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SBJ/December 10 - 16, 2001/Opinion
MLB wants to fold its most efficient teams
Published December 10, 2001
Major League Baseball's plan to eliminate two teams is like removing an appendix to cure a migraine headache.
Baseball certainly has its problems. Most franchises are losing money, revenue and payroll disparities are growing, and competitive balance is suffering. MLB understands the diagnosis, but its prescription is way off.
The two teams at the top of MLB's cut list happen to be two of the most efficiently managed clubs in the league. The Montreal Expos and Minnesota Twins may bring in the lowest revenue (which is why they have been targeted for elimination), but they get greater performance for their payroll dollar than most teams in the league. In the accompanying table, note that the Twins won more games (3.5) per $1 million spent on player salaries in 2001 than any major league team. The Expos were very close to the top of this list at almost 2 wins per $1 million.
Teams from much larger markets with more money to spend did not fare as well. The Boston Red Sox were the worst team in the American League, with 0.75 wins per $1 million. The Los Angeles Dodgers won only 0.79 games per $1 million.
Measuring efficiency using this simple technique is enlightening, but it hardly can bear the weight of the argument. Too many complexities are involved.
Researchers use a technique known as Data Envelopment Analysis (DEA) to more precisely measure efficiency among a group of business units. The technique adjusts for decreasing returns to scale and allows for multiple inputs and outputs. It has been used to measure the efficiency of hospitals, warehouses, sales forces, banks and many other institutions. Similarly, DEA can be used to measure the payroll efficiency of the 2001 MLB franchises by comparing each team's expenditure on pitchers and hitters with wins, earned run average and batting average.
To see how this technique works, consider the American League. The New York Yankees spent $45,410,750 on pitching in 2001 and $64,381,143 on hitting. They won 95 games with a 4.02 ERA and a .267 batting average.
The Seattle Mariners performed better than the Yankees in all three on-field categories while spending less both on hitters and on pitchers. With the "naked eye," we can see that the Mariners are efficient and the Yankees are inefficient.
Both the Minnesota Twins and Oakland Athletics are also efficient. When these teams are compared to the Yankees, neither team is outright more efficient than the Yankees. Both spent less on hitters and pitchers, but neither team outperformed the Yankees in all three categories.
However, the DEA technique considers that if the Twins and Athletics are efficient, then any potential franchise that blends them is also efficient. So a franchise that is 60 percent Athletics and 40 percent Twins spends $13,845,900 on pitchers, spends $16,180,550 on hitters, wins 95 games, has a 3.96 ERA, and has a .267 batting average. When the Yankees are compared to this combined Athletics/Twins franchise, the Yankees are even more inefficient than they were when compared to the Mariners.
The Yankees overpaid by $31,564,850 (70 percent) on pitching and $48,200,593 (75 percent) on hitting. Given the Yankees' level of performance in 2001, they should reduce payroll to 30 percent of its original level in order to be efficient. Thus, the Yankees' DEA efficiency score is 0.30.
Half of MLB's franchises received a score of 1.0 for the 2001 season, indicating these franchises are all efficient. That is, no other team or combination of teams could be found with more wins, a lower ERA, a higher batting average and lower pitching and hitting payrolls.
With so many variables, a franchise must be very inefficient if it has a low efficiency score.
The fact that the Twins and Expos are deemed efficient using DEA is not surprising, since no team in their respective leagues spent less on both hitters and pitchers. These franchises are efficient by default.
The extent of the inefficiencies of the other franchises is striking. Many of these inefficient franchises come from large markets. A team from New York or Los Angeles can significantly overspend for on-the-field performance compared to its small-market counterparts.
Major League Baseball's financial infrastructure breeds inefficient payroll spending. Without a revenue-sharing arrangement, rich large-market teams get even richer by keeping their own prospects at home and by luring away veteran players from smaller-market clubs. The smaller-market teams get poorer as their revenue-generating players leave to greener pastures.
The answer to baseball's problem is not to cut a couple of small-market teams. The Twins and Expos are actually doing much more with their payroll dollars than many other franchises. The disparity will not end with two fewer teams in the league. There will still be efficient small-market teams and lavish, inefficient large-market teams.
The league must either allow franchises to relocate freely to higher-revenue generating markets or it must implement a revenue sharing arrangement with a salary cap. A salary cap can be implemented with a salary minimum requirement along with a maximum.
The players union should seriously consider how far contraction could go. Contracting now will set a precedent for the future. The Twins and Expos may be first. Are the Royals and Marlins next?
Major League Baseball should not cut two efficient franchises that have done well with what they have. In the true spirit of competition, teams should be rewarded for their ability to produce the most with the least — not for their ability to produce the most with the most.
Karl Einolf (email@example.com) is a professor of economics at Mount Saint Mary's College in Emmitsburg, Md.