THE FINANCIAL FOLLY THAT IS MAJOR LEAGUE BASEBALL

Posted on Posted in Economics

In the year 2001, according to the U.S. Bureau of Labor Statistics, there were the fewest number of workdays lost to major strikes or lockouts since 1947. This represented an all-time low of 1.2 million in 20011 . The reasons for this can be summed up as a steady weakening of labor unions, a willingness of organizations to operate during strikes, tenuous economic conditions, and the scars remaining from the disastrous strikes of the 1980’s. The key event was the 1981 PATCO strike, in which President Reagan fired the striking air traffic controllers and replaced them. In one stroke, President Reagan changed the psychological landscape for collective bargaining in the United States. According to Rick Bank, director of the AFL-CIO’s Center for Collective Bargaining, “labor unions know that certain situations aren’t good ones to strike in.” 1 Most Americans are more concerned with job security in this economy than they are with economic gains. So what is going through the minds of the Major League Baseball Players Association and the Major League owners?
Major League Baseball has experienced eight work stoppages since 1972. And until both sides backed away from the brink of destruction, they were facing the following financial scenario. The players would lose their salary for the final weeks of the season. The owners would face an even bleaker scenario as the World Series would be wiped out for the second time in nine years and would most probably depress ticket sales in 2003.
The economic issues are revenue sharing, a luxury tax that would slow salary growth, and the expansion of the amateur draft to players around the world. The owner’s would like to increase shared local revenue from 20 percent to 50 percent. If it had been in place in 2001, the amount redirected from the high-revenue teams to the low-revenue clubs would have increased from $167 million to $298 million.2 The players on the other hand have proposed an increase to $228 million. The owners would also like to switch formulas, which currently give the largest percentage to the lowest revenue clubs, and redirect more revenue to the middle tier clubs. This would also take away additional money from the high-revenue teams. The luxury tax proposal would assess a 50 percent tax on the portions of payrolls above $98 million. The players want this threshold to be significantly higher. It is interesting that no one has mentioned arbitration, the ultimate salary booster.
The owners contend that they are losing money, what with attendance exhibiting a decidedly downward trend over the past few years and season ticket sales growth at what can only be termed as stagnant. What is with the fans? Is this not the “Great American Pastime”? The players and the owners may come back from the brink, but the fans may not! “The game, already in a steep decline and near contraction, is slowly dying.” “Attendance is down.” “Interest is nil.”3 Unlike other professional sports, baseball is controlled by the players and will not tolerate competitive balance. The National Football League has a salary cap, full revenue sharing, and an enviable competitive model. Take a look at who has played in the last three or four Super Bowls. It has been the Falcons, the Broncos, the Ravens, the Titans, the Rams, and the Patriots, to name a few. It is any wonder that the NFL is the most successful sports entertainment package in America? Is it also any wonder that the financial folly of baseball is grounded in the microeconomic theories of scarce resource allocation, absolute and comparative advantage, production possibilities and opportunity costs, market supply and demand, market equilibrium, price elasticity of demand, production costs, and market competition?
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