First Pitch: The Difference Between the Haves and the Have-Nots

As you know, I’ve written a lot about how MLB’s economic system is unfair. Large market teams can spend with no concern about financial risks or dead contracts in the future. Small market teams have to be smart, and have a large group of players that are completely unavailable to them. The difference in payroll is about $100 M from what the mega teams spend and what most small market teams spend. The gap is even starting to grow between large market and mid-market teams.

It seems that people are taking notice. Over the last two days I’ve noticed three articles that touched on the small market vs large market issues in baseball. Two of the articles were specifically about the issues, while one unintentionally pointed out the advantage that large market teams have.

On Monday, Buster Olney wrote about MLB’s financial divide, and how it is creating concern. He pointed out how the Dodgers were able to sign Clayton Kershaw for $30 M per year, but the Braves are fighting to save money on Craig Kimbrel through arbitration, and running the risk of eventually not being able to afford him in a year or two. He also pointed out how the Rays have been considering moving David Price, how the Indians could eventually move Justin Masterson, and how the Reds let Shin-Soo Choo walk and could eventually do the same with Homer Bailey.

It’s one thing if you’re talking about the Rays and Pirates struggling to keep players. When you’ve got teams like the Braves struggling to keep players through the arbitration process, you know you have a problem.

In a similar article, Jeff Sullivan of FanGraphs wrote about the real market inefficiency in baseball. Sullivan’s article was another comparison between the “haves” and the “have-nots”. He really summed up the difference between the two groups with this summary of a player’s value.

If you think about it in the simplest terms possible, players are relatively cheap through their first six or seven years of team control. If they debut in their early 20s, that time runs out somewhere in the vicinity of 30. So when players start getting paid free-agent money, they’re usually getting worse, their peaks right behind them. And the best players demand long-term contracts, sometimes up to and exceeding ten years in length, and those have turned out pretty poorly in the past. You’d just pretty much always rather take a shot on a guy in his 20s than on a guy in his 30s.

When a team has more money, it can convince itself to spend it, and that’s practically beginning from an inefficient place. It might spend more on a “proven” player, or it might spend more to have a star player while the star is actively fading. When you have less money, you can’t afford to be anything but cold and objective, and you can’t afford so much to worry about labels like “proven” or “durable”.

Most players in free agency are a bad long-term investment. Those mega contracts to guys like Robinson Cano will work out in the first few years, and then they will look like a huge burden for the bulk of the contract. Big market teams can afford that burden, essentially paying more for the short-term production. Right now there’s a situation where small market teams can compete by focusing on young players, and not getting attached to established players. This means you’re going with an Andrew Lambo or Chris McGuiness, rather than Garrett Jones or Justin Morneau. The approach has worked for the Rays and Athletics for several years, and it is starting to pay off for the Pirates. But Sullivan brings up another point.

If everyone puts an appropriate premium on talented, cost-controlled youth, it’s going to be that much harder for smaller-market teams to exploit the competition.

What happens when big market teams realize that they can be like the Rays and win with young talent? What happens when these teams not only dominate the free agent market, but refuse to give up their young talent as well? Could we see the prices for arbitration players driven higher as money goes to the younger players? If that happens, then it could create a situation like Buster Olney described in Atlanta, where they wouldn’t even be able to afford to keep some of their top young players through their league-controlled years.

Finally, Ken Davidoff of the New York Post wrote about how the Pirates threw a wrench into the Yankees’ plans to sign Masahiro Tanaka and keep their payroll under $189 M. The Yankees planned on signing the top Japanese pitcher, by spending a ton of money on the posting fee, which didn’t count for luxury tax purposes. Frank Coonelly fought for changes to the posting system, and the system ended up being revised, to the point where any team that posted the max bid ($20 M) could sign Tanaka. What this means for the Yankees is that they now have to bid against other teams to sign Tanaka, and will have to pay more. That means they won’t be able to sign Tanaka and keep their payroll under $189 M, thus re-setting their luxury tax percentage.

Davidoff describes the “troubles” that face the Yankees, and it’s kind of comical when you look at it from a small market standpoint.

The Yankees, sore from a 2013 season in which they put up their worst winning percentage since 1992 and saw their attendance and television ratings plummet, aggressively signed free agents — most prominently Carlos Beltran, Jacoby Ellsbury and Brian McCann as well as re-signing Hiroki Kuroda — to put themselves in serious jeopardy of going over $189 million. Independent arbitrator Fredric Horowitz’s 162-game suspension of Alex Rodriguez restored the Yankees’ chances of financial salvation once more, but only if they don’t get Tanaka.

