ANDREW ZIMBALIST 

The Economics of Baseball

Conway, New Hampshire, August 19, 1992

Andrew Zimbalist is professor of Economics at Smith College. He is the author of many books on development and comparative economics. His latest book is Baseball and Billions.

 

Two and a half years ago I was putting my then eleven-year-old son to sleep in his room which, like many kids his age, is covered wall to wall with baseball cards. It was in March of 1990, during the owners' lockout of the baseball players from spring training camp. It turned out to be a lockout that lasted thirty two days. My son was, needless to say, very disappointed and wondering what was going to happen to the baseball season. He asked me to explain why it wasn't happening. I didn't have too much to say about it, since I hadn't thought very much about the business or the economics of baseball. Just before he went to sleep, he said, "Dad, you just finished your book on Panama. You like baseball. You're an economist. Why don't you write a book about the economics of baseball?" Well, I did. So my professional life in the economics of baseball does not go back very far, but I must say that I as I delved into it it became more and more fascinating. It also has a number of fascinating political hooks.

My son was disgruntled, to say the least, back in March of 1990. Judging by the letters to the editor in various newspapers that I was looking at, there were millions of other Americans who were disgruntled as well. They were disgruntled because that thirty-two day lockout in 1990 marked the fifth or sixth time since 1970 that there was a work stoppage in professional baseball. Indeed, every single time that the basic agreement between the baseball owners and the baseball players came up for renegotiation, there was either a strike or a lockout.

One would suppose that in an industry in which since 1976 salaries are going up at a clip of twenty percent a year, team revenues are going up over fourteen percent a year, employment is expanding, franchise values are skyrocketing, one would expect that if anywhere in the U.S. economy such an industry would be able to find labor peace. One might also expect that players who were earning five to seven million dollars a year would find it in their hearts to sign autographs for children for less than $25. This is of course what's happening in baseball these days. This area of labor turmoil is just one of the many problem areas in major league baseball. This problem, like the others, finds its root in what is euphemistically called the "baseball anomaly." This is that baseball has an exemption from the anti-trust laws in the United States. It's a monopoly with an exemption from the anti-trust laws, and it's the only industry in the United States which has that characteristic. It's also not regulated. So it's a self-regulating monopoly exempt from anti-trust. Where did it come from?

Back in 1914 and 1915 a competitive league established itself, called the Federal League. Back then, as is still largely the case today, although things changed a bit in 1976, players were under reserve to a particular team for their lifetime. They would be brought up through the farm system of the team and they would stay with that team. They didn't have the right to offer their services to somebody else, either if they wanted to move or were hoping to get the benefits of a free labor market and have a competitive bidding process for their salaries. Players couldn't do that. Everybody was under reserve.

So the Federal League came along and started offering players a little bit more money. A lot of players were willing to jump because they were earning such low salaries in major league baseball. Major league baseball didn't like this competition around salaries. They struck a deal with the owners of the Federal League to incorporate some of those owners into ownership into either the American or the National League, or in some cases they simply paid off the owners. The owners of the team from Baltimore, which was called the Baltimore Terrapins, were offered as a buyout only $50,000. That was a paltry sum in comparison with what the other owners were being offered. Charles Comiskey, who was the owner of the White Sox at the time, explained that the reason why Baltimore didn't deserve more money and why they couldn't incorporate Baltimore into the major leagues was because Baltimore was just not a major league city. In fact, it wasn't even a very good minor league city. Charles Ebbets, who was the owner of the Brooklyn Dodgers, explained a little bit more what Comiskey had in mind. He said, The reason Baltimore's not a very good baseball city is because too many colored people live in it.

The $50,000 offer was not satisfactory to the owners of the Baltimore Terrapins. They sued major league baseball on the grounds that they were restraining trade, an anti-trust suit. This was in 1916. The suit finally was heard in the Indiana Supreme Court in the spring of 1919. The Indiana Supreme Court said, yes, indeed, baseball is engaging in restraint of trade. The Baltimore Terrapin owners should be awarded triple damages of $240,000. Major league baseball, needless to say, appealed. It went to the Washington, D.C., Circuit Court of Appeals in 1921. They overturned the trial court ruling. It was appealed by the Baltimore Terrapin owners. It went to the Supreme Court headed by William Howard Taft, a former President and also a former third baseman on the Yale University baseball team and the first President ever to throw out the opening day ball. Also on the court, the person who ended up writing the decision, was Oliver Wendell Holmes, who himself had been an amateur baseball player before going to the Court.

