By: Blair Einfeldt
Just like any other NBA fan, my social media pages following the fallout of DeMarcus Cousins signing with the two-time defending NBA champions, has been filled with a wide range of emotions. And by wide range of emotions, I mean varying degrees of anger. Admittedly, I grew up in the Rocky Mountain area so my social media connections tend to skew into small market Western Conference franchises. But my friends that I have gained from living on the eastern part of the US, have had similar angry social media outbursts.
One friend said, “the NBA needs to figure out a way to stop this” and then complained for what seemed like 3 hours (facebook post equivalent of 3 paragraphs) about how the league blocked Chris Paul going to L.A. but couldn’t do anything about this. Another friend posted memes of the newly formed Death Lineup + Boogie as the Space Jam Monstars or even worse a picture of the new Warriors with LeBron’s face photoshopped over internet infamous BBQ Becky, seemingly calling Adam Silver over his anger of the new team. One friend simply said, “the NBA product is ruined.”
I think an argument can be made that this is not bad for the NBA, but that is an argument for another time. But the truth of the matter is, the Golden State Warriors are clearly making a mockery of the NBA Collective Bargaining Agreement and more specifically the Salary Cap. Fivethirtyeight came out with an article today detailing why this is the case and statistically made an argument of how this signing of Boogie, even if he only plays part of the season, is the single greatest use of the Mid-Level Exception the NBA has ever known. For an explanation of the MLE, Hoopshype has a pretty solid one, but in a nutshell it is a smaller contract that is allowed to be given to “role players” (whatever that means in the modern NBA) by teams that are already over the salary cap. While this is all speculation, in a nutshell, Boogie holds a Value Over Replacement (VOIP) of 11.9 which equates to 30 wins. The average MLE player has a VOIP of 1.2 which equates to 3 wins. So, basically The Golden State Warriors signed a player at a position that would generally create 3 wins with someone that should generate 27 more than that. Fiverthirtyeight also uses a model called CARMELO that values the financial value of every player suggesting Cousins to be worth $46 million.
While there are concerns about his injury, and the deal is only a one year deal, it cannot be argued with a straight face that this deal is not an advantageous one for the Warriors and does not make a mockery of the salary cap.
But it isn’t just Golden State. Oklahoma City recently re-signed Raymond Felton becoming the first $300M team in salary and projected luxury tax. The Thunder now have a tax bill of $150M. To put that into perspective, OKC’s luxury tax bill –not their salaries– is more than any other team in the NBA, including Golden State, is paying in base salary. OKC could stretch Carmelo Anthony’s contract next year (waiving him and then paying the remainder of his contract over the course of a few years) and save $90M. And the fact that they are considering not doing this is a real question as to what the value of an individual player really is. The natural next question is whether the salary cap even means anything any more. Especially if all but 3 teams at this moment (LA Lakers, Indiana Pacers, Atlanta Hawks) have any actual cap space, and only 5 more even have practical cap space. Literally over 75% of the NBA teams are working above the salary cap.
So, the first question is, how does the NBA stop the Warriors from loading up on talent but the natural progression of steps to answer such a question is, what does the league do about the salary cap? The actual solution is to junk the salary cap altogether. But let’s explore why.
What is the Salary Cap?
Basically, a salary cap is a limit on the amount teams can spend on player contracts, which, in theory helps to maintain competitive balance in the league. Without a salary cap, teams with deeper pockets theoretically could simply outspend the remaining teams for the better free agents. The basic idea behind a salary cap is that a team can only sign a free agent if its total payroll will not exceed the cap, so a team with deep pockets is on a more level playing field with every other team.
The cap is nothing new in the NBA, in fact it has been part of the league since the 1946-47 season where teams were capped at $55,000 per season on their players. As has been stated before, the goal behind the salary cap is to create a level of competitive balance. But over 80 years later, I think it is a fair question to ask whether it is actually achieving that goal.
