Whether this strategy is shown to be brilliant or foolish, it will be copied. It'll be the Wimpy Hamburger theory ...
"For example, if consumer prices rise only 1 percent a year through 2029, in the final year of Scherzer’s contract, his $15 million paycheck will be worth $12.9 million in today’s dollars. But if inflation averages 4 percent in that span, it will be worth only $8.3 million."
The idea that Scherzer has made a bet against inflation is unbelievably absurd. On the downdside, only $8.3 million?? And this years after he has retired??? Only in the alternate universe of professional sports salaries would this be considered a bad deal.
The idea that Scherzer has made a bet against inflation is unbelievably absurd. On the downdside, only $8.3 million?? And this years after he has retired??? Only in the alternate universe of professional sports salaries would this be considered a bad deal.
1
I don't know why anyone makes so much money.
Why don't they pay players a flat salary - say $ 500,000 a year
and then add or deduct from that salary depending on how they do that season.
Why don't they pay players a flat salary - say $ 500,000 a year
and then add or deduct from that salary depending on how they do that season.
2
I'm willing to pay $100 to park, see a game, eat, and have a couple beers. Most of that $100 already goes to the owners. Do you want the owners to get more?
3
That laughter you hear is from every agent and professional athlete in the world. They consider half a mil nothing more than chump change.
According to Forbes, in 2014, rapper-entrepreneur Dr. Dre took home $680 million after taxes; actor Robert Downey Jr., $75 million; and McKesson CEO, John Hammergren, $131 million.
I guess one way to look at this astronomical contract is that at $15 million per year, Scherzer will be in the 39.6% federal income tax bracket. That's $5.94 million more each year for entitlements and war-mongering. Not to mention, an additional $217K into medicare!
1
These huge salaries are the reason I hate professional sports, and have lost all interest in them. Too much money has ruined the spirit of these things we call "games".
I will stick with college sports.
I will stick with college sports.
2
Oh that's an improvement. Supporting the free educational of thousands of neanderthals so that one or two might make the pros. Not to mention the obscene profits these so-called "schools" are making by being sports factories. I would love to see college sports or at least televised college sports go away.
2
Truly laughable that the commenters here seem so much more incensed about a baseball players salary than they are about the obscenity of salaries for people like Jamie Dimon of J.P. Morgan or Lloyd Blankfein of Goldman Sachs.
1
It would be inordinately difficult for me to care less about baseball or this contract. However, it strikes me that this is just an advertising expense, couched in salary terms.
Good marketing is always going to be expensive to reach a national market.
Good marketing is always going to be expensive to reach a national market.
1
The Nationals are not taking an "implicit bet" on high inflation, nor is Scherzer doing the reverse. Each party is *exposed* to inflation, but they are not betting on it per se. Inflation is rightly out of the scope of the contract. Either party is welcome to hedge its inflation / rate exposure with interest rate derivatives, which is the risk averse thing to do.
7
I remain fascinated by the MLB practice of signing guaranteed long-term contracts for huge sums rather than contracts based on performance and ability to play. How did that ever start? And such contracts fly in the face of the much-hyped idea of moneyball.
1
Yeah.I'm with you.When I worked ( retired) my employment was based on performance.Bring it in or you're out! What fascinates me even more is how did these bozos get so much money since these 'deals' are evidence of dumb business men.It'll never change but it would be thrilling to see a performance based contract someday.
How can 'a more reasonable price' and '$15 million a year' exist in the same article?
It's absurd. Period.
It's absurd. Period.
8
It sounds like the team ownership is expecting ever-increasing media revenue. Will it go up in the future, almost certainly. Will it go up as fast as the various franchise owners expect? - It may well finally reach the breaking point.
1
Was this really a rational economic decision on the part of the Lerner's?
To me it sounds more like a case of eat, drink, and be merry, for tomorrow we shall die.
To me it sounds more like a case of eat, drink, and be merry, for tomorrow we shall die.
1
The history of long term high price contracts in not particulary favorable. The significant injury rate most specifacaly for pitchers who are considered to have had a good game if they pitch 7 innings makes this contract much too generous.
Baseball salaries are a profound obscenity. Big-screen TV is the tent that houses the traveling circus of sport and other amusements for the masses. Ads provide the bounty to pay the bloated salaries even of journeymen far below the exalted stature of a Scherzer (one was just signed to a one-year contract for $8 million).
