Thinking Cap (Part 4, The Aftermath)

A salary cap requires rough economic equality, and that equality does not exist in baseball.  When the gap between rich and poor is too great, you cannot eliminate the gap by setting spending limits and spending floors.  You might just as well address the gap between rich people and poor people in the U.S. by passing a law requiring everyone to live in the same size house.

As I said earlier: baseball needs a salary cap, and it is a shame that baseball cannot afford one.  Without a cap, the Yankees will continue to spend more than any other team can afford to spend.  The Yankees are run by smart people who have no interest in wasting the Steinbrenners’ money.  The Yankees spend more than everyone else for a reason: it gives the team a competitive edge.   We can (and will) argue about the size and nature of this edge, but the edge exists, and it is important.  When the Yankees win, the win is due in part to the Yankees’ economic dominance.  When the Yankees lose, the loss is in spite of the Yankees’ economic dominance.  Baseball’s economic imbalance is fundamental to the game at the moment; it is a patina that colors everything that happens on the field, particularly if one of the teams on the field happens to be the Yankees.

It’s wrong to focus this entire discussion on the Yankees.  The problem we’re discussing is a baseball problem, not a Yankees problem.  There are other rich teams in baseball.  There’s economic inequality at work when the Phillies defeat the Rockies for a National League Championship.   But the Yankees serve as a convenient lightning rod for all discussions on money in baseball.  We know this is true.  That’s why this blog is the only blog on Rob Neyer’s Sweet Spot list with the word “money” in its name.

Baseball needs an effective salary cap, but cannot afford one.  Is there a workable alternative available? Some analysts recommend that instead of a salary cap, baseball’s luxury tax penalty be increased to make it “financially painful” for teams like the Yankees to exceed the luxury tax threshold.  I don’t understand this argument, particularly when it comes from experts like Maury Brown who acknowledge that the luxury tax is a type of salary cap.  The issue is not whether a luxury tax is “financially painful” – no one likes paying taxes, and all taxes are painful.  The question is whether baseball should adopt a luxury tax that is financially prohibitive.  If the tax is not prohibitive, then the Yankees will continue to pay the tax (painful as it may be).

But if the luxury tax rate is increased to the point that even the Yankees cannot afford it, then the luxury tax is effectively a hard salary cap.  A hard salary cap might be enforced by means of a prohibitive tax or an outright spending ban, but the results in either case would be the same.  The cap would have to be accompanied by a hard salary floor.  It would not get the support of the player’s union.  It would require minimum payroll guarantees.  It would be no more viable than the solution I painstakingly built in Parts 1-3 of this series, and abandoned here in Part 4.

Baseball needs an effective salary cap.  I may never tire of saying so.  Others can and will disagree with me.  But it’s premature to debate the question.  Baseball’s current economic structure does not support an effective salary cap.  Unless this structure is changed, it’s pointless to discuss a cap.  Until this structure is changed, we cannot even determine what kind of salary cap we’re arguing for, or against.

You may think like I do that baseball needs an effective salary cap, but we cannot use a salary cap to narrow the gap between rich and poor baseball teams.  No.  Instead, a salary cap is possible only after we have narrowed the gap between rich and poor teams.   How do we narrow this gap?  A better system of revenue sharing might do the trick.

It’s not time yet for “Thinking Cap.”  It’s time for “Thinking Revenue Sharing”.  Coming soon to a blog near you!

17 thoughts on “Thinking Cap (Part 4, The Aftermath)

  1. D-Day

    Ahoy! Couple points I'd like to chime in on this debate.

    Baseball needs to move in a few different directions to fix competive balancing before you tried something as drastic as a knock-down, drag-out brawl with the Player's Union over a cap.

    1) Fix the draft system. It's inexcusable to have a team pass on the best player available because they're going to hammered by a kid who just picked up the right to vote. Sure draft picks are no guarantee, but every time a first-round pick refuses to go to Washington or Pittsburgh over money, the franchise is at a huge handicap. And if that $10 million prospect fails? It can set a team's expectations back years. Go the NBA route with this one; the worst teams draft the best players, and the worst teams can afford to sign the best players.