In a decision reminiscent of the wisdom of the Court in the 1990s, the Supreme Court back in 1922 ruled that baseball was not covered by the anti-trust laws because baseball did not engage in interstate commerce. That's a curious decision. The players, after all, cross state lines to play against teams from other cities and states. The bats, the balls, the uniforms all cross state lines. In 1921, the year before the Supreme Court ruling, the first World Series game was broadcast on radio. In fact, they used the radio relay that went from the Polo Grounds to Newark and then back to New York, so that was clearly interstate commerce. So it was a very curious ruling indeed.

Perhaps even more curious was that there were two subsequent occasions for the Supreme Court to either uphold or repudiate the 1922 decision. What the Supreme Court did in 1953 was to uphold the decision of 1922 that said baseball was not engaged in interstate commerce. In 1972, in the Curt Flood case, again the Supreme Court upheld the anti-trust exemption. So baseball thus is in a unique position that none of the other sports leagues are in and certainly no other industry, manufacturing, service or otherwise, is in. It's a self-regulating monopoly. There are no federal or state bodies that regulate what baseball owners can do.

The people who self-regulate baseball are the owners. There are twenty eight baseball teams, one woman, and all the rest are men. The woman inherited the team from her husband, Marge Schott from Cincinnati. They are the ones who decide how the game is played, if there are changes in the rules of the game, like the introduction of the designated hitter, changes in the strike zone, or whatever. They are the ones who decide how the business of baseball is run. It is a peculiar business, as are other sports businesses. A baseball team does not flourish when it knocks its rivals out of business. IBM might flourish, might be delighted if it knocked Apple Computer out of business. But the Yankees don't flourish if the Boston Red Sox go bankrupt. The teams have to behave as a cartel.

Like other cartels, it is threatened by the self-interested and sometimes group-destructive behavior of its members. Baseball's barons behave often as deviously, shortsightedly and inefficiently as the members of the OPEC oil cartel. I don't have time to go through all the owners historically. But one could weave many books out of the tales of egregious behavior of baseball's owners. Some of the stories are well known. George Steinbrenner, the current owner of the New York Yankees, who made illegal campaign contributions to Richard Nixon and was suspended for a couple of years from major league baseball. George Steinbrenner, who can't hold a manager or a front office executive for more than a year. George Steinbrenner, who was again suspended from baseball for paying money to an extortionist to get dirty information on one of his players, Dave Winfield. When Steinbrenner was suspended the last time he was replaced by an interim executive whose name is Jack Lawn. That name might be familiar to some of you. He was the former head of the Drug Enforcement Agency. He wrote several letters to Manuel Noriega in Panama commending him for his excellent assistance in fighting drug trafficking.

Then there's Marge Schott, presently the only female owner in major league baseball. There was another one, Joan Kroc, who was Ray Kroc's wife. She inherited the San Diego Padres from her husband Ray Kroc, of McDonald's franchises. After a couple of years she decided that baseball wasn't for her. She tried to give her team to the city of San Diego, but the old boys club of major league baseball wouldn't let her do that because they don't allow municipal ownership. They're afraid of the exposure that would ensue, primarily financial exposure of their books. Marge Schott is the owner of the Cincinnati Reds. Back in 1990, when the Reds were in the World Series, she surprised CBS television and insisted that she get to go up to the microphone at home plate during the pregame ceremonies. She said she wanted to say a blessing to "help our boys in the Far East." This was when we had just sent our troops to the Middle East to do unpleasant things.

That was the first that I started taking notice of Marge Schott, and I've followed her a bit since then. I read a couple of accounts of a time when she had just finished a meeting of front office executives where she had served donuts. There were several left over. She picked up the donuts and walked out into the clerical offices and sold the donuts to her clerical employees. There are lots of stories like this. Before she went to the Reds she was a used car dealer. She still is, and she now sells new cars. She uses the Reds advertising facilities at the ball park, the program guide, etc. for free advertising for her team. She won't let any other car dealers in Cincinnati have access to the Reds' media outlet. The year before last she was sued by the minority owners of the Reds for hiding profits and not distributing profits. Then she was sued by her bookkeeper, who explained that he was asked directly to finagle with the books to hide profits. So she's another owner who doesn't get as much press as George Steinbrenner but is probably even zanier than he is.

