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Evil Empire and the Economics of Baseball

Well, the Yankees obtaining Alex Rodriguez has all the fans (especially Red Sox fans) in a snit. It’s refreshing to hear a voice of reason, and I couldn’t say it any better than my favorite sports columnist, Ken Rosenthal, of the Sporting News (the magazine isn’t what it used to be, but Rosenthal still churns out quality content), who says, Ahem! The Yankees are not evil:

Imagine, if MLB had adopted a fairer system that based revenue-sharing contributions on potential and not actual revenue, the Yankees still would pay more because they play in a large market. But they wouldn’t be punished for making extra money. Nor would other high-revenue teams.

“The Yankees generate more revenue than the Mets, but (Mets owner Fred) Wilpon shouldn’t be paying less to the system than Steinbrenner; then you’re penalizing Steinbrenner for being good,” says Andrew Zimbalist, a Smith College economics professor and author of the book May the Best Team Win: Baseball Economics and Public Policy. “You want to reward owners for being good. Otherwise, they have no incentive.”

Emphasis mine. Hey, I’m a Mets fan (well, the Giants are now my team, but I still root for the Mets when they aren’t playing us), and I have to say he makes sense. Look at what happens with the perverse incentives we have now:

Of course, MLB never would accept such a plan, preferring to subsidize incompetent owners. Take Selig, for example. His family-owned team, the Brewers, received a reported $15 million in revenue sharing last season. The CBA requires that money be spent improving the franchise, yet the Brewers have cut payroll by more $10 million in each of the past two years.

And if you wonder why knowledgeable baseball fans hate Bud Selig, that blatant conflict of interest is one big one.

Anyway, there are two big problems with salary caps. First of all, it’s socialist. Now, I’m not a right-winger who thinks socialism is evil. Socialism and capitalism are both economic systems and thus are incapable of being good or evil. However, socialism has proven in the field to be a very inefficient economic system (at least, for human beings as they are now). The socialist idea of revenue sharing is exactly why some owners of some small market teams (like the Brewers) choose to field the cheapest and weakest team they can and pocket the money they get from the rich teams. That’s what the socialist system incentivizes them to do. If they spent more money, their gate receipts wouldn’t increase enough to offset the extra money spent on payroll, not to mention the fewer revenue sharing dollars they would receive.

The whole idea of a salary cap rests upon the premise that people can better know what a baseball player is worth than the free market. Yes, baseball players seem to get an obscene amount of money. So do rock stars and movie stars. The reason they get a lot of money is because so many American consumers’ dollars go towards baseball, CDs, and movies. If you don’t like how much money they get, allocate fewer of your dollars towards these things and more towards areas you think are underfunded, like education. If everybody did that, then you wouldn’t see people becoming so rich for doing the superfluous job of entertaining a bored American public. It’s as simple as that.

The second problem with a salary cap is that it really amounts to collusion (something the baseball owners have actually been found guilty of a couple of times). When all the companies in an industry agree to hold down salaries, that’s usually illegal. What if every company in your industry put a salary cap on your job to hold down costs? How would you react? You’d scream bloody hell, that’s what. Heck, many software engineers are screaming bloody hell over outsourcing, despite the fact that it involves no breaking of the law whatsoever, and all it shows is that software engineers are overpaid compared to the value of their labor. The only reason the salaries were so high in the U.S. is because the demand outstripped the available supply, and the market is now — as it’s supposed to do — balancing this by increasing the supply. And yes, I’m a software engineer myself. I plan to write more on this topic when I finish my post on free trade and outsourcing.

As for what the salary cap has done to football, I do think it’s done a lot more harm than good to the game, as I previously mentioned in my comment here, but I suppose some people like seeing parity more than quality, mistake-free football from the best talent in the world (and note whenever it comes down to a choice between football and baseball, most athletes opt for baseball).

In the same column, Rosenthal also briefly mentions his idea of how to address the revenue disparity the economically correct way. An idea he detailed before in a previous column:

The reality is, nothing will change until MLB undergoes dramatic structural reform. I’m not talking about a salary cap, which creates its own set of problems and would never be embraced by the players union. I’m talking about a market correction, and not the kind in which the owners squish midlevel free agents like so many bugs.

Put a third team in New York. And don’t stop there.

Stick one of the Florida teams in Washington, D.C./northern Virginia and tell the Orioles to get their act together and compete. Move the other Florida team to Boston to prevent the Red Sox from creating their own Evil Empire. End the Giants’ Bay Area hegemony by removing their territorial claim to San Jose and giving the A’s a place where they can financially succeed.

None of this will happen, no matter how much economic sense it makes. But if the disparity in local revenue is the greatest obstacle to competitive balance, and if the redistribution of that revenue is failing to achieve the desired results, the next step should be obvious: Attack the problem at its core by cutting into the revenue streams of the big-money franchises and leveling the financial playing field once and for all.

And for a sense on why the numbers make sense:

The New York metropolitan area generated $836 billion in personal income in 2000, according to Business Week Thus, each New York team has an economic base of $418 billion. The Orioles are next at $284 billion. Dividing the New York market three ways would leave each club with a base of $279 billion.

Why do we have only two New York teams? Because baseball is a cartel. In most businesses, when somebody sees a market opportunity, they take advantage of it by opening a business. In baseball, the existing owners have to agree to let new owners in. And of course, it is in their best interest to keep the number of teams artificially low so that more profits are distributed to fewer teams. And yes, it’s in Bud Selig’s interest to keep people upset about the disparity so that socialist programs like revenue sharing can continue to line his own pockets.

And on a side note, here’s a pretty decent analysis on the ARod trade that shows it not to be as one-sided as it might look:

Player: OBP/SLG A-Rod: .396/.615
Soriano: .325/.501

A-Rod is clearly the better player, but how much better? In terms of runs produced, I ran a regression on the returns to OBP and SLG on runs per game by team over the past 6 season in the AL. I pick this time-period to go back to the most recent expansion. The results are:

Runs per Game = -6.07 + 22.54*(OBP) + 7.99 (SLG)

This fits almost perfect with Paul DePodesta’s 3OPS model, meaning each OBP point is 3-times more valuable than a point of SLG. When I plug in the individual player numbers the model tells me how many runs a team comprised entirely of these players would produce. … Now we have usable numbers to compare these players’ worth per dollar.

A-Rod: 139.7/$16.3 = 8.57 runs per million
Soriano: 94.6/$11.1 = 8.51 runs per million

It seems that this is a pretty even swap, and that the Yankees didn’t use their financial muscle to “overpay” to get A-Rod at all. The Rangers appeared willing to cover A-Rod’s salary to make the trade work with any team willing to deal.

(Note, Paul DePodesta was the laptop-wielding assistant to the A’s brilliant GM, Billy Beane, and recently got his own GM gig at team Poopyhead… er, the L.A. Dodgers.)

Of course, the only teams willing to take on that salary were the Red Sox and the Yankees, and the Red Sox had their shot to keep him away from the Yankees and muffed it. But the size of the contract was not the Evil Empire’s fault. It was the Rangers who gave him that monster contract in the first place.

And really, the Yankees (who, remember, lost the World Series to a low-payroll team) are hardly a lock to win the World Series this year. I don’t think they have the pitching, and would’ve been better served going after Greg Maddux (who signed with the Cubs).