Baseball’s New Labor Deal Is Bad for Small-Market Teams? I Don’t Think So.

The stadium scene.
Dec. 8 2011 2:03 PM

Hooray for the Rays

Baseball’s new labor deal is great for small-market teams. Why is everyone saying the opposite?

Bud Selig.
Bud Selig pushed hard for a luxury tax during the recent labor negotiations.

Photograph by Patrick McDermott/Getty Images.

Last week, Major League Baseball’s players union approved the sport’s latest collective-bargaining agreement. To lock down five more years of labor peace, players and owners agreed to some big changes (the addition of a second wild card team per league) and some small ones (“All Players will be subject to a policy governing the use of Social Media”). But one change in particular has preoccupied baseball’s chattering class: For the first time, the sport will essentially regulate the price of its incoming amateur players, imposing a “luxury tax” and other penalties on all spending over a certain baseline figure. This approach has been blasted by baseball analysts from Buster Olney to Jonah Keri as a disaster for small-market clubs. Dave Cameron of FanGraphs summed up both the objection and the outrage in a piece titled “Did a Steinbrenner Write the New CBA?”: “Congratulations, Major League Baseball, you just screwed every team that doesn’t have the capability of running out a $100+ million payroll.”

Bud Selig has pushed hard for the new system, which would normally be reason enough to oppose it. But this is a rare instance where the commissioner has it right and his critics have it wrong. In fact, the CBA’s opponents can be easily refuted by a recent piece of baseball scholarship. I’m talking, of course, about a little book called Moneyball.

Before we turn to Michael Lewis and Brad Pitt, though, we need to sketch baseball’s old system. In 1965, the sport implemented an amateur draft with two main goals: distributing talent evenly and tamping down costs. It worked pretty well on both counts—at least until Scott Boras got involved. During the 1980s, baseball’s most-prominent agent chipped away at the draft structure. Then, in 1991, he found his jackhammer. After the Yankees selected a high-school pitcher named Brien Taylor, Boras gained leverage by enrolling his client in a junior college. Boras eventually got Taylor an unprecedented $1.55 million, though not before a scout allegedly representing the commissioner’s office showed up at the player’s North Carolina trailer home and warned him, “You’re making a big mistake.”

Over the next decade, draft bonuses inched higher and higher. So, in 2000, baseball rolled out a method of cost control only slightly less absurd than the one it tried on Taylor: the slot system. Every year, the commissioner’s office would issue “recommendations” for what each draft pick should receive—a $4 million bonus for the first pick, $3.25 million for the second, and so on. Since this slotting wasn’t binding, Selig’s only shot at enforcing it was a blend of secrecy and wrist-slapping. Baseball hosted “negotiating seminars” for the teams’ scouting directors; when those directors still went “over slot,” someone called and yelled at them. Selig also applied pressure to the owners themselves, with better results. There were rumors of forfeited chances to host the All-Star Game, and of fines levied on other dubious grounds. When a scouting director called Selig and explained why he needed to go pay more for a player, the commissioner would call the team’s owner to badmouth the scouting director. Then he’d yell at the owner, too.

The whole thing felt very high school. It also didn’t work. While baseball was pushing its slot recommendations, the best amateur athletes were circulating bonus figures and saying: This is what it’ll take to keep me out of junior college or off the football field. Many of those players dropped to large-market teams like the Yankees and Red Sox, who happily ignored their slots in order to sign some of the draft’s top talent. At the same time, small-market teams resorted to drafting cheaper, less-talented players. One of the best examples came in 2007, when the Pittsburgh Pirates, who had the fourth pick in the draft (and who hadn’t made the playoffs since 1992), passed on the Scott Boras-represented super-prospect Matt Wieters. The Pirates picked Daniel Moskos instead, signing him for $3.5 million less than Wieters and issuing a press release touting their new bargain as someone “ranked by Baseball America as the fifth-best pitcher available.” (Remember, they drafted Moskos with the fourth pick overall.)

And yet the crazy thing about the slot system was that it drastically undervalued amateur talent. After all, the same year the Pirates settled for Moskos, they also threw $3.5 million at a major-league pitcher so lousy he couldn’t even stay in the team’s rotation. Young players like Wieters, who remained cheap for their first few seasons, offered a far better value than mediocre veterans. In fact, the smart small-market play wasn’t to avoid expensive draft bonuses—it was to load up on them.

The Kansas City Royals took full advantage of this strategy. In 2006, the Royals, who hadn’t made the playoffs since 1985, hired a new general manager named Dayton Moore. In his job interview, Moore promised team owner David Glass the best farm system in baseball. Glass, to his credit, gave Moore the cash to build it. The Royals had previously skimped on the draft, just like everything else. (A favorite tactic: draft a mediocre college senior and offer him a flat $1,000.) Under Moore, however, the Royals started spending like drunken Steinbrenners. They splurged on first-round picks (and Boras clients) like Mike Moustakas ($4 million) and Eric Hosmer ($6 million). They also targeted over-slot players like Wil Myers, a third-rounder who wanted to play college baseball—until the Royals offered him $2 million, or five times the approximately $400,000 baseball recommended.

