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David Price and the economics of baseball inflation

Scott Tong Dec 2, 2015
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By now, any reasonable sports fan has seen the headline: David Price — $217 million. Welcome to the Major League Baseball arms race, in this case a race for a left arm that throws a fastball 95 mph. The Boston Red Sox are the winning bidder.

All of which raises the question of how inflated baseball salaries really are.

To geek out on sports inflation, it’s useful to look at the concept of money supply. Really. The more money in any economic system, the higher prices want to go. And baseball teams have more money than ever; the average club is worth $1.2 billion, according to Forbes.

“The biggest reason has basically been these television contracts,” said analytics researcher Jesse Wolfersberger, who writes for Hardball Times. He said TV stations pay so much to teams because advertisers pay so much to stations.

“In live sports, people don’t skip the commercials,” Wolfersberger said. “So a whole bunch of money is getting funneled into sports networks.”

By one estimate, in the last dozen years, baseball salaries have inflated 60 percent. But team revenues have gone up 120 percent. So all this baseball money supply is chasing a few select men who stand on a hill and throw. Preferably lefties.

“Every market, there’s supply and demand considerations,” said Patrick Rishe, director of sports business at Washington University in St. Louis and founder of the research firm Sportsimpacts. “But a top-flight, left-handed starter is in short supply. Most of us are not as in short supply in terms of how unique we are to our employers.”

The average baseball player salary is reportedly 66 times the average American household income. And the next big contract for the next David Price will be more inflated than the last.

Is there no price stability? Is Janet Yellen listening?

Actually, there is something in the baseball market that holds down rising paychecks: a luxury cap that taxes high-spending clubs.

“If there was not a luxury cap, David Price would be earning more money, I would assume,” said sports economist Robert Baumann at College of the Holy Cross. “And so it’s stopping teams from paying even larger salaries.”

This year that luxury cap gives teams an incentive to pay its players $189 million or less every year. Still, as the late Yogi Berra put it, salaries seems to be rising so fast, “a nickel ain’t worth a dime anymore.”

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