Silly Money and What Our Society Values

The Boston Red Sox recently signed starting pitcher David Price to a seven-year, $217 million contract. That works out to $31 million per year. Not to be outdone, the Arizona Diamondbacks then signed pitcher Zack Greinke to a six-year, $206.5 million contract. Using straight division, Greinke’s contract calls for an average of $34.4 million per year, but the deal includes $60 million in deferred money that will be paid out in the five years following the end of the contract, so Greinke won’t be making $34.4 million next year. No matter how you look at it, though, these are big money deals.

There are many comparisons you can make with this. For starters, each time David Price heads out to pitch next season he will be making around one million dollars. David Price has averaged 217 innings pitched over the last six seasons. If he pitches 220 innings next year, he’ll make around $140,000 per inning. At 15 pitches per inning, that’s more than $9,000 per pitch. David Price will make as much money for throwing six pitches next season as the average public school teacher makes in a year.

In the world of Major League Baseball there are good arguments to be made that Price and Greinke will be worth the cost of their contracts. The most likely scenario for a long-term, big-money contract is that the player provides surplus value in the first few years of the deal but ends up overpaid in the last part of the deal. Baseball is flush with money right now for a number of reasons, including strong attendance numbers, but the big drivers behind the current economic strength of the game are cable television contracts and Major League Baseball Advanced Media (MLBAM). Baseball has done a very good job of establishing an online presence through MLBAM, which allows fans to follow their teams on assorted electronic devices beyond TV and radio.

Also, the way people consume entertainment these days is a big factor. More and more people have an on-demand mentality when it comes to their entertainment choices. No longer do we have to be in front of the TV at nine o’clock on Wednesday night to watch Modern Family. We can just record it and watch it later. If we miss the first few seasons of a popular show, we can binge-watch past seasons and catch up. We can record a week of Jeopardy! shows, then watch five in a row on a Saturday afternoon.

Sports are different. Most people want to watch sports live and this gives baseball (and other sports) a huge advantage. Sports fans have to be in front of the TV—or watching on a smartphone, a tablet, or a computer—while the sport is happening. We want to talk about it with friends, tweet about it on Twitter, and complain about the refs on Facebook. This strong desire to watch sports live makes sport programming a highly desirable commodity for networks and results in the big money TV contracts that baseball teams are signing.

So when you read about David Price or Zack Greinke signing a contract that will pay them $30 million or more per year, you have to understand that teams have enough money to pay them. They wouldn’t dish it out if they couldn’t afford it. These contracts aren’t unreasonable in the context of the game. As much as Price and Greinke are making, the owners of their teams are making more. Getting paid $30 million per year is not so ridiculous in the context of Major League Baseball in 2015. This is the going rate for a top pitcher these days.

As a matter of fact, Major League Baseball players are earning a much lower percentage of league revenues than they did a dozen years ago. Back in 2002, MLB player salaries were 56% of league revenues, but it’s been dropping steadily ever since. Their share dropped below 40% in 2014. That’s a significant decrease. Imagine how much pitchers like Price and Greinke would be making if the players’ share of league revenue hadn’t declined so much in that time period. Where is that money going now? In the pockets of the owners, of course. Baseball is flush with money these days and player contracts reflect that, but they could actually be making much more than they are now. Instead, the owners are making it.

In the world where most of us reside financially, it seems ridiculous to have a professional athlete make that much money, especially when compared to a teacher, a construction worker, a police officer, or any other job where people put in a good day’s work to make enough money to pay their rent and feed their family. This is where it can be frustrating for fans. Most of the people sitting in the stands or watching the games on the electronic device of their choice will never come close to making the annual salary of a major league rookie (around $500,000).

And it’s not just sports. There are plenty of other high-income fields with ridiculous salaries. According to Forbes.com, movie star Robert Downey Jr. will make $80 million in 2015. Jackie Chan will make $50 million. Vin Diesel will make $47 million. On the small screen, Jim Parsons, who plays Sheldon Cooper on The Big Bang Theory, makes $29 million per year. His TV roommate, Leonard, played by Johnny Galecki, makes $27 million. Even smarmy Howard Wolowitz (Simon Helberg) and his awkward buddy Raj (Kunal Nayyar) will each make $20 million.

