Inflation And Prospects

Until last year, baseball had seen steady salary inflation of nearly 10 percent per season for over a decade, as free agents cashed in on ever growing contracts. Teams counted on this inflation to justify long term deals, as the assumption was that a player would not decline much faster than salaries grew, keeping his relative value fairly steady even if he lost value on the field.

That assumption has to be thrown out the window now, however. Despite signs of economic recovery in the U.S. (the stock market is going to close up 20 percent in 2009), we’ve seen a significant pullback in spending for the second consecutive year – Jason Bay notwithstanding.

Trying to project future inflation now is just a guessing game. Will salaries increase again in the future? Probably. How quickly? No idea. Teams are learning how to restrain themselves from spending sprees in the winter, finding value in players they used to overlook. The acceptance of concepts such as replacement level have taken some of the mystique away from veteran players with track records, as teams are less willing to pay for what a player did in the past.

What I think will be interesting to watch is how this unpredictability of future salary growth will affect how willing teams are to pour money into scouting and player development. During the age of booming inflation, players with 0-4 years of service time were remarkably valuable, as they could provide production at minimal cost.

If we do not return to that kind of inflation, however, the relative salary difference between young players and veterans will be significantly smaller than it has been in the past. And with a smaller gap in cost, it may be become more viable to build a team with established players.

For instance, this winter, teams have been able to sign useful major league players for a couple million dollars. Kelly Johnson got $2 million from Arizona. Adam Everett got $1.5 million from Detroit. A ton of average-ish infielders signed for $5 or $6 million per year for one or two years.

If that remains true in future years, then it reduces the desire to spend millions on prospects with fractional chances of making the majors. The previous cost differences were great enough to make it worth investing in a lot of prospects, reaping the benefits from the ones who make it, and building a team of good young players to avoid having to pay the market premium. But now, if we continue to see years where near average players can be had for $2 to $3 million per win, then the player development calculation makes less sense.

If we don’t see a real up-tick in spending next winter, expect some teams that have traditionally focused on building from within to do less of that going forward. Buying wins in free agency, rather than developing them through the farm system, may be the new trend if inflation doesn’t return.