Does A-Rod deserve a quarter of a billion dollar contract?

I have been noticing a lot of buzz among my Facebook friends lately regarding personal wealth, or the lack of it, or the lack of access to it, if you will, among many of the citizens of our great nation, or any nation, for that matter. In any event, those commentaries brought to mind the title question, which was originally posed to me by a reader, who was doubtful at best. She posted the query in a comment to an article I published about a year ago that actually had nothing to do with A-Rod (for those who don’t know what an “A-Rod” might be, this is the media’s term of endearment for a specific and, obviously, very special baseball player with the New York Yankees by the name of Alex Rodriquez). What a great question! I had actually composed a response, but upon going back and having a look at it, I discovered that it was never actually sent. So, here it is:

You make a good point. In response, I thought it might be interesting to see if we can gain some perspective on these phenomenal salaries. Warning: the figures below have been researched only half-heartedly, as I am too lazy to do a better job. But they seemed to come from pretty good sources.

So, let’s take a look at A-Rod’s astronomical $275 million/ten-year deal (that’s $27.5 million per year, give or take a few million) in the larger context of the entire major league baseball industry. This is what I learned:

Well, what we see here is that, sure enough, that is one huge compensation package for A-Rod; someone in the Yankees’ front office obviously thinks very highly of him. In any event, these numbers beg the question: If those players’ salaries were reduced, where do you think that money would go? Hint: straight to the owners, of course, who are already making a reasonable profit even after covering that hefty payroll. And one must keep in mind that those owners obviously couldn’t make a nickel in the baseball business without the services of the baseball players, the latter of whom, in my view, should have a right to sell their services to the highest bidder.

Well, if those players don’t deserve those salaries, that raises a sticky question: Who gets to decide how much each of the players deserves to receive? And if we can figure that out, then I guess “somebody” is going to have to decide how much the owners deserve. And so it goes. That’s a slippery slope, ay?

From a historical perspective let’s look at the salary of Babe Ruth, who many regard as one of the greatest players in the game, and who earned about $910,000 in 1931 dollars over his entire career. That comes to nearly $14 million, inflation-adjusted. Asked whether he thought he deserved to earn $80,000 per year ($1,117,928, inflation-adjusted), at a time when the president of the United States, Herbert Hoover, was earning a salary of $75,000, Ruth famously remarked, “What the hell has Hoover got to do with it? Besides, I had a better year than he did.”^{1 2}

By further comparison, Ted Williams’ contract for $98,000 per year in 1955 is equal to about $840,000 in 2012 dollars. Not too shabby, either.

So, it’s not as bad as it looks! These guys are expected to earn those astronomical salaries, of course, with wins and stats that will excite the fans and generate revenue. And they have to do it fast. A typical window of opportunity to make that kind of money is the athlete’s typical career span, which the New York Times tells us is about 5.6 years for fifty percent of rookies entering the game. Only about one out of a hundred players manages to last through twenty years or more.

But I was also curious about another issue: I wondered whether the costs associated with operating major league baseball, which includes those humongous salaries, have had an upward impact on ticket prices. No doubt they have, but, according to what I could learn, not enough to affect attendance at the parks. In fact, annual attendance remained steady at about 7,400,000 from 2010 to 2011, which means ticket prices are pretty “inelastic,” to borrow a term from the economists. And, in any event, if costs were driving ticket prices so high as to reduce attendance, those salaries would surely be affected as well, since lower attendance would have a negative impact on operating income. Of course, over and above ticket sales, a huge income source for the industry is the TV rights.

MLB is big business. And I am confident that the teams’ owners will not pay these sums to the players if they don’t have reason to believe they can deliver (profits via excellent performance); same as any other business. By the same token, if the players’ agents can convince the owners that their clients can drive ticket sales and television viewership, the players will get their fair share of the resulting revenues. Good ol’ capitalism at work, once again. [Read more on this topic in “Reverie” at Occupy capitalism and the elephant in the room.]

Anyway, I thought you, as a former business owner, might appreciate this perspective.

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Well, I could cherry pick about ten issues in the foregoing paragraphs and write a whole piece on each one. Hmmm…may be I will.

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[1] Stewart Wayne (2006). Babe Ruth: A Biography. Westport, Conn., Greenwood Press, p.63.

[2] Wilborne Hampton (2009). Babe Ruth: a Twentieth Century Life. New York: Viking, p. 162.