size of their existing payroll. This raises a key question: how large a payroll floor can a poor team afford?
Go back and take a look at the chart above. Note that the average team in baseball spends about 46% of its revenues on player salary. Also note that the low payroll teams – the bottom nine teams on the list – spend less than 40% of their revenues on payroll. A few teams’ payrolls are at 30% of team revenue, or less. It’s a legitimate question whether these “poor” teams can afford a payroll at around the league average. However, small market teams like Kansas City and Tampa Bay are able to spend for payroll at the league average. So for purposes of this analysis, let’s make the relatively aggressive assumption that any team in baseball can afford to spend 45% of its revenues on player salary.
There is a second, related question: is it good for baseball to force small market teams like the Pirates and the Padres to increase their spending on player payroll? Of all the reasons to question a salary cap (and salary floor), this strikes me as the best reason of all. Teams like the Pirates might be better advised to invest their money in player development, or signing international free agents, or building better community relations, instead of signing free agents to boost their payroll to an agreed-upon minimum.
We will discuss this point further in Part 4 of this series. To be certain, there are small market team owners (like the Rays’ Stuart Sternberg), who will support a salary cap only if the cap does not come with a salary floor. My response to Mr. Sternberg is that caps are impossible without floors — if team owners are unwilling to pay the price of the floor, they won’t get the benefits of the cap. But the reluctance of people like Sternberg to support a salary floor should at least serve to caution us against trying to push our proposed floor any higher than 45%.
If we apply this 45% figure to the revenues for the lowest revenue-earning team on the list, the Florida Marlins, we get our third rule of thumb: (3) Baseball cannot presently afford a salary cap/floor that would force the poorest teams in baseball to spend more than $64 million annually on player salaries.
(Note that the effect of our rules of thumb (2) and (3) are about the same. If you think that we might get away with having a cap and floor affect more than 1/3 of the teams in baseball, you’d still be stuck with our floor limit of $64 million. Or if you want to propose a salary floor above $64 million, you’d still have to figure out how to get baseball to adopt a cap and floor that affected more than 1/3 of baseball teams.)
We’ve had prior discussions here at IIATMS with Pirates fans, who argue (with some justification) that there’s no way for the Pirates to earn local baseball revenues on par with the Yankees. But from the above chart, you can see that baseball’s ability to afford a higher salary floor does not depend on the Pirates earning what the Yankees earn. All we’d need is for teams like the Pirates to earn revenues on par with teams like the Brewers. If the Pirates (and the Padres, and the A’s) could afford another $5 million in payroll, or $10 million, or $15 million, we’d end up with an affordable cap and floor much closer to the cap/floor difference in the NBA.
But we cannot design a salary cap and floor to fit the sport of baseball that we might wish existed. We have to deal with the business of baseball as we find it. So let’s reload. Given our new rules (2) and (3) above, let’s produce a third chart, one that sets forth a cap that fits Major League Baseball circa 2010:
The above chart represents the most aggressive proposal that satisfies all three of our rules of thumb. Our salary cap is set at $147 million, and our floor is pegged at $62 million. Under this proposal, no team is required to spend above our $64 million limit. We have eight teams affected by the floor and only two by the cap (again, note that the floor affects more teams than does the cap), leaving 2/3 of the teams (our required 2/3 majority) unaffected by cap or floor. And we’re still being fair (at least, arguably fair) to the players by making certain that the capped amount does not exceed the amount affected by the floor.
So there you have it, ladies and gentlemen: $147 million “capped” at the top and $62 million “floored” at the bottom. Our proposed cap and floor does not provide for anything like NFL parity, or even NBA parity. But it’s the best system that baseball can afford. Baseball cannot afford an NFL-style salary cap, or an NBA-style salary cap, because the poorer teams in baseball cannot afford NFL or NBA-style salary floors. Unless or until the poorer teams get richer (either through their own local success or through more effective revenue sharing), the best system we can have is a cap set arguably too high, and a floor set at less than half the level of the cap.
Is it worth it, to disrupt the current economic structure of baseball, just to impose a cap and floor that would be this weak, this far from the norm in other professional sports? Maybe. I think so. We’ll explore this question in Part 4 of this series.
But first, we have to ask whether baseball can afford even the weak cap and floor proposed above! Tune in next Monday for Part 3 of this series, when we’ll explore how to package a salary cap and floor so that it might be sold to the MLB Players Association.
Excellent analysis, Larry. Looking forward to the remainder of the series!
Interesting. I have more questions, but I might wait until the next few parts to ask. The question I have right now is if you're going to talk about possibly staggering the implementation of a cap/floor and how to do that. You don't want to make Pittsburgh spend $30MM right away, and you can't just make the Yankees cut $60MM immediately, either.
I guess there's probably little point, but looking at those payroll figures and the teams and so on, I'm not really seeing a huge problem.
Also, any introduction of a cap will also require a change to arbitration and the player control period.