They’re at $170.058 million with 18 players plus A-Rod signed, and when you factor in the $11 million that must be included for benefits and $5 million for in-season call-ups, that leaves the Yankees with virtually no money to add a veteran reliever, let alone Tanaka. But if they somehow find a taker for Ichiro Suzuki and his $6.5 million, and if Brett Gardner and his $5.6 million salary end up elsewhere in a trade? Then they probably could have fit Tanaka and stayed below $189 million under the old rules. Not now.

To recap: on the Pirates side, fans are hoping that a top veteran pitcher returns, and maybe one big free agent could be added. On the Yankees side, they brought back their veteran pitcher, signed three of the top free agents, but they’re disappointed that they can’t afford the top pitcher on the market, plus a veteran reliever, without having to pay luxury tax.

Olney and Sullivan had good comparisons to illustrate the difference between the “haves” and the “have-nots”. But I think that summary by Davidoff unintentionally showed the difference between the two sides the best. Pretty much every small market team would be satisfied with one big free agent signing, or just keeping one of their most reliable starting pitchers. Most small market teams don’t see that happen. But when you’re a big market team, that’s just the norm.

Links and Notes

**The 2014 Prospect Guide is now available. You can purchase your copy here, and read about every prospect in the Pirates’ system. The book includes our top 50 prospects, as well as future potential ratings for every player.

**We have been releasing our top 20 prospects for the 2014 season, and this week we started the top 10. Today the countdown resumed with #9 – Luis Heredia.

**Winter Leagues: Polanco’s Hustle Not Enough in Escogido Loss

First Pitch

  • Kansas City Shuffle — that is how the Rays and Pirates and A’s will always compete.

    Whatever 80% of the league is doing, they will do the opposite (or should).

    Right now, FA’s are making insane money. Why? Everyone wants to sign them. So the Pirates and Rays go young (cheap).

    If the Yankees and Dodgers start operating like the Rays and Pirates, YES the cost of young talent will rise. BUT you can’t ignore the other side of the coin: the cost of FA’s would then fall accordingly. Suddenly the Matt Garzas (think “level B” free agents) become affordable. HOW TERRIBLE!

    Teams like NY and LA can’t do both. You can’t go with all young, homegrown talent and also spend $200M — it’s just not possible. All those young guys take up the roster spots of high dollar free agents.

    This is all pointless to worry about. The Yankees have gotten smarter over the last 5 years, but they’ve also proven that they can’t help but trade prospects and luxery tax penalties for a a team of “sure thing” verterans. They play in a big market, and with that comes big expectations. Going young is just too risky, and they don’t have the luxery of patience.

    • Well said Mr. Goodkat!

      …although I’m not sure the Yankees have gotten smarter. Check that statement in 2-3 years…..

      • I think the point that is being missed here is the impact these large contracts have on all other contracts, especially the ones for arbitration eligible players. The years of truly controlling players is shrinking rapidly due to the astronomical contracts that are being handed out. These pacts will impact Cole, Marte, Polanco, et al., in the years to come.

        In the not-to-distant future, the big market teams will still be paying the big bucks to the so-called stars, but they will be getting them when they are younger because the PBC, Tribe, Rays, etc., will not be able to afford more than 4 years of their own players.

        I don’t think any of us on this board is advocating throwing money around for the sake of it. We just want to see the team spend the money for that one missing piece or to keep the team together. Only time will tell if the FO stays true to their word. They were right to let Byrd, Morneau and Jones walk this offseason.

  • CalipariFan506
    January 22, 2014 1:23 pm

    Also for you guys to argue that big market teams can overcome bad contracts, you need to define big market. Because other than the Dodgers or Yankees nobody does that. Boston found a miracle team in LA to get them out from under crushing contracts even.

    Soriano destroyed the Cubs. Ichiro and Richie Sexson destroyed the Mariners, Cano will do the same now. Pujols and Hmilton are on their way to killing the Angels. Detroit couldn’t handle the Fielder contract and Texas won’t either. The Mets with Santana and Bay. I mean the list goes on and on and on. I see no end to teams overpaying for free agents like a lot of you guys can’t wait to see the Pirates do.

  • CalipariFan506
    January 22, 2014 1:19 pm

    I don’t think the Pirates didn’t offer Jones a one year deal because they are cheap. I think they did it because he stinks.

  • I understand few will agree with me especially among the Pirates’ fan, and you can certainly cite the fact that the greatest ability humans posses is to interpret new data to fit their pre-existing biases, but I read that Jeff Sullivan’s piece and see the relative ineffectiveness of a vast payroll.