Then there's Tom Monaghan, who is now in the process of selling his team to another pizza store owner. He's the owner of Domino's Pizza. He's an anti-abortion crusader, a religious proselytizer, in spite of which he has been sued on numerous occasions by people who tried to get a job with Domino's Pizza for engaging in religious discrimination. He gave a talk at Wayne State University two years ago and explained to the crowd assembled that he found poverty "exciting." He of course is a multimillionaire. He is also a man who insisted that Detroit build him a new stadium. When Mayor Coleman Young wanted to talk to him about plans for the stadium and called him on several occasions, Monaghan didn't return his calls. Mayor Young, in a press conference a few months ago, says that he was calling him for two and a half years.

Then there's the case of Mickey Monus. He was a principal shareholder in Phar-Mor Corporation, chief executive officer for the wholesale drug store chain. He was either the majority or the second largest shareholder in the new Colorado Rockies team. He was just found guilty of embezzling and defrauding Pharmor Corporation for $350 million. He has since disappeared. His close business associate and friend John Antonucci is also an investor in the Colorado Rockies and is presently the President of the Colorado Rockies.

I could go on and on. The reason I'm spending any time at all denouncing owners' behavior is that these are the people who decide upon the changes in the rules about how baseball is played and other kinds of changes in the business operation of baseball. We don't have, as a public, through our government or directly, any direct oversight.

One of these things that we hear year after year from these owners is that their business is not profitable or that it's on the verge of becoming unprofitable. The head of the Players Association, Don Fehr, commented in reference to the owners' claims of always losing money, "If you read the Sporting News over the last hundred years, two things are always true from the owners' perspective. One, they never have enough pitching. Two, they never make any money." In fact, the owners' have been required since the collective bargaining settlement with the players back in 1985 to release to the players summary financial statements of their books. If you look at the books closely, you discover pervasive bookkeeping shenanigans, accounting sleight of hand. It's quite clear, although the details of the books are private, from leaks from previous financial officers and other kinds of leaks to newspapers, that major league baseball's teams, teams like the Seattle Mariners, which were just sold off to a partnership that has large Japanese participation, or the Pittsburgh Pirates, the teams that have been most talked about as teams that are losing big dollars, that they're not going to be able to hold on to their stars, that these teams have been making not a lot but a little bit of money in recent years. What we're getting in the public statements has no bearing on the underlying reality.

So what are the games that get played to hide the profits? One of the most important is that virtually all owners of baseball teams have other businesses that they're involved in. Usually the other businesses were first and that's where they made their money. For instance, the Cardinals are owned by Anheuser-Busch. They play in Busch Stadium. The Atlanta Braves are owned by Turner Broadcasting Systems. The Chicago Cubs are owned by the Chicago Tribune. The Blue Jays are owned by Labatt's. What these joint ownerships allow the owners to do, through corporate tie-ins, is to transfer profits from one company to another, taking money out of one pocket and putting it into the other pocket. The way they can do that is very simple. If Mr. Busch, who is the Chief Executive Officer of Anheuser-Busch and also the President of the St. Louis Cardinals, if he chooses, he can charge the Cardinals very high rent for playing in Busch Stadium, which he owns. The profits that the Cardinals might make all go into the rent that they pay that now appears as profits for Budweiser, for some other branch within Anheuser-Busch. Then when they make a report to the public or go to the bargaining table with the players, they say, Look, there's no profit here. Or when the Chicago Cubs make similar deals with the Tribune. The Chicago Tribune is not only a newspaper. It owns WGN, the main television station that broadcasts the Cubs games, not only in Chicago, but it's a superstation, uplinked to satellite and broadcast around the United States. All the Tribune has to do to make profits disappear from the Chicago Cubs is to give it a poor television contract. And indeed they have done that, in spite of the fact that it's a superstation. A typical team in a city the size of Chicago that had satellite uplinking might get a broadcasting contract on the order of fifteen or twenty million dollars. The Cubs have a broadcasting contract that's below five million dollars. So there's ten, fifteen, twenty million dollars that get transferred from one business to another.

Another way that they can make profits disappear is by giving themselves high salaries. Baseball companies are closely held private companies. There's not one that's publicly traded so that a small stockholder could go and demand to see the books. It's owned by one individual or a group of individuals. They can do what they want. I don't know what the situation is for baseball, and I don't know anyone who has. But coming out of the recent National Football League case in Minneapolis, where the football players were suing to be free agents against the owners, they were forced to release as part of that hearing salaries for some of the owners of professional football teams. It turns out that the owner of the Philadelphia Eagles paid himself last year $7.5 million in salary. You're talking about a team that probably generates on the order of $45 or $50 million in revenue, perhaps even less than that. We're not talking about profits or dividends, just in straight salary. And because it's closely held, the owners, if they don't give themselves high salaries, they give themselves wonderful perquisites. The fellow who used to own the Seattle Mariners, Jeff Smulyan, used to live in Indianapolis. He had a corporate jet that he went back and forth to Indianapolis several times a week. That corporate jet was charged not to his Indianapolis business but to the Seattle Mariners.