Does the Salary Cap Create Competitive Balance?
To be able to analyze whether the salary cap actually functions the way it is intended I’d like to look at a few things. First, it is important to compare the NBA (which has a soft cap, allowing teams to go over the cap to sign their own players and role players at a penalty) with the two other major sports leagues; the NFL (which has a hard cap) and Major League Baseball (which does not have a cap at all).
In the NFL, the hard cap has created a situation where over the last 20 years, there have been 12 different Super Bowl Champions. This hard cap has definitely created the desired result, if competitive balance means having different champions every year. In the NFL, there is truly an “any given Sunday” mentality for each team and each season. But digging a little closer, each season the NFL displays teams with the highest average winning percentage with teams often touting winning percentages in the .750 range or higher while having teams like the 2017 Cleveland Browns who did not win a single game last season and has won 1 game in two years. If your definition of competitive balance is to have more competitive teams, that may not fit the metric. But again, if the desired result is having a broader array of champions, this hard cap has accomplished that.
With this being said there has definitely been a fulfilment of the law of unintentional consequences to the NFL as a result of the hard salary cap.
Since the hard cap, the NFL has developed a two tier compensation system where stars make exponentially more money than their counterparts. The top half of the quarterback market is in the $20-22 million range, while even fairly unproven players like Jimmy Garropolo and Kirk Cousins are the highest paid in the crop at nearly $28 million per year. Because of cap limitations it means that a team must have rookies and aging veterans who are salaried at the minimum as the backups. When a critical player is hurt during the year, it has a disproportionate impact on a team’s play. Since the hard cap, it makes no sense to see a team like the old San Francisco days of a Joe Montana backed up by a Steve Young. Heck, you’d be hard pressed to find a team with a Joe Montana backed up by a Steve Urkle. The hard cap makes it almost impossible to afford depth and injuries seriously derail a team unlike any other obstacle in the NFL. This also creates a talent gap between starters and their backups. There is no cap room available to replace the starter with an equivalent player, even in the unlikely event such player could be found.
Likewise, first round rookies, more often than in any other sport, are forced to become starters immediately because of the large cap hit placed on other positions. The money given to star positions requires immediate pay off, and the lack of depth causes many to play when they may not be ready while forcing others, who may develop later, to be cut because their price tag is much higher. It also forces teams to shrewdly cut star players fairly frequently because their price tag becomes too difficult up against the cap and has led to non-guaranteed contracts. Non-guaranteed contracts create a market of concern for players about a myriad of issues, but most specifically the overall quality of players and especially star power. I would argue that the NFL’s star power is a little less important simply because of helmets (it is much more difficult for a fan to connect with a number and a faceless body), but regardless the hard cap makes being a star in the NFL much more difficult, thus giving power to the owners and franchises in establishing one of the least effective players unions in professional sports. All of this as a negative result of the hard cap.
However, if the goal is simply parity, then it is clear that the hard cap at least provides a higher level of competitive balance. Whether it creates a better product, or even a collective unified league working to better their sport is another thing entirely.
Major League Baseball conversely does not operate with a salary cap at all. In fact in most ways, Major League Baseball has enacted the fewest “parity-producing” rules. It did not require teams to abide by a salary cap. It did not specify a maximum salary. Because its franchises depended so much on local attendance revenue and local television contracts for their revenue, it did not have a strong system for revenue sharing among teams, apart from the national broadcast revenues. Despite comparatively few parity rules, baseball has always featured substantial competitive balance. Even the worst teams in the league consistently win four out of ten games; the best win six out of ten. Other professional sports, albeit with a shorter schedule, do exhibit much greater competitive disparity, despite having a plethora of parity-inducing rules. Even comparing the diversity of championship teams, over that same period of 20 years, MLB has produced 12 different championship franchises.
