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Baseball: A New New York Team?

Baseball owners and players have been negotiating how to make it easier for poorer teams to compete with richer teams, especially the New York Yankees. Proposals include revenue sharing between the clubs and a luxury tax that would penalize teams who spend above a certain limit.

But there's a far simpler solution to the problem of competitive balance: put a third Major League Baseball team into the New York area. New York teams possess an enormous advantage because of the outsized economic clout of the region, which accounts for fully 10% of the country's personal income all by itself. A richer and broader fan base means more TV money and more cash to spend on players, leading to competitive advantage.

Adding a third team--either by expansion or by moving a team from a smaller region--would provide more competition for TV and fan dollars for the Yankees as well as for the Mets. This would substantially reduce the Yankees' economic edge without creating complicated tax or revenue-transfer mechanisms.

One way to see this is to look at the economic base for each team in baseball, which BusinessWeek defines as the total personal income for its region divided by the number of teams. The New York metropolitan region--including Long Island, Westchester, and parts of New Jersey--generated $836 billion in personal income in 2000, according to the most recent data from the Commerce Dept. So the two New York teams have an economic base of $418 billion each.

That's far ahead of any other team in baseball. Next on the list are the Baltimore Orioles, which has an economic base of $284 billion, including the Washington (D.C.) area. Close behind are the two Los Angeles teams and the Boston Red Sox (chart).

Another team in the New York area--perhaps located at the Meadowlands in New Jersey--would reduce the economic base of the existing New York teams down to $279 billion. While still high, it would no longer be out of line with the rest of the league.

Moreover, such a move would go a long way toward restoring competitive balance across the entire league, because it turns out that the two New York teams account for the entire advantage of rich teams in recent years. The Yankees and Mets have turned in a winning percentage of .561 from 1995 to 2001. The next 10 teams with the biggest economic bases have a winning percentage of only .497 over the same stretch.

This solution isn't on the table now. But the Yankees and Mets might well prefer having another team enter the market than face an onerous luxury tax on their payrolls--especially if they got a big expansion fee up front. The share of the working-age population without any kind of health insurance, private or public, rose from 13% in 1987 to 16% in 2000 despite good economic growth over the period.

Why? Big increases in the cost to workers for company-offered health insurance, according to Harvard University economist David M. Cutler. From 1988 to 1999, inflation-adjusted employee payments for family health insurance doubled, to about $1,600 in 1999 dollars. As a result, there was a fall in the "take-up rate"--the share of eligible employees who sign up.

Since health-care costs are zooming up these days at a 5.5% annual rate, "continued declines in health insurance are quite possible," Cutler writes. But he resists concluding that the answer is to control medical spending more tightly. Cutler says that to stop workers from dropping employer-based insurance because premiums are too high, "the government could well decide to subsidize private insurance coverage." The stock market has long been seen as a leading indicator of economic growth. That's why this summer's big drop in the market was taken by many as a sign of an impending double dip.

But while the stock market may have been a good predictor in the past, it has missed the mark over the past 15 years, say economists James H. Stock at Harvard University and Mark W. Watson at Princeton University. They found that adding the stock price to a simple forecasting model lowered the accuracy of the forecasts from 1985 to 1999.

Other financial market-based variables have done no better in recent years. From 1971 to 1984, the spread between short-term and long-term interest rates was a good indicator of future economic growth. When short rates were lower than long rates, that was associated with faster growth over the next year. But in the period from 1985 to 1999, the yield spread has lost its predictive power. Similarly, in the earlier period, the difference between the yields of safe government bonds and corporate bonds of the same maturities contained information about the prospect of corporate debt defaults. If these yields were closer, it meant that investors didn't fear future defaults, indicating better growth in the future. But that forecasting advantage seems to have eroded, too.

Stock and Watson also combined 24 financial-market indicators for a composite forecast. That gave a better prediction than the individual indicators. Still, it's not more accurate than a simple method using current and past values of the growth of gross domestic product to predict its future path.

The economists conclude that it's not wise to put too much faith in any one indicator. As the economy evolves, what was a great predictor yesterday might be terrible tomorrow. "The attention-grabbing indicator of the day often tells us little about the future of the economy," Watson warns.

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