Normative Narratives

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Monday Morning QB: The Tanaka Effect

The subject of this blog is Japanese pitcher Masahiro Tanaka. The MLB pitching market this off-season has been non-existent, as teams looking for top-notch pitching wait to see if Tanaka is an available option. The issue surrounding Tanaka’s potential availability is a proposed rule change for the “posting fee” a MLB team has to pay its Japanese counterpart for the rights to negotiate with a player (original article):

Japanese pitcher Masahiro Tanaka’s baseball future was thrown into flux Thursday when the president of the Tohoku Rakuten Golden Eagles told a newspaper that the team might not make the prized starter available to major league teams as a free agent this winter.

Yozo Tachibana told Sponichi that the Golden Eagles might refrain from making Tanaka available through the posting process. Under a proposed system, major league teams would submit maximum bids of $20 million for rights to negotiate with Tanaka, and Tanaka would be free to sign with the club of his choosing among those that meet the threshold.

Previously, major league teams would submit bids and the club with the highest offer would receive exclusive rights to negotiate with the player.

The proposed rules would result in a significantly lower payout to the posting club — in this case, Rakuten — while giving Tanaka a wider range of teams in the bidding. According to reports out of Japan, 11 of Nippon Baseball’s 12 teams agreed to the $20 million maximum fee and the proposed system, while Rakuten was the dissenter.

Officials from MLB and its players’ association are hoping to get Tanaka’s situation resolved as quickly as possible, because his status could have an impact on Matt GarzaErvin SantanaUbaldo Jimenez and other top free agents who might have to wait in line to see how the market for their services shakes out.

Lets consider how this rule change might affect all parties involved:

The Nippon (Japanese) Baseball Team:

As the article clearly states, under proposed rule changes, the posting fee would be capped at $20 million dollars. While multiple teams could post this $20 million dollar fee, only the team which successfully signs the player pays the fee.

$20 million would be a substantial decrease in revenue for the Japanese ball club. Comparable free agents Daisuke Matsuzaka ($51.1 million) and Yu Darvish ($51.7 million) commanded much higher posting fees. The lower posting fee may make the Japanese club reconsider letting their best player go; for $50 million they will likely give up our best player, for $20 million they may not.

The Free Agent:

The financial benefits go to the player in question. The player will command a bigger contract under the proposed system for two reasons:

1) Competition: Under the old system, there was no competition from other clubs once a posting fee was accepted by the Japanese club. The only two options for the Japanese pitcher would be to either sign with the MLB team or reject the offer and return to the Japanese team. Under proposed rule changes, multiple teams will have the right to make offers, and the player can negotiate with any team that makes the posting fee.

For a player in high demand (such as Tanaka), this will bid-up the price of the player as teams compete for their services.

2) Total Cost: Teams generally have an amount (or range) they are willing to spend in order to sign a player. When it comes to Japanese players, this total included both the posting fee paid to the team and the contract signed by the player. With less money now going to the Japanese club, this frees up more money for the clubs to offer the player.

MLB Teams:

As stated before, MLB teams will likely have to offer a larger contract to highly desired Japanese free agents, as they will have to bid against one another. There is another small caveat that should be mentioned here, regarding teams that are trying to get below the luxury tax threshold.

As it currently stands, the posting fee is not factored into the teams payroll and therefore is not counted against the luxury tax threshold. Therefore, a Japanese player is even more attractive to a team that is near the threshold, as it can theoretically sign a higher caliber player while taking less of a payroll hit. This is part of the reason why a team like the New York Yankees is very interested in signing a player like Tanaka.

If the rules are changed, more of the cost of the player will be reflected in his contract, and therefore count as part of a teams payroll / luxury tax burden.

Other Free Agents: 

Often times, players must wait until the most sought-after free agent at a specific position is signed before they start to receive offers. This top free agent “sets the market”, and once they are signed, other players at that position receive offers from teams that could not sign that most sought-after player.

This is likely what we are seeing with the market for pitching this off-season. While many big name players like Robinson Cano, Jacoby Ellsbury, and Brian McCann have signed lucrative contracts, big name pitchers such as Matt Garza and Ubaldo Jimenez have not. Once the Tanaka situation is resolved (one way or another), expect teams to more aggressively pursue the other available free agent pitchers.

