Recently I wrote a story about how soccer club owners don’t understand the value of the money they spend on transfer fees. It turns out baseball — or at least the people who cover baseball — is even worse.
Exhibit A: The New York Mets’ trade of pitcher Max Scherzer “and $36 million” to the Texas Rangers for highly-rated prospect Luisangel Acuña. Coverage of baseball transactions has become highly sophisticated in appearance, with all sorts of experts purporting to analyze the economics of these deals.
At the Athletic, for example, highly-respected Keith Law says of the Rangers, “Adding Max Scherzer in a trade with the Mets on Saturday for their fourth-best prospect and only assuming about a third of the remaining money on his contract is a no-brainer.” Equally respected Ken Rosenthal argues that the Mets are spending something like $36 million to get a single minor-league prospect, because the Mets are paying $36 million of the money owed to Scherzer over the rest of his contract. (Rosenthal adds, “Scherzer’s value to the Rangers is not $0, so Acuña is not valued at $36 million.” But since Scherzer has positive value, that would imply that Acuña is valued at more than $36 million, not less.)
They miss the basic point.
When evaluating a transaction, you have to look at the starting point prior to the transaction. And when evaluating a professional baseball player, you have to compare the value he provides to the amount he costs you.
So let’s look at this from the Mets’ perspective. Scherzer is pitching like an above-average, 1.4-WAR pitcher. (That’s according to Rosenthal; I claim no ability to foresee how he will pitch over the next fourteen months.) Also according to Rosenthal, that makes Scherzer’s value in free agency about $12–15 million per year. He has a $43.3 million annual contract that runs through next year (assuming he exercises his option, which he was already certain to do). That means that the Mets were on the hook to pay him about $58 million for 1–1/3 seasons, during which he would be expected to provide about $16–20 million in value. So at the top end of Rosenthal’s valuation, the Mets were already looking at an expected loss of $38 million on Scherzer (not counting luxury tax, which I’ll come back to).
If you have an asset that is worth negative $38 million to you, it makes sense to pay someone else $36 million to take it. You come out $2 million ahead. In other words, the Mets should have been happy to give Scherzer to the Rangers along with a $36 million check, simply in order to avoid paying him the other $22 million they owed him. But on top of that, they got a top-100 prospect for free. That’s particularly important in baseball because teams can only reliably earn outsized profits on players whom they control — those who haven’t qualified for free agency yet. On an expected value basis, the Mets took the Rangers to the cleaners.
Now, the Rangers are betting that Scherzer’s health, velocity, and slider will all recover and that he will be the missing piece to take them into the playoffs and beyond. Fine. They are making an investment with a negative expected value because of the high potential returns if they turn out to be lucky. But they are paying a high price to do so.
Now let’s go back to that luxury tax. The Mets have the highest payroll of all time, which means they pay a 90 percent marginal tax rate. So saving $22 million in Scherzer’s salary actually saves them $42 million. That means that the bottom line looks like this:
- Plus $42 million in cash
- Minus future pitching services worth $16–20 million
- Plus a top prospect whom they can underpay for several years (thanks to baseball’s horribly unfair compensation system)
Basically, the Mets got Acuña for free from the Rangers and $20 million in tax arbitrage savings (because every dollar paid to Scherzer cost less to the Rangers than to the Mets). That sounds like the deal of the century.
The basic error people make in evaluating this deal is thinking that the Mets are giving the Rangers Scherzer and $36 million. The fact is that, before the trade, the Mets owed Scherzer $58 million and owned the right to 1–1/3 seasons of pitching services. The Mets sold those pitching services to the Rangers and got $22 million in return (which is slightly more than those services are worth). Economically speaking, the cash went from Texas to New York, not from New York to Texas. Oh, and a highly-rated prospect went in the same direction.