Friday, November 18, 2011

An Econ 101 Explanation Why a Cap On Draft Spending is a Bad Idea

There is some good news on the Baseball Labor front, from all reports it appears that an agreement has been reached and will be announced on Monday however not all the news was good. One of the major discussion points in this year's negotiation was over the amateur player draft and the amount of money that was being spent there.

Bud Selig and a group of owners were looking to control the amount spent on amatuer players which had increased quite a bit in recent years as teams realized that they can get high quality talent at a reduced price compared to free agency.

To slow the increased spending imposing a hard slotting system to replace the current soft slotting system was proposed. This was a very bad idea and luckily it seems that this bullet has been dodged in favor of a luxury tax system on the draft. It will work similarly to the way the payroll tax system works, after a certain amount that a team spends on the draft they will have to pay a tax for each additional dollar above that threshold.

While this is better than the proposed hard slotting it is still a bad idea for baseball.

Here is a quick econ 101 explanation as to why this will shrink the pool of amateur talent and hurt the future level of talent in baseball.

The owners are looking to restrict the money that they spend acquiring talent, which I certainly understand from a business perspective but you have to realize that the draft already is a pretty good mechanism in lowering the payouts to amateur players below what it would be in a open market.

Look no further than what international free agents are able to command compared to their state side counterparts. With multiple teams bidding on their talents relatively raw 16 year olds they are able to get signing bonuses larger than players drafted from the United States and Canada who have the ability to only negotiate with one team.

Major League Baseball came to an agreement to use its monopsonistic power (one buyer of labor) to implement a draft to capture some of the gains that the players used to get. This isn't a completely evil thing because they also agreed to implement it in a way that let bad teams have access to the best talent first in a way to try to bring about parity.

If we were to simplify the current system and diagram it you would get something like this:

In this the upward sloping line labeled "S" represents the supply of baseball talent, when you pay a higher price you get higher quality talent. On the flip side is the baseball team's demand for talent, a high prices they only want a few of the very best guys but as the price drops they are willing to "buy" more talent.

This is a very simplified model but it does a good job describing the basics of what goes on. So next we will look at what happens when the "tax" is implemented into our system.

The basics remain the same but that dotted line is the "tax" which acts as a ceiling to what the baseball teams are allowed to spend on talent. If the "tax" is put into place above or at the equilibrium point there is no change to what happened before but that is unlikely to happen because the idea is to lower the amount spent so it is likely to be put below the previous amount spent on talent.

At this price the quality of talent supplied is lower than in the previous scenario as players who have other options such as going to college or playing a different sport do otherwise. The other likely outcome (if this isn't stopped in the CBA) is that teams will shift their spending from America to the international markets because teams will still have a demand for high quality players but less able to get what they demand from the draft.

This change isn't going to cause any fewer players to play baseball but like all price ceilings it will create a shortage, the shortage in this case will just happen to be in American and Canadian talent.

For those that love baseball and want to see the highest caliber players play the new draft rules have to make you cringe. I hope that this tax doesn't turn into a cap in the future.

Become a fan on Facebook and follow the The Crazy Crabbers on twitter there is lots of good stuff going on there. Sign up for our free newsletter!

No comments:

Post a Comment