February 19, 2002
The Daily Prospectus
Salary CapI started what I hoped would be a series on baseball's economic issues. As you can see, it's been a while between articles.
It has taken me three weeks to put together a coherent salary-cap column, because there are so many issues that come into play when trying to write about it. There's a mythology that surrounds the salary cap, one so ingrained in any discussion of the topic that to get through the layers of misconceptions takes the work off on a half-dozen tangents, all of which are informative and entertaining, but which make for a difficult read.
So let's start with the basics about the salary cap, and actually, the term itself. The so-called "salary cap" is actually a payroll cap, or a labor-cost cap. Salaries are not limited on an individual basis, but by team, so the restriction is not on the players, but on the teams.
That's an important distinction. Were the more accurate term "payroll cap" used, the effects and intent of the tool would be more clear: to restrict the amount of money management can spend on labor. It's an agreement among competitors to inhibit the labor market, lowering salaries.
A salary cap transfers wealth from labor to management.
That's all it does, and that's all it's supposed to do. The nominally fan-friendly effects of a salary cap are either fictional, or secondary, weak ones. A salary cap merely keeps teams from bidding on labor past a certain point, regardless of the value of the available labor or the team's resources, with the effect of lowering salaries across the board.
The salary cap is a popular concept among many fans, for as best as I can tell, two reasons, both the result of heavy league and media proselytizing:
Neither is true. The first case is probably the most important one, because it's the one that the leagues and their respective owners have spent years promoting.
The price of tickets is not set to recoup costs, but to maximize revenue.
If you take nothing else from this column; if you think I'm a blithering idiot unfit to spend time in the company of humans; if you'd rather I be carved up and sold for pennies a pound... believe the above statement. Send it to two friends. It's the single misconception most damaging to the public discourse on sports economics.
Prices are set by teams to maximize revenue, and are based on anticipated demand. They are not set to "make up" whatever rise in payroll is anticipated, no matter how many teams send out letters to season-ticket holders claiming this to be the case. Rising player salaries do not drive ticket-price increases.
There are countless examples that show this, but the two I like best are major college sports--where the players are "paid" with scholarships and stipends, yet ticket prices are comparable to those in their professional counterparts--and the NBA and NFL, where a salary cap hasn't stopped a steady rise in ticket prices over the last 15 years. Baseball ticket prices are high because lots of people are going to baseball games. (I know corporate purchases, and the tax laws that drive them, are part of this equation. It's a topic for another day.)
For a salary cap to impact the price of tickets, you'd need something along the lines of a "revenue cap" to balance the scales. This would be a completely irrational solution, in part because implementation would be difficult, and in part because the market would correct for the lowered prices. There would be a huge secondary market in which tickets are priced according to demand, with the revenues going not to the teams themselves, but to the brokers in that market. There's no reason to implement a system that encourages this.
A salary cap isn't going to put money back in fans' pockets.
The notional impact of a salary cap on competitive balance comes from two places. One is the idea that a team's success is tied to its payroll. It's a wrong-headed one, driven by a number of factors including the Yankees' success over the past seven years with a high payroll, the willingness of some teams at the low end of the revenue and payroll scales to suck up revenue-sharing dollars, and a whole host of convoluted statistics cooked up by the Blue Ribbon Panel of Experts Picked by Bud Selig to Produce a Report That Supported His Ideas With as Little Input From Unfriendlies as Possible.
There is no clear relationship between success and payroll, particularly at the high end of the scale. Spending gobs of money on baseball players doesn't guarantee success, even in the wild-card era, as recent performances by the Orioles, Mets, Dodgers, and Red Sox show. It is possible--if more difficult--to win while having a low payroll. The success of the A's and, at least in 2001, the Twins is evidence that even a vanishingly low payroll isn't an absolute barrier to success.
The interactions among payroll and success and market size and revenue and capitalization are complex. When you look at the big picture, at all the reasons why some teams are successful and some aren't, why some are high-revenue and some aren't, there's just no way to pick one solution--a salary cap--from the ether and say "this will make everything right."