Mark…
I think that any cap discussion must include the clause that all contracts signed in advance of the implemention of a Cap are grandfathered in, in some way.
And in a similar fashion, you can't have PIT just throw an extra $30m at players who otherwise wouldn't be worth that expense, just to get to a floor.
Can you imagine a world where the Livans, Ponsons, Marquis', Garlands, etc. are paid comparable to the Verlanders, Sabathias, etc. due merely to the presence of a Cap?
Maybe this will be discussed in future parts, but I have serious concerns about perverse incentives this cap/floor system creates.
Previous posts have noted that baseball, to a greater degree than the NFL or NBA, is local. If large market teams have to ship off more and more revenue, and smaller market teams get subsidies, doesn't this undermine the incentive to produce a quality product? If the Yankees have to send more and more cash to smaller markets as revenue rises, do they build the new stadium? If small market teams know they'll get hand outs from larger markets, what incentives do they have to boost their own revenues. Would the Twins build their new park if they were getting enough to re-sign Mauer even with the old Metrodome?
Also, all this salary cap talk ignores a fundamental question: why SHOULD every team be on equal footing? If the Rays, despite having a really good, exciting young team cannot draw fans, why do they deserve to compete equally with the Yankees? Miami is a fairly rich city, that just doesn't care much about baseball. Why should the Marlins be on equal footing with the Red Sox? This is after all, merely entertainment. I agree to have a viable league, small markets must have some shot at contention. But that's already the case. The smallest markets can compete, just not as consistently. Why should Yankee fans pay $70 for a ticket, just to have a huge chunk of that sent off to subsidize a Pirate's fan's enjoyment from his $20 ticket?
The real problem is that the payroll numbers do not take into account the player development numbers. So, a team like the Pirates which is allegedly spending a lot in player development right now would be forced to spend that money on mediocre major league players instead of on prospects who could potentially enable them to compete in the future.
So, the Yankees and Red Sox would then be able to spend even more internationally to lock up the best international prospects because they would have a lot of extra revenue to spend whereas now, teams like the Reds can spend for a Chapman.
What David said. If we're going to go down this road, I see a requirement for spending x% of revenue sharing funds on baseball operations being more effective than a cap-floor structure designed around sports that outsource most of their player development to an amateur cartel.
Andrew, thanks!
Mark, here in part 2 I’m just trying to get the numbers to balance and to figure out how much cap and floor we can afford. But yes, my master plan (to be revealed later on) would be to phase in any cap and floor, probably over a minimum of three years.
Brien, I know I’m taking an unusual approach in these posts. The usual approach would be to identify a problem, then propose a solution. My approach is to analyze the solution first, then see if the solution (as it might be applied to baseball) could solve a problem. When I’m done with my analysis of what a salary cap in baseball might look at, then you and I can discuss if there are any existing problems that this solution might solve. I swear, there is a method to this madness.
Jason, agreed on grandfathering, but note that the Yankees have “only” around $141 million in guaranteed contracts extending into 2011.
JP (and Jason, since your comments echo JP’s), you are quite right, a salary cap and floor creates market distortions. Jason may be right that the introduction of a salary floor would boost the value of mid-level free agents. JP is right (you must be right, as Bill James has said the same thing!) that revenue sharing distorts the incentives that would otherwise drive both payor and payee teams to improve their product and build their local revenues. These distortions are a cost of reform, to be balanced against the purported benefits of reform. I’ll address this balance (or at least, my own view of this balance) in part 4 of this series.
But I’ll go out of order just for a moment, and try to address JP’s other question. JP, you’re right that a team’s long-term success is tied to the willingness of its fan base to support the team economically. I’ve made this argument here before, see http://bit.ly/90ikDn. However, the cause-effect relationship here is less clear. To be certain, the loyalty of the fan base in New England may be one cause for the Red Sox’s rise to the top echelon in baseball. But I think in most cases, success (or lack of success) on the field drives attendance numbers and not the other way around. It’s more a matter of “if you build it they will come”, and not the other way around. Admittedly, this is a complicated topic – I’ll try to do a better job of addressing this question in a later IIATMS series on revenue sharing.
David, you are making a good point. If our only goal is to drive the LONG TERM improvement of the Pirates’ ability to compete on the field, then we might not want to force the Pirates to do anything to improve in the short term. (I’ll ignore the issue of whether the Pirates really have a long-term plan to improve their team, and whether the cost of this long-term plan really precludes the Pirates from spending money on free agents or to retain their existing players.) However, if we care about competitive balance, then we also have to care about the balance struck between short-term and long-term goals.
Competitive balance is going to suffer if “poor” teams like the Pirates can tank season after season as part of their plan (however well-intentioned, and however strategically sound) for rebuilding.
David is right, nothing in this world comes for free. If the Pirates are forced to spend more on current payroll, then (ignoring the team’s profits, or alleged profits) they’ll have to spend less somewhere else. But I have no problem with the idea of imposing a salary floor on teams like the Pirates, and telling them that there’s a limit on how much they’re allowed to neglect this year’s on the field performance in the chase after a longer-term team improvement.