    2) Add a 5th team into the playoffs (giving the best record a bye, or just add 2). At this level you're bringing in mid-market teams like the White Sox, Braves, Giants, and any team overachieving like Washington. Also, you're dramatically changing the market for players during the trade deadline. Now, more teams can consider themselves "buyers", and the teams looking to dump salary and players have a larger pool to pick prospects from. Also this move can obviously alter attendance; now instead of being on the outside with two weeks to go and 6 games back, you're right in the thick of it, and if your fans are worth a damn they'll show up.

    3) Mimic some of the NBA cap-rules. The Larry Bird exception in the NBA is a godsend. What if, as part of revenue sharing, MLB allocated a set amount of money per year to aid teams with the lowest revenue? I'm a bit fuzzy on this and I don't have the time to properly hit all the propsed points, but here goes; Take Adrian Gonzalez, perhaps the prime free agent as a position player. As a player who's been with San Diego for X years, on a team within the X-lowest revenues, he qualifies for "MLB Bird Rights". The Red Sox come in with a bid of $17mil per year for 5 years. San Diego, naturally, can only afford so much. So, as part of revenue sharing and tv-deal money, MLB publicly allocates $5mil per year for 4 years to help San Diego make an offer. So now San Diego can either "match" the Red Sox offer by offering $12mil per year and picking up the tab in year 5, or they can top it by going more than $12mil. Something along those ways.

     

    There's still a ton of other small tweaks that can be made (fixing arbitration so both parties dont wind up hating each other is one), but trying to go all out for a salary cap doesn't fix the low end problems. I think there's a whole bunch of ideas you can push that the Union would be either for, or maybe just less against, before getting into a labor dispute about a cap.

     

    (p.s. apologize for spelling/grammar, gotta run!)

     

    Cheers

  2. StephenH

    Very quick comments:

    1) If MLB guaranteed a percentage of revenue distributed to the players themselves (like the NHL does), this may make a cap more palatable (it worked for the NHL!)

    2) In response to D-Day. You state "It’s inexcusable to have a team pass on the best player available because they’re going to hammered by a kid who just picked up the right to vote." I would agree that it's inexcusable to have a team pass on the best player available, but my argument would be that the cost of a draft pick for a team is just so small compared to signing a replacement-level free agent (e.g., anyone the Royals sign) that it is completely inexcusable for teams to pass on a high upside draftee over a million dollars.

  3. JP

    "Baseball needs an effective salary cap."

    What do you mean by "need" and "effective?"

    Baseball does not need a cap in the sense that the sport cannot survive under the status quo.  Baseball is hugely profitable as is, and total revenues have been growing.  Arguably, a cap may make baseball better off (however you may define better), but it in no way NEEDS a cap.  While small markets absolutely cannot compete as consistently as big markets, if they manage to draft well, the smallest of markets can be contenders.  No team is precluded from contention.

    What does "effective" mean?  Is a cap only effective if we have PAYROLL parity?  Or is a cap effective if we have parity in terms of which teams can contend?  I see no reason at all why we should care about payroll parity for its own sake.   Also, for a cap to be effective, do the Pirates need to be on exactly equal competitive footing as the Yankees?    Or is it enough that small market teams can still contend, so long as they draft well (e.g. Tampa Bay).

    A cap taxes fans to subsidize other fans.  It taxes passionate fan bases to subsidize fans who don't care.  If Marlins fans were willing to pay ticket prices anywhere near Red Sox, Cubs or Yankee prices, they'd have tons more revenue.  But their fans simply don't care.  The league should employ this cross-team subsidization to the extent necessary to sustain a viable league.  Beyond that, I genuinely struggle to see the justification for a more robust cap.

  4. Hantu13

    Larry,  good post and good series all around, I've enjoyed reading it!  I think you've ended up where you started- baseball needs some sort of cap, but none is practical…  Which is why this is such a messy topic and hasn't been resolved.  There are no easy answers.

