The Reserve Clause, Public Funding, and Social Cohesion

The following is a long discussion between myself and Ted McClelland, spurred by his Slate article on baseball player salaries and social cohesion. Mr. McClelland graciously offered to conduct an e-mail debate on the question, and to allow me to post the results of this debate on the blog. My initial questions are in bold; his responses and counter-questions are italicized.

1. Can you establish a link between public financing of stadiums and the end of the reserve clause in baseball?

The era of publicly stadiums didn’t begin with free agency, but free agency made those stadiums more common, more expensive and more elaborate.

“Since the 1970s, changes in professional sports have led to an increase in publicly funded stadiums. Growing costs in the form of player free agency and changes in the tax code left team owners looking for ways to increase revenues in order to maintain their returns on their investments in professional sports team franchises. One of the most effective ways to increase revenues is to invest in a grand new stadium with luxury boxes and elaborate concessions.” — “Public Funding of Sports Stadiums,” Sarah Wilhelm, Ph.D., Center For Public Policy & Administration, University of Utah

By 1988, 80 percent of professional sports stadiums were publicly funded. I find public financing so obnoxious because it increases inequality by transferring wealth from the masses, with their stagnant incomes, to players and owners. If you pay taxes, you pay baseball salaries, whether you buy a ticket or not. As Dr. Wilhelm points out, as salaries increase, so do baseball’s demands on the public purse. Marlins Stadium will cost Miami-Dade County $2.4 billion by the time all the bonds are paid off. (Comerica Park, where Verlander pitches, was 38 percent publicly funded, with a tax on rental cars, hotels, and revenue from Indian casinos. I’m sure $115 million could have gone a long way toward rebuilding Detroit, but stars need a stage.)

Dennis Coates, a professor at the University of Maryland, Baltimore County, found that pro sports actually reduce a city’s per capita income, by withdrawing entertainment dollars from local businesses and transferring it to athletes and owners who don’t live in the area, and don’t spend much of their enormous salaries and profits: “money paid to players does not circulate as widely or abundantly as it would were it paid to people with less wealth and more attachment to the city.” So the public is helping to pay the salaries of people who don’t return it to the local economy — a double fleecing.

As a Chicagoan, I’m happy that Mayor Emanuel told the Cubs to pay for their $500 million renovation of Wrigley Field themselves.

I happily agree with Mr. McClelland’s contempt for public funding of sports arenas.  The question here concerns the causal link between player salaries and public funding.  Mr. McClelland cites a 2008 CPPA study as authoritative in this regard, although the above quote is the only mention of free agency in the study, which focuses rather on the effects of franchise mobility on public funding, and on whether public funding of stadiums ever results in economic benefits.  The Wilhelm study, in turn, cites a 1998 Public Affairs paper by Mark Bernstein , which mentions free agency as one of several motivations (along with changes in tax law) for owners to seek public funding.  Notably, Mr. Bernstein and Dr. Wilhelm focus on franchise mobility, rather than free agency, as the most important cause for owners’ success in pursuing public funding.  In a long section on possible solutions to the problem, Mr. Bernstein suggests legislative remedies that would restrict franchise mobility, and that would reduce the legal authority of municipalities to pay for public stadiums, as potential solutions to the problem, but does not suggest eliminating free agency or recreating the reserve clause.

Moreover, actual empirical studies suggest that the connection between public financing and free agency is quite murky.  As this study suggests , public funding for stadiums exceeded private funding by the early 1960s, well before the end of the reserve clause and the advent of free agency. Additionally, the National Football League, with a more restrictive free agency regime, has managed to acquire a larger percentage of public money than Major League Baseball. The public-private distribution since 1975 is not linear, with public funding taking up a huge chunk of the (relatively small) stadium budget in the ten years after the fall of the reserve clause, a much smaller percentage of the (much larger) construction budget in the 1990s, and a very small percentage of the construction budget in the past five years.

I detail this a bit more in my response below, but bottom line it is very difficult to find a clear link between player salaries and the construction of publicly financed stadiums.  Major North American sports have become wildly more profitable since the 1970s, for a variety of reasons, most of which have little to do with public financing. Owners seek additional revenue, regardless of how much they’re paying their employees, but the rules of bargaining help determine how the much larger pie is distributed between players and owners.

If Mr. McClelland wants to declare that free agency causes public financing, that’s fine; if he wants to convince anyone, he needs to show it in some fashion. This means accounting for the facts that public financing preceded free agency, that public financing has increased across sports despite alternative free agency structures, and that the mix of public-private financing has varied considerably even within the free agency era.

2. Can you explain why creating rules that disadvantage labor in salary negotiations with management nevertheless improve the position of labor in society?