I think David/Brien/JP all bring very real and valid counterpoints to this discussion… and remember that's what this is: a discussion.
Especially with the amount of available $ that the larger teams would have to funnel into international development… or just annexing of the DR by the Yankees. The Dominican Republic of The New York Yankees.
Hell, the GDP of the DR is "only" $45B;
"
Competitive balance is going to suffer if “poor” teams like the Pirates can tank season after season as part of their plan (however well-intentioned, and however strategically sound) for rebuilding.
David is right, nothing in this world comes for free. If the Pirates are forced to spend more on current payroll, then (ignoring the team’s profits, or alleged profits) they’ll have to spend less somewhere else. But I have no problem with the idea of imposing a salary floor on teams like the Pirates, and telling them that there’s a limit on how much they’re allowed to neglect this year’s on the field performance in the chase after a longer-term team improvement. "
A couple of points:
1. There's a longevity factor here. If a team can spend $120 million over two years within their budget, they don't necessarily have to divide it up evenly. Spending less in one season can allow them to spend more in the other, and thereby take a bigger run at competing in that year. They may be terrible in the other year, but what's a better position to be in; having to sacrifice a season for a real chance at competing the next, or evening out the payroll and hovering within 5 games or so of .500 in both?
2. One thing a soft cap does, or can do, is encourage teams to throw away seasons in exchange for freeing up future cap space. Look at how many teams have tanked their last two seasons in the NBA in exchange for the chance to land more free agents from this year's mega-class, for example.
Brien, good points. On your point 1, much depends on how we define the "competitive balance" we seek. I agree that one good year and one bad year sounds better than two mediocre years. We might structure our salary floor to allow teams (within limits) to spend less than the floor in one year, in return for a promise to make up the difference in a later year.
On your point 2, agreed, but even without a cap we see baseball teams (like the Indians) dumping salary mid-season as soon as they determine that can't compete for the post-season. I agree that the NBA cap can provide an additional incentive for a basketball team to throw away a season. However, my proposed cap is set so high, it only affects the Yankees and Red Sox at the moment — most teams in baseball have more room than they could ever use under my proposed cap.
Re: Larry's point
I do totally agree that team success breeds fan support which in turn creates revenue. But how do you explain the Marlins and Rays have had very very good teams, and still struggle with attendance? Miami is a small, but pretty wealthy town. They just don't care about baseball. I really see no reason why after winning 2 titles, they should get more subsidization from fans elsewhere. I mean, seriously, the CUBS ought to be sending more cash to the Marlins?
Also, I generally dislike the MLB to NBA/NFL comparisons, as they ignore three major differences. I wonder if they can be addressed.
1.) Baseball has compensatory picks, which can help funnel young, cheap talent to smaller markets who fail to re-sign stars. The NFL has compensatory picks, but only for players with the franchise tag. The NBA has no compensatory picks. This often gets totally ignored in comparisons.
2.) Baseball systematically underpays young stars. The NBA has some restrictions on rookie contracts too, but players start making near-market rates fairly quickly. In the NFL, well, top draft picks are ridiculously OVER paid. Tim Lincecum, Ryan Braun or Evan Longoria could command $20 mill per year on the open market, but their clubs can control them well into their primes. If we're moving towards an NBA model, don't we also need to free up youngsters to make their due sooner?
3.) Baseball inherently involves more chance than NFL or NBA. A-Rod only gets 1 in 9 plate appearances. Sabathia only gets 1 in 5 starts. The best teams only win about 60% of the time. If the Knicks could go sign Lebron, and Wade, and Bosh, and keep David Lee, they'd win almost every night, and would be a prohibitive favorite to win the title. With baseball, the 116 win Mariners can get knocked off by an 87 win Yankee squad. Even the best team of all time more likely than not to fall short of a championship. Baseball has a natural, built-in equalizer.
None of this is to say the Yankees don't enjoy a huge advantage. But comparing baseball to basketball or football is an apples/oranges comparison. These other mechanisms that promote competitive balance have to be taken into account.
JP, terrific comment. Some comments back:
Miami is a small town? Miami – Ft. Lauderdale is the sixth largest metropolitan area in the U.S., though the Miami TV market is ranked number 17. At some point I have to figure out how to rank team markets by size …
I appreciate your point abut revenue sharing, but I have to take these topics one at a time. I’ve posted before on revenue sharing, and will post again on revenue sharing. Yes, I understand that teams in small markets may need financial assistance, but it bothers me that teams in sizable markets receive revenue sharing. I mean, at one point the Phillies were receiving revenue sharing! That’s not right, I agree. It would be good to distinguish between the teams that deserve revenue sharing and the teams that don’t.