Another thing that baseball owners can do to make profits disappear is they are allowed to do something no other industry is allowed to do. They're allowed to depreciate their players. A typical manufacturing corporation can't depreciate their workers, but they depreciate their players as if their players were machinery. So that if I were to buy the New York Yankees for $250 million, what the IRS would allow me to do is to take half of that sum, $125 million, and say that that part of the $250 million is the value that the players contribute to the Yankees. I could then take that $125 million and depreciate it. It used to be over five years, but now there are some cases where you can depreciate it more rapidly. But let's say it's over five years. That would mean that I can take $25 million off of my profits every year and not pay taxes on that. No other sports teams are allowed to do that. But outside of the world of sports, people can't depreciate their employees. It's a really crazy notion anyway. One of the reasons it's obviously nuts is because most players don't hit the top of their careers until they're in their seventh, eighth or ninth years. That's statistically demonstrable. So players don't depreciate the majority of their playing lives; they appreciate.

Another little trick that gets played by many of the ownership groups is they deduct interest expense. What they do is they set up a partnership to buy the baseball team and then as an individual they loan the partnership money in order for the partnership to buy the team. When Steinbrenner bought the Yankees he was part of a partnership. He loaned the Yankees a big chunk of money and charged them a high interest. The money went into his pocket directly in interest payments. But it was really profits in the Yankees. It didn't appear as profits in the Yankees. It appeared in some other book of Steinbrenner's that he was getting interest income.

More recently, the owners have played other games. Many of you may have read that a couple of years ago the players' association was suing the owners for colluding in holding down salaries. Collusion damages were found to be equal to $280 million. Each team was more or less liable for about $12 million in collusion settlement payments. What the Pirates did, for instance, while they were trying to get a special deal from their city, they took $12 million in one chunk and deducted it from their income statement when they published their income statement. The reason that that was spurious was that in 1989, the year that they deducted that, they didn't make any payments. They made payments in 1990, some more payments in 1991 and finished payments in 1992. But they deducted the whole thing from their books in 1989.

I could go on and on again in this area of bookkeeping shenanigans. But I just wanted to illustrate the point about why we can't believe at all when the commissioner of baseball, or some owner, starts complaining about insufficient profits.

Another thing that we have to keep in mind about baseball owners is that they often are able to take advantage of promotional synergy for their other businesses. The fellow, for instance, who owns the Baltimore Orioles, Eli Jacobs, is a venture capitalist who used to own dozens of other businesses. Many of them have gone bankrupt in the last year and a half. What he used to do is entertain Presidents and Vice Presidents and Congresspeople and Senators in his luxury box, which used to be at the old Memorial Stadium in Baltimore, now it's in Camden Yards, the new stadium in Baltimore. He's able to promote himself as a businessperson because of his ownership of the Orioles and get various kinds of favors because of that. The fellows who own the Cleveland Indians, two brothers also called Jacobs, not related to Eli, bought the Cleveland Indians because the Indians were threatening to move out of state and they had just invested tens of millions of dollars in a new mall they were building downtown. So for people in that kind of a circumstance, and to one degree or another most owners are in this kind of a circumstance, there's a larger benefit from owning the baseball team that has nothing to do with the particular profits that the team itself might or might not earn.

Finally, of course, most baseball owners have what economists would call a "consumption value" from owning and operating a team. Just like your baseball fanatics who play with rotisserie league or fantasy league baseball, these guys get to make trades. They get to trade their players. They get to be in the newspapers and get interviewed. They get fame. And there are lots of quotes from baseball owners about how much they enjoy the spotlight. Not everybody does, of course, but if you do, that's not a bad place to be. So that's another return that they get as baseball owners. It's not something that's measured quantitatively and financially.

