On Tuesday and Wednesday, TYU will be running four guest posts from four excellent writers. The third comes from Mark Allen, who some of you might recognize from twitter as @markelderallen. He looked at the current economic system in baseball, and the Yankees’ place within it. It is an entertaining read that I am sure you will enjoy.
Since 2003 the New York Yankees have paid over $180 million to Major League Baseball in luxury taxes. The luxury tax bills have not been sufficient to prevent the Yankees from putting a quality product on the field of play, but one has to wonder why every 7+ years the Yankees should have to offer a full year’s payroll to the “poorer” or “smaller-market” teams in the game.
The most common justification for the luxury tax threshold stems from a belief that the goal is somehow to achieve a level financial playing field among all of the teams. Words like “fairness” are often used and comparisons to football are made to seem logical and relevant. Before we can address the issue of how to create a level playing field, how to be “fair,” and how to obtain competitive balance, we must first address the greater question of why these should be league objectives.
Is there something inherently wrong with one team, be it the Yankees or any other team, generating more revenue than any other team? If the Yankees, over the course of time, as their spending power increases both in total real dollars (meaning adjusted for inflation) and relative to other teams, find a way to use their superior resources to win a disproportionate number of regular season, postseason and World Series games, is that wrong, and if so, how? Is it bad for business? Is it bad for the purity of the sport? Is it immoral?
First, let us consider whether this financial advantage is inherent or achieved. In my lifetime, and likely yours if you are reading this post, the Yankees were outspent by the Royals. Yes, twenty years ago it was the Kansas City Royals who led Major League Baseball in payroll. It bears repeating. Kansas. City. Royals. I don’t have the figures in front of me, but I find it hard to believe that both teams were putting an equal share of revenue toward payroll in the early 1990s. Since then, the Yankees have dramatically improved their revenue stream with the creation of the new Yankee Stadium (aka YSIII and NYS), and more importantly, the YES network. Today the radio rights to broadcast New York Yankees games cost more than the television rights to Kansas City Royals games, so it is unlikely the Royals will be outspending the Yankees any time soon.
This minimizes the criticism of many small-market teams that they could compete better if they were to actually reinvest their revenue into product development (such as signing draft picks, foreign prospects, and proven free agents). It does not eliminate the criticism, but the truth is that under the current system, even if they were to ramp up efforts to bring fans to the ballpark with, say, ballpark renovations or fan promotions, their revenue stream would not suddenly jump to a level at which they could financially compete with the New York Yankees.
If we agree that the financial advantage is inherent to the market due to population density, then we can agree that the financial advantage is “unfair,” but not whether fairness is relevant. Understand that Major League Baseball in its current iteration is, in real terms, more profitable than it has ever been for players, owners and team management. It is hard for any business to grow the way baseball has grown and simultaneously condemn itself. If unfair baseball is more profitable, then as a business, it is illogical to make fairness the goal.
However, when we expand our scope, we see that all sports are more profitable today, and so baseball’s growth, when understood in the context of the broader sports landscape, is less impressive. It is plausible that baseball’s growth is being slowed by the public perception of a lack of fairness or competitive balance. I say perception because the financial disadvantages of smaller market teams does not necessarily have an anti-competitive impact that would be considered unfair, even if we agree that those financial disadvantages are, within the present-day system, inevitable.
So for the purposes of discussion, we are considering the current landscape of Major League Baseball to be unfair and unbalanced, but even if we agree that this problem is intrinsic to the system in place, we may still disagree whether the problem needs correcting. I am assuming, for the purposes of discussion, that correcting this problem would result in increased demand for Major League Baseball.
Now, any economics student can tell you that, if baseball were subject to market forces, and one team, such as the Yankees, were able to produce an amount of revenue so relatively high that it prohibited another team’s ability to compete, that team would either be folded or forced to relocate to a stronger market, and in the words of Shakespeare, there’s the rub.
No matter what the product, market forces prevent competitive imbalance and dictate that, over the course of time, no profit is earned. The only way to ensure that is to allow the businesses manufacturing the product to compete against each other, and Major League Baseball does not, except when they do.
In the case of the Oakland Athletics, a move from Oakland to San Jose has been blocked because San Jose baseball fans primarily root for the San Francisco Giants, and so Oakland – a team that already competes in essentially the same geographical market – has been prevented continually from moving into an area populated primarily by fans of another team.
However, in the case of the Washington Nationals, just the opposite is true. The Nationals were previously the Montreal Expos – a team with no proximity to Washington, DC. Washington, DC and its suburbs in Virginia and Maryland were filled with fans of the Baltimore Orioles prior to 2007 when the Nationals came to DC. Orioles’ management protested the move, but was overruled by Major League Baseball, as commissioner Bud Selig was in favor of the move.
The rules that prevent most teams from moving into the geographic jurisdiction of existing teams are precisely the reason we have competitive imbalance today. If Florida could move to Manhattan, they would not only be increasing the size of their natural market, but they would be reducing the market size of two competitors who are presently dominant in the marketplace of professional baseball. Unfortunately, if the Yankees and Mets even had to blink to block such a maneuver, I’d be shocked. Both teams are too influential for the issue to subject to even be seriously broached with the owners.
Getting rid of this rule has the potential to permanently and summarily solve the problem of intrinsic financial advantages of a specific team. The luxury tax system, on the other hand, is not even a band-aid, nor is it a real acknowledgment of a problem. The Yankees are seen as having an intrinsic advantage because of the population density of their city and the lack of other teams in their geographic region, and yet the luxury tax does nothing to address this concern. If the Yankees made $10 billion in 2010, but spent only $100 million on payroll, they would pay not pay a cent of luxury tax this year. This tax is therefore effectively a safeguard for profit.
Baseball is exempt from antitrust regulations and therefore permitted by US law to operate in an anticompetitive business environment. The continued insistence on an anticompetitive marketplace has resulted in the ability of every team to make a profit – not just the teams from New York and Los Angeles. The Florida Marlins, for example, represent a metropolitan area of over 5 million people, so how is it that they recently had a team payroll that is considerably lower than John Lackey’s current salary? Ownership took money from the Yankees luxury tax payments, from ticket sales, from television and radio contracts, and they pocketed it.
If the fans of Major League Baseball are comfortable with ownership groups profiting and not reinvesting their revenue into improving their product (as EVERY other business must do to compete in the marketplace), then we should continue to operate in a system with salary restrictions, be they taxation-based or cap-based. If fans want teams to do everything they can to always put the best possible product on the field, then it is time to abandon the antitrust exemption and eliminate the geographic relocation boundaries presently in place. Let the market determine how many teams can compete, where they should situate themselves geographically, and individual teams can operate as they please in a free and open market. Then the success of each team will be the result of its merit, and that is what people are clamoring for. If that solution is unappealing to fans, then perhaps they should reconsider their stance on “fairness.”
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