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Will declining free agent costs result in less emphasis on player development?

Dave Cameron at fangraphs is always good for some provocative ideas, and his recent article on declining inflation in baseball salaries caught my attention.  Maybe the thesis of his article is something we can ponder and discuss at a time of nearly dead news in the baseball world.

Cameron correctly points out that baseball salaries have been escalating at approximately a 10% annual rate during this decade.  However, he looks at some of the early signs of this off-season, with teams opting to pay lower salaries to pick up "overlooked" defensive players, and suggests that the era of rapid price inflation in baseball (what economists might call "real escalation," price increases in excess of overall inflation rates) may be coming to a close.  Cameron implies that  teams' preference for signing and developing young players as a cost-effective approach to team-building is based on the assumption that rapid escalation of free agent salaries will be a constant.  His point:

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 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.

Baseball certainly is not immune from the forces affecting the overall economy.  And the recession (which officially has ended, by the way) has caused a reversal in inflation rates.  For example, Colorado's constitution indexes the state's minimum wage law to inflation, and now Colorado officials are faced with the prospect that the minimum wage hourly rate will be reduced.  Baseball players are a long way from worrying about the minimum wage law, but it's not unreasonable to expect a reversal in the previous trend in baseball salary escalation when overall wage inflation is zero or negative.

In discussing Cameon's theme, I should point out that his conclusion about salaries in the current free agent market is based on early indications.  How the current glut of available free agents is digested by market decisions over the next month or so will tell the real tale.  The future salaries of guys like Miguel Tejada and Jose Valverde--good, but older, players who have experienced lack of interest in their multi-year salary demands--may be the real story of the economics of the free agent market this year. If Miguel and Jose face a possible unhappy surprise in this market, consider what must await Jim Thome and Vlad Guerrero, once-great hitters who now can only DH. I have to agree that this off-season feels like it will produce a significant downturn in salaries.  Indeed, if Yankees' signings are set aside as a unique case (as in a unique actor), I suspect that last off-season was the beginning of a downward trend in player salaries.

Cameron includes a "notwithstanding Jason Bay" as a caveat on his conclusions.  But I view Bay's situation as an indication that the market dampened even high end free agents' salaries.  Bay was widely viewed as the No. 2 premium free agent hitter (behind Holliday), and he immediately rejected offers by the Red Sox to re-sign him to a good, but not great, contract.  The Red Sox's reaction is part of the trend this year, signing a much less costly defense-first Mike Cameron to play in the outfield.  Given that the Red Sox are an elite team in terms of budgetary resources, this probably surprised Bay.  Jason Bay is the type of premier run producer who would have induced high level bidding in the past, with resulting overpriced contracts with excessive length.  Jason Bay is a comparable player to Carlos Lee during his free agent offseason (06/07).  Bay is at a similar age with a similar reputation for run production.  Bay's offense has been slightly better than Lee's, and his defense is probably similar to Lee's. Both Lee and Bay were the No. 2 premier hitter in their free agent season (behind Soriano and Holliday). Yet Bay's  4 / $66 million contract is much more team friendly than Lee's 6 / $103 million contract.  While the annual salaries may be similar, the length of Lee's contract is much less advantageous to the team, particular given that both player may be  DH-type players after their fourth year.

Another example of a difference in markets, Marlon Byrd vs. Gary Matthews, Jr.  The similarities for these two guys in their big free agent off-season is almost Twilight Zone eery.  Both centerfielders had three years with the Rangers at a similar age (Byrd is 32 and Matthews was 31 in 2006).  Neither hitter posted particularly good offensive numbers before their Rangers' stint, but both players became .800+ OPS hitters in Texas.  In fact, the triple slash line for Matthews and Byrd as Rangers is almost identical.  Both Matthews and Byrd had career years going into free agency, with Byrd hitting 20 HRs and Matthews hitting 19 HRs.  However, Matthews signed a 5 / $50 million contract with the Angels in the same 06 / 07 free agent season as Carlos Lee.  And Byrd has just signed a 3 / $15 million contract with the Cubs.  Matthews reverted to his pre-Ranger offense and, to top it off, his defense fell off a cliff.  The Matthews signing is now widely viewed as one of the worst in baseball.  It's very possible that Byrd's offense will decline to pre-Rangers' levels (.700 OPS) and his defense will continue to fall.  But the contract won't be an albatross, even if Byrd is confined to back up outfield duty in 2011 and 2012.

To be sure, there are other undercurrents to the story.  One could argue that teams are simply becoming aware that defense is undervalued.  Or perhaps the preference for defenders over powerful sluggers is simply like the consumers who decided to buy a more cost effective Honda Civic instead of the super SUV.  They may still prefer driving an Escalade, but their budget now dictates the Civic.  Also, as best I can tell, the decline in salary escalation appears to be more pronounced for position players rather than pitchers.  Pitching still seems to be relatively expensive.

I would suspect that the trend pointed out by Cameron would initially produce a trade off between team controlled arbitration-eligible players and free agents.  At one time, the "team development" story line was based on the cost efficiency of a young player throughout his team controlled years.  However, if market salaries are allowing more low and mid-range positions to be filled by less costly free agents, the arb-eligible years may be less attractive.  Last year, Ty Wigginton was one of the surprises among arb-eligible players when he was non-tendered by the Astros.  And this off-season has seen a number of quality arb-eligible players who were non-tendered and became free agents.  The better known examples include Mike Capps and Kelly Johnson.

In theory, Cameron is probably right--a sustained decline in free agent salary escalation probably should diminish the incentives for big spending on acquisition and development of amateur players.  However, whether it happens depends on many other factors, which make the conclusion anything but a certainty.  The impact could materialize in a minor way, with fewer teams willing to pay above slot for drafted players.  Also, the success of this shift really depends on the team's ability to time the market.  In markets with boom and bust cycles, the majority of actors are too late in reacting to market trends.  And once everybody has reacted, the market has entered aother cycle.  If teams can't time the market well, perhaps they should maintain a constant level of player development spending.

And this leads us to the Astros.  It seems to me that the Astros haven't done well in timing the market, so to speak.  The Astros signed Carlos Lee in what became a peak year for big sluggers' salaries.  Unfortuantely, the Astros were looking for a HR-hitting LFer at a time when the market for the sluggers was scarce.  The Cubs set the market very high by signing Soriano for 8 / $136 million before the Astros signed the second best hitter.  The Astros back-loaded Lee's contract, probably assuming a continued high escalation in free agent salaries.  But diminished escalation makes Lee's salary excessive today.  This also means that Lee will be less tradeable during the one year window for trading him (2011). This off-season would be a good time for the Astros to rely on bargain free agent hitters to improve the team.  The signing of Feliz at 3d base could be viewed as a bargain signing.  But there are many other high quality potential bargains on the market.  Tejada and Valverde both may turn out to be tremendous bargains for whichever team signs them.  However, Drayton McLane's ordered $10 million budget cut comes at a bad time for taking advantage of this year's free agent market. 

Will the Astros respond by cutting back on player development expenditures?  This seems unlikely, if for no other reason than the fact that the Astros historically have been near the bottom in draft pick spending.  But I wouldn't be surprised if McLane tightens the screws on possible decisions to draft over slot.  Maybe a trend of less player development spending by other teams would help the Astros by reducing the budgetary gap between the Astros and competitors.

Your thoughts?