A $10.10 minimum wage works out to $21,000 a year on a 40-hour, 52-week basis. The $8 million player "works" from the third week of Feb. through the first week of October (with additional pay for any post-season play). For each of the 32.6 weeks of the season, his pay amounts to $245,399. His hours playing (or in reserve or injured), practicing or conditioning may top 40; travel, regional to cross-country, will be required once or twice a week for what equals half the season. At any rate, on a 40-hour a week basis, his hourly wage is approximately $6,135. At 60 hours, it drops to $4,090.
$4,090. $10.10
Do professional athletes deserve to be paid well? Yes! The best, extraordinarily well? Yes! Do other entertainers deserve to be paid well? Yes! The best, again, extraordinarily well? Yes!
But $4,090 an hour? For a third-or-fourth level player whose name isn't likely known outside his home team's fans.?
It's been common to measure top level corporate salaries as a multiple of lowest-level employees -- to gauge inequity (and avarice). Why not here?
Ironically, doesn't Joe Fan subsidize the player bonanzas via fat TV contracts with MLB and teams?
A $10.10 minimum wage works out to $21,000 a year on a 40-hour, 52-week basis. The $8 million player "works" from the third week of Feb. through the first week of October (with additional pay for any post-season play). For each of the 32.6 weeks of the season, his pay amounts to $245,399. His hours playing (or in reserve or injured), practicing or conditioning may top 40; travel, regional to cross-country, will be required once or twice a week for what equals half the season. At any rate, on a 40-hour a week basis, his hourly wage is approximately $6,135. At 60 hours, it drops to $4,090.
$4,090. $10.10
Do professional athletes deserve to be paid well? Yes! The best, extraordinarily well? Yes! Do other entertainers deserve to be paid well? Yes! The best, again, extraordinarily well? Yes!
But $4,090 an hour? For a third-or-fourth level player whose name isn't likely known outside his home team's fans.?
It's been common to measure top level corporate salaries as a multiple of lowest-level employees -- to gauge inequity (and avarice). Why not here?
Ironically, doesn't Joe Fan subsidize the player bonanzas via fat TV contracts with MLB and teams?
6
For those too young to know and old timers who may have forgotten, 50 years ago in 1965 the Dodgers won the world series with ace now hall of fame pitchers Don Drysdale and Sandy Koufax. After that, both "held out" for a salary of $100,000 per year and at the time the top tax rate in the USA was 70%. (Now the top tax rate is less than 40%.) If inflation alone is considered, pay for top pitchers today would only have increased about ten-fold, or to around $1 million per year.
I think the author has confused the time value of money with future inflation rates. While the two are correlated, the determinant is at what rate could the funds be invested (not with the Madoffs) or conversely what rate is assumed by the deferred compensation. I suggest one ask Bobby Bonilla to help with the math.
PS I think it's also safe to say that future tax rates are a bigger variable than future inflation rates. On the whole, financial analysis by a baseball writer not an analyst.
PS I think it's also safe to say that future tax rates are a bigger variable than future inflation rates. On the whole, financial analysis by a baseball writer not an analyst.
2
Inflation doesn't affect a baseball player (or team owner) in the same way as Joe six pack, especially if the index is based on consumer goods. A baseball player can only consume so much milk, gasoline, wheat, and whatever else may be tied to the index. Luxury goods, on the other hand, may become even more inflated (if the 1% continue to gobble up more wealth). In that case, I suppose the owner made a better deal than the player.
1
Gotta say that this analysis is a little bit precarious. This is a nice toy problem if you keep in mind the fallacy of composition with regard to macro and micro economics. Inflation affects different people very differently. Even with high inflation, Scherzer may be able to spend his 2025 dollars on something that has actually gone down in price. Then it's a win-win for he and the Nats.
1
Why should there be such a thing as "today's dollars"? Why should a dollar evaporate over our lifetimes?
If I earn $100 today, spend $50 and save $50 of it, the $50 that I save starts losing purchasing power immediately. Since that $50 is a token of the work I did to earn it, I am seeing my labor stolen.
If I earn $100 today, spend $50 and save $50 of it, the $50 that I save starts losing purchasing power immediately. Since that $50 is a token of the work I did to earn it, I am seeing my labor stolen.
1
Not true. If you invest it conservatively it should at least keep up with inflation. Where people get in trouble is in their effort to beat inflation, which involves taking on risk.
1
If you look at the Nationals' record from last year, why didn't they win it all? It's because luck, chemistry, chance - basically anything that can't be bought still comes into play in baseball. Not to mention all the shots a wild card team has now. That being said, as a Met fan, it has me wondering if a team's wins can ever dip into the negatives against a division rival. Before Max Scherzer being signed, I couldn't imagine it getting any worse than 4-15.