Without question, if you are concerned about competitive balance, the existence of a lack of a salary cap has created more balance in MLB than in the NFL. The question would be why that is. Conventional wisdom would state that the major markets would just go above and beyond and buy up all of the talent. The myth of the evil empire in New York, seems to be a great example of that narrative, however even the massive resources of the New York Yankees has resulted in 3 championships in 20 years including a current 7-year drought. As for other large markets like L.A. or Chicago, this has resulted in a combined 2 championships in 20 years (the Cubs in 2016 and Anaheim Angels in 2002).
In his seminal book “The Players’ Labor Market,” University of Chicago Sports Economist Simon Rottenberg theorized that a free market in baseball labor would not change its distribution. In Rottenberg’s view, what prohibits large market teams from acquiring all or most of the useful talent is the law of diminishing returns, along with diseconomies of scale. The latter is a theory In microeconomics where the cost disadvantages that firms and governments, or athletic teams, accrue due to increase in firm size or output, results in production of goods and services at increased per-unit costs. In a nutshell, this means that the cost for every single win increases beyond its value to the public and the team, or forcing an increase in cost of game attendance or ancillary sales eventually blocking out a majority of fans from the market (for example see the Florida Marlins championship win of 2003 and then subsequent talent fire sale because the cost of winning was more than the value of winning).
As for the law of diminishing returns, at some point, a team can have too many good players. Only one player can take the court at starting point guard; only one player can lead the team in scoring and shots taken (looking at you Mr. Bryant). Some players have to come off the bench or be put on injured reserve or even stashed overseas. High-quality players relegated to inferior roles will want to move to teams where their contributions can be valued and to maximize their brand. The law of diminishing returns amplifies this tendency. Employing high-salaried stars in inferior roles, or even as backups or relegated to the G League, effectively reduces team revenue. Each win costs more; the marginal revenue from wins diminishes, until it is exceeded by the marginal cost of adding another player. In short, it will not pay to increase the “factor”—the quality of players on one team—without limit. At some point, Rottenberg writes, a “first star player” is worth more to the inferior team than he would be as the “third star [player]” on the rich team.“ At this point, [the inferior team] is in a position to bid players away” from the superior team. The superior team’s “behavior is not a function of its bank balance.”
This becomes even more relevant when players have been increasingly viewing their salaries as side hustles, while their main income is their brand. Dwyane Wade is famous for saying, “I’m not a business-man. I’m a business, man.” LeBron this last season made 36 million dollars from the Cleveland Cavaliers, but according to Darren Rovell of ESPN his salary (which ended up only being about half of that after taxes) made up less than a third of his annual revenue. LeBron made about $55 million in endorsements (Sprite, Nike, Kia etc.). But he also made millions in real estate deals, investments (Blaze Pizza, the Uninterupted). He even owns a portion of Liverpool FC Soccer Club, 2% which he bought for $6.5 Million and is now worth about $32 million.
As players begin realizing the potential of what they could do off the court and how their salary can be a small portion of their annual income, this could create more Boogie Style Contracts. But more importantly if the NBA moved to eliminate their cap, it would free up the NBA teams to offer these added incentives to contracts. But as we’ve seen with baseball, this hasn’t created any form of competitive imbalance. Definitely not like what we’ve seen in the NBA as of late.
The NBA teams are already circumventing the salary cap, or blowing right through it, in the case of OKC, and clearly the value of the players is even more overblown than what they are paid. Back in 2014, LeRoy Brooks, a professor of finance at the Boler School of Business at John Carroll University in suburban Cleveland, said that LeBron was worth nearly $500 million per year added to the local economy. I can’t imagine Carmelo Anthony being worth that much but clearly he is worth at least the $90M annually to the Oklahoma City economy, that they are still considering paying him and not stretching his contract.
So, why continue the facade, especially when the main reason for the soft cap is to create competitive balance, yet it is the least competitive league in the major sports? The idea of keeping the cap makes about as much sense as Boogie Cousins getting paid the MLE.