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I’ve touched on this idea nin the past, but I would like to fully form it today.
The pre-lockout New York Rangers and the current New York Knicks have more in common with the 2000s New York Yankees than a home city. All three functioned with a huge payroll relative to their competition. While the Yankees managed to put together winning teams during their time of payroll advantage, the Rangers and Knicks did not, and I’d be willing to say that all three teams were huge disappointments relative to their payroll.
Economists have a term to describe a weird phenomena in developing countries called “Dutch Disease”. Dutch Disease refers to a strange currency phenomena that I don’t really understand, but the jist of it is pretty simple: developing countries rich with natural resources do worse than countries that have fewer natural resources. Its a paradox that many very smart people in developing countries know about, but can’t really do much to stop.
I think that the Knicks, Rangers, and Yankees suffered from Baseball Dutch Disease in a very specific way. They were victims of trying to be normal teams. Normal teams, with normal payrolls, are a part of a rebuilding/contention cycle. They load up for a championship or three, and then spend a few years overcoming the hangover while their team leaves for free agency or gets old. It takes some time for the poor teams to build up the cheap base of players to do it again, but moderate to large payroll teams have the resources to shorten the cycle. No one so far has been immune to it – though I think the Yankees can be (that’s for another post).
All three teams tried to buy their way to contention. This can, and often is, a legitimate way to win games. Big stars are big stars because they help teams win games. However, free agents are generally signed as they exit the prime of their careers to long term contracts. While these teams can afford to load up with high-paid stars, they can’t afford to not play these same stars. That means that Alex Rodriguez is all but guaranteed a spot in the Yankee lineup until his contract is up. So is Derek Jeter, Jorge Posada, Mariano Rivera, Mark Teixeira, C.C. Sabathia, A.J. Burnett, etc. They will be on the roster through their decline years, and the Yankees will have to play them.
This is where Baseball Dutch Disease comes in. Teams sign a number of players to big, long term contracts. Those players get old, or generally aren’t as good as the team hoped they would be. The team signs or trades for a few more older players to make up the difference. These players get old or don’t play well, but the team is now left with no payroll room. All of the sudden, the Knicks or Rangers or Yankees resemble a zombie team – lots of former stars who are paid a lot of money, but aren’t really good, and can’t do anything to get rid of them. The zombie team plays a lot like a low payroll team: lots of mediocre, not a lot of great.
Those teams with smaller payrolls can have the same problem, because 1 or 2 bad bets set them back until the contract is over. Moderate to large payroll teams, on the other hand, are forced into a balance of big contracts and young players. This means that they will have to rebuild every once in awhile, but they won’t have to wait for a bunch of bad contracts to run out at any given time. This is how the New York Rangers, the second or highest paid team in hockey, didn’t make the playoffs for almost a decade before the NHL’s salary cap. Its a strange paradox.
The Yankees have for the most part been very lucky. Derek Jeter, Alex Rodriguez, Jorge Posada, Mariano Rivera, Mike Mussina, and others have generally functioned out outlyers: they aged gracefully. Still, their pitching and defense woes in the middle-late part of the decade could have been a lot worse had the team not been populated with unusual Hall of Famers.
Dutch Disease is not inevitable. It is a symptom of a preventable problem: the rebuilding/contention cycle. In order to insure that the Yankees don’t end up burdened with Dutch Disease, and I think Brian Cashman is thinking this way, they need to stop thinking in terms of “loading up for this year”, which is what the 2000s teams did. This may create a World Series favorite team for a season or two, but it does it at the expense of long term success.
Young players are key to the equation. The average starter (Closer, top-5 startering pitcher, 9 position players) on the 2010 roster that has at least entered their arbitration years cost the Yankees 15 million dollars – 17.65 if you look at only free agents. Even if you pay everyone else on the roster the minimum, that means that at any given time the Yankees can only have 9 or 10 big contracts on their roster. If any kind of critical mass of these contracts (let’s say 6 or 7) falls in to decline, the team is powerless to go out and get more players, except for promotion from the farm system.
Figure that a team in perpetual contention needs to look a lot like the 2009 Yankees: plus players at every position, stars at a few, and few holes. The 2009 Yankees had, by my count, 16 star-caliber players on their roster when the season began. Some didn’t work out, some did. But had the team replaced a few Robinson Cano’s, Joba Chamberlain’s, Phil Hughes’, David Robertsons, etc with the types of players that they did in the mid-2000s (Miguel Cairo, Buddy Groom, etc) for the same salary, they would probably have not won the World Series.
So there is the solution: young players offset the older ones. Essentially, having a Robinson Cano allows you to have another Mark Teixeira, or two Nick Swishers. That is the value in Jesus Montero – if he becomes a young, cost-controlled star, we can go get another star and have two studs on the roster. If we trade him or he doesn’t work out, we get to have 1 stud and 1 dud.