1
Since baseball will be dead way before the end of his contract, this is a pretty awesome deal for that pitcher.
This also adds fuel to the argument that taxes should be raised on VERY high earners. Say 50% for those who make over $2 million a year.
6
70%
2
Do I hear 90%...going...going....
I wonder if you offered $5,000 a month for life, to the best minor league prospects, adjusting for inflation - would many take that deal? For about 98% of them it would be a fantastic deal.
So, how much would that cost? And how much would ticket prices be for the fans for the next 50 years?
Just wondering, just fantasizing. Isn't baseball a fantasy?
So, how much would that cost? And how much would ticket prices be for the fans for the next 50 years?
Just wondering, just fantasizing. Isn't baseball a fantasy?
Depends what you think inflation will be and how long your average major league prospect will live
If we assume a 60 year timeline (earning until age 80ish), this lifetime annuity style contract would have a nominal cost of $3.6mil
Factoring in inflation, that would actually cost (2014 dollars)
$2.69m @ 1% inflation
$2.08m @ 2%
$1.66m @ 3%
This starts becoming an attractive proposition for players at some point toward the end of the first round of the draft where the contract/bonus amounts start to level out in the $1-2mil range
Even a lot of those "top" prospects will flame out without inking another significant deal, and pretty much anyone who does not sign a major league deal would win by taking the monthly payouts. It's more complicated than that; the lump sum payment will have a bigger chunk taken out for taxes, but having the cash on hand means you can leverage that money earned while young into investments that will gain value over time, while the fixed annuity loses value over time.
I would make a ballpark (hehe) guess at 75-80% of players who would do better under the annuity even with above-target inflation.
The annuity saves the team lots of money since they can invest it and make payouts from the earnings. ~1.2mil set aside today would pay for the entire annuity assuming 5% ROI. This is why the Mets are paying Bobby Bonilla until the next century. Just don't do what the Wilpons did and invest it with Madoff, -100% ROI kinda screws this plan up.
If we assume a 60 year timeline (earning until age 80ish), this lifetime annuity style contract would have a nominal cost of $3.6mil
Factoring in inflation, that would actually cost (2014 dollars)
$2.69m @ 1% inflation
$2.08m @ 2%
$1.66m @ 3%
This starts becoming an attractive proposition for players at some point toward the end of the first round of the draft where the contract/bonus amounts start to level out in the $1-2mil range
Even a lot of those "top" prospects will flame out without inking another significant deal, and pretty much anyone who does not sign a major league deal would win by taking the monthly payouts. It's more complicated than that; the lump sum payment will have a bigger chunk taken out for taxes, but having the cash on hand means you can leverage that money earned while young into investments that will gain value over time, while the fixed annuity loses value over time.
I would make a ballpark (hehe) guess at 75-80% of players who would do better under the annuity even with above-target inflation.
The annuity saves the team lots of money since they can invest it and make payouts from the earnings. ~1.2mil set aside today would pay for the entire annuity assuming 5% ROI. This is why the Mets are paying Bobby Bonilla until the next century. Just don't do what the Wilpons did and invest it with Madoff, -100% ROI kinda screws this plan up.
2
A minor league player who wanted a steady $5k a month would quit baseball and get a real job.
1
I wonder what Curt Flood would think?
6
Well, at least baseball is one field where already good money for the better players is enhanced by pay that drifts upwards in response to salary pressures and inflation. I wish the same could be said for the average American worker. I am very senior and skilled in my field. Sadly, there was nobody looking out for my* interests when I got laid off from one if America's biggest companies in mid 2013. I have not worked full time since. Note that I went *years* without a raise prior, as did the vast majority of my colleagues, regardless of the obscene profits pulled down by the company. In corporate America, we are told bluntly, "Profit = Revenue - Expense... and you're the Expense."
Oh... I forgot. Players have Agents and Unions. The average worker does not.
I love baseball, but it's hard to get excited by ballooning salaries and inflationary pressures that slowly drive up salaries. It is absolutely critical that our Leaders learn that even for folks who have jobs, salaries are often very low, and have not budged - often for as much as a decade. That means every year, the worker gets more skilled, but their salary goes down in real terms.
Oh... I forgot. Players have Agents and Unions. The average worker does not.
I love baseball, but it's hard to get excited by ballooning salaries and inflationary pressures that slowly drive up salaries. It is absolutely critical that our Leaders learn that even for folks who have jobs, salaries are often very low, and have not budged - often for as much as a decade. That means every year, the worker gets more skilled, but their salary goes down in real terms.