    Jeff Sullivan found a relationship of 18% between payroll and wins, other economists found from the period from 1988 until the time Jeff Sullivan discussed an 18% relationship. So under varying systems of free agent compensation, and revenue sharing the link has been stable.

    More importantly note Jeff’s conclusion, an extra million was worth an extra 0.0008 of winning percentage. My preexisting bias is I do not believe that payroll is a significant advantage, or at least not as large as people assume, and I think these finding support my point. Additionally, how can the current system realistically be altered, everyone loves to cite the NFL, but fails to understand the local nature of baseball revenue and how a complete centralization would lead to perverse incentives.

    Furthermore, I find it odd to complain about the threat of big market teams investing in young talent when strict limits have been placed on draft and international spending.

    • Good points Andrew. Another fact people can overlook is how quickly a payroll can build up simply through the arbitration process. For example, if the Pirates paid Neil Walker’ second year of arbitration settlement figure of $5.75 MM to each of their eight starting position players and their five starting pitchers; and paid the remaining 12 players the Major League minimum their total payroll would exceed $80 MM! This shows the importance of the Pirates being able to compete with a majority of younger players whose abilities are improving, and foregoing the temptation of spending money on higher priced older players eligible for free agency and also suspect for declining skills.

  • I agree that the economic imbalance in baseball is out of control. I think something that gets under-reported is that this imbalance hurts the players, not the owners. Think of Football. Even the very worst teams have all types of sizable contracts. I heard someone say the other day that baseball gives 45% of it’s revenue to players, while NBA, NFL, NHL is closer to 50%.

    On a separate note, the out-of-control spending of the Yankees can’t be used as an excuse for the Pirates to do nothing. The Yankees have spent 500 million on Free Agents this offseason, while the Pirates have spent 5 million. The fact that they didn’t offer Burnett the Qualifying Offer is truly unforgivable, regardless of if he would have accepted it. It is certainly possible that Burnett only wants to play for the Pirates, but not at a below market rate. Think of yourself. If you were able to retire, but had an inkling to still work for your favorite firm, would you go work for them @ 50 cents on the dollar?

    On a similar note, I have trouble with the fact we didn’t bring back Garrett Jones, even if he does play at a replacement level. We always talk about how much 1.0 WAR is worth in a given year, but that is only in relation to the alternative. What if your alternative is not replacement level. Then even if Garrett Jones is 1.0 WAR (his five year average), that might be 1.7 if the group of losers who replace him is -.7. Suddenly, that 5 million doesn’t seem so crazy.

    Long story short (too late), the Pirates can’t be the Yankees. They can’t even be the Diamondbacks. But feeding Garrett Jones and A.J. Burnett market rate, one year contracts, would have been a worthwhile investment, when you consider the alternatives.

    • Agree on Burnett, but definitely not on Jones. The list of better moves they could and still can make before you get to “maybe we should have just re-upped GFJ” is really long. The Pirates would’ve had to pay Jones 5-5.5M in arbitration – and it’s worth noting that he signed with Miami for an AAV of 3.75, so even on the free market no one thought he was worth that salary.

      James Loney would ultimately sign for just 1.5-2M more and is 0.5-1 win better on average. OK that failed, but the trade market has plenty of options at 3.5M or less (Smoak, Davis, Moreland), and at least those guys all have upside. Those options are still in play. If the asking price never comes down and a trade for one of these guys is unworkable, then you’ve got Lambo and McGuiness, each of whom could very well put up 1 WAR production for minimum wage (and you can plug the unspent salary into the extension fund). If they don’t, well Gaby Sanchez was a competent, 1+ WAR regular not long ago, and you’re paying him already, so it’s worth giving it a try.

      And if Gaby isn’t up to the task, you’ve got the 5-5.5M you would have paid him available for a mid-season pickup, where impending free agents like Billy Butler, Michael Cuddyer, Adam LaRoche and Adam Lind may come available if their teams fall out of the race. Any of those guys could put up a win in a fraction of a season (well, maybe not LaRoche…).

      And if those options STILL don’t materialize…well then maybe it would have been a worthwhile investment to re-sign Jones.

      • Fair enough. I think the likely hood of two low profile minor leaguers, who have essentially never played in the Majors putting up 1.0 WAR at a position where most of the value is derived from offense is unlikely. In fact, being replacement level is unlikely. That is truly my overriding point. Not that I’m in love with Jones’s production, I’m not, just the alternatives really suck.

  • TonyPenaforHOF
    January 22, 2014 11:32 am

    Excellent article Tim. I read all the pieces you mentioned in your article but I didn’t put the correlation together. Now that you put sunlight on the issue it really stands out as a major problem for MLB.