All told, the Royals invested $45.2 million in draft bonuses from 2007 to 2011, an outlay that ranked third in baseball (and remains impressive even after you adjust for their consistently high draft order). But the strategy paid off. This year, Baseball America declared the Royals’ farm system the best in the game—the best, in fact, of the last two decades. The team’s prospects, by one rough measure, project to be worth $245 million.

So, $45 million in, $245 million out. When baseball’s pundits complain that the new CBA has knee-capped small-market teams, this is precisely what they’re talking about. Under the new rules, slotting is back, except baseball now defines a “signing bonus pool” for each team—the total amount of money a franchise can spend on its picks in the first 10 rounds. (In the latter rounds, any bonus of more than $100,000 also must be deducted from this pool.) But that's not the only change: If you exceed the amount of that recommended rookie signing pool, you will now have to pay a luxury tax. A team that outspends its pool by 10 percent, for example, will pay a tax of 100 percent for every dollar it goes over. In that circumstance, the team would also forfeit a future first- and second-round pick. Recall that, under the old system, the Royals spent around 500 percent of baseball's recommendation to sign Wil Myers (and he wasn't the only player they splurged on that year). The new penalties make a strategy built on such outsized bonuses suicidal.*

It seems, then, that the Royals’ grand experiment has come to an end. But here’s the thing—that experiment was going to end soon, anyway. This is where Moneyball comes in. In that book’s preface, Michael Lewis praised Billy Beane and the Oakland A’s for “looking for inefficiencies in the game”—for valuing on-base percentage because everyone else was undervaluing it. When the rest of baseball caught on, Beane turned to another underappreciated skill: defense. When baseball caught on to that, he turned to … well, Beane doesn’t seem to know what’s next, and the A’s have struggled. On the promotional circuit for the Moneyball movie, the A’s general manager claimed that baseball is drifting “back to an efficient market—albeit one with some random events that don’t offer perfect efficiency—where whatever you spend, that’s where you’re going to finish.”

For a few years, going over slot in the draft had been the new on-base percentage. But Billy Beane is right: It’s ludicrous to expect that, in this age of efficient baseball markets, that inefficiency would’ve remained exploitable for teams like Kansas City. It’s even more ludicrous to think that once this inefficiency was recognized, the small-market Royals would continue outspending every other major-league team.

You could make the case that, even before baseball’s new labor deal, the Royals’ window was closing. In 2007, the Pirates got themselves a new general manager and set about obliterating their slot recommendations. On the big-market side of the ledger, the Yankees, Red Sox, and Tigers never really stopped funneling money into the draft. The Mets are giving big draft spending a shot, as are the Washington Nationals, the Texas Rangers, the Toronto Blue Jays, and (presumably) Theo Epstein’s Chicago Cubs. Imagine how many teams—and, crucially, given the old slot system, how many owners—would have joined the party when the Royals or the Pirates actually made the playoffs? Imagine how high Boras could have driven the bonus demands then.

The new CBA prevents this scenario from playing out. And for that, small-market teams should be happy, not sad. One day, when Eric Hosmer has become the Yankees’ new first baseman, and when the Royals have returned to the top of the draft, they’ll be able pick the best amateur players while knowing they can afford them. The Royals will never acquire talent at the rate they did from 2007 to 2011. But neither will anyone else. Indeed, the Red Sox and Yankees will have to wait at the back of the line while the worst teams—like their brethren in the NBA and the NFL, which use similar draft setups—get the best talent.

Now, this doesn’t mean baseball’s new CBA is perfect. It offers a prime example of a sports union selling out its future members. It makes it harder to lure multisport amateurs to the diamond. (These fears, too, may be overstated; we’ll see for many players whether football was about desire or leverage.) It applies tight strictures to the signing of international players—another area where small-market teams (including my favorite team, the Cincinnati Reds) have invested wisely. But it will also create a new set of inefficiencies. A safe bet—and Royals fans should take heart here, since spending lots on players doesn’t guarantee you’ll spend lots on good players—is that scouting will become more important. But there will be other inefficiencies as well. A few teams will exploit them, the others will catch up, and the game will start over again.

Correction, Dec. 9, 2011: This article originally mischaracterized Major League Baseball’s new rules on amateur draft spending. MLB will not tell teams how much to spend on individual picks. Rather, each team will have a “signing bonus pool” that it can divvy up on every player taken in the first 10 rounds. (Return to the corrected paragraph.)

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