13
Amen, brother! I went through three corporate layoffs, each time taking less money for a comparable job, and have now been out of work for years. I worked in industries where there was no union presence. That was the capitalist free market in practice. It may work for people with caliber skills of Scherzer, but for most of us the system actually works against us, not for us, too frequently.
10
Aside from real-world inflation is baseball inflation. Broadcast rights money keep rising, so the amount of the Scherzer deal today (however you calculate the amount) is considerably less remarkable than what will be paid to a comparable player in, say, five years.
2
About 20 years ago baseball, football, well all sports priced me out of being a fan. 35 dollars for a hat, 40 dollars for a ticket, 8 dollars for a beer.
If you buy into that then you buy into millions to throw a ball.
If you buy into that then you buy into millions to throw a ball.
23
Since this deal is in Washington, it invites comparison between this salary and those of our elected officials. Each year is enough to pay the salaries of more than three quarters of the Senate, or easily enough to pay the salaries of the President, the Vice President, and the cabinet.
4
"We like to imagine that Ted Lerner foresees the onset of hyperinflation in the years ahead and that Scherzer forecasts protracted Japan-style deflation, but in the news conference announcing the deal Wednesday, the sportswriters present shamefully failed to ask about monetary policy." You have quite an imagination! Had the sportswriters focused on long-range economics rather than the impact on the pennant race, the readers would have just turned the page.
You also engage in circular logic. You believe the parties considered Federal Reserve policies in their negotiations (although for some reason drawing opposite conclusions from the same available data), yet you also suggest the Chair of the Federal Reserve Board should consult with the franchise before setting those policies.
Please don't choke on your tongue in your cheek.
You also engage in circular logic. You believe the parties considered Federal Reserve policies in their negotiations (although for some reason drawing opposite conclusions from the same available data), yet you also suggest the Chair of the Federal Reserve Board should consult with the franchise before setting those policies.
Please don't choke on your tongue in your cheek.
2
Should inflation be the discounting measure? What about average rate of return on the earnings that Scherzer could have invested in a variety of financial instruments, thus creating more wealth over the long-term (e.g. investing in a stock market index with a long-term average rate of 10% growth)? If a corporation owned the Nationals, wouldn't the proper discounting measure be the risk of the underlying asset, the baseball team, taking into consider how the baseball team is capitalized with debt and equity? Random thoughts from an economics major.
2
The Nats fans that attend home games will feel the brunt of decisions like this with individual tickets being raised $8-$30/ticket and concession prices rising 10-15%. Wonder why a domestic beer costs $10-$12 at Yankee Stadium? The largest payroll in baseball needs to be fed money and lots of it. Once a team starts having a losing season(s) however, the attendance goes down and all of the residual income with it then all of those optimistic formulas crash like the stock market of 2008.
The fans are the ones who pay the price in the end.
The fans are the ones who pay the price in the end.
10
The largest payroll in baseball (by a lot) is in Los Angeles. Concession prices ar high because you have no choice to buy elsewhere for less. No different than in a movie theater or theme park, where drinks and snacks are marked up 300-400%.
Fans of winners complain less than losers.
Fans of winners complain less than losers.
2
And even those who can't afford to attend games or aren't fans at all end up paying as in most cities new stadiums have been built with tax dollars and/or state and city issued bonds.
But, of course, why spend money on unimportant things like education and transportation when you can give it to billionaire owners.
But, of course, why spend money on unimportant things like education and transportation when you can give it to billionaire owners.
8
I understand that the point of the article is to illustrate how inflation degrades the value of money. But a more important point might be the absurd escalation of "perceived value" of performers.
I don't live in a major league "market" so I mostly get my fix from an MLB television package, recording games to avoid the ads. The few times a decade I do make it to a major league game I'm disgusted to find that the ballpark is a shopping mall. The game is being killed by the player's and owner's lust for money. This contract was the last straw for me.
I've cancelled my MLBTV package for the coming year and resolved to go to more minor league games. So, am I an example of elastic demand? And is there a tipping point at which the 99% will refuse to participate in the 1%'s folly? $200 to take the family to the ballpark? $500 in 2025 dollars?
I don't live in a major league "market" so I mostly get my fix from an MLB television package, recording games to avoid the ads. The few times a decade I do make it to a major league game I'm disgusted to find that the ballpark is a shopping mall. The game is being killed by the player's and owner's lust for money. This contract was the last straw for me.