    Hopefully the next Comish will address this in a fair way so all MLB teams can have a fair chance.

  • What a sad state of affairs the growing imbalanced economic system of baseball has become. This makes me sick that any team could sign a pitcher with no major league experience to a contract this large. (5th richest contract ever for a pitcher) I’d pass out steroids to my small market team to level the playing field. Complete joke of a system!

    • The very competitive nature of the game is ruined because America is applying the rules of our economy to this sport.

      Baseball is NOT in the same realm as so-called “free market” industries. In other sectors, this “free market” dictates success and failure in terms of market control, profit margin, scale of efficiencies, etc. Winners last, and losers declare bankruptcy. The winners proclaim, the “free-market” has spoken; wherein, really, much of the success has been due to favorable tax status, affects of lobbying for corporate largess, monopolistic practices, etc. See for instance, Freedom Industries’ total lack of fiduciary (community) responsibility for the disaster in WVA. Or, climate change, which is merely the result of externalized costs of production to the society , wherein the costs of carbon, gases, and pollution are NOT factored into every purchase of the product.

      On the other hand, baseball is a closed economic universe, meaning there is no external threat to the success of the sport. The sport exists of the same rules for all of the competing franchises.

      MLB is at its best when ALL of its franchises succeed, because each of them is absolutely necessary to the other 29 teams. Currently, it’s easy to see that NOT all of the franchises are succeeding, if one merely looks at playoff performance as a measure of success.

      EVERYONE knows the sport has been corrupted, but I believe few will point to the canard that is the so-called “free market” as the reason.

  • And Tanaka signs with the Yankees for $155 million. Yes, the system is broken.

    • Up front — I am a long-time Yankees fan — and I do not like the way the team currently does business. Additionally, I find the team very hard to root for…..okay, all of that is out there.

      Now….explain why the signing shows the system is broken…..if he signed for $140 million with Arizona or the Cubs, or whomever, would the system be working?

      Look, I agree in principal that the payroll differential is getting badly out of wack and that it may have negative impacts. On the other hand, I think the article and many of the excellent comments make the very valid point that free agency makes teams pay for players’ past performance….and that the consequences can be a disaster.

      2-3 years from now, the Yankees will be a total freaking train wreck of old, poorly performing players on enormous contracts — the Pirates will be a very competitive, relatively young team.

      Heck….tell me which team is going to win more games THIS year. Right now, I’d take the Pirates!

  • CalipariFan506
    January 22, 2014 9:09 am

    IMO the big market teams will always find a way to self district by spending the money available. Tying up aging players limits flexibility when these guys skills diminish and limits flexibility to replace them if they’re injured. That’s why the Yankees were stuck with Lyle Overbay or the Dodgers with Juan Uribe.

  • The baseball economic system is broken.

    But, how do you fix it? Lots and lots of ‘solutions’.

    Pretty soon, the Bucs aren’t even going to be able to keep their youngsters thru arbitration.

    Kinda almost makes you want to give up on baseball.

  • Yeah i was thinking about this. What if the Yankees had the best farm system, and could very well fill the team with a bunch of very good league minimum players?

    Would they let themselves do that? or to they have to be the YANKEES? i don’t think Cashman would just let 160 Mil go unspent, would he? He’d have to blow at least SOME of that on players he doesn’t need because that city would probably implode on itself.

    And could the Pirates get up to 100 Mil like media guys like D. Todd on 970 am are hammering on (and he says that he’s hammering on it. i’m not just calling him out randomly. he’d own up to hammering on it)? yes totally. but they tried to bring in the right players and they said no. People complain about payroll, but offer no solution. Or at least no solutions that the team didn’t already reportedly try. They were competative for Loney, had a bigger offer than the Padres for Josh Johnson, and are open to Burnett coming back. Could they have offered more for Loney and Johnson? sure. but at what point is it “taking advantage of the new tv money” and at what point is it “being purposefully inefficient just to add $20 mil to last year’s payroll”. It’s not all about the payroll itself. You want your assets to be tradable too.

    I guess they couldve in theory purposefully overpaid for loney so he had negative surplus value and then just pick up money in the deal to get value back.

    In short, the Pirates are still a “have not” in the scheme of baseball and shouldnt go to their allowable salary maximum just to go to their allowable salary maximum. Right deals, right players.

    • also, even if the pirates *did* get to 100 mil…

      that’s like… their peak. they COULD spend 100 mil. that’d be stretching it.

      the yankees and dodgers spend 189. but they COULD spend like 300. even if the pirates eeked out 100 million, it doesnt make anything any more fair.

    • Good point Jay, and great article Tim, which I want to chime in to agree with, and have advocated before.