This is why the team was probably right not to go get Matt Holliday, even though he was signed to a good contract. Holliday would get old right around the time that Sabathia, Teixeira, and Burnett (not to mention Nick Swisher and Curtis Granderson) start getting old. He would probably put the Yankees over critical mass. Even if they have the payroll space, this may mean that the Yankees should wait a few years before spending on another 2-3 players (probably after Jeter/Posada/Mo start to get cheaper).
I hope that made sense. I’ve been snowed in for awhile (1 week now) and I’m starting to go a little crazy.
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7 Responses to Preventing Dutch Disease
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TIQ IQ
I think the Rangers make for an apt analogy. If you go with all big money players, eventually they won’t be able to perform and you will be hamstrung. Especially now that they havea budget, the Yankees need to find a balance.
“Essentially, having a Robinson Cano allows you to have another Mark Teixeira, or two Nick Swishers.”
Swisher was worth 3x his salary. He was paid 5.4 million last year and Fangraphs has him at 15.9 million for last year.
I think your last point is very apt. The Yankees will be hard pressed to sign any more big free agents until Posada, Jeter and Mo start to get cheaper. This is probably what is going on with the Yankees front office right now as they look ahead to the next offseason.
Right now the Yankees are UNBELIEVABLY talented. They could get rid of the DH, let their pitchers hit and still score the most runs in the league. This allows them to have somebody like Brett Gardner out in left (or center) field and use their resources to stock up in other areas. When you look at next season, there is probably going to be another monumental shift as you’re probably going to not have one of Vazquez and Pettitte (or both!) on the team. That’s a savings of 22 million right there. Say that one of those empty rotation spots is taken up by Hughes who will be making very little as a first year arbitration guy and the other is taken up by a free agent.
Now who will this free agent be? I’d argue that the salaries of Mo and Jeter will have a significant impact on that. Let’s say that between the two, they take a pay cut of 9 million and Jeter makes 16 million to Mo’s 12 million (which is still overpaying) you can use that money to upgrade from a pitcher like Pettitte at 12 million to Cliff Lee at 18-21 million.
I think Cashman has really been smart over the past five years with the draft strategy to reflect this. Players like Posada, Jeter, and CC are the hardest to acquire and the most costly to keep. Developing them is significantly more important than developing a right fielder who can hit 25 homers a year. Those types can be pulled off the free agent market (Damon) and are often easy to trade for (Swisher). The ones who are expensive and difficult to trade for are guys like CC, Johan Santana, Mauer, Beltran, Hanley, ect who offer huge upsides at important positions. Now, when you look at what Cashman has done in the draft and international FA market it all makes sense. He’s stocked the system with catchers (Montero, Romine, Sanchez, Murphey, ect), potential ace pitchers (Hughes, Joba, Brackman, ManBam, Betences, ect) and up the middle guys (A-Jax, Slade, Angelini who didn’t turn out but still…).
So, it’s really not having a cost-controlled star (which is good) but having cost-controlled stars at positions in which they’re scarce (which is amazing).
Nice read, EJ. I’m stealing that “zombie team” line.
Welcome to it, since I pretty much stole it from Lost.
“Economists have a term to describe a weird phenomena in developing countries called “Dutch Disease”. Dutch Disease refers to a strange currency phenomena that I don’t really understand, but the jist of it is pretty simple: developing countries rich with natural resources do worse than countries that have fewer natural resources. Its a paradox that many very smart people in developing countries know about, but can’t really do much to stop.”
It never ceases to amaze me when folks don’t get this. There’s nothing unusual, unexplainable, or complex about this. Natural resources are just a tiny fraction of the economic equation. A country rich in steel does not have what is required to be a top auto manufacturer. That requires engineers to design it, parts manufacturers to supply it, marketing companies to create demand, and retailers to sell it. Plus a zillion smaller suppliers to feed each service along the way. Raw materials are often a small component of many product, the labor involved in turning it into a desirable product which people demand is at least 90% of the equation.
Even a raw material like gold or diamonds must be shaped, formed and packaged into something extraordinary for it to be sold at a premium price. Of the final purchase price, the vast majority will go to the creative and/or intellectual capital that took that raw metal and turned it into something desirable, not to the minors or mining company that pulled it out of the ground. The money is in refinement of raw materials by skilled individuals, not in the materials themselves.
The reason why countries like Japan have succeeded with few natural resources is that in a global marketplace, origin of materials is largely irrelevant. If Russia wants to jack up the price of steel you simply buy it from India the next day. What is truly valuable is branding, innovation, services, etc. That’s where the money is.
So, I actually strongly disagree. The Dutch Disease/Resource curse problem is well documented. Without going into too much detail, two things happen: large amounts of natural resources cause political instability, and large inflows of money create systems filled with moral hazard and poor manufacturing due to currency devaluation. Basically: the foreign currency coming in makes it really expensive to manufacture things domestically, so the country never creates a manufacturing sector, and therefore never develops a middle class or grows. Combined with political instability, the end result has almost always been a lot of death and destruction and not much development.
But this discussion is for another blog…