MLB Fans:

Fans may bear the greatest cost of the proposed rule change, if they are deprived of the opportunity to see Tanaka pitch in MLB games.

I do not see this as a likely scenario, but it is something the Tohoku Rakuten Golden Eagles are threatening if the new rule is passed.

Update: Tanaka-claus is coming to town!

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Transparency Thursday: Is There Anything More American Than Baseball?

Baseball is America’s pastime. Despite the NFLs meteoric rise as America’s most popular sport, and the global expansion of basketball, baseball remains uniquely American in more ways than most people generally realize.

For one, baseball is “Americas Pastime” because it has been around longer than football. The exact origins of baseball are debated, but historians agree that it has existed since the early-mid 19th century. In a way, American and Baseball grew up together, and will be forever intertwined. The dog days of summer, hot dogs and cold beer, and watching a baseball game have become an enduring image of American culture. The image of the hard working American also has parallels to baseball players, whose 162 game schedule is unrivaled by any other major sport.

The following analysis is much less nostalgic and much more economical. It is inspired by the fast-approaching beginning of the 2013 MLB season, and a recent report by Forbes which states that the average value of MLB baseball teams rose by 23% last year, the “biggest year-over-year change in valuation ever calculated by Forbes magazine”.

“In its report, Forbes, which has been tracking the league’s finances since 1998, revealed that the money that all teams made from the $450 million sale of the Montreal Expos in 2006 was invested in hedge funds that are now worth more than $1 billion.

“The value of a team used to be about a team itself,” Forbes executive editor Michael Ozanian said in a phone interview with “Then it shifted to the stadium value and then to the television deals, and now it’s more about what’s not on the field at all.”

Is there any other sport that parallels the U.S. economy so? I think not. Both represent capitalism in their purest forms. America is one of the strongest pro-market advocates of all the world powers. MLB has the most free market-driven amongst major sports.

In baseball, there is no salary cap, and competition is protected through a redistributive luxury tax system. In the U.S., as in baseball, the open market determines someone’s wages, and poorer parties are compensated by redistribution of wealth to help ensure equality (who does this better, the U.S. or MLB, is open to debate). Other major sport’s wages are also determined by market forces, but are influenced in general by salary caps, which distort market values.

The MLBPA is the strongest of all the players unions. Strong unions, believe it or not, used to be a bastion of American wealth. The MLBPA was perhaps too strong, to the point where regular steroid threatened the integrity of the game. Just like in America, vested interests continue to hold sway until the system is “brought to its knees”, and only then is real reform discussed (in baseball it is PED testing, in the American economy financial and tax reform).

Baseball as a sport exemplifies American ideals, and as a business mirrors the U.S. economy. Teams increased value represents not an increase in popularity of the sport, but savvy off field investments by teams.

How would you feel if your team lost lots of money in the financial market and it affected the on-the-field product? We already saw this to a certain extent with the Wilpon-Madoff debacle, but most people assumed this was an isolated issue—the recent Forbes report suggests perhaps all teams are more vulnerable to financial market shocks than we may realize.

But restricting team’s investment opportunities would be decidedly un-American. Perhaps MLB should put a limit on the amount a team can cut it’s payroll from year to year, ensuring that off-the-field investments do not affect the product a team puts on the field?

Most people will not care about this issue unless it affects them directly—out of sight out of mind. Mets fans were outraged that their team’s payroll took a hit when the Wilpon’s lost money in the financial market. I would also not be surprised if eventually we find out the Marlins salary-dump was somehow linked to losses not directly related to baseball activities.

Perhaps investment in financial markets is an unstoppable force, and that any entity that has a large amount of capital—including major sports organizations—will naturally be drawn to it. I do not know if the commissioner’s office has the power to regulate how owners invest their profits even if it wanted to.

Banks have to have a certain amount of reserve cash to back up their assets, known as a reserve requirement. Perhaps the commissioner’s office should institute a similar policy to ensure that financial market fluctuations do not affect the integrity of the game. Or should the system stay as it is, and address teams financial woes on a case-by-case basis as it currently does ?(such as the Dodgers MLB managed bankruptcy)

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