Long is the New Short- A Tale of Free Agent Madness

Of all of the perplexing developments in the first phase of Major League Baseball free agency, one jumps off the page to me more than the others. Jim Hendry’s 8-year pact with the 30 year-old Alfonso Soriano stands out as a bastion of lengthiness in a sport where many executives aim at keeping contracts short and risks low. Six years of Carlos Lee and four years of Juan Pierre reinforce the idea that GMs across the league have become more accepting of the long-term deal. Remember, just two short off-seasons ago, the fate of the World Champion Boston Red Sox turned on the idea of contract length and risk minimization; Pedro Martinez walked not over dollar amounts, but getting an extra guaranteed year. Jason Varitek shared the same hang-up in his negotiations, and Johnny Damon ran into a similar issue before bolting for the Bronx. Analysts extolled Theo Epstein and company for keeping their commitments to expensive players to a reasonable length, and discretion has proven the better part of valor, as both Pedro and Varitek face uncertain futures for 2007 and beyond. Now, even the Red Sox are trying to squeeze extra years out of Daisuke Matsuzaka, beyond what Scott Boras wants to secure.

While the Sox’ desire for mucho Matsuzaka goes back to getting the most out of their astronomical posting fee, something is clearly in the air when in comes to the length of contracts dolled out this year. Not since the exorbitant winter of 2000 have players signed on for so much, and especially for so long, and I’m not willing to concede that the Islanders’ Rick DiPietro contract liberated several of MLB’s GMs. I believe the change comes from two factors converging at the right time. First, with all of the money floating around from the new CBA and MLB Advanced Media, more than a few franchises are willing to hand out wads of cash to get the guys they want. To set themselves apart, teams like the Cubs and Astros chose to stretch out the length rather than the yearly dollar value. Second, GMs see this year’s contract inflation and the increasing reasonableness of the Manny Ramirez/Derek Jeter/Alex Rodriguez monster deals and start to think that the yearly value of these contracts will not look so bad as salaries continue to escalate. In other words, “$17 million in 2014” sounds like a lot, but in 2014, maybe $17 million will not sound like so much.

As far as the validity of these two assumptions goes, I think the first is far more passable than the second. Obviously, if a team wants to set its offer apart from the crowd, that team can increase the money or the years- no magic or karma enters into the equation. The second part of the calculation is substantially more dubious. Obviously, inflation has an effect on any contract, but Hendry and company seem to think that inflation will continue at this year’s crazy pace. If the average yearly salary of new free agents goes up 50 or 60 percent every off-season, the Soriano will look like a bargain in the middle of his deal. In reality, salary inflation always occurs to some degree- even in times of collusion- though to varying and cyclical degrees. Typically, salaries will inflate heavily for a season or two, then cycle back down as teams find that they have invested a huge chunk of change in a few players over a couple of years.

Again, consider the Red Sox over the last several years. The big contracts to Nomar, Manny, Pedro, and others under the Duquette regime forced Epstein’s group to be a little more judicious with their spending patterns when they took over the team. Hence, instead of signing a big time free agent to play first base or DH, they took their chances on washouts, minor league free agents, and rejects, winning big on David Ortiz and Kevin Millar while cutting their losses on the Jeremy Giambis of the world. The Red Sox show that big salaries or long contracts are not the only ways to land big talent. More crucially, the Red Sox show how an individual team can only spend like it’s their bachelor party for so long before the tab comes due and they have to rein in the GM’s allowance.

Since teams bid against each other for free agents, salaries tend to escalate for several teams at the same time, usually when financial conditions in the league are fortuitous. Consequently, inflation tends to subside at the same time, as all of these teams have priced themselves out of the bidding- though THT’s Dave Studeman recently pointed out that the decrease in inflation has historically never reached the level of deflation.

The relevant conclusion is that a long contract only takes perceptual advantage of inflationary patterns if it spans an entire inflationary cycle. Even then, teams do not get additional value out of the player, the player simply looks cheaper relative to the rest of the league. Nothing has changed the risk of catastrophic injury or rapid decline that made the generation-long contract undesirable in the first place. Therefore, even though I understand the reasoning of behind lengthening contracts for top flight free agents, and it seems that the GMs offering them have real plans, I still believe that these teams are taking on an unjustifiable amount of risk.