Finally, the last gain that they get, and this is a great big gain over the last twenty years, is that there have been tremendous capital gains in buying and selling baseball teams. Franchise prices, franchise values have exploded. Just to give you one example: the team that's supposed to be the financially weakest team in baseball, the Seattle Mariners, was created in 1977 as an expansion team in the American League. Seattle had a ball club in 1970 called the Seattle Pilots, but the owner didn't make enough profits to satisfy himself and sold the team to Bud Selig and they moved the team to Milwaukee. Selig is the owner of the Milwaukee Brewers. The city of Seattle was going to sue major league baseball. To get out of the anti-trust suit major league baseball created an expansion team in Seattle. When it was created, the Mariners were purchased for $6.5 million in 1977. Then they were sold to some other owner in 1981 for $13 million. Then they were sold in 1988 to a fellow by the name of Argyros who lives in Los Angeles, which is interesting because neither Argyros nor the subsequent owner, whose name is Smulyan, lived in Seattle. But major league baseball said one of the reasons they didn't want the Mariners sold this year to the president of Nintendo America was because they wanted local ownership. It turns out the president of Nintendo America has lived in Seattle for the last fifteen years and he would have been the only person who ever owned the Mariners who had a Washington state license plate.

So they sold for $13 million in 1981, for $77 million in 1988, and they just sold for $106 million, so the team over that fifteen year span went from a value of $6.5 million to $106 million. This is supposed to be a team that doesn't earn any money. So again, if one looks carefully and accurately at the business of baseball, it's a profitable business, and it's even been profitable for the teams at the very bottom. A word of caution here, however, is necessary. Like most industries in the United States, there are periods of tremendous growth and boom and other periods which are not so positive. Baseball, it's my feeling, is coming to the end of a fifteen year boom. I don't think that it's about to go downhill, but it's been gaining by leaps and bounds in its national media contracts and in licensing contracts and in other areas. My sense is that the national television contract is going to go down a little bit. That's going to be offset by growths in licensing income, growth in luxury box income, and some other growth, local cable income. So what's going to happen over the next five years or so in baseball is you're going to see basically flat revenues. They'll be going up a little bit but not a whole lot. So the period of tremendous growth is over.

During this coming period of five years of so I think it does make sense to take a close look at some of the teams from the smaller cities financially. Player salaries have gone up very rapidly, and some of these teams, as I said, although they're making money, they're not making very much. So you have a team like the Mariners that might be making $1 or $2 million some years, it might even be having a loss, on the one hand. On the other hand you have teams like Steinbrenner's Yankees, who go to the same player market to buy the same players and basically pay the same salaries, have cost structures that are almost identical with the other teams, but instead of making $40 million a year revenue like the Mariners do, the Yankees have been making $110 million a year. So the Yankees are sitting on top of $30, $40, $50, $60 million a year profits, while there are other teams in baseball that have a very small profit. Again, maybe even some years they don't have profits at all. Somehow major league baseball owners think they're different than other people under capitalism. My understanding of capitalism was that there was supposed to be some risk involved in owning a company and that you weren't guaranteed a profit every year. Baseball owners seem to think that it's a catastrophe if they go through a year of having a loss. But the real question is not whether a team has a loss in one year or not, but whether in the coming years some of these small city franchises will find themselves structurally in a situation where year after year, almost no matter what they do, they'll be losing money.

So there is this tension in baseball. There would be one very obvious way of dealing with it: to basically do what football does and say, Look, we're in the same boat together. The Yankees don't flourish unless the Mariners flourish. You've got to be able to field a competitive team from Seattle, from Minneapolis. We're going to do what football does: we're going to share our revenue. That's what the owners of the NFL teams do. They almost have complete revenue sharing. That would be one plausible way out of their possible dilemma.

Almost needless to say, the owners of the teams from the big cities, New York, Chicago, Los Angeles, don't want to share their revenues. They say that they've paid top dollar for their franchises on the assumption that they weren't going to have to share their revenues. So baseball is really unable to take the easy road. The self-regulating monopolies are unable to do what would probably be best for the game. Instead of doing what's best for the game, because they have this distribution tension, what they're doing is turning their wrath on the minor leagues, on the cities, on the fans, and the major league ballplayers, in order to squeeze money out of them. What it does is create strife, strife in the form of labor strife that they've had for twenty years now and will have again. It creates strife with the minor leagues. The major leagues almost ended the minor leagues as we've come to know it in the United States. It creates strife with the fans via the broadcasting of games, with major league baseball moving more and more towards cable, increasing the amount of time between innings so there are more and more commercials. The game gets commercialized more and more and more.

Let me take a closer look at some of these other areas where strife has been created. First of all, with regard to labor. Baseball players until 1976 were basically chattelized, like they were back in 1914 and 1915 when the Federal League came along. They were slaves. They got drafted out of either high school or college by a baseball team and they stayed with that baseball team for their entire professional careers, unless the owner chose to trade them or to sell them to another team. Back in 1976 there was a free agency provision introduced for major league players who were around more than six years. If you are around for more than six years you can become a free agent and receive competitive bids for your services as a baseball player. That's been a tremendous advance for all those baseball players who are free agents, but it turned out that only one in eight people who ever played a game in the major leagues make it past their sixth year. So that means seven out of eight don't benefit from that provision. There are 650 major leaguers and 3,400 minor leaguers. The minor leaguers don't benefit at all either. So the vast majority of baseball players don't have this free agency right.

