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Daily Box Score 9/15: Countercyclical in an Up-and-Down World

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It's been a miserable year for the economy. One year ago today, Lehman Brothers Holdings announced it would file for Chapter 11 bankruptcy protection. After that, the economy fell off a cliff, or it entered a tail-spin, or the excrement hit the fan; I'll leave it as an exercise to the reader to select her/his own metaphor. 

I'm as much of an armchair macroeconomist as the next guy, but for a while there it felt like reading Calculated Risk was like gazing into a palantir. But as the policy response started to materialize, economists, politicians, and technocrats began to settle on a plan to employ countercyclical measures to stabilize the economy. What, pray-tell, is a countercyclical measure?

Harvard economist Martin Feldstein explains:

Discretionary fiscal policy provides an alternative way to stimulate the economy when aggregate demand and interest rates are low and when prices are falling or may soon be falling.

Or, to bastardize and paraphrase, when things are down, spend, and when things are up, save. Has baseball learned the wisdom of countercyclical measures? There is ample cause for skepticism.

Table of Contents

The Familiar Lesson
Temporal Flexibility
Going Forward
Discussion Question of the Day

 

The Familiar Lesson

I'm tired enough of talking about the misinterpretation of Moneyball that it stood for the proposition only to care about on-base percentage that I take it for granted everyone has learned the true lesson of Michael Lewis' (go Newman Greenies!) book. I take that lesson to be that when resources are scarce, competitive advantages can be gained by identifying and exploiting relative price differentials.

Put another way, teams ought to engage in skill arbitrage, foregoing expensive opportunities for cheaper ones. This, I hope, is not new to you loyal readers.

But one way we can extend this familiar lesson is by exploiting temporal price differentials, which is to say waiting until the same asset is undervalued to buy and overvalued to sell. Dong, where are my examples?

Let's start with the Dodgers--never scions of reasonability but perhaps all the more suitable an example for it. Beginning in 2006, they were mired in a dugout battle between the Veterans and the Rookies, the latter mainly represented by the trio of Ethier, Kemp and Loney. 

All three had potential. Bespectacled, quanty-minded stats types nearly foamed at the mouth. But they haven't all panned out equally. Consensus today says they are valuable in descending order as follows: Kemp, Ethier, Loney. 

But we're being countercyclical today, remember? So let us start at the top with Kemp. Eriq Gardner is a doubter:

Obviously, Kemp is still young (he’s turning 25 next week so happy birthday, Matt) and has the ability to improve—a factor that no doubt counts in his favor. Yet, I see Kemp as being the type of player who carries far more risk than many people acknowledge.

He goes on to cite his selectivity, splits and relative size (to predict declining speed) as reasons to temper excitement. Just the kind of countercyclical thinking we need. Folks, Matt Kemp's bubble has reached Inland Empire proportions.

Now to tackle the bottom of the list: Loney. Mike Scioscia's Tragic Illness has got me covered:

So is James Loney "back"? I'm not ready to say that yet, and no matter what happens be prepared for a slew of October articles about how the Dodgers are at a huge disadvantage at 1B against either Albert Pujols or Ryan Howard - as though not being as good as those guys is somehow an insult. The point is, if Loney's found something that works for him, be it mental, physical, animal, mineral, or vegetable, and he can keep up some semblance of his current hot streak, then it's not going to matter that he's sucked for half the year; it's only going to matter what kind of player he in October.

Don't get me wrong, I'm extremely skeptical of explanations that rely upon new mouthguards (deus ex mandibula?). Nevertheless, while Loney may not be the best first baseman in the National League, we shouldn't go around predicting messianic things for Kemp while writing off Loney as a lost cause. Part of this is the regression to the mean we have been trained to expect.

A corollary is that, when you believe you have an embarrassment of riches, you should be cautious. In part, this is because you probably don't (or will not) have as much as you think. But another reason is to smooth out your expectations.

The flip side is that, when a player is doing the worst is when you should pour your resources into developing him. Loney may yet put it all together, especially if he can catch on to the lesson of his cross-town counterpart, who was once an underperforming former first-base prospect himself.

Temporal Flexibility

The real meaning of countercyclical policy, those of you who have studied macroeconomics are shouting, isn't to buy low or sell high. It's to moderate bubbles and recessions, in order to ensure stable economic growth. By raising interests rates when the economy starts heating up, and slashing them when production slows, central banks can ensure broad prosperity.

For a baseball team, competitive interests oppose each other and one team's win is another team's loss. That doesn't mean countercyclical thinking can't be of use, however. Consider the past offseason.

