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March 5, 2002

The Salary Cap

Another Viewpoint

by Ted Frank

The type of salary cap that is likely to be proposed by management in upcoming labor negotiations is probably a bad idea. But two recent articles at the Baseball Prospectus Web site overstate the case against salary caps in general.

One can immediately dismiss some arguments as irrelevant. Derek Zumsteg complains that salary-cap rules can be complex and boring. Certainly this is true in the NFL, where each team hires a professional full-time "capologist" to review a team's salary-cap compliance. This came about because the 1980s San Francisco 49ers were innovative and discovered that one could use the rules to structure contracts in a manner that, in effect, transferred future cap space to the present. Other teams weren't as clever right away, and the 49ers were dominant for years because they could effectively outspend other teams.

Eventually other teams caught on, and then the Niners' borrowing all came due at once, forcing the team to rebuild overnight. Now every team adopts the 49ers' methodology, and aims for building projects that give a team a two- to four-year window at the championship before the salary-cap borrowing forces them to rebuild from scratch.

The NFL salary-cap rules are close to inscrutable. Sportswriters don't understand them: Jay Fiedler's recent contract was reported as being for $24.5 million over five years, when it was really a two-year, $6.525-million contract with a team option for the last three years that will almost certainly be renegotiated in 2004. The "five-year" duration was purely a fiction to defer salary cap expense. If the teams need experts, and the media doesn't get the distinctions, it's pretty likely that most fans don't understand the NFL salary cap, either.

But so what?

How many baseball fans not named Doug Pappas can explain the options rule, or the system for awarding supplemental draft picks, or the Rule 5 draft, or the methodology of determining which third-year players are arbitration-eligible? Heck, the Dodgers were famously unaware in 1998 of the five-year-service/multi-year-contract rule that permitted Jeff Shaw to demand a trade, and had to renegotiate his contract to keep him. The opaqueness of a league's roster rules is hardly determinative of its soundness or of the ability of the fans to enjoy the sport.

Zumsteg complains that the NBA salary cap prevents teams from rebuilding and inhibits player movement. Pundits complain about the NFL salary cap for the opposite reason: it forces teams to adopt the 49ers' model, causing player movement and constant rebuilding. Nothing about a salary cap inherently causes or prevents player movement; how the cap is implemented does that. Zumsteg says that NBA teams have to give up roster players or draft picks to make trades at the deadline, but that's not because of the salary cap, it's because NBA teams don't have farm systems--there's nothing else for them to trade. And rebuilding does happen all the time in the NBA, notwithstanding the salary cap. That it's rarely successful is because, unlike baseball or football, a basketball team relies heavily upon having an impact player, and there's a severe shortage of those. The NBA experience is not going to be the MLB one.

Joe Sheehan posits that a salary cap transfers wealth from labor to management. It would be more accurate to state that a salary cap tends to transfer wealth from labor to management. A salary cap limiting franchises to spending $20 million per team in salary would clearly do that (though it would also create the incentive to establish a competing league). A salary cap limiting spending to $200 million per team would have no effect whatsoever. A salary cap combined with a salary floor (be it by team or by a pro-rated bonus awarded league-wide guaranteeing players a minimum proportion of revenues) might actually raise player salaries.

There's one additional, MLB-specific reason why a well-designed salary cap might very well increase salaries, increase competition, and redound to the fans' benefit: the Yankees.

The Yankees are simply playing a different game than every other major-league team. They can outspend their opponents by tens of millions of dollars, pay $26 million in revenue sharing, and still have a tremendous profit, because they receive more local-media revenue and sell three million tickets at high prices. The Yankees have their pick of free agents every year; it's gotten to the point where most other teams don't even try to compete for the free agents in whom the Yankees express interest. They've won five AL pennants in six years, and were one inning away from winning five World Series in the same time frame. Credit certainly goes to Joe Torre, the development system that produced the up-the-middle portion of the lineup and the prospects the Yankees could trade for other components, and a smarter-than-average front office, but their job has been made easier by their having no constraints on expenditures.

What about the intermediate case? If a salary cap were established at $110 million, and had an escalator clause reflecting MLB revenues, it would directly constrain just one team: the Yankees. What other teams would it affect?

Major-league teams have been adopting one of several strategies: (1) try to keep up with the Yankees in spending (and fall short); (2) spend in a middle-to-low range, and do the best one can to keep the team competitive and profitable within those constraints; or (3) the "Rachel Phelps" strategy of paying as little as possible and living off of TV revenue and contraction checks.

The thing is, more and more teams are dropping from category (1) to category (2). The concern is that more teams will drop from category (2) to category (3).

It's currently true that one doesn't need to spend a lot of money to be a relatively successful team, with the Oakland A's serving as Exhibit A. The question becomes whether that will remain true when the acolytes of Billy Beane spread through the league. Will the Blue Jays be Exhibit B? Detroit and Dave Dombrowski Exhibit D? The A's strategy works because there are a number of undervalued players in the majors and minors. Paradoxically, the more teams that adopt a similar strategy, the less likely that there will be undervalued players that can be had cheaply. It may still be a few years away before the competitive advantage of "Billy Beane in the front office" dissipates as the rest of the majors catches up, but there will be that transition, and then the Yankees' money advantage will only become more apparent.

The Cleveland Indians were once among the top spenders; lately, they've been dumping salary. Neither the Red Sox nor the Dodgers attempted any major signings this winter; the Dodgers actually dumped Gary Sheffield. Of the 12 heaviest spending teams in 2001, only the Rangers, Braves, Mets, and Yankees added salary this off-season, and none of the other three added as much payroll as the Yankees did. Could it be possible that the other high-spending teams decided that they couldn't outspend the Yankees and are readjusting their strategies? If so, won't that add to the Yankees' advantage?

Not only are the Yankees spending a lot of money, but they can also afford to spend more than they are. So far, they've been spending just enough to stay ahead of the Duquettes: they didn't make a real play for John Smoltz or Chan Ho Park or Alex Rodriguez; they've backed off of bidding wars for Japanese and Cuban stars. If the Yankees felt threatened, they could spend more in a flash--witness how they almost traded for Juan Gonzalez in 2000. More importantly, the other teams in the league are well aware that if they were to escalate their salaries and threaten the Yankees, the Yankees could respond in kind. Experience has taught them that escalating salaries is a losing battle.

I'm not a knee-jerk advocate of the salary cap; I'm likely going to be unhappy with what MLB eventually decides to offer. I merely suggest that if current trends continue, it is quite likely that more and more teams are going to drop out of the relatively free-spending category; that teams will "compete" with the Yankees only to the extent that they may get lucky and take a seven-game series from them; that MLB salaries will decline accordingly; and that interest in baseball could decline as a result, causing a spiral downward.

I further suggest that the Yankees' spending has impressed upon most of the rest of the league that it's futile to challenge the Yankees by accumulating free agents. I finally conclude that it's possible that a salary cap that acts to constrain the Yankees might encourage other teams to come out of their shells and raise both overall spending and competitive balance.

Ted Frank is an antitrust litigator in Washington, D.C. His sixth-favorite website is The Sound and Fury.

Related Content:  Yankees,  Yankees Prospects,  Yankees Fans,  Rebuilding,  Salary

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