Minor leaguers are the most exploited of all the players. They receive monthly salaries of somewhere between $850 and $2000 for two and a half months if you're a rookie, for four and a half or five months if you're playing higher level minor league ball. They have virtually no benefits and no job protection. They can be told by the field manager at 2:00 in the afternoon that they're fired. They don't get any severance pay. They can't stay with the team for another moment. Major leaguers are covered by the Major League Players Association, even those players who don't have six years are covered by a minimum salary, which is rather nice at $109,000, and a plethora of benefits.

One of the issues that free agency has brought to the fore, and one of the reasons as well why owners said that they could never have free agency in baseball because it would ruin the game, is the concern that if in order to get a good ballplayer you have to pay $5, $6, $7 million, then the teams from the smaller cities won't be able to buy the free agents. All the free agents will go to the teams from the big cities, the rich teams. If that's true, there won't be competitive balance, goes the argument. The Yankees will get all the good players. The Chicago White Sox will get all the good players. All the other teams will get the dreck and lose every year.

It turns out, oddly enough, that since free agency was introduced in 1976 there has been more competitive balance in the game of baseball than there has been for the entire century. I believe the record is that every team but three has won a divisional title since 1976. No team has one two consecutive World Series since 1978. Certainly the big city teams like the New York Yankees have not dominated. Or the New York Mets, or the Chicago Cubs or the Chicago White Sox. The big city teams are not dominating. What has happened that free agency, rather than undermining competitive balance, has actually strengthened it.

There are lots of possible explanations, some rather esoteric. Let me mention one or two thoughts to you. One is this: prior to 1976 players were able to move from one franchise to another when they were sold or traded. When they were sold or traded, however, the value of the player would be captured by the owner. In 1919, Harry Frazee, then the owner of the Boston Red Sox, was trying to produce a play on Broadway, No, No, Nanette, that his girlfriend was going to star in. He needed some capital. He sold Babe Ruth to the Yankees for $100,000. Babe Ruth didn't get that money. He was the one who was worth the money, but it was Harry Frazee, who wanted to put on a Broadway show, who got the money. Babe Ruth was still able to go to the Yankees, and many other cases of star players being sold or traded in an unequal trade transferred players from financially weak to financially strong teams. So precisely what major league baseball owners said was wrong with free agency was happening anyway. The only thing that was new about free agency wasn't that players would tend to drift, but that the players would be the ones who captured the value, or what economists call their own rent.

Looked at from this perspective you wouldn't think that free agency would have the deleterious effect that the owners claimed it was going to have. Moreover, now when you signed a free agent you have to give up an amateur compensation draft. So there is a built in institutional mechanism to try to equalize whenever players make those movements. One of the things that tended to happen is that when a team wins a pennant or the World Series, the players on that team are highlighted and somehow become more valuable. When they become free agents, they get bid away. In other words, it's harder for the best teams to keep their best players. They get signed up by some other team. So it's harder for teams to repeat. If they've won the World Series in one year, it's harder to come back and win it the next year. By the same token, teams that are doing very poorly can go to the free agent market and prove themselves immediately. Before they couldn't.