     

    What if we just look at this from another angle.  The payroll of the Yankees is a symptom of something else- their outsized revenue compared to other teams.  Now, the Yanks are a bit of a historical outlier, since the combination of their media market, history and success is something unique across all sports.

     

    Generally though, large market teams have a higher potential revenue than small market teams because of the inherent nature of where they play- the 20m in the NY metro area, vs. the 1M or so in KC.

     

    Why not just get rid of the luxury tax and have a large market teams contribute money into a pool which gets distributed to small market teams?  Let everyone pay players whatever they want.  Say that the small market teams have to spend the money to improve the "on field product" and allow MLB, MLBPA or an objective 3rd party- (This is currently on the books now, but Selig hasn't enforced it) to enforce it… Maybe the BBWA or something?

     

    The current revenue sharing formula, not salary caps or lack thereof, is the core of the problem.  All the teams put around 30% of their local revenues in a pool (after subtracting things like operational costs and stadium expenses- any wonder that the Yanks and Mets agreed to fund their own parks?) which is distributed evenly to all clubs.  The central pool, which comes from national broadcast contracts, etc., distribute overwhelmingly to low revenue teams.

     

    This creates the incentive for some teams to say- low ticket revenues mean more revenue sharing dollars!  which is a much easier way to make a profit.

     

    Why not attack this for your next series? I think it's an easier problem to solve and more likely to have the desired effect…

  5. Mark@IIATMS

    I have a hard time believing the players can’t be swayed into a cap. I know they’re “philosophically against” it, but everyone has a price. What if the players reached free-agency a year earlier? Minimum wage increased? An extra year of arbitration (2 at minimum, 4 at arb)? It seems that the players may go for it if given one or more incentives.
     
    Again, I’m not sure if those are good enough, and I don’t know if they would be more effective than better revenue sharing. But I have a hard time believing that the players can’t be convinced. Then again, maybe what would convince them would be too painful for the owners.

  6. Mark, I used to think everyone has a price, but that was before I looked closely at the MLB Players Association! Mark and StephenH, I assume that the players could be persuaded to accept a cap, but at what price? Whatever the price might be, baseball’s current economic system would need to be changed in a major way in order to fund the payment of this price, and baseball might have to give up something (like its current system of revenue sharing) in order to pay this price. Moreover, there’s the bigger point: the gap between rich teams and poor teams is too great to shoehorn them all into a cap and floor system that would provide for the payroll parity we see in other sports.

    D-Day, ahoy back at you! Your suggestion (1) is for the adoption of a so-called “hard slot” system for the player draft. That’s a topic for a full post, and since I’m at least a month away from writing my version of this post, you should check out my friend Kristi’s post at http://bit.ly/ddT9IZ. Your suggestion (2) goes in a different direction – you may have good ideas there, but any expansion of baseball’s post-season might require a contraction of the regular season, which would be difficult to accomplish. I’ll try to address some of your ideas in (2) in an upcoming post on realignment of baseball’s existing structure of leagues and divisions. Regarding your point (3), remember that San Diego is already receiving $30 million + annually in revenue sharing from the richer teams in baseball. It might be possible for some of this revenue sharing money to be held back from San Diego, to be released only for purposes approved by MLB (such as signing a player like Adrian Gonzalez). This is something I’m considering as I work on my proposal for improved revenue sharing in baseball.

    JP, good comments! You and I have discussed some of these issues before. Yes, as a whole, baseball’s financial situation is quite good. But if you look more closely you’ll see a growing gap between the “haves” and the “have nots” in baseball. Certain franchises are struggling financially – for example, the Rangers may be forced into bankruptcy at any moment and the Blue Jays are in bad shape. You and I have already discussed the situation with the Pirates; the Royals are in a similar situation. Yes, the Rays have managed to compete by drafting well, but in baseball “drafting well” really means being lucky enough to select a high percentage of young players that will develop major league talent. Most teams will not have that kind of luck. Yes, “competitive balance” is a relative and not an absolute standard, and the question of how much balance we “need” is open to question, but (putting aside the fact that David DOES sometimes defeat Goliath) it defies common sense to think that a six-fold differential in payroll size is consistent with “balanced” competition. As to your point on caps and subsidies: baseball’s system of revenue sharing already requires Yankee fans to subsidize fans in other markets – you can figure that in rough terms about 25% of the price of a ticket to Yankee Stadium goes to the “poorer” teams in baseball.