I can’t avoid comparisons to the NBA or the NFL, particularly in a discussion of salary caps. I agree, we need to be careful in making these comparisons, and we have to understand the differences between the three leagues when we make these comparisons.
Good point about compensatory picks. The rules on compensatory picks act to depress the value of free agents, particularly “Class A” free agents, as these rules make teams somewhat more reluctant to sign free agents. But the compensatory pick system is not really comparable to a salary cap, as the compensatory pick system affects all teams and not just teams above or in the vicinity of the cap. We can consider the compensatory pick rules as a way to help maintain competitive balance, but I think they’re better analyzed in a different discussion.
Your point about baseball underpaying young players is spot on. The rules delaying player eligibility for free agency do a great deal to enhance competitive balance. I’ve read proposals where the owners offered to trade faster eligibility for free agency in exchange for a salary cap. From the standpoint of competitive balance, this is probably not a good trade. Especially given how little salary cap baseball is able to afford.
Yes about baseball involving more chance. We’ve discussed that here before. However, the chance factor declines as you look at longer stretches of baseball games. There’s a great element of chance in a 7 game series, less chance when you look at a whole season, even less when you look at a period of years. I’ve used this analogy before: if I sit down at a blackjack table next to a professional gambler, the gambler has only a small advantage over me from hand to hand, or even from hour to hour, but eventually I’m going to go broke and the gambler is going to make money. In other words, I don’t think that element of chance has anything to do with competitive balance.
With all due respect, I think your proposal fails to take into account several important issues, only a few of which I will summarize below. Before doing so, however, it should be pointed out that NFL/NBA style parity is accomplished by having more playoff teams, not by having a salary cap.
1) MLB revenues are local: Why is this important? Because it is not easy to verify or discern what revenues should be included as part of the salary cap/floor calculation. For example, the Yankees own a share of YES, however, the station is a separate entity. From the players’ standpoint, the Yankees are earning revenue because of baseball, but it technically is not baseball revenue. With the proliferation of RSNs, this is not just an isolated concern.
2) MLB has significant player development costs: You can’t institute a salary floor without incorporating player development. Unlike the NBA and NFL, which don’t have minor leagues, baseball teams spend a lot of money on their farm systems.
3) Salary Floors are conceptual: It’s a little known fact that the NFL salary floor isn’t as hard as the ceiling. For example, the Tampa Bay Bucs have been known to give ridiculous incentives, which count toward the floor, to players, knowing they will not be collected. In effect, the salary floor is prone to numerous loopholes.
The more pertinent issue, however, is there is no reason why MLB needs a salary cap. The game is as popular as it has ever been, and its revenue growth has been exceeding even the NFL’s. So, what exactly is being accomplished by gerrymandering an economic system when the current one is working very well (and if you think it isn’t, what outcome is not being achieved)?
Larry:
Hm, well from a guy who's lived in NY and Philadelphia, Miami does seem like a "small town." But if it IS that big, that just makes my point all the stronger. There's plenty of market there, the team just cannot get fans to care. Plus, they've won two world series!. Isn't that strong evidence that perhaps there's already a fair amount of competitive balance?
Compensatory picks are obviously not equivalent to a cap, and they can assist rich teams and poor teams alike. But they're more likely to help out poor teams, who are the ones who will fail to re-sign Type A or Type B guys more frequently. On balance, it still helps out smaller market teams in the zero-sum game of the draft.
I'll strongly disagree with you on the role of chance. Yes, chance fades with larger sample sizes. But we all know in a 7, and certainly in a 5 game series, chance plays an enormous role. As long as small market teams can make it to the playoffs, the big market advantage all but vanishes. Once the Twins, A's, Marlins, Cards, Brewers, etc. make it in, they're just about on par with the Yankees and Red Sox. That seems highly relevant to considerations of competitive balance. As all of us Yankee fans know, buying up the best players does not virtually guarantee a title, like it would in football or basketball.
Anyhow, great blog. I just started reading it, and it's become one of my favorites.
Will, thanks for posting. On your three points:
1. True, most MLB revenues are local. I pointed this out in part 1. However, a salary cap focuses primarily on payroll, not revenue, so in the first instance the critical computation is payroll. Yes, there are various ways that payroll can be computed (25 versus 40 man roster, for instance). But baseball already has a formula to compute payroll size, which is used to calculate the "luxury tax".
For that matter, baseball already has a formula to compute revenues, which is used to calculate revenue sharing payments. You are right to point out that much depends on these formulas.
2. Again you are right, baseball has significant player development costs, but nothing says that these costs have to be included in the calculation of a salary cap or floor. (Biz of Baseball says that the MLB spends $600 million annually on player development, accounting for around 6% of a team's budget.)
3. I would disagree that the NFL floor is any softer than the NFL cap. Both can be circumvented. I cited http://bit.ly/apbNKs in Part 1 of this series, reporting that last year in the NFL six teams spent less than required by the floor and 13 teams spent over the cap. So, we can duly note that a salary cap and floor is like any other set of rules: people will figure out ways around them, and some people will get away with violating them. That's also true for the rules governing income taxes (and for that matter, the rules against murder, theft and other crimes), but that's not an argument for living without rules.
