Albert Pujols and the Great Moderation
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:
- Not only is the economy not static, but the value of a win is changing as well.
- 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.
- The price per win increased consistently through the final gasps of The Great Moderation (i.e. the housing bubble).
- After the recession, the value of a win plateaued and then went down for the first time in observed history.
- As noted below, baseball is slow to react to economic conditions because of the circumstances surrounding baseball contracts. Because of that:
- The price per win ratio may have come down even further this year (I'm not sure how to check that),
- ...and it may continue to come lower as the labor market lags behind the economy.
- 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.
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.)