Wednesday, February 23, 2011

Albert Pujols and the Great Moderation

Pujols, Pujols, Pujols. We Cubs fans have talked little else recently.

For the readers who have just recently exited their protective Cubs 2010 Season bunkers, allow me to update you: Albert Pujols and the Cardinals have reached a contractual impasse.

Yes, the much-famed, well-respected, and rightly-honored Albert Pujols presently seems unlikely to finalize a long-term contract before his self-imposed deadline. This means Pujols will test the free agent market. This means Chicago newsmen will will wear through their p, u, j, o, l, and s keys -- and undoubtedly fashion new ones from their extra supply of z, a, m, b, and r keys.

Here's the deal: I don't like long contracts. Never have.

At Another Cubs Blog, mb21 has done an excellent job showing how the Alfonso Soriano signing was good at the time -- a discount even. The problem: Unexpected hamstring injuries leading to a rapid depreciation in value.

Injury risk is always there, though, and no sane general manager would ignore it. Colin Wyers recently manifest a great Baseball Prospectus article, examining aging expectations with Pujols -- in short, it looks like glimpses of Barry Bonds.

I'm not here to say: Pujols will get injured; Pujols will age quickly; Pujols will this or that. (In fact, I'm not even here. I wrote this hours -- if not days ago -- and have changed locations possibly dozens of times to keep you from find me.)

What I would like to do, however, is examine the economic conditions that affect baseball, and that we analysts rarely consider.

I imagine most non-economists have nary heard the term "The Great Moderation." Basically, the Great Moderation was a period of extremely low volatility in the American economy from the late 1980s until September 2008 -- the financial collapse leading to the Great Recession.

In other words, the recent economic struggles in America represent uncharted territory for the Sabermetics Era.

This brings us to Albert Pujols. In analyzing a possible 9 or 10 year Pujols contract, we bloggers often assume away economic volatility or radical changes in the value of wins (or, specifically, WAR per dollars). Recently, J.C. Bradbury claimed a $40M per contract makes perfect sense for Albert Pujols because -- according to his expectations -- inflation will have rendered that now-absurd figure into something easily digestible by 2019.

This, in my opinion, fails to grasp the complexities of economics. Bradburry essentially assumes (as do most other bloggers) that inflation will remain constant and the economy will plod along comfortably.

However, things have been anything but comfortable lately. Ask the fans in the Tampa Bay area -- who tune into games, but cannot afford some of the league's cheapest tickets.

Let's look at some data:


s$/WAR: Dollars per win (or WAR), standardized using Z-scores.
sUnemp: The average annual unemployment rate, also standardized using Z-Scores (I also multiplied it by -1, so it would reflect the values of GDP -- i.e. higher is better, lower is worse).
sGDP: Changes in real gross domestic product (GDP), also standardized.

So, what does this tell us? Well, basically, the red and green lines represent how the economy is doing. Note how cute and weak the 2001 recession looks with respect to the 2008 death knell.

Also note: The green line, real GDP, has returned to more normal levels, yet the red line, employment, has remained rather miserably low. This has confirmed fears of a labor-free recovery -- meaning high unemployment while the economy recovers (as in the early 1990s recession) -- which has generated fears of a double-dip recession -- a second recession after a slight recovery (as in the mid 1930s).

Here's a list of lesson we should learn from the above graphic -- in order of importance:
  1. Not only is the economy not static, but the value of a win is changing as well.
    1. Caveat: I'm not sure what all has changed in calculating $/WAR over the last few years. This may be an important side note, thought.
  2. The price per win increased consistently through the final gasps of The Great Moderation (i.e. the housing bubble).
  3. After the recession, the value of a win plateaued and then went down for the first time in observed history.
  4. As noted below, baseball is slow to react to economic conditions because of the circumstances surrounding baseball contracts. Because of that:
    1. The price per win ratio may have come down even further this year (I'm not sure how to check that),
    2. ...and it may continue to come lower as the labor market lags behind the economy.
  5. The last time the US had a labor-free recovery from a recession -- the early 1990s -- baseball players went on strike.
Some things to keep in mind:
  • The $/WAR comes from the free agency market, which only captures part of the market for baseball talent. Still, it tends to give us a generally correct perception of the willingness of teams to spend on talent.
  • Baseball contracts get signed in the space of December through March, typically. In other words, really early in the year. Thus, the 2008 contracts were all signed before the financial crisis.
    • As such, we can expect a lag in contract values as the baseball world reacts geometrically, and not linearly.

Conclusion
You've made it this far? Well, congratulations, nerd.

All I'm trying to say: There's more than just an injury risk with signing Albert Pujols -- or any player, for that matter -- to a long-term contract. In all honesty, the economy could rebound like Dennis Rodman, and then Bradburry's prediction will appear oddly prescient.

Likewise, the economy -- which is already in a sad state of affairs -- could enter a Japan-post-Asian-Financial-Crisis period of slow-to-no growth -- we don't know.

I continue to be against long-term contracts. Despite Dave Cameron's recent, compelling argument about star players, I preferred diversified assets and short-term arrangements -- low risk, medium-to-high reward.

Parting thought: Had Albert Pujols signed a 10 year contract at fair market value in 2002, assuming he averages 8-WAR through the end of his career, he would be earning ~$20M per year. If he signed in a 2008 environment, he be earning $35M per year. (Lesson: Long-term contract = high risk, high reward.)