As for whether baseball needs a salary cap … that discussion will have to wait until part 4 of this series. In my view, too many commentators speak about whether baseball needs a salary cap, without first thinking hard about salary caps and what kind of cap would "fit" baseball. I'm taking the approach of understanding caps first.
Just a followup:
1) True, baseball has a luxury tax, but that is simply a means of redistributing wealth among owners. As soon as you tie player compensation to revenue, the formulas become more important. Until you can determine with great veracity the source and size of all revenues, a salary cap tied to revenue is like trying to hit a constantly moving target.
Also, I don't think you can say "a salary cap focuses primarily on payroll, not revenue" because the two are almost always linked closely.
2) I don't see how you could create a salary floor without factoring player development costs. Otherwise, you'd be robbing Peter to pay Paul. Smaller franchies are much better off investing on the low end of the development scale than inflating their payrolls by chasing midling free agents. As was mentioned, MLB's six-year reserve clause does more to balance "power" than any salary cap/floor could.
3) I agree that the ceiling in the NFL is also soft. I recently read a study in the Buffalo newspaper that basically stated, despite the cap, the NFL was a league of haves who spend and have nots who don't. In other words, no different than a non-cap sport.
Finally, I don't think you can "understand a cap" first by divorcing it from the context of the sport to which it is being applied. It makes much more sense to first determine what the problem is, and then see if a cap addresses it. I know you are trying to approach it a different way, but I think doing so distorts the issue.
JP, putting my modest contributions aside, I agree, this is a great blog. I was a fan of this blog long before I started posting here.
Regarding Miami, and markets like Miami: a lot depends on your perspective. Baseball might take the position that it wants to be important in every major U.S. market, and that it’s willing to spend the time and money to make baseball popular in Miami. Personally, I turn purple when I think about how the Phillies were able to collect revenue sharing money, but perhaps that money was needed to turn Philly into one of baseball’s elite teams (and franchises). It’s a complicated issue, how to spend revenue sharing money to get the most bang for the buck. This is one of the reasons why I’m addressing salary caps before I try to address revenue sharing!
Point taken about compensatory picks. I acknowledge that the requirement governing compensatory picks acts to discourage the signing of free agents, which has an effect on competitive balance. This topic is worthy of its own post. Maybe someday …
I don’t think we disagree on the role of chance. Agreed, in a short series, chance plays a large role. So once a team makes it into the post-season, the team has a decent chance to win it all. But chance and competitive balance are separate concepts. Competitive balance looks at the differences in talent and ability between team A and team B; the element of chance may mean that differences in talent don’t always determine results on the field. You’re right to point out that baseball has a higher element of chance from game to game than, say, football or basketball. If every important result in baseball was determined in a small sample of games, then maybe we wouldn’t need to care about competitive balance. But baseball also plays the longest season. A 162 game season should reduce the chance factor, so that the 8 best teams will emerge. If you want to evaluate the state of baseball’s competitive balance, the place to start is to see which teams consistently make it to the playoffs.
Will, you’re making good points. There’s room here for different opinions.
1. Technically, the luxury tax takes money from a few teams (mostly the Yankees), and the money is not redistributed to other teams. Revenue sharing moves money (a lot more money) from rich teams to poor teams. See http://bit.ly/aBhRtR and http://bit.ly/ajmbGQ. Agreed, many salary cap schemes incorporate some kind of tie to team revenues – my scheme here does not do so, but I may amend my scheme in part 3 to guarantee players a certain percentage of baseball revenues. I agree that in any system of rules, much depends on how terms are defined, but I don’t think that a proposed rule should be abandoned simply because it’s difficult to define terms or because critical terms might arguably be defined in different ways.
2. Your point about player development seems to me to question the wisdom of imposing a salary floor. Good question, that. I acknowledged in this post that I think this is the single strongest argument against imposition of a salary cap and floor. Personally, I favor a cap and floor because I think the benefits outweigh the costs. I’ll focus on this again in part 4 of this series. But to be certain, a cap limits the flexibility of poor teams to devote maximum resources to player development, and this is a significant “cost” of imposing a salary floor. If you’re looking for a reason to oppose my cap/floor proposal, I think this is the best reason out there.
3. It’s one thing to say that a cap/floor can be circumvented, and another to say that a cap/floor can have no effect. All rules can be stretched, no set of rules is free of loopholes, but this is not a good argument for anarchy. I mean, how many people cheat on their income taxes? But the government still seems to collect a few dollars here and there!
As for questioning my approach … question away! Maybe there’s a good reason why everyone else who has considered salary caps has taken a different approach. Come back to me after I complete this series of posts, and tell me then if you think I’ve distorted the issue. I think rather that I’ll have provided you with a different take on the issue.