      I am not the advanced matrix expert that many of you seem to be, but in this case, don’t really need to be.

      Can someone please name me three big contracts that have worked out well for the signing club? Just three?

      I can come up with Pujols first $100M contract, Miguel Cabrera’s contract was certainly fair, Barry Bonds with Giants, though Juiced, was a great value. I’m sure I have missed a couple, but not many.

      However, how easy is it to point out the dog’s, the horrible contracts? They just roll off the tongue. Rodriguez, Reyes, Heath Bell, Uggla, Upton (though, at least he is young and has a chance of redeeming last year), Pujols, Hamilton, Sabathia, Dunn, Crawford, Matsuzaka, Holliday, Eric Chavez, Neagle, Hampton, Ethier, Kemp, on and on and on, all the way back to Wayne Garland (haha). And I know I missed a bunch of them!

      Why do we want to fight to make these bad decisions. And they are really bad, doesn’t anyone remember 6-$60M for Jason Kendall?

      The point of this article is very valid and absolutely correct. The difference is growing too large for long term competitiveness. However, we need to watch what we wish for. The Yankees are a great example. I don’t want a 30 year old catcher for $80M, a truly great clutch 38 year old hitter who can hardly play the outfield for $42m and best of all a $140M, one year wonder of a center fielder who hasn’t even proven he can stay healthy. I really, really don’t want that. And neither should any of us.

      D. Todd, and other’s like him, simply want money spent to spend money. It is easy to spend other’s money, our president is presently doing a wonderful job. If my beloved Bucco’s can spend $100M and it makes sense, and making sense does not mean spending more than $21M on James Loney, then I think they can and will/might.

      But to those that continue to spend Nutting’s money just to spend it, the whine has gotten old, and articles like this make the point very well that what sense would it make anyway?

      Overspending on free agents is not the way to build a winner. Neither the Dodgers or the Yankees won the World Series last year. Here’s hoping they continue to overspend on soon-to-be over the hill vet’s, mostly to coddle to their fans/market.

      It may be a good way to make money, I honestly don’t know, but it is not the best way to build a championship team.

      • I think in the beginning of the offseason, it was easy to look through and see how they could efficiently and effectively spend the extra playoff revenue and TV money.

        I bet the pirates wished the payroll increased too, but only in the right way. The outbidding for Johnson, the competative offer for loney, the willingness to bring AJ back.

        Since they *say* that they’re willing to bring AJ back, that means they’re willing to add in the neighborhood of 10 mil. i’d rather them just go with the current guys than spend… idunno… 5 yrs 80 mil on Garza. They probably won’t need a “Garza” as soon as 2015 with all the young guys coming up. Sure makes the 2014 team better cuz Garza > Volquez. but he’s probably not what the team needs in 2015 16 17 and 18, on. AJ is not only good, but only a short contract.

  • Tim, the Sullivan article also made the point that you’ve made before, that limiting spending on international signings is particularly punitive for low revenue clubs. It’s really something that needs to be rethought in the next CBA.

    In theory, if the super-rich teams started managing their affairs more efficiently, then he demand side for free agents would diminish and their costs would go down accordingly, making them more affordable for smaller market teams. In reality, big markets have big egos and demand big moves, so I don’t think that doomsday is upon us.

    BTW, Tony Blengino at FanGraphs called the Volquez signing “potentially the best bargain free agent signing thus far this offseason.” Based on Volquez’s batted ball, K and BB rates, and projecting the move to PNC, he calculates EV’s “true talent” ERA to be 3.77. We’ll see, but if he gets anywhere close to that, it kind of reinforces Sullivan’s point. Some team is going to spend 8-10m more on a free agent arm like Garza or Santana than the Bucs did for Volquez, and they’ll have nothing to show for the premium they paid.

    • I think you’ve hit on part of the real problem for the Pirates under MLBs current economic system. The Pirates have never been and never will be big players on the free agent stage, and that’s fine–sabrmetric folks from Bill James forward have been saying, and rightly so, that trying to construct a winner strictly through free agency is a poor if not outright ruinous strategy. What the current CBA has done is eliminate the areas where the Pirates can compete by hamstringing the club’s ability to operate in international markets and by instituting a punitive slotting system. We won’t truly know the effects of those two changes for a few years yet, and I suspect they could be devastating for teams like the Bucs and Rays. It’s bad enough when you have to be almost mistake-free in the evaluation of current MLB players; when you have to be all but perfect in your evaluation of prospects as well, that’s one hell of a one-two punch to overcome.

  • Sullivan (and you) buried the lede in his piece:

    “the greatest market inefficiency of all is spending big money”