Silva’s contract, free agency, my general economic pessimism
The Silva contract has brought up again the question of whether any free agent signing is a bargain in a world where free agent contracts are ever-increasing. I’ll call this the Washburn Effect: today’s overpayment is tomorrow’s good deal. One of the arguments I’ve had here with Tom Tango is that his valuation of a contract’s worth is based on a formula that, to vastly oversimplify, goes
year N expected contribution * value of that contribution in the year N market
for each year of the deal. It assumes that salaries will continue to inflate as we’ve seen the last couple of years over the value of every deal, and so it hinges on whether you think that MLB revenues can continue to grow at 10% year over year for the foreseeable future. Many people believe they can, and I disagree with the certainty of those assumptions entirely and to a lesser extent, about what we should expect of the next few years.
I see two things I see stopping that escalation.
First, as we’ve argued many times here with different players, there’s often a similar skillset available for very little money. A team can sign Silva to a massive deal or find a reasonable facsimile on the minor league free agent market for $1m or so. That price isn’t increasing with the price of free agents. At the same time, we’re slowly seeing a replacement of more traditional major league front offices with smarter personnel who understand replacement value. They’re going to take the cheap option. If nothing else, that’s going to reduce the number of bidders for guys like Silva. Certainly, it doesn’t take many to keep the prices high, but even in the next few years we should start seeing the effects — and even ownership groups who don’t get it will start asking difficult questions about why they’re paying so much for so little. Just moving Texas from dumb to smart takes a huge spender on bad FAs (Chan Ho Park!) out of the market.
That may not have a huge effect, though. The larger is economic. Major league sports are entertainment, and while they have a loyal audience, in a larger sense they compete for dollars with movies, concerts, bowling alleys, nights on the town, and so on. And their sales of super-high-revenue luxury suites depends on the local corporate economy.
You can take your economic indicator of choice against MLB payroll or revenue in the post-collusion era and you’ll see they’re pretty tightly bound (I ran payroll against the price of the S&P 500 since 1989 and it came out at .86, which is amazing considering there are labor issues included). The error I see everyone making is that they’re looking at the last couple of years and seeing MLB developing new sources of revenue, especially in the web subscription money, and drawing a straight line out forever.
And that’s where I part ways. We can’t assume the economy’s going to go up, up, up. If it doesn’t, revenues don’t go up and payrolls don’t go up, and the whole model falls apart. I can’t think of any mature entertainment business – really, any major discretionary spending category – that can sustain 10% year over year growth through an economic downturn.
To our current situation specifically — we’re seeing the real estate market decline, severely so in many parts of the country. The immediate fall out’s been in the mortgage markets, affecting liquidity, credit, taking down hedge funds, and a huge increase in the number of foreclosures. Now, whether you think it’s all going to bottom out later this year and be hunky-dory from there out (it won’t) or what, you can already see some effects. People who feel less wealthy cut back on spending, and you can watch Applebee’s and Chili’s and Whateveree’s revenues taking the hit already.
I’m no economist, but if national real estate values are headed back to 2000 levels, however slowly, it’s going to be painful and tough, and between people spending less and the banking industry trying to ride the whole thing out, baseball’s revenues won’t be going up 10% year over year the whole time.
And if that doesn’t happen, today’s overpriced contract becomes tomorrow’s overpriced contract.
I don’t think the economy’s going to do well over the next couple of years. Now, you’re free to disagree, but none of us can know for certain the direction it’ll take. Maybe we’ll all be happily serving new robot overlords in a money-free economy by the time Silva’s contract expires. If it does, and salaries stagnate, today’s free agent mistakes are still going to look bad. If the free agent market gets more rational, they look even worse.
Arguing that Silva’s deal is okay because the market’s going to continue to go up forever is at least making a set of assumptions that aren’t tenable, and certainly aren’t knowable with that degree of confidence. Washburn’s contract may look decent now, in the same way getting into a house in a booming market in 2004 might have. That doesn’t mean that deal didn’t involve risk — or that you’d be right to not take that risk again in 2007.