Slow week at work….which is fine.
Fair point that over time, baseball may need to prop up weaker markets to build up a fan base that can eventually sustain itself. But again, the Marlins have been around for 17 years, and have two championships. I know they often blew up those good teams, but if two titles isn't enough to create a fan base, what is?
I don't think we should care about baseball talent qua baseball talent between big and small markets. I think outcomes are the ONLY thing we need to be concerned with. Large markets hoarding talent is only problematic to the extent it affects outcomes, and precludes small markets from competing. That clearly does not happen under the current set up.
I just think that even with 162 games, underlying talent corresponds less with outcomes than in other sports. And even to the extent the talent expresses itself, in any given season teams can diverge pretty widely from their pythagorean projections. Just last year the Yankees exceeded their fundamentals by 6 wins, and the Rays underperformed by 2 wins. Luck accounted for an 8 win swing, an enormous gap.
Again, Yanks still have a big advantage. But a team that has much less talent can still get a little lucky, snatch a wild card berth, and be as much a contender as any one. That may not be likely, and it won't happen every year, but it's something that probably just not possible in the NFL or NBA. It doesn't level the field by any means, but it helps.
A few more responses (and yes, there is room for disagreement, but some elements are fundamental).
1) Luxury tax is essentially redistributed wealth because the money is taken from the Yankees, for example, and used to fund league expenses. If the Yankees were contributing the money, other teams would have to make up the loss.
As for tying a salary cap to revenue, how could you possibly not do that? Why would the players ever accept one if they weren't guaranteed a share of increasing revenue. I think you may be ignoring practical elements in an attempt to look at this theoretically. From my standpoint, the theory is meaningless without the context.
2) I absolutely am questioning the salary floor, but one is necessary to guarantee a percentage of revenue. It really makes no sense to consider a cap without a floor because no union would ever accept it. Because the floor does more harm than good, why proceed?
3) Who is talking about anarchy? You are suggesting a major overhaul to a very successful economic system (unless you don't believe the revenue growth numbers). So, if the proposed overhaul may not even be effective, I think that is a great reason to not implement it. If it ain't broke, don't fix it.
I hope I am not coming across as to critical, but the first two installments seem to be taking you down a path of misunderstanding the issues.
2)
JP, I'm not known as a big fan of shipping money to the Marlins. If you want to read some of my preliminary thoughts about revenue sharing, see http://bit.ly/aMWLJR and http://bit.ly/drReg1 and http://bit.ly/cJF6nJ and http://bit.ly/dc8LIv and http://bit.ly/90ikDn (you did say you weren't busy today). As for competitive balance, for the moment I'll point you to Joe Posnanski on this subject (I mostly agree with what he has to say here): http://bit.ly/2PNlKM.
Will, quick responses. Baseball's collective bargaining agreement does not provide for "make up" payments in the event that nothing is collected by the luxury tax. In part 3 of this series, I'll discuss how to sell a cap and floor to the players' union, but the short answer to your question is that there's probably nothing we can do to get the players to accept a salary cap. The success of baseball's current economic system depends on where you stand: at least according to Forbes, the gap between rich teams and poor teams is growing wider. http://bit.ly/cDjG6n. No, you're coming across as intelligent — you're not required or even supposed to agree with me.
Good post… And I think I can see where you're heading.
The underlying issue here is not one of payroll, but one of revenue. Simply stated, the revenues associated with the size of the media market give large market teams (particularly at the very top of the market) a huge advantage over small market teams. This means that TV revenues for the Yankees are ridiculously higher than for say, Kansas City. This is, of course, why teams are rushing to own their own distribution.
This is mitigated in the NFL because the fan base and television distribution is largely handled nationally rather than locally. This is impractical in the MLB, which is far more local.
A more intelligent revenue sharing scheme is probably the answer, but it's tricky to design one that doesn't create an incentive for mismanagement. That is, tying revenue sharing to team revenues incents teams to minimize revenues in order to get more revenue sharing $$. This is also how you end up with a successful small market team paying money to a poorly run, large market team.
I've heard a couple of proposals to make this workable, but not from anyone associated with the teams or players…
Hantu, thanks! Yes, you're seeing the rough direction in which I'm heading, though this direction shifts a bit north or south from day to day.
We don't need perfect revenue equality to impose a salary cap — there's a 65% gap in revenues from top to bottom in the NFL (according to Forbes), but that's enough equality for the NFL to impose a tight, hard salary cap and floor. But baseball's rich-poor revenue gap is much, much wider than what we see in the NFL, and that gap can't be bridged entirely with a salary cap.
To bridge the gap between rich teams and poor teams, we are going to have to figure out a way to share revenues more equally. But there are practical limits to how much revenue can be shared, just as there are practical limits on baseball's ability to impose caps and floors. This is one reason why I continue to recommend a salary cap for baseball, even though the cap I'm recommending (obviously) would have only a limited impact. There's no magic wand that baseball can waive to put the Royals and the Yankees on the same financial level; there's no single solution that's going to work. We have to be willing to settle for baby steps in the right direction. A salary cap might be one of those baby steps, so I'm not willing to rule it out simply because my proposed cap falls short of what a cap proponent might wish for.
