John Henry v. Jeff Loria: Pick a Side

As John pointed out today, if we look at the NFL and their grim horizon it makes one thing starkly clear for Major League Baseball: the owners are not at war with the MLBPA. Owners and players are, broadly speaking, satisfied with the way things are. They aren’t discussing salary caps or anything else that would raise hackles and threaten a showdown. I don’t think the reason owners aren’t fighting players is ‘harmony’, though, I think the reason is that the ownership clique is at war with itself.

Boston Red Sox owner John Henry recently revealed in an interview that he was fined half a million dollars in 2009 by Major League Baseball for making disparaging comments about revenue sharing and it’s impact on the game. For shame. That was, of course, before the leaked documents proved the immense profits that Jeff Loria had been reaping in Florida from revenue sharing and public subsidies. That’s no excuse. Perhaps ‘knowing what they know now’ another owner wouldn’t be punished for making similar statements, or maybe they still would. Rob Iracane at the Big League Stew defended the right of MLB to censure their members, writing “The other owners are just trying to protect this good thing they got going; revenue sharing makes 30 owners very rich and it keeps the sport competitive.” I disagree. As it turns out, revenue sharing may be leading to the same pernicious anti-competitive market forces that baseball has warred with since the very beginning. And seeing what happened to Henry, is any other owner likely to take the risk of speaking out? Since Bud Selig lacks the authority to fine bloggers for exercising their constitutionally protected freedom of speed, I’ll lay it on thick here.

I made mention in a post this fall of the fact that for most teams, the most profitable business model is to strip down, give in and milk revenue sharing and the MLB general fund. It should come as no great surprise, since all of this has been known forever, to find proof that certain MLB teams were – in fact – taking advantage of this opportunity. True, many MLB owners don’t seem to care about profits (they care about winning) – but for those that do, nothing has changed recently in the underlying financials. Forbes magazine publishes estimates of profitability of baseball franchises every spring (I’m eagerly awaiting The Business of Baseball 2011), and had estimated profits for the Marlins at the top of the league before anything was leaked. MLB fined Henry because they wanted this hushed up.

The fact is, it has always been a problem for baseball that what is good for the game (competition, balance) isn’t necessarily smart for an individual owner. A number of innovations in the MLB are the direct result of trying to fix this problem. Wealthy teams were able to abuse minor league free-agency, hence we have the draft. It was once smart to sell budding stars for cash, turning some franchises into farm teams – hence we have restrictions on cash in trades. All of these things were bad for the game, especially for fans of the Senators or Philadelphia A’s. Intrinsically it isn’t that much different from the Black Sox of 1919, except that it is the team owners that are forfeiting for money. That kind of thing was common in baseball before 1919 – MLB fixed it with draconian punishments, and now with salaries so large that no betting syndicate can compete.

Revenue sharing was supposed to address the problem. On (flawed) principle that all owners want to win, presumably taxing rich teams to give to the poor teams (no strings attached) would allow them to spend more on player development and player retention, while simultaneously dragging teams like the Yankees down to earth. As any economist worth his salt will tell you, whenever you’re designing a policy the first things you need to watch for are false assumptions and perverse incentives. Revenue sharing in baseball has both: The perverse incentive that spending less and losing more saves you money and ensures a fatter check from MLB & the false assumption that all owners want to win above all else. Even Jeff Loria might want a championship more than $40 million in profit, but I certainly don’t think he wants to win 78 games rather than 71 more than $40 million in profit. MLB revenue sharing gives small market clubs a better ability to compete but it does nothing to give them an incentive to compete, and that is why it needs to be reformed or abolished.

What could be done? That much is simple, getting the MLB to take any sort of action will be tough.  I am sure that behind closed doors, owners are applying pressure on one another to spend.  Maybe that does explain the Royals signing of Jeff Francoeur as Jonah Keri hypothesized, but that is not enough.  Unless what the owners really want is a fair and equitable distribution of profits rather than true competitive balance.   To fix the system, to improve competition, the prescription is simple and long-discussed.  Keep the luxury tax, make the teams with the largest revenues pay into the pot. Dragging the Yankees of the world down, or at least making them think twice about the contract they’re offering to Cliff Lee is not bad for the game. What we need to change is how the payments go out. I should not simply be the case that lower revenues, fewer wins or lower payroll invariably means a fatter check. As opposed to setting a ‘salary cap’ we should set a salary baseline (and they can haggle over the number however they want) and pay small-market teams more from revenue sharing the closer they are to the baseline. Let’s say the baseline is $60 million. Give the biggest checks to the teams sitting right at $00 million, phase it out as their payroll rises above that. Phase it out as payroll falls below it too, so teams at $30 million get squat – same as teams with a $90 million payroll. Some might say that is a de facto cap, I disagree. It’s also a heck of a lot better than the system we have now, which actively discourages small-market teams from making the investments necessary to win.