Free Agents and the Free Market
In an article in the Wall Street Journal today, Reed Albergotti writes that eliminating the salary cap on free agents in the NFL hasn’t caused the season to “become the discombobulated cash volcano everyone was hoping for.” Now, I don’t know very much about football, but I do know enough about economics, and I find the author’s conclusion to be economically nonsensical (emphasis mine):
So with apologies to Messrs. Friedman and Hayek, here’s the likely game summary on the free-agent season that was: The free market ended up making the NFL’s players poorer and its owners richer than ever.
Removing a salary cap would not cause salaries to decrease — it would cause them to either increase or remain unchanged. If the salary cap were ineffective (i.e., above the equilibrium price), then removing it would result in no change in salaries. A football team owner is going to hire q* football players and pay them a salary of p* nevertheless. If the salary cap were effective (i.e., below the equilibrium price), then removing it would cause salaries to increase to the equilibrium level.
From what I can tell from the article, the author is incorrectly assuming that the salary cap for football players was effective (i.e., their past salary was below their market value). On the contrary, the salary cap was probably ineffective (i.e., their salary equals their market value), which would explain why nobody is “throw[ing] irresponsibly large sums of scratch at the sport’s top free agents” upon its repeal. This is evidenced by the fact that, while under the cap, many teams hadn’t used up all the funds they had allocated in salaries. According to a recent article in the Post-Dispatch, this group includes the Saint Louis Rams:
The Rams have only about $76 million committed to salaries so far in 2010, and with projections of $30 million or $35 million in cap space when all is said and done.
I realize you dont know a whole lot about the NFL, but
There are many things to keep in mind here when talking about the NFL and salary concerns.
1. I think the Post-Dispatch article you link is clearly outdated and hard to use as a source here. It was written about 2 months ago and I would say the Rams have signed about 5-10 players since (no more than 10 million $). Also, it was written when before it was officially an un-capped year.
2. There are only 32 teams, and only 53 players per roster per team. There are (or were) league minimums and different positions cost different salaries. When averaging that many variables you just wont see drastic changes in a 1 season period. Especially when it really isnt half way through this off season. Evaluation of a team’s spending needs to be done about half way through the regular season or even at the end of the season, so about Nov- January of each year. The fiscal year in the NFL is only about 1.5 months old.
3. The un-capped year has buyers beware, not an auction for many many reasons. Also, this particular free agent class isn’t all that spectacular. Also, auctions can be slow, free-market policies don’t dictate time frames.
4. Obviously the national recession has hurt ticket sales of many franchises including the lowest spending ones. Jags, Rams, Chiefs to name a few. Financing ultimately comes from the owners, and when the owners are independently wealthy a host of problems can be thrown in the mix.
5. a player’s value is only loosely tied to his salary. Evaulation is a hit or miss system with too many people making non-economical decisions.
6. unions, agents, lawyers, owners, coaches, players are all involved in this.
I guess what I am trying to say is that this is hardly an idealized supply and demand curve.
Comment by Adam Lodes — March 25, 2010 @ 12:26 a.m.
I’d add that the salary cap was not a cap on what any given player could be paid, but rather on what the team could spend in aggregate for all of the players it would employ. Players wishing to maximize their income could simply look for a team willing to skimp on other players’ salaries.
Also, the salary cap helped to reveal those players for whom non-monetary rewards in the form of the likelihood of on-field success proved more important than salary maximization. In several instances star players (such as future Hall of Fame quarterback Tom Brady) willingly accepted below-market salaries in order to free up the cap space necessary for the team to sign talented teammates.
Comment by Dave Roland — March 25, 2010 @ 1:22 a.m.
I would also add that I would not put it past the owners to collude to keep player salaries down. Baseball team owners did it in the 1980s. It is very hard to prove collusion as it can be done with a wink, nod etc.
Comment by Papillon — March 25, 2010 @ 9:45 a.m.
I also don’t know “a whole lot” about the NFL but:
I find the 2009 NFL cap figures evidence that the cap was, in fact, effective. I would not expect any team to spend all the way up to the salary cap. I would expect a team to keep a few million on hand as a “just in case” option.
Looking at the salary spending figures for 2009 with that in mind, I find evidence that the cap was effective because 15 teams had spent nearly up to the cap, while 17 had $5 million or more to spend on free agents. What was at play, as Adam and Dave have noted, was a constraining factor for which the NFL teams adopted differing strategies.
Comment by Audrey — March 25, 2010 @ 10:11 a.m.