I've cancelled my MLBTV package for the coming year and resolved to go to more minor league games. So, am I an example of elastic demand? And is there a tipping point at which the 99% will refuse to participate in the 1%'s folly? $200 to take the family to the ballpark? $500 in 2025 dollars?
Very interesting. But he presents no evidence that either side was actually thinking about projected rates of inflation. Indeed, the Lerners were just as likely to be considering the fact that they will hopefully soon enter into a settlement with their regional cable sports channel (MASN) that will greatly increase the amount of cable money the Nats get.
4
The greatest player-Willie Mays-made $185,000 per year during his last two years with the New York Mets. He now collects a pension many times that, using accelerator clauses. Even when the Nationals are through paying Scherzer, he will still have a number of years to go before he can collect any of his pension: Players can collect pensions at 50 years old, while most of us schlubs have to wait until at least 55 years old. (A friend of mine got penalized for two years because he retired too early and started drawing right away.) But then, I doubt if anyone is crying over what he will receive when that time comes.
Smart in the confines of the argument - but still a ridiculous sun for any entertainer - whether an athlete or a movie star... Millions of people have bad priorities.
6
$210 million is a lot of real money no matter how you slice it - unless you're Bill Gates or one of our numerous other billionaires. So I certainly don't blame Scherzer for taking it. The Nats will likely get their money's worth over time even if it's just indirectly the way the Yankees have - through TV contracts and increasing the overall value of the team so don't feel too sorry for them and don't be foolish enough to laugh at them while they're laughing all the way to the bank just as George Steinbrenner did for all those years of paying too much for overvalued talent.
2
It's amazing it's taken so long for huge professional sports businesses to evaluate NPV of mega contracts, it's good to see they can better manage cash flow over a longer time line while still paying highest performing players market rates and at the same time guaranteeing they can't play for a competitor in the future.
No matter how inflation progresses, both Max Scherzer and the owners of the Washington Nationals will live their lives without worrying about money.
This analysis is far removed from the lives of most Americans.
This analysis is far removed from the lives of most Americans.
6
Believe it or not, everyone worries about money. Even the rich. And athletes should worry more, considering how poorly they handle their money. Most players are in real financial trouble in short order after retirement, believe it or not. Baseball players tend to do better than athletes in other sports, and deferred deals like this help, but, nobody is financially secure in today's world.
1
Mike,
Give me, or just about anybody I know, $15 a year and I promise you there will be no financial worries.
Other worries...yes, of course. But not financial.
"...nobody is financially secure in today's world." Are you kidding?! Overall, we are far, far more financially secure in today's world than at any other time in human history.
Give me, or just about anybody I know, $15 a year and I promise you there will be no financial worries.
Other worries...yes, of course. But not financial.
"...nobody is financially secure in today's world." Are you kidding?! Overall, we are far, far more financially secure in today's world than at any other time in human history.
The problem in the value calculations is that this is not real property like a house that maintains its essential qualities over time. Pitchers are notoriously unpredictable and susceptible to injury (the risk of which is of course highly correlated with age). Scherzer would be an outlier to perform at 37 near the level he did at 30.
My guess is the Nationals view this as a costly 3 or 4 year contract, not so unlike biting the bullet on that nice vacation, putting it all on your credit card and paying it off over the next year or two.
Bad economic decision in my opinion given risk of injury, but let's remember its baseball. A World Series appearance in any of Scherzer's years makes this genius :)
My guess is the Nationals view this as a costly 3 or 4 year contract, not so unlike biting the bullet on that nice vacation, putting it all on your credit card and paying it off over the next year or two.
Bad economic decision in my opinion given risk of injury, but let's remember its baseball. A World Series appearance in any of Scherzer's years makes this genius :)
1
The beauty of the contract is the Nationals are pretty much assuming he won't play at anywhere near the level he's playing now in 7 years time. But instead of giving him $20 million year for 10 years and risking he is an outlier at age 37, they spread those same dollars out over a longer period of time which reduces their cash outflow each year, diminishes the real cost of the outflow over time, all while their star is happy with his huge contract and is unable to ever play for a competitor in his twilight years.
1
Agreed, except, why isn't he able to play for another team in his twilight years? After the 7 are up with Nats, he may end up winding down his career with another team while still collecting his $15M/yr from Washington. If we're truly back to "real" baseball, he likely won't be a star, but oh what irony if he pulled a Howard Ehmke on his former team in one of those one-game wildcard play-in games.
@pintoks: "Scherzer would be an outlier to perform at 37 near the level he did at 30."
