Some Economic Lockout Thoughts Six Weeks In

So far, things have gone about how I predicted. Let's hope that continues.

When the MLB owners locked out the MLBPA in early December, the timeline I figured the negotiations would take would be a silent December and then tepid talks in early January followed by them heating up around the middle of the month. My guess at the time was that there wouldn’t be any games missed and very little, if any, spring training missed. I guessed a deal would be reached around February 1, which was ample time to get the rest of the free agents who would sign signed and then start camp roughly on time.

When there were no discussions throughout any of December, it was kind of weird because it went with what I was expecting, but to not hear any news put some doubt in my mind. And then when they didn’t talk at all to start the new year, and reports were that nothing was on the books, it put a lot of doubt in my mind. When it was reported that the two sides would talk again this week, it was a relief, not just to me, but it put my faith back in an on-time start.

Today’s talks went…well they happened. I’m not going to get in to what has been reported that they discussed because I think getting together is as important as anything right now and it sounds like there was no movement on much other than maybe the minimum salary.

The big thing with the talks is that it sounded like the players believed they had made the last proposal while the owners believed they were the last to the table. Which meant that each side thought it was the other’s responsibility to start things up again. You can have a…ahem…urination battle all you want but at some point someone has to step up and be the adult in the room and recognize what they’re sacrificing by drawing their lines in the sand and not letting anything happen.

Ultimately what it’s about for the players is to continue to get paid. They want their share of the revenue and they want their salaries to continue to rise. That’s not unreasonable and quite basic. I want to look at four points from the players to achieve that.

Teams Need to Try

One of them is for teams to at least try to be competitive. Why do they want more teams to try to win? Because then more teams will spend money and if more teams are spending money, more players are getting paid.

Over the past few seasons, baseball’s middle class has taken a hit. Some teams have come right out and said it while others have showed it with examples, but the general discourse here is that it doesn’t make sense to pay eight figures for a player who has shown they can be fine and help a team but not be a difference-maker when they can use a young player for dirt cheap who can provide similar results or at least close enough for their money. So you get guys like Mike Moustakas coming off a three-year period where he hit .275/.329/.496 having to settle for a one-year deal in March (that was in 2018, of course).

The general viewpoint in baseball is that if you’re not going to win enough to compete for a playoff spot, why win at all? There’s no reason to spend money on a product that will get you to 77 wins and be 10 or more games out of a playoff spot at the end. All you’ve accomplished there is that you’ve worsened your draft position without any benefit of even one additional home playoff game. So if a team isn’t prepared to win 85+ games, generally what they do is they figure out how to rid themselves of salaries and then don’t care if they win 55 games.

From a business perspective, it makes sense. And I think it would be a much more accepted position if two things happened. One, if there was a budget in place that allowed for spending that money saved when the team starts to win again. By all accounts, that generally doesn’t happen. And two, and maybe this should have been number one, if the tanking (or rebuilding, whatever you want to call it) was actually guaranteed to work. People point to the Astros and look at it as a sure thing. But it isn’t. Having the high draft picks helps quite a bit and having additional to spend later helps if it’s actually spent, but there’s no guarantee that a team becomes a winner and if they don’t, boy does it take fans some time to buy back in.

So what’s the answer? One of two things needs to happen that are related but not the same. Teams either need to be incentivized more to win or de-incentivized to lose. The owners want to expand the postseason to 14 teams and they want that to make more money. But the players see it as additional teams being involved in the race. I wrote on Royals Review last week that the average six-seed since 1995 had 87 wins and the average seven-seed had 84. That’s obviously if the playoffs expanded. In that time, eight teams would have made the playoffs with a record of .500 or worse. Would the prospect of making the playoffs make the threshold for a team’s projections enough lower to cut the number of teams tanking in half? Maybe.

But I look at the de-incentivizing losing as a better solution. I don’t think it’s fair to base this off payroll or losses individually or even one season. Look at the 2018 Orioles, for example. They went 47-115, but I’m not actually sure they were tanking. They went into the year with Manny Machado, Adam Jones, Mark Trumbo, Jonathan Schoop, Alex Cobb, Kevin Gasuman, Dylan Bundy and Brad Brach. I’m not sure they were ever a real candidate to win 90 games, but they weren’t trying to tank cheaply. They shouldn’t be punished for that. But since then, they’ve lost 108 and 110 games in the last two full seasons and I’d bet a large sum of money they’d have lost 100+ in 2020 if there were 162 games.

