SAMUEL STONE—This past winter, Major League Baseball’s (MLB) offseason “hot stove”—traditionally characterized by a flurry of lucrative free agent signings surrounding December’s Winter Meetings—was uncharacteristically cold. As spring training approached and an unprecedented number of high-profile free agents remained unsigned, the Major League Baseball Players Association (MLBPA) held its own spring training camp for the unsigned players for the first time since 1995, and some began to speculate and even accuse team owners of colluding against the free agents.
Collusion has been prevalent throughout MLB history; the most notable and egregious violation occurred in the 1980s and resulted in a series arbitral decisions that found the owners to have colluded to illegally suppress the free agent market for three consecutive years and forced them to pay $434 million in damages to the MLBPA. At first glance, it may appear that the owners similarly colluded to suppress the free agent market this past offseason. However, a combination of factors and recent trends—three of which are discussed below—offer more likely explanations.
- MLB’s Competitive Balance Tax and the Upcoming Free Agent Class
Under the current collective bargaining agreement (CBA), a team that exceeds a predetermined player payroll threshold—set at $197 million for 2018—is subject to a luxury tax on each dollar above that threshold. The rate of the luxury tax increases depending on the number of consecutive seasons that a club exceeds the threshold: 20% for the first season, 30% for the second consecutive season, and 50% for the third consecutive season and beyond. However, once a team’s payroll falls below the threshold for a season, their luxury tax rate resets.
These provisions have created a strong incentive for traditionally high-spending teams to reduce their payrolls below the luxury tax threshold for the 2018 season, so that they can reset their luxury tax rate in advance of next year’s “so-called greatest free-agent class ever”—which is expected to be headlined by some of the sport’s premiere young talent, such as Bryce Harper and Manny Machado. For example, the New York Yankees are on pace to remain below the luxury tax threshold this season for the first time since the luxury tax system was put in place in 2003.
Accordingly, there are fewer teams willing to exceed the luxury tax threshold for the 2018 season, and thus there was less demand for high-cost, long-term free agent contracts over the offseason.
- MLB’s Race to the Bottom
The past two World Series Champions—the Houston Astros and the Chicago Cubs—demonstrate a shift in philosophy and highlight baseball’s “race to the bottom,” which is characterized by teams’ willingness to lose in the present in pursuit of a championship in the future. Entering the 2018 season, it appears as though over one-third of teams are trying to win the top draft pick rather than the World Series.
Further incentivizing “tanking” is the combination of lucrative media contracts, MLB’s revenue sharing program, and each team’s receipt of a $50 million payout from MLB’s sale of BAMTech to Disney. These revenue streams allow teams to sacrifice short-term ticket sales and remain profitable, thus eliminating motivation to field a competitive team in the short-term.
Simply put, more teams are attempting to save their resources to build for the future, rather spend money on free agents, and thus there is less demand for high-cost, long-term free agent contracts.
- Smarter Teams and an Outdated Labor System
Under the current CBA, MLB players cannot become free agents until they have played six seasons in the major leagues—a system which teams have exploited to extend team control to nearly seven seasons by keeping top prospects in the minor leagues. This system was first agreed to during MLB’s “Steroid Era,” when many players reached their productive peaks in their early-30s and continued to play at high levels throughout their 30s by using illegal performance-enhancing drugs. However, most players make it into the major leagues at the age of 23 or 24, and analytics show that players now peak in their mid-to-late 20s, before most are eligible to become free agents.
By the time the 2018 regular season began, all of the top free agents had signed multimillion dollar contracts; however, many of these deals involved lower salaries and shorter lengths than what have come to be expected. For example, after hitting a franchise-record 38 home runs last season and declining a one-year/$17.4 million qualifying offer prior to the offseason, Mike Moustakas wound up re-signing with the Kansas City Royals on a one-year deal worth only $6.5 million. Similarly, Jake Arrieta ultimately reached a three-year/$75 million deal with the Philadelphia Phillies, well after spring training had begun and well short of the six-year deal he initially sought.
As front offices become more intelligent and economical in the post-Moneyball era, teams are becoming less willing to expend resources on increasingly high-paying, long-term contracts for players whose performance they expect to decrease through their 30s. In 2017, 50 players made at least $17.5 million—roughly half of which collectively made $528 million and combined for a negative 10.7 wins above replacement (WAR), including Carl Crawford, who received $21.9 million in the final year of his seven-year, $142 million contract and could not even make a major league roster.
Conclusion
While owner collusion is likely not the cause of the free agent market shift, if the past offseason is an indication of baseball’s “broken” economic system, then the owners and the MLBPA have a lot to negotiate in order to maintain the longest stretch of labor peace in American professional sports following the expiration of the CBA in 2021.
