The Yankees are also irrational

Born in Southwestern Ohio and currently residing on the Chesapeake Bay, Brien is a former editor-in-chief of IIATMS who now spends most of his time sitting on his deck watching his tomatoes ripen and consuming far more MLB Network programming than is safe for one's health or sanity.

About Brien Jackson

Born in Southwestern Ohio and currently residing on the Chesapeake Bay, Brien is a former editor-in-chief of IIATMS who now spends most of his time sitting on his deck watching his tomatoes ripen and consuming far more MLB Network programming than is safe for one's health or sanity.

29 thoughts on “The Yankees are also irrational

  1. Your method might be preferable for academic purposes, but from a practical financial standpoint, it makes much more sense to align the luxury tax with the marginal costs over the threshold. Put more simply, if the Yankees' don't sign Kuroda, they don't pay an extra $5mn in luxury tax. The prior expenditures have no impact on the additional tax because those decisions have already been made. That's not distortion…it's real world economics.

    Finally, before you can all of sudden brand the Yankees as being cheap, you need to clearly prove that Kuroda is an upgrade worth $17 million, $12 million, or whatever. Just because he might be a marginal improvement doesn't justify an outlandish expenditure.

  2. Hindsight is always 20/20, but the question would likely differ on the Kuroda costs depending on who he would actually replace, whereas;

    1) Freddy is traded or middle relief….Kuroda 12M, plus 5 (tax), plus 4.5 (as Freddy is a unhappy middle reliever) above what a min. salary AAA arm. 21.5M$ additional spent.
    2) AJ is pen bound…12+5+16 (more than AAA arm) 33M$ more
    3) AJ is traded & they have to eat two-thirds his remaining salary….12+5+22 (as minimum at 2 years would cost 1-2M$). 37M$ more.

    Add in the fact that Kuroda didn't want the EC (or the playoffs for that matter) during late 2011 & one could challenge that he lacked competitiveness and now either wants only the coin or use the EC teams (Saux/Yanks) to drive his WC market higher. How could one be all in on that…recall cash telling Pettitte that unless your coming back hungry, go hang with the kids.

    I'm thinking the tax is the excuse of the day and they are saving the bullets for June when needed. I just hope they realize the playoff advantage by having the best record is extreme due to a single-game two WC winner needing to play the best record.

  3. This article is completely wrong about the allocation of costs. In Cost Accounting, only fixed costs should be allocated, not variable costs. Fixed costs are costs that would be incurred no matter what. Variable costs are dependent on a level of activity, and can change. Fixed costs are allocated because they cannot be attributed directly to one activity or decision. For example, let us say we have a factory that produces widgets. There are two costs, the property taxes on the factory we own and the wood used to make the widgets. Even if we produced no widgets, we would still have to pay the property taxes on the factory. If we produced a thousand widgets, we would still owe the same amount of property taxes. However, if we produce no widgets, we don't have to buy wood. If we produce more widgets, we have to buy more wood, and our costs go up.

    My sample above isn't exactly like running a baseball team, but it does give us some insight. The luxury tax is not a fixed cost, but varies depending on the Yankees decisions and the level of their payroll. Signing Kuroda would mean the Yankees incur an additional cost of $5 Million of Luxury taxes. Not signing Kuroda would mean the Yankees are not responsible for that cost. Since the Luxury tax level would be directly affected by this decision, it is improper to allocate those costs to other contracts. At the end of the day, if the Yankees sign Kuroda, it will cost them an additional $17 Million, ($12 in Salary and $5 in luxury tax). You need to think about it like that, otherwise you are hiding the true cost of this transaction and could lead to poor decisions being made.

    This was the whole point of the Luxury tax btw, it was to increase the cost of free agents for big market teams, making it harder for them to sign free agents and less costly for smaller market teams to pick up free agents

  4. I don't think it much matters to the Yankees wallet who they attribute the luxury tax – they have to pay it regardless.

    I imagine the best way to consider it, though, is to look at the team as a whole. Is a $215m team WITH Kuroda significantly better than a $200m team with payroll flexibility? The answer is no (at least to the Yankees).