I don’t know what the point is, but somewhere, I believe, teams need to be punished for that kind of losing consecutively. Maybe it’s cutting off international spending money, maybe it’s losing draft picks or dropping spots in the draft that will then ultimately decrease their draft pool. I like the idea of a draft lottery for the first handful of picks and then reverse draft order from there. So the first, let’s say, five picks are part of a lottery from the five worst teams (there’ll be a caveat in my idea, but hang tight). Then pick six is the best non-playoff team and the last pick for the playoff teams is the sixth-worst team in baseball.

Where the exception comes in is if a team has lost 100 games or more for two seasons, they can’t pick in the top two. And if they’ve lost 100 games or more for three seasons, they can’t be in the lottery. That gives teams a chance to have a bad year or even two before they’re truly punished for not trying. Is it enough? I don’t know, but it’s worth a shot.

Revenue Sharing Needs to be Spent

This one didn’t make sense to me on the surface at first, but as soon as I sat down and thought about it for a few minutes, I realized how much sense it makes, though I don’t think eliminating it entirely is fair. The argument the players are making is that teams receiving revenue sharing - Brewers, Diamondbacks, Guardians, Mariners, Marlins, Orioles, Pirates, Rays, Reds, Rockies, Royals, Tigers and Twins - aren’t all spending that money appropriately on payroll.

With teams receiving a good chunk of money from the national television deals and their own television deals (even if the bubble has burst a bit), it’s easy to see why they maybe aren’t spending that revenue sharing money. From my perspective, though, I don’t want them to eliminate that because I think there are teams that could benefit from it. But I believe it needs to be monitored and if teams aren’t using that money within a multi-year window, then it needs to be removed. Tigers site, Bless You Boys, wrote a bit on this last month and I thought it was exceptionally well done.

I’m not sure I agree with the solution put forward, but it’s certainly interesting. But like the penalties for losing, I don’t think anyone should be penalized based on one season. Look at the 2022 Royals as an example. They currently have seven players under contract and seven more who are arbitration-eligible. Even if all 14 are on the roster, they have 12 other spots that are allotted for young players who are pre-arbitration. In some ways, sure, that’s the problem, but when your pre-arb players are key contributors like Brady Singer, Daniel Lynch, Carlos Hernandez, Kris Bubic, Kyle Isbel, Bobby Witt Jr., Nick Pratto, MJ Melendez and others, it’s hard to see how differently the Royals should be approaching this season. I don’t think teams should have to spend money just for the sake of spending it, but over a three- or four-year period, you can find teams that are pocketing that money.

The Competitive Balance Tax Threshold Needs to Bump Up

I believe this is going to be one of the biggest sticking points, even though it should be one of the easiest to clear up. The argument the players are making is that the luxury tax has worked as a salary cap far too often, when in reality it should serve as a soft cap. The idea behind it when it was first implemented was to stop teams like the Yankees from spending so much more than any other team. The problem is partially listed above. The Yankees have stopped (and most teams have really), but the other teams haven’t made up the difference in payroll to balance it out.

In 2021, the tax was set at $210 million and there were varying levels of tax on going over. It’s a lot, but here’s what the landing page on MLB.com says:

A club exceeding the Competitive Balance Tax threshold for the first time must pay a 20 percent tax on all overages. A club exceeding the threshold for a second consecutive season will see that figure rise to 30 percent, and three or more straight seasons of exceeding the threshold comes with a 50 percent luxury tax. If a club dips below the luxury tax threshold for a season, the penalty level is reset. So, a club that exceeds the threshold for two straight seasons but then drops below that level would be back at 20 percent the next time it exceeds the threshold.

Clubs that exceed the threshold by $20 million to $40 million are also subject to a 12 percent surtax. Meanwhile, those who exceed it by more than $40 million are taxed at a 42.5 percent rate the first time and a 45 percent rate if they exceed it by more than $40 million again the following year(s).

Beginning in 2018, clubs that are $40 million or more above the threshold shall have their highest selection in the next Rule 4 Draft moved back 10 places unless the pick falls in the top six. In that case, the team will have its second-highest selection moved back 10 places instead.

So a team with a $215 million payroll going after the threshold for the first time would pay an extra $1 million for the $5 million they went over. But a team with a $275 million payroll for a third straight season would pay nearly $51 million extra in the tax. It’s convoluted and, ultimately, the semantics don’t matter, but it’s easy to see why teams are afraid to go over it. And again, if other teams were making up the difference on the other end, I don’t think the players would be so adamant about raising this threshold.