I think, however, that there's a much more important factor that's operating and equalizing the outcome in major league baseball. That's what I call "talent compression." What you have in baseball today is a much smaller share of the population playing at the major league level than ever before. If you compare it with the beginning of the century, it's something like a fifty four percent smaller share of the population playing today than ever played before. Not only is it a smaller share of the population, but the population is much more physically fit than it was before. Not only is it more physically fit, but it's more specifically prepared in baseball skills, because things like the Little League didn't begin until the early 1940s. What followed, the Babe Ruth League, Mickey Mantle League, all the other youth baseball programs, are things that have come in the last twenty or thirty years. So there's much more very specific preparation in baseball skills. So you have a more athletically prepared and healthy population, more specific training in baseball. You have a smaller share of the population playing. You have blacks entering the game in the late 1940s but then coming in big numbers in the last twenty or thirty years, something like twenty six or twenty seven percent of major league baseball players are black. And you have the Latin players coming in in big numbers. So you have a lot of talent compression. On the field what that means is that the difference between the very best player and the very worst player is smaller now than it's every been before. For those of you who follow baseball, if you think about the records in baseball, virtually every single one of them was set before 1930, except for the one with the asterisk in 1961, but even that now was thirty one years ago. Rogers Hornsby, Ty Cobb, the people who batted over .400, they did that in the teens, and 1920s. The RBI record from Gehrig and Ruth, nineteen teens, 1920s. Runs scored, Hank Greenberg's records. All of those records were set at the beginning of the century. I would submit that the reason why Babe Ruth has the home run and RBI and runs scored record isn't because he's a better home run hitter than Josť Canseco. It's not because he's a better home run hitter than Mark McGuire, or Cecil Fielder. If you look at his body alone it's quite obvious that he didn't have more talent in that direction. The reason was that Babe Ruth faced a lot of very good pitchers. He also faced a lot of very bad pitchers. You didn't have the talent compression then. You had talent dispersion. That's why it was possible to break all sorts of batting records on the one hand, and on the other hands, it's why all sorts of pitching records were broken back then. If you go back and look at who's got the ERA lifetime record, back in the nineteen teens, somebody had a 1.30 and somebody else had a 1.04 yearly ERA. That's much better than today. Why? Because the pitchers back then faced some very good hitters, but they faced an awful lot of very bad hitters. So that what the talent compression has done is on the one hand it's made it very difficult for anybody in modern baseball to approach these old records, with the exception of some things like stolen bases, which as everything else in baseball is the outcome of competing forces. The batter isn't good independently of who's on the mound. Two people who are both better facing each other today relative to what happened a long time ago. But somebody who's stealing a base is basically out there by himself. Yes, the pickoff move matters a little bit. Yes, the catcher's throw matters a little bit. But basically that's the individual running skill. The other skills, though, and the other records are the outcome of competing forces. Those records don't get broken any more. But the other thing talent compression means is that it's very hard to buy a winning team today. Data would show that it was quite easy to buy a winning team between 1903 and the 1960s. Right now, if you look at the average salary per team and compare that to the win percentage, do a statistical analysis, you find there's virtually no correlation at all. I think the reason is that because there's this talent compression, there are very few people who reliably are going to perform at a top level year after year. On top of all that there's a lot more emotionally at stake in playing a baseball game today than there was thirty or forty years ago. There's a lot more financially at stake, which means that there's more emotions, more emotional pressure in a player's performance.

One of the reasons I'm spending some time on this is because the chief reason why owners give for not expanding the game of baseball, ultimately one of the major ways to remedy its problems is to expand, they say the reason we can't expand is that there's not enough talent out there. Look at the fact that nobody hits more than fifty five home runs any more. Look at the fact that we don't have any pitchers who have ERAs below 2 any more. That's a bunch of nonsense. All of those records have to do with competing forces. If both sides of the competition get better, you're not going to have the records set any more.

One of the reasons that expansion is important is because of baseball's relationship to the cities. Baseball's most recent expansion is in the National League, one in Colorado and one in Florida. The reason we're going to have them in those two cities is because there was a Congressional Task Force headed by Senator Tim Wirth from Colorado and Senator Connie Mack from Florida, who were the ones who were putting the political pressure on baseball. As soon as Florida and Colorado got their teams they disbanded the task force, even though they had set a goal of six new teams. Major league baseball two years ago had a bidding, even though I would argue it was predetermined who was going to get the teams. There were eighteen different ownership groups from fifteen different cities that wanted to get a major league baseball team. Each of these groups had to be serious, because they had to put down a $100,000 application. Of course, only two of those groups were able to get a baseball team. What's going on here again is that baseball is a monopoly, and like any good monopoly that's not regulated and told to do otherwise, the way it makes monopoly profits is by restricting supply and driving up the price, in this case the price of franchises. So the demand by viable cities far exceeds the supply of available baseball teams. Baseball restricts supply as a monopoly. What does that do? It means that the Detroit Tigers are able to go to Mayor Coleman Young and say, Listen, you either build me a new baseball stadium that has luxury boxes, and these luxury boxes get put in either through refurbishment or into new stadiums and generate $5 to $10 million in revenue for the owners every year, new luxury boxes, more parking space, new space for concession stands, new electronic scoreboards where I can get $1 to $2 million in advertising space. You either do all that for me or I'm going. I'm taking the Detroit Tigers and we're going to go to Tampa, Florida or some other city. The reason he's able to do that is that there are a lot of desperate cities out there that want a baseball team that don't get them through expansion. Before Tom Monaghan did that the same thing happened in Chicago. Jerry Reinsdorf and Eddie Einhorn, who were the owners of the Chicago White Sox, went to the city of Chicago and the state of Illinois and said, We're going to go to Tampa, Florida. Tampa was told back then that the White Sox were going to move, that they were on the verge of moving. At the last second the Illinois state legislature voted them a new stadium. Because it was represented to them that they were going to get a new baseball team, Tampa built a domed stadium. That dome has been sitting there ready to be filled.