Well, to some people there is: the NFL. The blessed NFL is held up as an example of a wildly successful league with a salary cap. The truth is that the NFL's nominal "competitive balance" is a function of a number of factors, including the shorter season, larger playoffs, fixed scheduling, and the greater impact of a reverse-order draft in a sport where players can make a more significant initial impact.
To the extent that the salary cap contributes to competitive balance, I would say that it works negatively: it punishes success, forcing well-built, winning teams to shed talent on a near-constant basis. It also makes it virtually impossible to trade, increasing the impact of a single catastrophic event in a league where teams cannot make adjustments on the fly. A system that punishes success, rather than rewards it, seems an odd construct for any endeavor, and it's one I have difficulty supporting.
The NFL is successful, and the NFL has a salary cap. Unless you're an owner, though, the case that the latter has been a cause of the former is awfully weak.
I'm really going to need to do an entire column on MLB v. NFL, because surface comparisons of the two don't advance the discussion much. Suffice to say that, "because the NFL has one" is a lousy reason to support a salary cap. The two entities share little more than green fields and space on the national stage.
What would the actual effects of a salary cap be, if one was implemented in major league baseball? Well, because the cap is generally tied to a specific percentage of revenue, the first thing you'd have to do is get MLB owners to be honest about their finances. That alone could take us into the 2020 season.
After I wrote my article on revenue sharing, a number of people made the claim that the money going from high-revenue to low-revenue teams would cause the low-revenue teams to become more active in player acquisition, increasing demand for lower-tier free agents and essentially keeping the amount of money going to the players constant. It's a nice theory, and it's popular among those who want to believe that 1) teams are aching to give players money and 2) the MLBPA actually has something to gain from a payroll restraint.
It's not likely to be the case, though, and in fact, this is why all salary cap plans come with a salary floor. There are plenty of team owners who don't want to spend more on players than they absolutely have to pay them. This would be especially true if revenue sharing increased enough to guarantee a profit for every team in the league.
Remember what we know about the distribution of talent in major league baseball: it's the right end of a bell curve, with a few great players at the extreme, more players with good talent towards the middle, and a near-endless supply of free, or replacement-level, talent. It's taken some time, but teams are beginning to recognize this, as we saw this winter.
Put another way, there is no "middle class" in baseball. You start young and cheap, and you either become older and expensive, or just older. Changing the distribution of revenue in baseball isn't going to change these things. If Jason Giambi makes $12 million per year instead of $17 million, Tino Martinez isn't going to still make $8 million just because the Reds, Devil Rays, and Royals all have some of the Yankees' money. The entire scale slides down; no "middle class" emerges just because the revenue is distributed differently. None should, because the salary scale should match the distribution of talent.
Any "demand effect" of the extra money going to lower-revenue teams is not going to cancel out the impact of what is happening at the top of the salary scale.
There are other reasons to oppose a salary cap, not the least of which is that it will make being a fan tedious. Derek Zumsteg will have more on this later this week, but for an example of life under a cap, check out Bill Simmons's latest ESPN.com column. Baseball fans may complain about money now, but there is simply no way to talk trade in the NBA without retaining all kinds of ridiculous information, as well as the knowledge of cap rules that are, to understate the case, intricate.
The salary cap is the Holy Grail of sports ownership. If you can get one in your league, you lock in ungodly profits while eliminating risk. That is a perfectly good business plan, and it's hard to fault MLB and its member owners for doing everything they can to force one on the players.
Recognize, though, that the only people who gain anything from a salary cap are those member owners. A salary cap doesn't benefit fans, it doesn't benefit the game as a whole, and it doesn't do anything for competitive balance. It reduces the financial incentives to improve and innovate and succeed. Moreover, the pursuit of a salary cap has caused the leadership of MLB to relentlessly trash its product in an attempt to reach the ultimate goal. The anti-marketing of baseball, which has done more actual damage to the game than any economic system ever could, has one goal: get a salary cap.
Joe Sheehan is an author of Baseball Prospectus. You can contact him by clicking here.