First of all, I think it’s a mistake to think of baseball players as “labor” in the same sense as, say, autoworkers. Even though they perform a physical task, and are members of a union, their compensation packages resemble those of highly-paid executives more than hourly workers. They are at-will employees who can be fired as soon as their skills decline. They don’t receive salary increases according to seniority, but according to performance. And they don’t labor for hourly wages, but are covered by guaranteed contracts. Like CEOs with golden parachutes, they are often paid millions after they’re let go. Only the lowest-paid workers have their wages set by a collective bargaining agreement. Most baseball players bargain individually with teams, through talent agents. The end of the reserve clause did nothing to help the labor movement, because baseball players aren’t part of the labor movement. They’re specialized entertainers who have benefited from a trend toward higher wages for skilled workers. In 2008, the Boston Herald asked members of the Red Sox how they were voting in the upcoming election. Only one, Gabe Kapler, was a Democrat. You won’t find attitudes like that in a union shop.

I would expect that anyone paid to write about American sports (and American labor) would take the trouble to learn something about his subject.  The members of the MLBPA are not, it is true, exactly like auto-workers, but then there are *many* unionized professions that are also not exactly like auto-workers. I’ll assume that the “physical task” comment means… well, frankly I have no idea what it means.

Baseball players are not “at will” employees, and they cannot be “fired as soon as their skills decline.” One would think that Mr. McClelland would have taken note of the contradiction between “at will employees,” “covered be guaranteed contracts,” and “often paid millions after they’re let go,” but it can be very difficult for to remember what you wrote just a sentence ago.

Like many unionized workers, baseball players increase in salary through a combination of performance and seniority. Mike Trout, the best player in baseball last year, will make $510000 this year, while Vernon Wells will earn $21 million. This is because, of course, Wells has more seniority than Trout, and was able to negotiate a guaranteed contract at the height of his skills that also covered what his decline years.

Baseball players (at whatever level of seniority) enjoy significant employment protections won by the MLBPA.  These include union protection from unreasonable termination, arbitration of workplace related disputes, input into the requirements of employment (number of games, for example), a pension plan, and input into the basic structure of the league. These are exactly the sort of concessions that collective bargaining is supposed to win, and are precisely the policies that most unions pursue.

Baseball’s minimum wage has increased from $16000 in 1975 to $480000 in 2012; roughly 7 times as high in inflation adjusted terms. Baseball’s average salary has risen more quickly, but this should serve as explanation that the beneficiaries of the end of the reserve clause aren’t simply the most wealthy, most skilled players, but also those playing for the league minimum. Unfortunately, the MLBPA does not provide any extensive protection for minor league baseball players, who do not enjoy the same rights as major leaguers.  Arguably, however, minor league baseball players are still far better off than their counterparts in NCAA football and basketball, who effectively play for free.

And yes, baseball players are specialized entertainers, who have created a labor union in order to protect their interests and maximize their share of revenue in the industry in which they work. In this they are no different from any other group of works which seeks to band together in order to bargain collectively and protect its interests.

3. Can you explain how Mike Ilitch receiving my ticket money, rather than Justin Verlander, improves social cohesion in the United States?

You are making an assumption, which I don’t share, that the pie would be the exact same size if players’ salaries hadn’t increased twenty-fold, and owners would have claimed all the spoils. There are forms of revenue that didn’t exist in Hank Aaron’s day, such as cable television, that have contributed to players’ rising salaries. But as Dr. Wilhelm pointed out, there are other forms of revenue that have been necessitated by rising salaries, such as luxury boxes in big, publicly funded stadiums. The point is, players earning less money does not necessarily mean owners keeping more. High salaries are “laid off” on the public.

This largely recapitulates the answer to question number one; to believe that player salaries are being paid by the public, you need to establish a causal link between free agency and public funding. To be clear, I’m stunned to learn that anyone thinks that, in the absence of being forced to pay high salaries, Major League Baseball owners would forego pursuit of additional revenues.  Owners (and universities) build luxury suites not because they have to pay exorbitant player salaries, but rather because they want to maximize revenue and franchise value. The Oregon Ducks do not pay their players exorbitant salaries, or really any salaries at all; nevertheless, Autzen Stadium added 32 luxury boxes in 2002.  The Yum Center, home of the 2013 NCAA Champion Louisville Cardinals, houses 75 luxury suites. Fans of the Nebraska Cornhuskers, another team which does not suffer the embarrassment of having to pay its players anything at all, can enjoy 101 luxury suites catering to various levels of civic and business achievement.

Major League Baseball owners would pursue public funds for the construction of luxury boxes even if the reserve clause still allowed them to effectively enslave their players. I know this because a) MLB owners sought public funds before the reserve clause ended, b) MLB owners denied public funds nevertheless build stadiums with luxury boxes, in order to maximize revenue, c) owners of sports franchises with alternative (and far more owner-favorable) structures of free agency also pursue public funds for the construction of stadiums, and d) operators of sports franchises that do not pay their players at all also pursue public funds for the construction of stadiums.