I think the correct long-term solution is to look to build national sources of baseball revenue that can be shared equally. But that's going to take a long time. Moreover, as you point out, baseball is (and I think always will be) a more local game than the NFL. There may be no way to give every baseball team access to the same amount of money … but I still think it's worthwhile to narrow the rich-poor gap to the extent that we can.
I think you are missing my point about the luxury tax. I didn't mean to imply that there are makeup payments. The point about the luxury tax is 75% is used to find player benefits, as "provided in the Major League Baseball Players Benefit Plan Agreements", and 25% goes into the "Industry Growth Fund". With or without the luxury tax, MLB has to fun both, so if the Yankees don't pay the luxury tax, the money has to come from somewhere. For example, if a bond covenant calls for interest to be paid from a certain revenue, the debtor still has to make payments if that revenue dries up.
I agree with you that the MLBPA would likely never accept a salary cap (which I think is saving grace for the game), but any good idea should try to meet that threshold. I look forward to seeing how you do that.
As for the growing economic disparity in the game, I am unclear why that's a bad thing? If you look at the big picture, every team has seen significant increases in revenue, EBITDA and franchise value. That's a good thing. There is something to the notion that a rising tide lifts all boats. My main opposition to a salary cap is that they are not economically sound and don't create "balance". The only thing they really do is give owners cost certainty.
One more point:
Why do the Royals and Yankees need to be on the same financial level? Not only is that unnecessary, but I also think it is bad for the game. Baseball has never had revenue quality…not now, not at the beginning and not any time in the middle. Why is there a need for it all of a sudden? As keeps being pointed out, baseball is and always has been a local game. It grows by teams exploiting their local markets. Taking away those incentives can only damage the game (look at the stagnation during the mid1970s-mid1980s, when owners battled players on cost control instead of trying to increase revenue). The only way to make the game more “national” is probably to foster the same ties to gambling as exist in the NFL (which, let’s be honest, is a major contributor to the NFL’s popularity). Also, reducing the schedule to once a week to cash in on the general public's short attention spans would help as well. Neither solution is suitable for baseball.
It’s nice to say you want to narrow the rich-not as rich (there is no poor) gap, but it’s another thing altogether to show why that’s a good thing.
Will, I need to focus on writing Part 3, and I hope you'll continue your comments there.
I don't think the luxury tax point is worth arguing about. Some pension plans are defined contribution plans (like a 401k) with no minimum funding requirement. If the MLB Players Pension Plan is a defined benefit plan with a minimum funding requirement, I don't know that it's currently underfunded or might become underfunded if the luxury tax was eliminated. I don't even know what other sources are used to fund the Pension Plan. Your analogy to a loan is not a good one, as a pension plan is not a loan – I used to be a lending lawyer (I also used to practice in a firm devoted to pension plan law), and this much I know. Some loans are "non-recourse" loans, and if the source of paying such a loan dries up, the borrower is not necessarily required to come up with another source of funding. This discussion is going very far afield of what I want to talk about, so let's agree to disagree on this point.
Your more fundamental question is whether teams should all be on the same financial level. I'm enough of a realist to know that this can never happen, and that any effort aimed at achieving financial equality would both fail and do more harm than good.
It's not necessarily a bad thing to have some teams lead the way financially — I'm thinking of the Cowboys in the NFL. They can serve as a kind of financial model. The Yankees can do the same thing in baseball — for example, if the league is interested in broadcasting 3-D TV, let the Yankees take the risk by being the first to experiment with it, work out the kinks and prove concept. If it's a good idea, then everyone can follow; if it's a bad idea, then the Yankees can afford to write off the costs.
But I've made this argument before: baseball is not a normal business. We fans are paying to see an athletic competition, which requires some balance in the ability of every team in the league. A team's strength on the field is not DETERMINED by the team's financial strength (see Cubs, Chicago), but there's a definite relationship between the two. True, the chance factor in the playoffs (best of 5 and best of 7 series are crapshoots, as Billy Beane would say) means that a team cannot buy a World Series championship. However, teams CAN buy an increased chance of making it into the post-season, and the ability to do so with reasonable consistency from year to year.
Is it good enough, to have some teams like the Yankees with the financial wherewithal to make it into the post-season year after year, and other teams like the Royals that are trapped in a cycle of continual rebuilding where (if they are successful rebuilders) they might make the post-season once or twice in each rebuilding cycle? For the moment, I'm not going to debate this question. Instead, I'm trying to investigate first whether there's any solution available that would give the Royals a better chance for on the field success, and that would not do more harm than good given the state of the game circa 2010. If there is no such solution, then that ends the debate.