True, though many stars continue pitch very well into their 40s: Nolan Ryan, age 47; Roger Clemens, age 45; Mariano Rivera, age 44.
True, though many stars continue pitch very well into their 40s: Nolan Ryan, age 47; Roger Clemens, age 45; Mariano Rivera, age 44.
Actually, this is closer to a discussion seller financing using unsecured debt with an imputed interest rate. The player is taking the risk of execution, bankruptcy, and capital structure of payments that extend past his playing life. Presumably, if the team defaulted prior to finishing his playing days, he would not only be able to litigate but also continue to play for another team.
Good column but some oversights posters have mentioned:
1. *Baseball Inflation*. Separate from overall rate. Why? Population and total income available for entertainment keep growing. Supply of top quality baseball does not. Prices rise instead. Basic supply/demand. Other entertainments compete, but MLB doing very well. Why should this *Baseball Inflation* slow down? Props to @Brian P.
2. Cable/ TV. @Mike M could have noted Dodgers, Clippers sale $$ to nail his point. How much of this gusher-bonanza is higher subscriber fees, and how much is more ad $$? And is either one sustainable? [Why I'm not rich.]
Maybe NI can follow up later . . . .
1. *Baseball Inflation*. Separate from overall rate. Why? Population and total income available for entertainment keep growing. Supply of top quality baseball does not. Prices rise instead. Basic supply/demand. Other entertainments compete, but MLB doing very well. Why should this *Baseball Inflation* slow down? Props to @Brian P.
2. Cable/ TV. @Mike M could have noted Dodgers, Clippers sale $$ to nail his point. How much of this gusher-bonanza is higher subscriber fees, and how much is more ad $$? And is either one sustainable? [Why I'm not rich.]
Maybe NI can follow up later . . . .
I wonder if Boras takes his cut up front or over the 14 year horizon. After all, Boras negotiated the deal, not Scherzer.
Besides, can't he just structure a swap with a bank that hedges this risk away ?
Besides, can't he just structure a swap with a bank that hedges this risk away ?
1
It does explain the respective views on inflation, but it doesn't appear that Scherzer has valued the increased credit risk exposure he's taken on..... I think The Nationals come out on top on both counts, economically speaking!
The Lerners know how to make money work but it was lack of runs, not pitching, that kept the Nationals out of the League Championship last year.
3
This article might be well wide of the mark on the inflation issue. There is no reason to believe that it was the driving consideration.
Scherzer would be worth $30-35 million/year on a shorter term contract. This deal gives Scherzer a great tax break and the Nationals a huge salary deferral. In theory they will receive the benefit of Scherzer's many wins without paying a market price for them.
Scherzer would be worth $30-35 million/year on a shorter term contract. This deal gives Scherzer a great tax break and the Nationals a huge salary deferral. In theory they will receive the benefit of Scherzer's many wins without paying a market price for them.
1
If I was scherzer I would expect tax rates to rise, therefore, on an after-tax basis he should have taken more money upfront.
Bobby Bonilla.
14
LIke the Yankees trying to buy championships, I'll enjoy it all the more when the Nats fail to deliver.
11
Aw come on, we haven't won a World Series since 1924. We're overdue.
3
Yup... Ppl forget the core of the Joe Torre Yankees were players called up from the farm system.
Not one mention of cable TV revenue. That's where this money is coming from, and, most team owners have figured out how to charge the non sports fan basically the same as the rabid fan (in the same region) for the same product. Genius. A dollar here, a dollar there, multiply by literally millions, and then we're talking about real money. If the cable subscriber who could care less about sports, or maybe watches one infrequently, knew how they are subsidizing this spectacular greed, then maybe all of this foolishness would end.
17
Thank you for pointing out the soft underbelly of baseball's economic dragon.
Imagining that cable TV revenues are going to expand into the stratosphere is simply foolishness. With a plethora of options now sprouting up like so many unchecked weeds, the viewing public is less and less likely to simply pay their outrageous cable TV bill every month.
That means that both sides of this contract are exposed. Scherzer is exposed to a potential Lerner / Nats bankruptcy. Lerner and the Nats are exposed to a Scherzer arm injury. If I was Scherzer I'd be buying the equivalent of a credit default swap on the contract. If the Lerners can't pay, I still get paid. If I was the Lerners, I'd be buying a seven year insurance policy on Scherzer's arm.
The $64 question is, is another significant financial player dumb enough to take either risk?
