The Yankees are also irrational

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.

    • BrienJackson

      "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."

      Well no, real-world economics largely grasps the concept of sunk cost, and the contracts of A-Rod, A.J., and Soriano would be seen as thus. That's another reason not to put the full cost of the tax on Kuroda's contract, which is likely to be a useful asset.

      Also, this concept of proportional value really doesn't make very much sense when you're a team in the 88-93 win range, where each additional win has much more value than it does other places. Fangraphs might no say Kuroda is worth ~$10 million more than Garcia, but what if the difference in wins between the two is the difference between making the playoffs and third place? Would you pay the extra money then?

      • The reason every pre-existing contract is a "sunk cost" is because the money has already been spent. Kuroda would be a marginal expense, and like or not, that additional expenditure incurs a hefty tax. When businesses make decisions, they have to consider the real world implications, and understanding sunk cost means realizing that money has already been spent and can not be recovered.

        If you could prove to me that Kuroda is worth 2 wins more than Garcia (which assumes Garcia would be the odd man out anyway), then I'd consider whether it was worth it to spend an extra $17 million dollars on him. I don't think he would come close to that comparative advantage. Not only do I not think Kuroda is worth the money, all things considered, but I don't think he makes the team that much better, if at all.

        • BrienJackson

          I could also work in opportunity costs here, but that would probably just confuse the discussion at this point.

          As for whether Kuroda would be better than Garcia, I suppose opinions on Garcia are going to differ quite a bit, so compare him to Burnett, who should be the first one out of the rotation anyway. I think it's pretty fair to say Kuroda would be better than A.J. and, even if you do apply the full cost of the tax to Kuroda, he would only cost about the same amount of money as Burnett is. The logical thing to do would be to dump Burnett on a team like San Francisco or Seattle while paying all but $5-8 million of the remaining balance of his contract if the money is that big of a deal.

          Of course, that would be neither here nor there if ownership hadn't lit a pile of money on fire to sign Soriano, so you're not really undercutting my final point, which is that ownership is primarily clawing back the cost of their mistake(s) with this quick shift to austerity.

          • In my opinion, opportunity cost (or the value of the best alternative) would actually hurt the argument for Kuroda. I think the Yankees are better served going with Garcia/Hughes until a much better option comes along. If one things Kuroda is that better option, that's fine, but I don't see how anyone could present either side of the debate as a no-brainer.

            As for Burnett, if you could guarantee he would be tossed from the rotation (why stop there; how about the team?), I'd be all for it at almost any cost. In fact, that's what I think the Yankees are trying to do: dump AJ to clear a spot for an upgrade.

            Although I agree that Soriano's contract may be inhibiting some activity, ultimately, I don't the Yankees would have changed much this offseason because none of the pitching options have provided enough reward to justify the cost and risk, in my opinion. Also, even if the Yankees are being more cautious because of past mistakes, I don't see why that constitutes a quick shift to austerity. Not being willing to dump money in the lap of risky propositions doesn't mean the team still isn't willing to spend aggressively for the right kind of player. At some point, the Yankees need to be efficient with their payroll. If $190-200 million is that figure, I don't think it constitutes pinching pennies.

          • BrienJackson

            "In my opinion, opportunity cost (or the value of the best alternative) would actually hurt the argument for Kuroda. I think the Yankees are better served going with Garcia/Hughes until a much better option comes along. If one things Kuroda is that better option, that's fine, but I don't see how anyone could present either side of the debate as a no-brainer.

            As for Burnett, if you could guarantee he would be tossed from the rotation (why stop there; how about the team?), I'd be all for it at almost any cost. In fact, that's what I think the Yankees are trying to do: dump AJ to clear a spot for an upgrade. "

            All due respect, this is a rather odd pirouette to engage in. Since none of us are involved in the actual decision making process, we're ultimately just arguing about what the team *should* do in an ideal scenario. To that end, I don't really see the point in switching back and forth between that and bleeding in a large amount of what they will or won't do (like remove A.J. from the rotation). it seems like it should be one or the other full stop.

            As for the opportunity cost, I would argue that it makes it more appropriate to disperse the cost, especially to Soriano, since absent his contract the difference in the tax bill being paid would essentially be zero.

          • We may not be involved in the decision making, but I think it is clear that until he is trade, A.J. Burnett will be in the rotation. You can criticize that position, and I would support it. However, the main argument here is that the Yankees are being irrational for factoring the luxury tax into the cost of Kuroda, when in reality, that is exactly what any responsible business in any industry would do. "Dispersing the cost" is an academic subject. When it comes to determining real costs, all that matters is every additional dollar spent over the threshold.

          • BrienJackson

            But if we're going to go down that road, there are other things they could do to make up the cost (not signing Garcia for ~$5 million so soon, dump Burnett on another team and pay most of his salary, etc) to offset the cost, so we keep coming back to the same spot.

          • I'd rather have Garcia at $5mn than Kuroda at $12mn, especially if the Yankees are operating under a budget. Quite frankly, I just don't think Kuroda is that good.

          • BrienJackson

            Wanted to put this separately:

            "At some point, the Yankees need to be efficient with their payroll. If $190-200 million is that figure, I don't think it constitutes pinching pennies. "

            I agree, but that's more of a long term proposition, especially while certain contracts are on the books now. Adding a reasonable one year commitment shouldn't be much of a problem, even from a "restrained" posture.

      • LarryAtIIATMS

        Brien, William is right. A "sunk cost" is a cost that's been expended and cannot be recovered.

        • BrienJackson

          Which describes the salaries to be paid to Burnett, Soriano, and A-Rod in 2012 at this point pretty well, no?

          • LarryAtIIATMS

            Yes, exactly, but it doesn't describe the additional luxury tax you'd propose to allocate to those salaries if the team signs Kuroda.