    Hantu, thanks! Once again you and I see eye to eye. The problem with a system of salary caps and floors is that it looks at effects and not causes. The primary cause of payroll disparity is revenue disparity. While there are many causes of revenue disparity, the critical cause is disparity in market size. Let’s dump the current system of revenue sharing (which taxes teams for successfully exploiting their market potential, and rewards teams for failing to do so), and simply shift money around based on market size. There are problems with this idea, of course, the primary one being that some owners paid a premium to buy clubs in large markets, while other owners received a discount for buying in small markets. Nothing comes easy when you’re trying to reform an economic system. In any event, my next major series of posts (some time away!) will focus on revenue sharing.

  7. JP

    Right, there already is cross-fan subsidization via revenue sharing and luxury taxes.  That's no argument for further subsidization.  I'd love to get lower tier seats at Yankee stadium for $50 instead of $275.  I'd love to get terrace seats for $25 instead of $75.  We pay a LOT more; we SHOULD get a better product.

    I have to take issue with the argument that smaller markets can only compete with an abundance of luck.  That makes it seem like contention is merely possible, though extremely unlikely.

    In the last ten years, the Twins, Rockies, Rays, Brewers, Indians,  Athletics, Padres, Marlins and Cardinals have combined for 26 playoff appearances.  The teams in that group with largest metro population?  The Marlins.  Next would be the Athletics, though they split that market with the SF Giants.  After that would be the Twins (whom we would still characterize as small market?).  How is it that these teams, which have the all cards stacked against them have come up with almost 1/3 of all playoff spots over that time period?

    The notion that mid-size or smaller market teams have barely a sliver of hope just doesn't comport with the facts.  If it really were the case that they made the playoffs only once in a blue moon, then there would be a real case for further redistribution.  But look at that success!  You can't tell me the Pirates can't compete when the Brewers, Indians, Rockies and Rays have made it in similarly sized markets.

     

  8. johndougherty

     Always thanks for intelligent thoughtful posts, not too blustery which stands out. My understanding of the anti-trust exemption is that it boils down to never having to open the books, which MLB has never done. This prevents any chance of caps or floors because they would involve a percentage of the revenue. MLB seems to protect the truth of this number more than any sport .

       Go Yankees ! No cap in our lifetime !

  9. Josh

    i have to wonder what happens to all the money that the yankees and other teams have given to these so called "poor teams" in luxury taxes. how can these billionaires buy these teams and suck in all the luxury tax money they get from big market teams and not spend a dime on aquiring players? no paper boy ever bought an MLB franchise. i agree with Brian Cashman that the owners who have sucked in hundreds of millions of dollars from the yankees should stop complaining and show where that money is going.

    Yankee Pride, World Wide

  10. JP, we’ve had some back and forth on this topic.  What we need here is a long and thoughtful post on competitive balance.  I hope you stick around (patiently!) and join in the discussion next time.

    John D, LOL!   I TOOK antitrust in law school, and they never mentioned the part about not opening the books. 

    Josh, did Brian Cashman actually say that?  Can you point me to the quote?  You might enjoy my piece at http://bit.ly/drReg1 and Jason’s piece at http://bit.ly/aeBAAr.  

  11. Ant

    I have wanted to post on each of these, but there are so many layers to sort through it has become impossible to organize my thoughts into cogent sentences– lets give it a shot. 

    From a macro business perspective I will keep it brief, because I understand the need to seperate this from other businesses because the product is in some sense a cooperative endeavor between competiting 'companies'.  A step further, I am not sure baseball 'companies' are in competition with one another as much as they are in competition with alternative entertainment choices in thier areas.  While I am sure the Yankees do invest in having people chose thier brand over the Mets, Sox or anything else, I believe they are competiting against football, basketball, concerts, restaurants for the entertainment dollar, and almost as importantly against other media for the advertising dollar (without the fans there are no impressions to sell to advertisers).