You know the person's that laughing the most right now? Scott Boras. Millions will flow into his coffers regardless of what happens. What did he do? Some marketing. End of story.
Imagining that cable TV revenues are going to expand into the stratosphere is simply foolishness. With a plethora of options now sprouting up like so many unchecked weeds, the viewing public is less and less likely to simply pay their outrageous cable TV bill every month.
That means that both sides of this contract are exposed. Scherzer is exposed to a potential Lerner / Nats bankruptcy. Lerner and the Nats are exposed to a Scherzer arm injury. If I was Scherzer I'd be buying the equivalent of a credit default swap on the contract. If the Lerners can't pay, I still get paid. If I was the Lerners, I'd be buying a seven year insurance policy on Scherzer's arm.
The $64 question is, is another significant financial player dumb enough to take either risk?
You know the person's that laughing the most right now? Scott Boras. Millions will flow into his coffers regardless of what happens. What did he do? Some marketing. End of story.
4
The PV of the contract is between 120 and 180 million. Probably closer to 180. What's the difference, though. The pitcher is 30 and has an early history of arm trouble. There's a low probability the Nationals will get five dominant seasons from him.
2
What is your interest rate assumption in calculating the PV? -methinks that the rate of inflation is not the proper number but rather it is the anticipated market rate of return (PV is what do I have to invest today at an assumed rate of return to generate a cash flow over time). Actually the rate of inflation is irrelevant to this entire discussion of the real value of the contract. The author should have had a discussion with the people of this paper who are the finance and investment experts. The entire article, focusing on inflation, is a lame piece of work.
1
Ps: At a conservative assumed annualized ROR of 6.5% the NPV of the deal is about $93mil; at a reasonable 7.5% it is $82mil. Oh and Ps at the conservative 6.5% rate the Tiger's $144 mil deal over 6 was worth $105mil, at the 7.5% rate it was $101mil -his salary last year was $15.5 mil so basically at the end of the day he is either marginally better off, or marginally worse off. Oh and let us not forget there is always the possibility over such a long period of time as 14 years that the Nats could go bankrupt in which case he is SOL.
1
As a very old Geezer, I find it difficult to understand how one human-being athlete could be worth that much money. When most children's orphanages could function for so many years on a very small part of such a sum. It DOES say a lot about our society and what is important to it..........
49
Paying one person that much money to play a game doesn't make sense.
The alternative is that money should be kept by people who have never taken the field, which makes even less sense.
The alternative is that money should be kept by people who have never taken the field, which makes even less sense.
2
I always puzzle over people who say this. As long as people fill the stadium and the TV companies spend the money SOMEONE has to take the money - I would rather it be the players. Everyone howled when Pete Rose was paid the "absurd" sum of 400,000 by his new team - until season tix sales paid for the contract before the season even started.
Until and unless millions happily fork over money to orphanages, let's pay the players, not the owners. The bad old days were worse. Hooray for Curt Flood.
Until and unless millions happily fork over money to orphanages, let's pay the players, not the owners. The bad old days were worse. Hooray for Curt Flood.
2
The Nats are paying Scherzer so they can make more money. If you look at these salaries in a vacuum, you do a real disservice to the athletes, which is hard to do considering how low my opinion is of them. Where do you want your cable, ticket and concession money to go? If you want it to go to poor kids, don't buy cable or baseball tickets, give it to charity.
2
The future value of money is one reason it is good, even necessary, for businesses and government to borrow money. This economic thinking doesn't generally apply to individuals, however.
The rule in borrowing is to borrow "dear" (highly needed funds or funds which can offer a means of additional income) and payback "cheap" (pay part of the proceeds of added income, in other words: pay back the bank with its own money, like gambling in a casino using only the funds you've won already).
Money borrowed in a time like the present, low inflation, can be paid back easily if inflation hits, because a business can raise prices much more quickly if everyone else is doing it. In some cases, it even pays to borrow during a run up of inflation as the up surge continues, thus making the money used to pay a loan back cheaper.
These kinds of economics don't apply, at least not that much, to individuals. When someone takes out a mortgage, the loan is "front loaded" with interest so that in the first few years, the holder is paying almost nothing toward the actual principal. In other types of loans, it is only a good deal of the taker anticipates and gets pay raises. Otherwise, a loan can be like an albatross around the neck.
In terms of signing a huge contract, owners are also betting that winning, going to the World Series and perhaps winning, will have a huge effect on attendance and the value of the franchise. If 200 million brings in 500 million, that's not a bad deal.
