September 15, 2005
Lies, Damned Lies
The Hometown Discount
Baseball Prospectus hasn't spent a lot of time lately talking about baseball's economic issues. That's a good thing, because it means that there's not a labor dispute percolating, and that the Collective Bargaining Agreement agreed to in the summer of 2002 has gone over relatively well. Baseball's revenues continue to grow. Those teams that "needed" new stadiums have, in most cases, gotten them. Salaries are accelerating at a reasonable clip, but there's none of the insanity that characterized the 2000-01 off-season, when the Dodgers decided that Darren Dreifort was a $55-million pitcher.
What's interesting is that when talk about labor discussions dies down, so does talk about "competitive balance." Although the 2002 CBA introduced the luxury tax and raised the revenue sharing rate from 20% to 34%, measures that Park Avenue claimed would help smaller market teams to compete, there's little evidence that those teams on the wrong side of the tracks have found it any easier to emerge from the ghetto. The six smallest markets with MLB teams are, by most reasonable definitions, Cleveland, Cincinnati, Denver, Kansas City, Milwaukee and Pittsburgh. Since the new CBA went into effect in 2003, and including year-to-date results for 2005, the teams representing those cities have combined for just two winning seasons in 18 tries (the 2003 Royals and this year's Indians).
Let's shift gears for a second and revisit the finding I introduced last week, that from a revenue-generation standpoint, players are worth significantly more to teams with a reasonable near-term hope of competing for a playoff spot. One of the implications of this is that teams that are not competitive, particularly ones that play in smaller markets, are at risk of joining something of a permanent underclass. When Jason Bay becomes a free agent in a few years, and the Pirates still stink, they're going to find that he might be worth $8 million per season to them, while he would be worth $10 million to the Phillies, who presumably will have gone 85-77 for seven years running and will desperately need a player to get them over the playoff bubble. If the Phillies outbid the Pirates for Bay, it's because he really is worth more in Philadelphia, not because the Pirates are being cheap.
The current CBA doesn't do anything to address this structural problem. Revenue sharing acts as a flat tax that cuts against locally-generated revenues at the same 34% rate for all clubs, rich and poor alike. If Bay is worth $8 million to the Pirates and $10 million to the Phillies before revenue sharing, he's worth $5.3 million ($8 million less 34%) and $6.6 million to those clubs respectively after revenue sharing. The Pirates will wind up with a nice check from Bud Selig at the end of the season, and Bay's salary winds up being lower than it would be with a lower revenue sharing rate. That doesn't do enough to help the Pirates keep Bay in Pittsburgh.
If baseball is serious about encouraging competitive balance, it needs to develop incentives that specifically address this disparity--that the marginal economic value of a win is higher in some markets than others. The luxury tax potentially works in this fashion, but in practice has limited application, since the payroll thresholds are set so high that it only materially impacts the Yankees, and the problem isn't really the Yankees' hegemony so much as it is the Pirates' economically-reinforcing ineptitude.
A solution that would more adequately address the problem is what I'd call a Hometown Discount. Suppose for example that baseball agrees to pay 25% of Jason Bay's contract if the Pirates re-sign him. Now the Pirates can afford to pay Bay $10.7 million per season--$8 million of which they'll cover themselves, and the remainder of which is subsidized by MLB--and they'll outbid the Phillies. Let me introduce some parameters for how such a Hometown Discount might work.
I'd like to think that the benefits of this proposal are self-evident:
Disadvantages? The salient one from MLB's standpoint is that salaries would increase by some fraction. In the Jason Bay hypothetical, for example, Bay would wind up making $10.6 million per year rather than $10.0 million. I'd like to think that this increase would be tolerably small--the intent of the plan is to allow small-market teams to match big-market salaries, not to dramatically exceed them--and more than made up for by improved revenue generation in smaller markets.
Besides, the number of players eligible for the Hometown Discount is relatively manageable. Here, for example, are the players in the upcoming winter's free-agent class who would be eligible under the program (this list was generated by hand, and may be subject to errors and omissions):
Team Class Type I Type II Angels A Bengie Molina, Jarrod Washburn -- Dodgers A -- Darren Driefort Mets A -- -- Yankees A -- Bernie Williams Braves B Rafael Furcal -- Cubs B -- -- Phillies B -- -- Rangers B -- -- Red Sox B -- -- White Sox B -- Paul Konerko, Frank Thomas Astros C -- Brad Ausmus, Craig Biggio Blue Jays C -- -- Giants C -- -- Mariners C -- -- Marlins C A.J. Burnett, Alex Gonzalez -- Nats C Tony Armas -- Tigers C -- Bobby Higginson A's D Erubiel Durazo -- Cardinals D -- Matt Morris D'backs D -- -- D-Rays D -- -- Orioles D B.J. Ryan -- Padres D -- Trevor Hoffman Twins D Jacque Jones, Joe Mays -- Brewers E Wes Helms -- Indians E -- -- Pirates E -- -- Reds E -- -- Rockies E -- -- Royals E -- --Admittedly, this winter's is a pretty barren free-agent class, so let's look at the likely eligibles from the 2006 free agent class as well.
Team Class Type I Type II Angels A Adam Kennedy Darin Erstad Dodgers A Eric Gagne -- Mets A -- -- Yankees A -- Jorge Posada, Mariano Rivera Cubs B -- Kerry Wood Phillies B Vicente Padilla, Randy Wolf -- Rangers B -- -- Red Sox B -- Doug Mirabelli, Trot Nixon White Sox B Mark Buehrle, Jon Garland -- Astros C -- Jeff Bagwell Blue Jays C -- -- Braves C -- Chipper Jones, John Smoltz Giants C Pedro Feliz -- Mariners C R. Franklin, G. Meche, J. Pineiro -- Marlins C Juan Pierre Luis Castillo Nats C Nick Johnson -- Tigers C -- -- A's D Barry Zito -- Cardinals D -- -- D'backs D -- -- D-Rays D Aubrey Huff -- Orioles D Jay Gibbons, Melvin Mora -- Padres D Adam Eaton -- Twins D Luis Rivas, J.C. Romero Torii Hunter, Brad Radke Brewers E -- -- Indians E David Riske -- Pirates E Kip Wells -- Reds E -- Sean Casey Rockies E -- -- Royals E -- --The Hometown Discount proposal is designed for players like Huff and Adam Eaton and Barry Zito, homegrown guys who are popular in their local markets and who may be just outside of the price range of their home teams. By no means is it assured that these players will re-sign with their clubs--there's no amount of discount that could cover for a crazy Denny Neagle type of contract offer, and sometimes teams will have good reasons for wanting to look in other directions. But the Hometown Discount would do something tangible to level the playing field for legitimate small-market teams, both from an economic standpoint and a competitive one.