    Anyway, the thought of revenue sharing is disheartening– it creates peverse incentives.  Its not at that level yet, but for a cap to happen it needs to go hand in hand.

    On the revenue side, at what point do we reward the teams who have created large revenue streams and do we punish teams who have not?  http://www.mediainfocenter.org/compare/top50/  I have linked to this before, and it measures the population of the top 50 metro areas in the country.  Notice Miami ahead of Boston (along with Atlanta and Washington– NL East has the largest natural advantage in the sport).  Yet the Marlins are a struggling 'small market' team.  I dont think there is anything to add to this, it speaks for itself. 

    The last point is the scope of the organizations.  Football has an 53 man roster, X amount of practice squad spots, and thats it–  all talent comes through the draft process and everyone has equal rookie pool allocation, limiting the opportunities for thier investment.  Baseball teams have many areas to invest thier money beyond the scope of the major league roster, and that must be considered as well.  And again, do we reward teams for investing in thier infrastructure, or does that fall under the laws of the cap as well?  Constricting the spending of the Yanks/Sox on major league talent may cause a much deeper problem– their investment in the draft and international free agents, completely restricting the pipeline of talent to less fortunate teams. 

  12. Jason@IIATMS

    Ant:

    Looking at defined demographic areas, like "Boston" isn't relevant.  The "Boston market" includes northern CT, RI, MA, plus a good majority of VT, NH, ME.  Also known as "New England".  They are the only game in town.

    The Yanks and Mets share NY, southern CT, northern NJ.

    The Phillies take southern NJ and eastern PA.

    So while your point remains true, that teams are competing for your entertainment (not baseball) dollar, we have to be careful about relying on singular DMA rankings to make the case.

  13. Jason and Ant, we have measures of metropolitan areas (Miami in 6th place and Boston in 11th place), and measures of media markets (Miami in 17th place and Boston in 5th place).  It's somewhat confusing; I'm not sure which measure I'm supposed to pay attention to.  I'm tempted to say that the metropolitan area defines the fan base that would be likely to attend a game and the media market defines the number of people who'd tune in on TV … but my guess is that the Red Sox fan base and regional sports network reach well beyond the borders defined for the Boston metro area and media market. 

    Jason, granted it's confusing when we have a metro/media market shared by two teams.  Probably we divide the market in half and assign half to each team — don't know what else we could do.  But if the BoSox are the only game in "town" in N.E., can't we say the same for Miami in its market?

    Defining market size is of interest to me.  I think that market size should be the primary basis for revenue sharing — big markets should share with small markets. 

    Ant, you make good points.  From a certain perspective, we want the big money teams to invest aggressively to find the best talent and bring the talent to MLB.  We don't want to achieve competitive balance by watering down the level of play.  We could have a level playing field if the Yankees played baseball at the level of the Royals, but that shouldn't be our goal.

    But note, it may be in the best interests of baseball to prop up teams like the Marlins (and Blue Jays).  We want baseball to be successful throughout the U.S. (and Canada) — it is good for baseball as a national (and multinational) sport to be present in all important markets.  Yes, at a certain point, if the people of Miami just don't like baseball, then it would be pointless to continue to subsidize it for them.  But baseball could rationally decide as a business matter to continue to invest $$ in the Miami market.

  14. Ant

    That is a valid point– but I disagree.  While the Yankees do need other teams to EXIST for the mere opportunity to play a game, baseball is a localized game (in terms of revenue).  Unlike the NFL where most revenue is brought in as a league, in baseball the parts are greater than the whole.  The Yankees do not benefit, for the most part, whether baseball succeeds in Miami or not. 

    The league as a hole has had unprecedented growth in the past decade and a half, with the revenue inequity as is.  I don't see how supporting an unsuccessful venture helps the league as a whole.