          • BrienJackson

            But viewed that way, you'd be spending $5 million to swap Burnett for Kuroda in the rotation. That seems like a good deal to me.

          • LarryAtIIATMS

            Aren't you spending $17 million for the swap?

          • jay_robertson

            To say the least; someone has their stubborn hat on. While the overall luxury tax can be amortized across the entire roster, if the next hire bumps the tax $5 million dollars, than that player's effective wage is equal to whatever his contract ends up being; PLUS, the luxury tax bump.

            Probably MORE than &17 mil for the swap, depending on how much of AJ's salary has to be eaten by the Yankees. ;(

          • BrienJackson

            I'm taking the implication of Matthews' report somewhat literally, which was that the Yankees would spend $12 million on Kuroda, but not $17 million.

          • It describes every year of every guaranteed contract to every player (unless they are traded, of course). Sunk cost is not a qualitative concept. Granderson's and Cano's contracts are sunk costs too.

      • Ben

        88-93, you're crazy. I'm tired of this cynical pressure of trying to have the yanks do something just to do something.

  2. CS Yankee

    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.

    • BrienJackson

      "I'm thinking the tax is the excuse of the day and they are saving the bullets for June when needed. "

      I'm not entirely sure how this is going to work. The pitchers on the market are most likely to be rentals the team won't want to pay a huge price for, and if Milwaukee, Philadelphia, and San Francisco are all competitive the pickings could be even slimmer. Additionally, I'm not sure who the Yankees are going to trade for them. Montero will be difficult to part with if he's an effective regular in the lineup, and dealing him for a rental not named Cole Hamels would be unthinkable. Sanchez/Williams/Bichette may be well regarded, but they're too young to anchor a package at this point. Romine, Noesi, Warren, et. al. don't have high enough ceilings…

      In other words, to pull a deal in June/July the Yankees will either have to sell low on Montero to fill a short term need, or they'll have to do a complete 180 on trading Banuelos/Betances.

  3. Christopher Scott

    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

    • BrienJackson

      "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. "

      Well, that's rather the point. If, for example, you could sign Kuroda and take away Rafael Soriano, you wouldn't incur the additional cost in the tax either. To that end, the additional cost in the luxury tax is very much a function of the misbegotten decision to sign Soriano.

      Now, from a functional standpoint the basic question is whether you should let a one time allocation of $5 million stop you from signing Kuroda if you like him. I would say it shouldn't, just because it's such a relatively small amount of money to the Yankees. It would be one thing if they just didn't have the resources to foot that bill, but they do, and so they get to choose whether they're going to compound the Soriano mistake or not. My answer would be know; that it's nice if they've learned their lesson, but that they should apply those lessons when Soriano's contract comes off the books and take their lumps on the bottom line in the meantime. But then, my interest is solely in seeing the team win games, and I'm not terribly concerned with how much money the Steinbrenner family is taking home at the end of the year.

      • Hank

        You are not looking at this correctly…. Kuroda's entire salary is more or less A ONE TIME ALLOCATION! For some reason you are drawing a distinction between 17 mil going to a player vs 12mil to the player and 5mil to MLB… in either scenario the cost to the Yankees is 17mil.

        Similarly your Soriano example is equally flawed… If the Yankees dumped Soriano before the season they would still be over the luxury threshold. Adding Kuroda would continue to be a 17mil expenditure question. In other words the additional cost is not a function of the Soriano signing as you infer , as Soriano is not the difference between being under or over the luxury tax threshold.

        • BrienJackson

          True, but again I'm referencing back to the Matthews post, so that premise is a little unbelievable, at least if we're going to take Cashman at his word that he wanted to improve the pitching staff. A 40% tax would increase the cost of pretty much everyone who could really upgrade the staff, unless Cashman was willing to dump a big package of prospects for a cost controlled young starter, which he obviously hasn't been. So to mix themes a bit here, we're going back to the point that the "team sources" can't have it both ways. Either they're trying to improve the rotation, or they don't have the money to do so because they don't want to pay the associated tax bill that will come with it.

          (And the reference to Soriano is that they obviously didn't very much care about the tax bill *then,* whether because this is a new found concern or because they thought Soriano was worth the extra money in tax expenditures and opportunity cost.)

          • Christopher Scott

            "Either they're trying to improve the rotation, or they don't have the money to do so because they don't want to pay the associated tax bill that will come with it."

            Why can't they have it both ways. Maybe the entered the season with the desire to upgrade the rotation, but found all of the available options to be overpriced. Maybe they aren't interested in spending prospects or money on players that aren't much better than the options they currently have. Remember, Kuroda has average at best statistics while pitching in the most offensively challenged division in MLB. This guy also turned down a trade and an opportunity to play for a WS contender. Kuroda could very well get worse playing in the Bronx.

            I guess what I am trying to say is that the Yankees can afford to spend millions of dollars or trade Montero for Cliff Lee, but they can't afford to spend $17 M on an average/aging talent with questionable drive and desire. Yes, I would love the Bombers to upgrade the rotation, but the last thing I want them to do is overpay for veteran talent for a short term fix. This is a crappy market for pitching, why overpay? With or without Kuroda, the Yankees are still very likely to be playing in October.

          • BrienJackson

            People are really misusing the term overpriced these days. Prices for free agents, especially pitchers, are going up because a) the supply is getting smaller and b) there's more money in the coffers decreasing the value of the dollar. That's not the same as saying Player X is overpriced. In that case someone would need to be getting something that was an outlier in the market. Papelbon's new contract would be a good example of an overpriced player.

  4. Mister D

    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).

  5. saplinklizo

    hell yeah!!! )

Comments are closed.