What was the deal that the Chicago White Sox got from the city of Chicago? They knocked down Comiskey Park and put up a new one across the street. Who was living across the street? It was low income housing. Low income inhabitants of that district demanded indemnity and got it. Who paid the indemnity? The city of Chicago and the state of Illinois. Who built the ball park and with whose money? The city of Chicago and the state of Illinois. The ball park comes rent free, with a $2 million per year maintenance subsidy for ten years. Beyond that there's attendance guarantees; if attendance falls below a certain point the city of Chicago buys seats to fill up the ball park, and so on. This is what happens when you have an unequal economic relationship which is flowing from the restriction of baseball franchises. This is all structurally rooted in the monopoly. The one way out of it is through expansion. Baseball is not going to expand on its own.

I've said before that these cities are viable. One of the ways you can figure out whether a city is viable or not is to consider the following: the Cincinnati Reds are in the smallest media market of any baseball team. Cincinnati is the thirtieth media market in the country. The Cincinnati Reds have operated profitably for time immemorial. It's a profitable ball team in spite of the fact that it's the thirtieth largest media market. No other ball team is in a smaller media market. If you consider that, with the fact that four cities, including the Bay Area, have two baseball teams and there are two teams in Canada, then without admitting any new teams to cities that are smaller than Cincinnati, you could have thirty six teams instead of twenty eight teams in major league baseball. And there are another twelve or fifteen cities that are within ten percent of the media size of Cincinnati. So if you had an expansion program that went to the year 2000 or 2005 and you posit a population growth of only around one percent for those cities, then those cities also would be large enough. So there are enough cities out there which can support a major league baseball team.

Another area of problems in major league baseball has to do with the media. Basically what's happened in the media with regard to broadcasting is that baseball telecasting is being siphoned to cable. Within cable it's getting tiered, put on premium tiers, not basic cable, but on higher priced tiers, and also it's starting to go towards pay per view, which is what everybody talks about is the wave of the future. Along with that you have the fact that World Series games are no longer on in the daytime. I think 1986 or 1987 was the last time a World Series game was broadcast in the daytime. Now they put it on at night. That's prime time. That's when the most people will be watching. What they forget to think about is that America's youth, at least on the East Coast, doesn't get to stay up and watch the end of the World Series game. That might be great for American culture. But it is not very great for baseball in the long run. In the short run it might bring them a little bit more money in the national media contract. But now they're creating a whole generation of kids who don't have the habit of watching baseball on television.

The remedy is that there are three choices. One is to do nothing, to let these characters who own baseball, the old boys' club of baseball owners, to let them do whatever the hell they want to maximize their profits. That's one option. Another option is to subject baseball, like all other industry, to anti-trust laws, to remove its exemption. That might have something to commend it. But in my viewpoint it's not a preferred route. I think what it would do in the short run is create a lot of chaos in the structure of baseball. It would be a field day for lawyers. The game would be litigated out of existence. More important than any of that is that it would actually give baseball in the short run, at least, more opportunity to take advantage of cities. There's a story in football of the Oakland Raiders moving down to L.A. Football is not exempt from the anti-trust laws. When the football owners tried to prevent Al Davis from going to L.A., they weren't allowed to because Al Davis sued them in court, saying they were restraining trade. If they had had an exemption, he wouldn't have been able to move his team. So there are other issues here that I don't think the anti-trust exemption will deal with directly.

Hence, what I propose is that we need regulation. We need a national, a federal sports agency that oversees the game in every aspect, one that would set a timetable for expansion, that in return for the tens of millions of subsidies that cities give to baseball teams that a certain amount of free access television, ticket pricing controls could get put in place, other kinds of controls on the exploitation of minor leaguers and amateurs could also be put in place. There have been bills that have come up in Congress from time to time to introduce regulation. So far they haven't made it, and of course, like every other political change that might be salutary in this country, it's going to take a lot of work.

Let me close by reading a statement made by former Baseball Commissioner Happy Chandler just before he left office in 1952. I think it says it all. "I always regarded baseball as our national game that belongs to 150 million men, women and children, not to sixteen special people who happen to own big league teams." That's the way it ought to be, but we're going to have to work to make it that way. [applause]