I guess this is where things get to the point of the B, Bargaining, in the CBA. The owners originally made a proposal dropping the threshold but also put in for a minimum salary. The players responded with asking for it to be raised to $240 million (maybe $245 million, I’ve seen both) and the owners responded with $214 million in their original discussions. This seems to be a pretty easy negotiation if they want to make the tax rise by $5 million every year of the new CBA (which will likely be for five years). They can start it $220 million and it’ll be at $240 million by the last season. Two of the five years will be tilted to what the players asked for with two of the five more toward the owner proposal and the third year right in the middle.

But there are also questions about the punishment. According to Cot’s, only the Yankees, Mets and Dodgers are currently projected to exceed the most recent threshold of $210 million. There are still enough free agents out there that it seems possible and maybe even probable that the Padres and Red Sox could join them. According to Spotrac, only the Dodgers and Phillies exceeded the tax in 2021. The Yankees, Astros and Cubs did in 2020. The Red Sox, Cubs and Yankees did in 2019. And the Red Sox and Nationals did in 2018. So that’s seven out of the 30 teams in four seasons with four of the seven only exceeding that number once.

I understand what the purpose of this threshold was and I even agree with it as someone who follows a lower revenue team so closely, but I also believe it’s become a hindrance for putting the best players on the field. I don’t think raising this a reasonable amount (and the graduated increases seem like they could work) along with forcing teams to actually spend the money they’re gifted by the higher revenue teams is a bad idea.

Getting to Free Agency

The current system, I believe, makes more sense in theory than in practice. A player has three seasons where the team controls their salary and then three seasons where an arbiter can potentially control their salary and then they hit free agency. The problem, of course, is gaming the system. Let’s use our very own favorite prospect, Witt, for this scenario. The Royals, under the most recent CBA, could start the season with him in the big leagues and have him for six full seasons of 162 games. Or they can keep him in AAA for about three weeks, get him for 140 games in 2022 and then six more seasons of 162 games. He’d have four arbitration seasons rather than three, so that helps some, but he hits free agency a whole year older and we talked above about those players.

Is it smart for teams to hold players down? Absolutely. As a fan, I struggle with what to root for because it’s silly that the rules allow it, but shouldn’t the teams do what they can to keep their teams the most competitive? I’m telling you, it’s a constant back and forth in my brain on this. But the players rightfully are fighting this. To be completely honest, I don’t know what the answer is. No matter what the system is, teams will likely find a way to game it unless you go to an age-based free agency. But even that has its big issues.

The players proposed reducing service time by a year but maintaining the three arbitration years. So that ends up being five years of control with two of them pre-arb. I think that sort of makes some sense, but even if it was agreed to, teams would still control players for almost six seasons. I think it would just add to the gaming of service time.

To me, the easiest route here is to ensure pre-arb players get paid more, so that means either raising the minimum salary, paying for performance or both. The most recent minimum salary is $570,500, which is about 13.7 percent of the average salary. In 1992, the minimum salary was $109,000. That was about 10 percent of the league average salary. So that tells me that the minimum salary is actually fairer than I realized. Still, I’d like to see players actually paid for their performance. Mike Trout made roughly $2 million to hit .311/.403/.561 from 2012 to 2014. He’s maybe not the best example because he got paid massively in an extension, but not everyone gets to that huge deal.

Look at a player like, oh I don’t know, Whit Merrifield. He hit .298/.348/.454 from 2017 to 2019 and made about $2 million but because he was an older player when he debuted, he “only” cashed in to the tune of up to about $27 million through 2023. I know it’s hard to look at these numbers and think they deserve sympathy, but it’s all relative to the revenues in the league. A player like Merrifield should have been able to access additional salary for reaching certain thresholds. Now, my problem is that I don’t know how you determine that. Is it based on WAR? Is it based on counting stats? Is it based on a vote at the end of the year? Teams would struggle to budget for it, but I do believe there is a benefit to having some performance-based earnings for players who are at the whim of their team to determine their salary.

Maybe that’s where the unused revenue sharing money goes. I don’t know, just a thought. If they are able to earn more through that, then it probably lessens the impact and desire to get players to free agency more. Again, this is much more complicated than a single newsletter can make it out to be, so there are many layers, but it’s a very interesting discussion.

---

I’m not breaking any ground in saying this, but I believe the owners will need to give more ground in this negotiation than they have recently and probably want to. The last few negotiations have been very owner-friendly, and that’s part of why this is so contentious right now. The players need a win. It doesn’t have to be an obvious knockout to the owners, but they need a 60/40 type win in this. The good news is that the owners will continue to be billionaires when it’s all said and done, so their fortune might get dinged but only a bit. They need to figure this out and get on the field when it’s time. Fans will eventually come back, but why add that to their plate to have to figure out how to get them back?