Let's continue the debate in Part 3 (which I have to finish; even bloggers have deadlines!).
Maybe I should wait for parts 3 and 4 but, again….slow week at the office.
Will there be a discussion on how a cap might affect central revenue funds? I don't have any data, but I assume big market teams, with large diaspora fan bases (Yankees, Red Sox, Cubs, etc.) provide a huge chunk of national revenue. I can't imagine there are that many Royals fans signing up for MLB.TV. If the big market teams are less competitive, how will this impact national TV ratings, MLB advanced media revenue, merchandise sales?
If we're roughly defining "good for the game" as total league revenue (i.e., growing the sport nationally), it seems these effects need to be accounted for. Even with the NBA, David Stern famously, and idiotically, proclaimed his preference for the Lakers in the finals. Big market team success means big ratings which means big dollars.
I'm not necessarily making a "Yankees winning is good for the game" argument, but nor do I think we should ignore the impact of big market team success on central revenue.
Good idea about carrying over further comments to the next installment.
As for the luxury tax, according to my research, MLB is required to pay for player benefits (it isn't a 401k for players). It also used its central fund for the good of the whole. So, if the Yankees luxury tax is being used for both purposes (which it is), it does in fact constitute a transfer of wealth. If there was no luxury tax, MLB would still have to pay for player benefits and likely still maintain a central fund. I don't see how you could argue that the Yankees payments aren't benefitting the entire league.
Will,
I don't think revenues need to be "equal", just not as extreme as they are now.
From an economics perspective, you could say that the Yanks are extracting revenues from their monopoly over baseball in the NY metro area (shared with the Mets). In a completely free market, the owner of a team in a market with limited demand would simply relocate to an area with higher demand, increasing competition and flattening revenues.
Of course, the MLB doesn't work that way, since the Yanks and Mets can prevent new competition in their market. You can look at revenue sharing as compensation to the owners of small market teams for the anti-competitive structure of the MLB.
Terrific post! I’m just sorry I was late getting to it.
You said, “let’s make the relatively aggressive assumption that any team in baseball can afford to spend 45% of its revenues on player salary.” I don’t think it’s an “aggressive assumption” – I think it’s 100% true.
Then there’s this part: “There is a second, related question: is it good for baseball to force small market teams like the Pirates and the Padres to increase their spending on player payroll? Of all the reasons to question a salary cap (and salary floor), this strikes me as the best reason of all. Teams like the Pirates might be better advised to invest their money in player development, or signing international free agents, or building better community relations, instead of signing free agents to boost their payroll to an agreed-upon minimum.” I addressed this in my article responding to the first part of this series over on <a href="http://www.itsaswingandamiss.com,” target=”_blank”>www.itsaswingandamiss.com, but I’ll say it here too for those not making the jump over to my site (shame on you all, lol). Answer this: why should MLB force a club to spend more on anything team-related? To improve competitive balance? What if MLB thinks there is sufficient competitive balance now? Not to mention that it’s virtually unheard of to force a business within an industry to spend a specified amount on payroll or operations.
I support greater revenue sharing, if anything. No cap. No floor. Watch for a post on <a href="http://www.itsaswingandamiss.com” target=”_blank”>www.itsaswingandamiss.com sometime this week on where the great equalizer in baseball truly lies…
Excellent work here, Larry! I’ve really enjoyed this and you’ve clearly done your research!
Kristi, thanks for dropping by! We’ve missed you. And thanks for your nice words.
My 45% assumption may be “aggressive” for 2 reasons. First, the 45% is based on a league average for all teams, rich and poor. However, my guess is that certain costs of operating a baseball team are fixed. It costs a poor team as much as a rich team to hire a grounds crew, pay the electric bill and fly the team to Los Angeles for a west coast road trip. If a poor team has fixed costs that are the same as a rich team, then the poor team has to spend proportionally less on variable costs – payroll being the biggest and most variable of costs. Second, I AM considering that a poor team has to devote as much money as it can to player development.
Why should MLB force a team to spend more on anything team-related? First, there’s a matter of contract: the poor teams are receiving revenue sharing money based on the CBA requirement that the money be spent for on the field improvements. Second, there’s the issue of competitive balance. As we’ve discussed (and as you used to argue before you became such a free market proponent, lol), sports is different from other businesses – if the Yankees’ competitive zeal leads them to crush their opponents, there will be no one left to fill the visiting team’s dugout in the Bronx.
I also support greater revenue sharing. But as we both know, there are also problems with revenue sharing. To paraphrase your objection to salary caps and floors, what industry forces its most successful companies to subsidize its least successful companies? It’s also the case that baseball is ALREADY sharing a lot of revenue – the $443 million in revenue shared in 2009 is a whopping percentage of the roughly $550 million in baseball profits reported by Forbes. Moreover, revenue sharing is moving big bucks to teams that are among the most profitable in baseball. To paraphrase you, what industry does that?