    Also, keep in mind that the health of the sport is not predicated on successful teams in important markets.  The NFL has gone without a team in the second largest market for 16 years now I believe. 

    I think this discussion would be important if the game were struggling.  I understand that nothing is permanent or bullet proof, and it is foolish to just gloss over any problems during a period of growth.  That being said, we are talking about revenue inequities that have grown HAND-IN-HAND with the growth of baseball's revenue. 

    Maybe rather than encourage the Yankees and Red Sox to behave like the rest of baseball, we should encourage the rest of baseball to act like the Yankees and the Red Sox– 

  15. Ant, there are Yankees needs and baseball needs.  Baseball wants to sell merchandise (25% of which would be Yankees merchandise) in Miami, and get Miamians to watch MLB national broadcasts, subscribe to MLB cable TV packages and pay for MLB advanced media offerings.   But as you've stated, baseball is primarily a local product: without a successful local team in Miami, MLB cannot properly exploit the Miami market for its national offerings …

    … or so the argument would go.  Properly seen, this is an MLB investment decision.  Either it's worth the risk to invest the money in trying to make a go of a Miami franchise, or it isn't.  It's not my judgment call to make.  All I'm trying to say is, MLB might decide that this is worth the risk. 

    Otherwise, I think we're in agreement: revenue sharing should go to small market teams that are doing a good job of getting what they can out of their markets, not to large market teams that are economic underachievers.

    I don't agree with your comparison to the NFL.  I live in L.A.  Lots of pro football fans here.  If TV ratings have declined here during the years we've been without a local football team, I haven't heard about it.  This is a great place to be a TV football fan: there's no threat of a blackout, and relatively few crappy regional TV games (the networks seem to think we care two cents about the Raiders and Chargers, but they don't throw these teams at us too often).  It's what you said, only in reverse: football is a national sport.  It doesn't require a local presence.  You can stick 30-odd football teams in places where it's cheap to build stadiums and where the local goverments will provide financing, and the rest of us will continue to watch.  Baseball is not like that.  Baseball is driven by local interest in the local team.

    Your factoid about the Tampa stadium situation makes good sense.  Of course, many metropolitan areas (my home metro area of L.A. being one) are a lot larger than 30 miles in radius. 

  16. Ant

    Regarding the demographic information, there are many different ways to look at it.  The issue at hand here is revenue.  And it has been written here that attendance is the largest source of revenue for teams. 

    I can’t find the link, but I was reading something regarding Tampa’s stadium issue.  The article stated that the biggest factor in stadium attendance is the population within a 30 mile radius. Presuming I am correct, the most important data is population within a metropolitan area.

  17. strangello

     

    Every year we go through the same arguments about a salary cap. Your never going to see one in Baseball because the owners dont want it, and the players union doesn't want it.You can sit here and argue about the Yankees buying another pennant etc etc etc. The simple fact is that investing in free agents is not going to ensure you win WS championships, it does however increase the odds that your going to make the postseason, simply because you have quality players with veteran ledership. Thats the reason for the playoffs, in their present format they are the equalizer. No matter how much you pay your players, in a 5 game or 7 game format anything can happen and it has, how many times has the wild card winner won a series.How many different ball clubs have won the series in the last 10 years, despite the fact that there have been teams like the Yankees, Angels, Red Sox, Phillies that are there almost every year. No, what needs to happen is a salary minimum to stop club owners from taking revenues that should be re-invested into their organizations instead of buying condos and yachts. Lock down those 1st year and 2nd year players that just won 20 games or hit 30 HRs, give the players what thier entitled to, and they dont walk. Seems like that would be easy, but this idea would also mean that the owners would have to commit resources and money to win not only at the time but the foreseable future, or risk losing his prize players later anyways because that player wants a chance to win a championship

     

    . A league minimum win ensure that teams would be able to keep their prize players longer. Insure the quality of personal play (if you believe the concept of a good days work for a good days dollar), and force the owners to invest in their farm systems and player development.

    It would also level the playing field, because the Pujol's and Utely's and Ether's aren't going to be free agents for a long time.

     

     

     

Comments are closed.