Price Controls

Unless you are from Mars, you probably know LeBron James is a free agent, being courted by a number of teams, ultimately deciding on Miami over his home town and former team in Cleveland.

This has been an odd auction for his services, because except for some tax issues (which certainly may have been a factor in going to Florida), price controls in the league effectively cap how much James can be paid.  And given his talent, it was clear that every team would be willing to pay him the max.  This has led to offers based mostly on non-monetary factors, with Cleveland mainly taking the Glenn Close approach from Fatal Attraction, basically saying it would have to commit suicide if LeBron breaks up with the city.

Many have commented on how much Cleveland, economically, had riding on James and that it may well get the biggest economic benefit, bigger certainly than Miami which has fairly indifferent and easily distracted fans, of any of the teams in the auction.  But with price controls, Cleveland lost because it was not able to bid for LeBron's services what he was really worth  (in fact, it was pretty clear that all the teams involved expected to have a huge consumer surplus from LeBron's acquisition, since his value to any team seems to be higher than the salary cap).

By the way, speaking of surplus or lack thereof, my belief is that New York has continued its tradition of offering long-term lucrative deals to disappointing players.  Having watched Amare Stoudemire for seven years, I can say that he is fully poised to be the next Stephon Marbery for the Knicks.  He can be brilliant, and he is very talented, but he has focus issues that are not going to be enhanced in New York and at times was thrown off-kilter by the media pressure in Phoenix where the press is a cupcake compared to New York.  He is not even much of an upgrade from David Lee, but he gets paid a lot more guaranteed money.

  • Craig

    I am of the understanding that Cleveland had the most money available to offer him, either because they had the most cap room or they were the incumbent. So they did make a higher offer, which was rebuffed.

  • Highway

    Yes, incumbent teams have an advantage with free agents, primarily because the incumbent team is able to offer a 6-year guaranteed contract, rather than the limit of 5-years that other teams have.

  • Michael

    I'm not one for following recreation involving balls, but being in Cincinnati, the tax payer is expected to pick up the tab for the stadiums and profits for the owners of the teams. I wonder what the value of James would be if team owners had to pay their own costs.

    We had a temp half per cent tax increase to build the stadiums which became permanent. Now we face another half per cent tax increase to keep the stadiums funded. The people here are pissed and screwed.

  • DKH

    The incumbent team can also offer greater annual raises. You'll often hear that Cleveland could offer "nearly $30 million more" or some such, but as Highway says, this is due to counting an extra year. The actual number over the first five years is about $5 million. All of the stars will be taking a slightly greater discount to play in Miami, I believe (although Miami cleared even more salary space after LeBron's announcement, so that might have changed). Certainly the *guarantee* of a sixth year at a ~$25 million salary is worth something, but it's likely LeBron will be able to get at least ~$20 million at that point in his career, certainly depending on his injury history, the economy, etc.

    So really, he's only leaving ~$10-12 million (maybe) on the table by going to Miami, or $2 million per year. Obviously this isn't insignificant, but it's probably small compared to his endorsement income. The added fame of championships, if he feels that is more likely in Miami, might increase his endorsement value and overcome that cost anyway.

  • DKH

    Oh, I should also have mentioned the difference in state income tax rates (6%) that will apply to half of the games he plays, as well as to his endorsement income, which Brian Windhorst reported to be $15-20 million/year. So he actually gets back about $1-1.5 million that way.

  • richard

    Warren,

    > Unless you are from Mars, ...

    There are 6.5 billion people on this little earth of ours, about 300m of them are Americans. I would guess at least 6.2 billion people have no clue who this LeBron James is.

    According to your definition, 97% of the people on earth are really secretly Martians, including myself.

    Scary ...

    😉

  • Henry Bowman

    Price controls are well-known to be disasters, and are usually implemented either for political reasons or to benefit a small group economically. I have never heard a single economist argue for price controls, though surely there is some loon out there who does (Krugman comes to mind).

    So I always wonder why the U.S. controls the price of money, via the Federal Reserve controlling the interest rates. Everyone should know that this is a very bad idea. The Federal Reserve primarily exists to benefit a small number of relatively large banks, not the citizens of the country. Just as I think that separation of church and state is an excellent idea, I see no reason for a government to have anything to do with money.

  • James H

    It was funny that Amare was so excited that LeBron might join him, and then got snubbed. In certain games, usually near the trade deadline, Amare will all of a sudden come out and just control the floor. All of a sudden he goes for rebounds, and seems unstoppable in the paint. Then the deadline passes, and its back to ho-hum.

  • Ignoramus

    You're leaving out the big money for a star like LeBron: endorsements.

    LeBron needs rings to really cash in -- Miami now looks like a sure thing to give him a few.

    His winning rings in Cleveland would have had more catchet. Many will be rooting against Miami now -- I for one hope they fail. They're like the Yankees without the history, without the class.

  • Henry Bowman

    The comment above about endorsements is absolutely correct. I recall that, as of about three years ago, Derek Jeter had a nominal salary of merely $16 million, or something like that. However, he made $80 million in endorsements!

  • Dave

    This entire exercise is also a useful reminder of the extent to which professional sports teams are a public good. The value of LeBron James to Cleveland far exceeds the direct payments made to the Cavaliers in the form of ticket purchases and merchandise and even the indirect payments in the form of television viewership, etc.

    The bogus "economic impact" analyses done to justify (or decry) public funding for stadiums and other infrastructure associated with professional sports teams attempt to count every peanut vendor outside the park, but for some reason completely ignore the fact that people LOVE having a sports team for which to cheer, and the success or failure of that team has a giant impact on their overall happieness.

  • Jim

    Looks like LeBron took the easy way out to me. Taking on the challenge of winning a title for his hometown in Cleveland would have been worth several championships with the new, stacked "Big Three" in Miami. He should have stayed the course in Cleveland, and his popularity would continue to soar, which automatically increases his income with more endorsements!

  • Ron H.

    Dave said:

    >"The value of LeBron James to Cleveland far exceeds the direct payments made to the Cavaliers in the form of ticket purchases and merchandise and even the indirect payments in the form of television viewership, etc.

    ...people LOVE having a sports team for which to cheer, and the success or failure of that team has a giant impact on their overall happieness."<

    Yes, psychic profit is wonderful, and the happiness of the people of Cleveland perhaps shouldn't be measures in mere crass dollars, but to suggest that EVERYONE in Cleveland benefits is quite a stretch.

    When public money is used to fund sports stadiums, everyone pays, while only those who "love to cheer for their team" benefit.
    What about the rest of us who don't really give a sh*t?

    Sports franchises are private businesses like any other, and public money shouldn't be used. What other business - well, other than automakers and banks and insurance companies - get to use public funds? Those who benefit should be those who pay.