In Praise of Sports Stars Leaving Money on the Table
Lots of big salary news out of the National Basketball Association the past couple of weeks:
Stephen Curry of the league-champion Golden State Warriors just signed a deal that will pay him $40 million a year for the next five seasons. James Harden of the Houston Rockets is guaranteed $228 million over the next six years. Everybody’s getting paid. Otto Porter Jr., the third-best player 1 for the good-but-not-great Washington Wizards, will make $25 million a year.
As long as professional sports have existed, fans have complained that players make too much money. But in an era when many disappointed Democrats still wish their most recent presidential ticket had been headed by a socialist, we should scarcely be surprised that vitriol is nowadays being directed against the team owners.
Consider a recent article posted at The Ringer entitled "The Empty Nobility of 'Taking Less.'" The author, Michael Baumann, is concerned about the accolades that sportswriters bestow upon players who agree to accept contracts paying them less than market value. The rationale for such deals is that the money saved helps the team sign other players and enhances the odds of a championship. Tom Brady, quarterback of the New England Patriots, is famous for accepting such deals. The five-time Super Bowl victor’s most recent contract ranks only 27th when measured against the National Football League’s salary cap. Sportswriters credit Brady’s unselfishness with helping win all those championships. 2
Similarly, Kevin Durant, the Warriors’ star, just signed a two-year contract that will pay him around $53 million, about $10 million less than he could have earned under the collective bargaining agreement. Management used the savings to keep the core of the team together. At least that’s the official story.
But Baumann, a very fine sportswriter, is concerned about all of this cheerleading. Durant’s action, he argues, writes, did not make the other contracts possible – “it made them cheaper, both in terms of the Warriors’ overall salary outlay and in terms of their luxury tax bill.” Management could have paid Durant his full $62 million or so and also paid to extend its other veterans; the team simply would have faced a big tax bill from the league for exceeding the salary cap.
But this is unpersuasive. A professional basketball team is a business for profit. The product is the game that is sold to advertisers and fans. The players’ labor is certainly the most important input. But it does not follow that the cost of the labor is irrelevant. As labor becomes more expensive, the team will cut elsewhere. Elsewhere can include the salaries of other players. No matter how wealthy the owner may be, the $10 million that the Warriors are saving over two years because Durant agreed to take less is not Monopoly money. If the savings makes signing other players cheaper, the team is more likely to make that investment. If by contrast Durant insists on the full amount to which he is entitled, the labor of the other players the team wants becomes more expensive (because of the league’s luxury tax on teams whose payrolls are too high), and the team is less likely to make that investment. 3
Moreover, compensation comes in forms other than money. Durant has accurately calculated that his chances of winning another title over the next two seasons are maximized if the Warriors are able to retain their core players. At 28 years old, he has already earned over $130 million dollars in his career and is willing to take a part of his reward in championships rather than cash. This might not be the same calculation every player would make but there is every reason to grant that it is entirely rational. (Also, Durant will be eligible in 2019 for a deal that will be likely to pay him over $40 million per year. So shed no tears.)
Of course Baumann’s real target is not Durant, or any of the other stars who have taken smaller salaries than they could to enable their teams to retain flexibility in the market for players’ labor. His target is the owners. Those who control professional sports franchises constitute an extremely wealthy group and, as Baumann points out, not all of them are admirable. But his principal objection is that they take the profits from the players’ labor.
In the short run this is probably not true. Professional teams rarely spin off much profit. Many operate at a loss. Owners buy them not to make money but for the psychic benefits – often, just to have fun. True, the franchises usually increase in value (there are a lot of fun-loving billionaires out there), and capital gains are profits, too. But the reality is that the owner of the Warriors is not pocketing the savings on Durant’s contract. In the near term, due to the tax, the team’s losses are likely to grow. 4
What Baumann means, I think, is that the owners pocket too much of the surplus created by the labor of the players. Studies tell us that this is not true for stars and veterans – the market for stars is particularly robust, and it is difficult for owners to avoid the auction problem, often resulting in overpayment. But the same studies tell us that players whose movement is restricted (usually by the collective bargaining agreement) wind up yielding a great deal of their surplus to the owners. In the particular case of the NBA, owners capture around one-third of the value created by players whose salaries are set by their rookie contracts. When those rookies become veterans, however, they get paid. 5
I agree with Baumann that sports owners are rich enough, and I am all for the players getting as much money as they can. But if some prefer to surrender dollar compensation to help the team, I’m among the admirers. We don’t have nearly enough public examples of unselfishness these days. Kevin Durant leaving millions on the table is a good one.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
I’m kidding. Although Porter does not get headlines, he is actually one of the top five shooters in the league, as measured by Effective Field Goal Percentage.
Including sportswriters at The Ringer.
In fact, the Warriors are subject to the so-called repeater tax, under which each dollar spent above the salary cap requires a payment of $2.50 to the league for the first $5 million, with increments above that. At $25 million over the cap, the tax hits $5.25 per $1. If, hypothetically, the entire $10 million that Durant forwent came after the team was already $25 million over the cap, the team’s actual savings would be an astonishing $62.5 million (the sum of the salary plus the tax). And the hypothetical may not be so hypothetical. Durant's deal is expected to save the team $25 million next season alone. Although NBA cap calculations are often murky, the Warriors are expected next season to pay a record luxury tax, well over $100 million. (The previous record was around $94 million.) Two years from now, the team's salary plus luxury tax bill will likely soar past $300 million. So if the players are being cheated, the villains are not the owners but the terms of the collective bargaining agreement.
See the previous footnote. If you want to dislike the owners, dislike them for the way they pressure cities to subsidize expensive stadiums. As economists have known for years, and as a recent summary from the St. Louis Fed reminds us, the cities never receive the returns cited by the proponents. (A professional baseball team returns about the same value to the city as a medium-sized shopping mall.)
See footnote 3.
To contact the editor responsible for this story:
Jonathan Landman at firstname.lastname@example.org