12 comments:

  1. I would have no problem giving Pujols whatever he wanted IF it meant a World Series championship for the Cubs.

    How many of us would really be complaining about the current and recent Cubs contracts if the Cubs had won the World Series sometime in the last five years?

    Having said that, how many times have the Cardinals won the World Series with Pujols at first? Two trips, one win. That makes eight seasons that the Cardinals did not get to the Series with Pujols at first.

    I know. Small sample.

    Still, I am willing to live without the Cubs signing Pujols.

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  2. Dumb question about the chart: I assume 0.50 s$/WAR = $5 million per win, right? That's the number Fangraphs has been using, and the one I've been sticking with. Just want to confirm.

    I defintely agree with your aversion to long-term deals. I've been hestitant to get too into this whole Pujols thing because of my own conflicted feelings about it. I can't help but wonder, though: How do you balance a dislike of long-term contracts with the Cubs glaring need for an impact player who could push their roster of useful players into true contention?

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  3. @Rich: Yeah, we might be singing a VERY different tune if the Cubs had won a World Series in 2007 or 2008 -- or both!

    Also, I think the fact the Cards have only reached the WS twice in 10 seasons with Pujols indicates how little influence one player has on the choas that is the playoffs.

    @Daver: It's actually all z-scores. So 0.50 is actually about $4M/WAR. If I didn't convert everything to z-score, it would have been nearly impossible to put them into the same chart (one is measured in millions of dollars and the other two are rates/percentages with different means and standard deviations).

    The call for an impact player goes against my preference because it reflects a WIN-NAO! mentality -- I'm all about long-term sustainability. A mega-deal for a mega-player often means the last years are predisposed to disappointment.

    Still, a team needs to use free agency to augment itself. But ten guaranteed years? Yeah, that's scary.

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  4. I see a couple of positives from a Pujols signing (aside from the obvious offensive juggernaut production for a few years):

    1. Baseball economics being somewhat removed from reality, as rich people seem to like throwing gobs of money at athletes, it won't be as bad as if, say, Wal-Mart started paying their greeters six figure salaries.

    2. If the economy does tank and Ricketts gets stuck with the bill, maybe he'll jump ship and sell the team to someone who actually might know what they're doing.

    Just a thought. Good article!

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  5. Wainwright is likely headed for TJ surgery. Does that move the Cubs ahead of St. Louis in the standings this season? He was projected for 6.6 WAR by fangraphs.

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  6. @Kin: Baseball is not immune to the economy -- it's in fact quite sensitive to it. At the same time, though, the teams are slow to react to bad economic conditions, but the fans aren't.

    As a luxury purchase, baseball tickets get the first cut when any family (regardless of income bracket) is looking to cut expenses.

    Still, winning teams tend to fill stadiums, regardless of the economy.

    Concerning your second point: I'm nowhere near ready to claim the book has been written on Ricketts. It makes sense to give your present employees a chance first before overhauling everything. Under the Tribune (especially over the 2005-2007 period), Hendry did not have complete control -- at least it appeared that way.

    @Eddie: On Twitter, I made some comments on this:

    "First of all: I really, really hate injuries -- they lower the quality of play and sully hard-earned victories."

    ...

    "But, from the analyst side of things, the #Cards lack of rotation depth has be a sword of Damocles for several years now. #Cubs"

    Losing Wainwright -- not matter how you slice it -- is the Cards losing their ace.

    They don't have great rotation depth, but they do have reputation of getting great play from poor players, so there's always a chance it may only hurt them 1 or 2 games (PECOTA has Wainwright worth ~5 wins). Still, in all likelihood, this may put the Reds in first place for free and give the Cubs a legit chance at the Wild Card.

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  7. @Brad
    To which I respond: Playoffs by any means necessary.

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  8. Cubs Stats: Haven for regressive psychotics.

    :)

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  9. Brad-- I strongly disagree with that post from ACB re: Soriano.

    No disrespect to Berselius who wrote the article, but the idea that he was a discount at any point in time is ludicrous. I don't disagree with the overall statement of the article--- evaluate contracts when they're signed, not after the fact--- Soriano isn't a great example of why we have to do that. His was a bad contract the very moment it was signed.
    I invite anyone who disagrees to check this out: http://rooftop-view.com/2011/02/22/rationalizing-the-soriano-deal/

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  10. Maybe it's a little obnoxious to link to your own stuff in someone else's thread, but I hope you don't mind Brad. After writing 1500 words on the subject, I didn't wanna just repeat myself. Feel free to ignore that if you don't like ppl linking to their own stuff.

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  11. I think you're a better expert on the economy than I, Brad, and defer to your judgment. I doubt Hendry has complete control under Ricketts either, though.

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  12. @Jack: Ah! No problem, man! I actually rather liked your analysis on the Soriano contract. I think I fall somewhere in between you and Berselius. I think the contract was -- at the time -- viewed as not-terrible (in the saber crowds), but at the same time, I agree with Rob Neyer who recently said (I believe it was him) that the Cubs "didn't do their research" before signing Soriano.

    @Kin: It's probably true Hendry has to run things by Ricketts, but I imagine he was a marionette in 2006 -- doing as the Trib ordered.

    To me, 2011 needs to be the final year that either (1) Hendry works with such a small staff or (2) Hendry works with the Cubs at all.

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