Doug Terry
The rule in borrowing is to borrow "dear" (highly needed funds or funds which can offer a means of additional income) and payback "cheap" (pay part of the proceeds of added income, in other words: pay back the bank with its own money, like gambling in a casino using only the funds you've won already).
Money borrowed in a time like the present, low inflation, can be paid back easily if inflation hits, because a business can raise prices much more quickly if everyone else is doing it. In some cases, it even pays to borrow during a run up of inflation as the up surge continues, thus making the money used to pay a loan back cheaper.
These kinds of economics don't apply, at least not that much, to individuals. When someone takes out a mortgage, the loan is "front loaded" with interest so that in the first few years, the holder is paying almost nothing toward the actual principal. In other types of loans, it is only a good deal of the taker anticipates and gets pay raises. Otherwise, a loan can be like an albatross around the neck.
In terms of signing a huge contract, owners are also betting that winning, going to the World Series and perhaps winning, will have a huge effect on attendance and the value of the franchise. If 200 million brings in 500 million, that's not a bad deal.
Doug Terry
2
"We like to imagine that Ted Lerner foresees the onset of hyperinflation in the years ahead..."
I like to imagine that Lerner is acting like an undisciplined consumer unable to defer gratification: Spend today, worry about the economic consequences tomorrow.
I like to imagine that Lerner is acting like an undisciplined consumer unable to defer gratification: Spend today, worry about the economic consequences tomorrow.
5
I'm sure you realize that Ted Lerner is 89 years old. Do you think he might be interested in winning the World Series while he's still alive and able to appreciate it? and maybe a little less interested in "tomorrow"?
16
Ha. I thought the same thing when the 80ish Mike Ilitch spent a king's ransom for that overweight Fielder to play first base a few years ago. Funny thing, though, Ilitch is still with us, but, Fielder is playing elsewhere. The accountants must shake their heads.
3
Just how much better can one live with $210 million than, say, $50 million?
14
It doesn't matter to the player or his agent, the want all they can get. If they could get a billion, they'd take it.
Very early in my own career in television news, I didn't care that much about how much I made. The working experience and being able to live comfortably were my main focus. This was really a dumb position to take because I came to realize that the company which employed me expressed its belief about my value only in dollars, virtually no other way.
If one insists on being paid very well, the company is going to do everything it can to maximize that value of the person, giving him or her the best opportunities to make a contribution. Conversely, if one is underpaid, then one is also under valued.
This is important in all endeavors. It is not so much what one does, but how it is viewed (even, to a lesser degree, when it comes to baseball statistics, which supposedly don't lie). However brilliantly one might contribute to a cause or an enterprise, the overriding important factor is how that contribution is perceived. If it is highly valued, then more opportunities will be made available and there is much less likelihood that someone will be fired. When things start to go downhill, the person is given multiple opportunities to change and improve.
Making them pay, in other words, is not just a matter of getting top dollars for talent.
Doug Terry
Very early in my own career in television news, I didn't care that much about how much I made. The working experience and being able to live comfortably were my main focus. This was really a dumb position to take because I came to realize that the company which employed me expressed its belief about my value only in dollars, virtually no other way.
If one insists on being paid very well, the company is going to do everything it can to maximize that value of the person, giving him or her the best opportunities to make a contribution. Conversely, if one is underpaid, then one is also under valued.
This is important in all endeavors. It is not so much what one does, but how it is viewed (even, to a lesser degree, when it comes to baseball statistics, which supposedly don't lie). However brilliantly one might contribute to a cause or an enterprise, the overriding important factor is how that contribution is perceived. If it is highly valued, then more opportunities will be made available and there is much less likelihood that someone will be fired. When things start to go downhill, the person is given multiple opportunities to change and improve.
Making them pay, in other words, is not just a matter of getting top dollars for talent.
Doug Terry
12
Thank you for your reply. Perhaps my lack of sympathy for owners, athletes such as this, and the fans who pay them has skewed my thought of pure economics.
2
Silly question. You can fund your children and grandchildren, you can start a charity/foundation - you could even buy a team.
His contract "will be worth only $8.3 million" if inflation averages 4 percent. Only? HAHA.
1
In other words it's about ego more than finances. Nats fans will soon find out, he has one heck of an inflated ego. Go tigers.
4
It is possible that Scherzer and the Nationals are both right. If the United States continues to have low inflation for many years to come then the contract is a great value for Scherzer. Baseball's salary increases, ticket prices, cable TV prices and almost all costs have greatly exceeded the US inflation rate for many decades. As long those trends continue then the deal is a bargain for the Nationals.
4