Howard Stern earned $95 million between June 2014 and June 2015, with $80 million of that coming from Sirius XM satellite radio. Ellen DeGeneres made $75 million in that time span. Thanks to his long-running talk show and the release of his 13^th book, Dr. Phil McGraw made $70 million. Kim Kardashian nearly doubled the amount she made from the previous year thanks to her role-playing app Kim Kardashian: Hollywood. She made $52.5 million from June 2014 to June 2015.

The simple fact is, athletes and entertainers are making million and millions of dollars because we spend our money to watch them. It’s very easy to say that a famous athlete or actor shouldn’t make 500 times as much as a schoolteacher, but we all make choices in how we spend our money and those choices dictate how much the athletes we love to watch will earn. We go to the games, we watch the movies, we subscribe to cable or Netflix so we can watch our favorite shows. Every time we choose to spend our money on entertainment, we’re contributing to the high salaries these people are making.

I have friends who are continually shocked by the big contracts that baseball players sign. They think it’s ridiculous. When I get into a conversation with these people about this topic, I always think about this quote by Bill James from the book, The Mind of Bill James: How a Complete Outsider Changed Baseball (2006):

“One of the unwritten laws of economics is that it is impossible, truly impossible, to prevent the values of society from manifesting themselves in dollars and cents. This is, ultimately, the reason why we pay athletes so much money: that it is very important to us to be represented by winning teams. The standard example is cancer research; letters pop up all the time saying that it is absurd for baseball players to make twenty times as much money as cancer researchers. But the hard, unavoidable fact is that we are, as a nation, far more interested in having good baseball teams than we are in finding a cure for cancer.

That pool of money which we pour into athletics makes it inevitable that athletes are going to be better paid than cancer researchers. Dollars and cents are an incarnation of our values. Economic realities represent not what we should believe, not what we like to say we believe, not what we might choose to believe in a more perfect world, but what our beliefs really are. However much we complain about it, nobody can stop that truth from manifesting itself.”

I live in Washington state, one of only seven states that does not have a state income tax. During the Great Depression in the early 1930s, Washington came very close to instituting a state income tax. Times were very hard back then and people were struggling just to put food on the table. Voters first voted to change the constitution to allow an income tax, then voted to approve the tax, with 70% in favor. An income tax was more popular among the voters than bringing back the sale of beer.

Local business owners could see where this was headed, so they challenged the tax in court. In 1933, this challenge reached the Supreme Court in Olympia and was voted down 5-4. Since then, a state income tax has come up for a vote seven times and voters have rejected it every time.

A measure was on the 2010 ballot that would have created an income tax on earnings over $200,000. This tax would affect fewer than 70,000 people out of the state’s 6.7 million residents and would provide money for education and health care. It was rejected by 65 percent of the voters. A dozen years before, voters had approved funding for the construction of CenturyLink Field, home of the Seahawks, even though the Seahawks’ Paul Allen is the NFL’s richest owner, worth $17.5 billion. I’m sure if you ask residents of Washington which is more important, education and health care or professional sports, they would say education and health care. But how they chose to spend their money says otherwise.

Income inequality has been and will be a big topic in the news over the next year. Not to get into the politics of the issue, but the statistics are clear. There is a growing disparity between what the majority of people in this country earn and what the richest people in this country earn.

In the most simple terms possible, the rich are getting richer. We often hear about the growing disparity between what the top 1% earns compared to the other 99%. It’s true; the gap has grown significantly over the last 30 years. Looking at the difference between the top 1% and the other 99% doesn’t tell the full story, though.

This IRS report showed the top 1% had an adjusted gross income (AGI) of $434,600 or more in 2012. The MLB minimum salary in 2015 was $507,500, which means every player in the major leagues is in the top 1%. It’s the level above the top 1% where the disparity is even greater and the gap is growing more quickly. The top .01% of tax returns in 2012 had an AGI of $12 million or more. Of the roughly 750 players in Major League Baseball in 2015, 121 made at least $10 million, which is about 16%. We could estimate that 10-15% of MLB players are in the top .01% of income earners.

The top .001% of tax returns had an AGI of $62 million. No player is in that range yet, but Bryce Harper will be a free agent heading into his age-26 season in 2019. With Zack Greinke having just signed a contract worth $34.4 million per year, will Bryce Harper be baseball’s first $50 million per year player in three years? If he stays healthy, we all know he will sign a record-setting contract. When he does, it’s very likely that our friends who don’t grasp the economics of Major League Baseball will lament the fact that a baseball player is making so much money. Then they’ll go to the theater and spend $15 to watch a movie starring an actor making $60 million and think nothing of it.