The economy took a long walk off the short cliff just before the offseason began. Many teams had structured their revenue streams to be highly dependent on luxury spending, and subsequently found themselves massively exposed when capital destruction kicked into high gear. But those, as they say, were sunk costs. How should they have proceeded?

If they were really wise, they would have saved some of the profits they had made during the prosperous 90s and 00s. But we can't expect baseball owners to do what not even the Federal Government had the foresight to do (save for two years there in the late 90s). Instead, a smart owner would have spent where other owners feared to.

Baseball teams have a lot of collateral, and thus can take on debt. While I understand many of them were already heavily in debt, once the economy fell, the cost of one of their primary inputs (players) fell dramatically. And that meant that the incentives were there to borrow more money to spend it on player salaries.

Just to give two examples, the deals given to Bobby Abreu (one year, $5 million) and Orlando Hudson (one year, $3 million base) are prime examples of spending where others would (or could) not. 

Now, I don't profess to know how the economy or the free agent market will fare over the next eight months. But I suspect free agent salaries will remain similarly depressed this year. 

The attendance indications don't look good. Major League turnstile numbers are down and unlikely to improve in the season's final month, as Clark Booth notes:

More to the point, this bummer of a September will cost everyone a chunk. Given solid races, baseball invariably draws huge houses the last month of the regular season. But with only a tender few enticing match-ups these last four weeks, the hit will hurt and it’s a bit of a shame because it takes some of the luster off what’s been a remarkable showing by the game, at least in the business sense.

Through August, MLB attendance was down only 6.8 percent. There is no industry under the sun that would normally consider such a dip in sales to be minor. But this is no ordinary industry, nor are these remotely normal times. MLB owners were scared silly over the winter when the prospects of what was being predicted as the worst economic downturn since the Great Depression (that classic misnomer) had them bracing for potential disaster.

But it's not just the Majors. As Baseball America notes, the bug has spread to the minors as well:

For the first time in six years, minor league baseball did not set an attendance record.

The economic slowdown proved too great for even the debut of six new ballparks to overcome. Final overall attendance is expected to be announced later this week, but MILB spokesman Steve Densa confirmed today that a new record was not reached in 2009.

Rob Neyer adds:

My guess? Professional baseball in all its manifestations -- majors, minors, independent -- is perfectly healthy, and where attendance has flagged, it will pick up when the economy does. Everybody else has taken a hit this year; why shouldn't baseball?

I think this is right, though I would add that I remain pessimistic about the economy in the medium-term. I don't think I'm alone in that, either. This winter, I suspect, teams will pinch every penny they can. This strikes me as supremely bizarre.

Exhibit A:

The Diamondbacks "don't plan to pick up Brandon Webb's $8.5MM club option," according to Bob Nightengale of USA Today (via Twitter).  Nightengale says they will instead try to negotiate a one-year deal.  Webb hopes to be ready for Spring Training after a recent shoulder cleanup.  Doug Haller of the Arizona Republic notes that the D'Backs have until five days after the World Series to decide between Webb's $8.5MM option and the $2MM buyout.

The Diamondbacks face a marginal cost of $6.5 million to keep on a guy who, when healthy, is one of the best pitchers in the National League. And they're thinking about turning it down. Now, I know Josh Byrnes is a smart guy (he went to Haverford), but that strikes me as crazy. Craig Calcaterra is similarly perplexed:

I suppose the Dbacks could know something about his health that we don't know, but if so, why then would they be trying to do a 1-year deal rather than just letting him walk?  And how much cheaper is that 1-year deal likely to be?  If they screw him into the ground and no one else is interested, the best they can probably do is $3-4 million, right?  If they do that and if he does turn in a bounce back season, they have effectively alienated one of the better pitchers in the NL over a lousy couple million bucks.

I think it's pretty clearly an indication that Arizona doesn't have any money, and its ownership is completely unwilling to spend more to gain a comparative advantage in an environment when the team's revenue streams are falling.

To my mind, though, there is no necessary relationship between short term revenues and long term strategic planning. If anything, decision making is most effective when insulated from the vicissitudes of quarterly earnings. Teams ought to spend away this winter.

That isn't to say they should go all Darren Dreifort, but the Dreifort example is actually pretty apt here, I think. At a time of complete euphoria, everyone wanted to spend, so those who did wound up making big mistakes. Now, when no one wants to spend, it will be those who fail to spend that lose out most.

Discussion Question of the Day

Should teams spend lavishly this summer, even if they are hard up for cash? Or am I completely wrong, and they should conserve their scarce resources?