The owners don’t need public money, but they sure want it, and they’ll make every effort to coerce municipalities into coughing up the cash, regardless of how much they’re spending in player salaries.  The real tragedy of public funding has nothing to do with Justin Verlander’s salary, the payment of which, given the current prospects of the Detroit Tigers, may be an entirely sensible investment. The tragedy, rather, is that the Tigers (and the Yankees, and all of the other teams that receive public funding for stadiums) almost certainly would have raised private money to build those arenas, because it is economically rational for them to do so. The New York Jets, New York Giants, New York Yankees, Dallas Cowboys, and San Francisco Giants all invested heavily in their arenas, and all continue to invest heavily in player salaries. It’s almost as if owners would, if required to, build extremely lucrative stadiums and pay for good players.

I suppose I can’t complain about a baseball player earning all the money he can in a free market. But Major League Baseball does not operate as a free marketplace. It’s a legal monopoly. Baseball’s anti-trust exemption limits the number of teams that can compete. Suppose that were overturned, and anyone were free to field a major league baseball team. The fan base would be diluted, and profits would drop. At the same time, the number of roster spots would expand, driving down wages.

I can only say that it is exceedingly surprising to see a sports writer make this argument, given that the NFL and NBA (neither of which enjoy anti-trust exemptions) nevertheless maintain a league structure quite similar to that of Major League Baseball.  The anti-trust exemption has little to do with MLB’s ability to prevent me from fielding my own baseball team, or even founding my own league; rather, the extremely sketchy business prospects of such an endeavor (likely to lead to a fate not dissimilar from that of the USFL), deters myself and others from such an investment. To be sure, the anti-trust exemption has an effect on the ability of the national sports leagues to compete; both the NFL and the NBA faced dangerous competition from rivals in the 1960s and 1970s, whereas MLB has managed to squelch such competition pre-emptively.  But given the rough symmetry in size between the four major North American sports, it’s obviously not the case that entrepreneurs can simply create new teams, “dilute” the fan base, and cause profits to drop.

Similarly, it’s hardly obvious that an expansion of the number of roster spots would drive down wages; historically, the creation of competing leagues has driven wages up, as was the case with the USFL, the WHA, and with the Federal League. The increase in roster spots increases demand for athletic talent, which is good for players. The creation of additional franchises does result in some dilution of the fan base, but it also increases the size of the pie, as these new franchises operate in heretofore underserved areas.

Since we eliminated the reserve clause, a free market check that suppressed players’ salaries, it’s only fair that we also eliminate the anti-trust exemption and public funding for stadiums — marketplace interferences that boost salaries. Would I resent Justin Verlander less if he earned his money on the free market, without any help from the Detroiters he so vastly out-earns? Maybe. But if he did, he sure wouldn’t be making $27.5 million a year.

The reserve clause was not, in any sense of the term, a “free market check,” although it was indeed a tool designed to suppress player salaries. I’m rather flummoxed at the notion that a rule precluding an employee from shopping his services to a variety of different employers within the industry could be conceived of as a “free market check.” I do hope that Mr. McClelland can further illuminate me with regards to this claim.

Moreover, I daresay that eliminating the anti-trust exemption would benefit the MLBPA immensely, which is why MLBPA litigation has consistently challenged the exemption. See this analysis on the effects of eliminating the exemption; short answer is that player bargaining power would increase, although the biggest changes would happen at the minor league level.

Now you will answer these three questions:
1. Explain how the elimination of baseball’s reserve clause benefited the American labor movement.

Unions represent their members; while we would hope that the victories of a particular union would benefit American labor as a whole, it’s often difficult to draw direct causal lines between the achievements of one union and the success of the broader movement.  However, given that the MLBPA has been one of the most successful unions in America since 1975, I think its history and experiences can be quite relevant for thinking about the general history of American labor during that period. For example, like many unions the MLBPA is blamed by the public for labor disruption, even when that disruption is brought about by the activities of ownership.  Like many unions (teachers, public employees) the MLBPA is demonized by journalists who are essentially ignorant of the economics of the industries in question. Like many unions, the MLBPA faces difficulties mobilizing its own membership, although it’s worth pointing out that the MLBPA has done a much better job than its counterparts in football and basketball.

2. How do you justify using public funds to pay for stadiums that contribute to the salaries of athletes and the profits of owners?

I don’t; I strongly oppose public funding of sports arenas.

3. Over the past 30 years, the Top 0.1 percent of American earners (those earning over $1.7 million a year) have tripled their share of the national income, from 3 percent to 10 percent. Do you consider this trend desirable, or even morally justifiable?

I consider it neither desirable nor morally justifiable.

I also like cheese; this fact has as much relevance for the debate over baseball player salaries as the answers to the above two questions. Final point; I agree to conduct this debate without resort to ad hominem attacks against Mr. McClelland, and I do thank him for taking the time to respond to my queries.