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February 17, 2009

Prospectus Today

Changing the Game?

by Joe Sheehan

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Well, this is a ridiculous notion:

Major League Baseball, the players' union, the Diamondbacks, and [Juan] Cruz's agents are in discussions to facilitate a sign-and-trade involving Cruz while adhering to the collective-bargaining agreement.

Free agents cannot be traded before June 15 without their consent, but the union will permit Cruz and other Type A players to waive that right in advance, according to Rob Manfred, baseball's executive vice-president of labor relations.

That's Ken Rosenthal, passing on a notion first floated by LaVelle Neal of the Minneapolis Star-Tribune. All of the wailing and moaning about the plight of the remaining Type-A free agents with draft picks attached to them is ridiculous, as if they were somehow victims of an unfair system. It might be unfair, but if so, it's that way by design. The free-agent compensation system, which dates in various forms back to 1981, is designed to lower the demand for free agents by adding to the cost of signing them. At first it was player compensation; now, it's draft picks. In any case, the idea is to make free agents less desirable.

In 2009, it's not that the system hasn't worked, it's that it has worked, and it's worked beautifully. We're so far removed from the original arguments over free agency that we've forgotten that the point of compensation is to restrict the market. Owners wanted a mechanism that would make it harder for players to move around, lower the financial costs of signing them, and provide something in return for losing them. My god, there was a strike over this, because the players recognized that free agency with compensation wasn't free agency at all.

For years, this didn't matter very much because the industry operated at well-below peak efficiency. Teams would sign Type-A free agents and give up their first- or second-round draft pick because they didn't adequately value either item. Many, even most, free agents will return less than what it costs to sign them, and they'll decline over the time frame of a deal. High draft picks are gold, a teams' best chance to secure low-cost, high-value talent through its peak years. Over a generation, the perceived values of each of those things have gone in opposite directions, and they crossed paths this winter. Now, most teams would rather have the draft pick and the cash than the veteran player. This is new; it was just a few years ago that the Giants signed Michael Tucker before the Royals even had the opportunity to decline to offer him arbitration, because they wanted to forfeit their first-round pick.

The thing is, you can't change the rules because they're working too well. We talk all the time about the Law of Unintended Consequences. This ain't that; this is the Law of Intended Consequences. Free-agent compensation rules are designed to lessen the demand for free agents. Well, this is what less demand looks like, and while it isn't fun for Orlando Hudson or Juan Cruz or Orlando Cabrera, to make a change now would have effects that we can't see, while also being unfair to those free agents and teams that reached agreements under the current understanding.

Think about the teams that signed Type-A free agents and who will now pay for that signing with draft picks. Had they waited, perhaps they would have been able to acquire those players without sacrificing the picks. The Yankees signed three Type-A free agents at a cost of their top three draft picks; no one feels sympathy for them, but a post-facto change in the rules would negatively affect them. The Angels gave up their first-round pick to sign Brian Fuentes; the Mets coughed up theirs for Francisco Rodriguez. How is it at all fair to these teams to make them lose a draft pick, but not do the same for the teams that end up acquiring Cruz, Hudson, Cabrera, or Ben Sheets, all of whom are governed by the same clause in the CBA?

Think also about the effect on the players who signed. Would Derek Lowe or Oliver Perez have held out a bit longer if they'd known that eventually the draft pick hanging from their necks would be removed? Would Jason Varitek have had better options than returning to the Red Sox? You're penalizing those players, all of whom tried to sign as free agents requiring compensation, by changing the rules after they reach agreements. We know that the market for these players was hampered in part by the need to give up a draft pick by signing them. Don't they have a right to be free agents under new rules that take that cost away?

The MLBPA, in allowing advance waivers, is trying to address the problems some of its members are having. Their intentions are good, but doing so would be to undercut the interests of its members that made decisions under the rules of the CBA. That Perez and Lowe and Fuentes and Rodriguez reached deals where Cruz and Hudson and Cabrera have not should not end up benefiting the latter group. It just happens that the demand for their services isn't enough at the cost of a salary and a draft pick. As I say, the system is working.

This would also set a terrible precedent for future offseasons. If owners and GMs know that these "sign-and-trade" deals will eventually be available, then they have every incentive to lowball free agents deep into the offseason. A situation that is largely coincidental this year would become the result of a strategy in future seasons; why sign a player on January 8 and sacrifice a pick when you can wait until March 8 and sign him for the cost of an inconsequential prospect? It would also affect the decisions to offer and accept arbitration, as the risks and benefits of doing so will have changed for both player and team. Players should be more likely to decline arbitration, knowing that they might eventually be able to sign without their new team giving up a pick. Teams should be less likely to offer arbitration, because while players are more likely to decline, the prospect of getting a pick when the player changes teams is reduced.

I play in a perpetual fantasy league, a good one, in which there was a huge controversy heading into the second season having to do with the salaries of players taken in the minor league draft. After the rules were set one way, it was proposed to change them as we headed into the second season, effective immediately. I fought hard against the change. The details are unimportant, but the principle carries over to this situation: you can't change the rules midstream when decisions have been made based on the old rule set, and the rules are working as intended.

Free-agent compensation is designed to lower demand and the prices paid for free agents by introducing a cost over and above the salary. All of the Type-A free agents previously offered arbitration who signed this offseason have had to deal with that cost attached to them, and that cost affected what they earned on the market. The teams signing those players have had to deal with the loss of those draft picks. While you might feel for the remaining Type-A free agents, their free agency isn't some accident of fate that needs to be accounted for; it's what happens when the system works. The free agents are simply going to have to sign for a salary that makes the total cost of acquiring them-draft pick included-worth it for the signing team.

The MLBPA should not change its rules, because doing so would be unfair to everyone who played by them.

Joe Sheehan is an author of Baseball Prospectus. 
Click here to see Joe's other articles. You can contact Joe by clicking here

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