During the lockouts, we hear a lot about "parity" and lots of rhetoric about how it's hard for small-market teams can compete with large-market teams.  Why isn't anyone asking the obvious question about what this has to do with total player compensation?

Even though I (and many of my peers at the Wages of Wins) don't really buy in to the premise that small-market teams are at a big disadvantage to large-market teams, or even that parity is a desired outcome, let us, for the purpose of making my argument, just concede the following points:

• Small market teams must pay a larger percentage of their revenue in payroll than large market teams, and this affects their ability to be profitable.
• Small market teams, for similar reasons, do not benefit as much as large market teams from the luxury-tax system; this is because a good portion of costs are large fixed costs

The NBA's solution to these appear to be 1) lowering the percentage of BRI that players receive (cutting salary costs, the largest component of the NBA's fixed costs) and 2) introducing the so-called "Super Luxury Tax", which would make going over the cap prohibitively more expensive than it is now (and therefore theoretically benefiting those small-market teams more from the larger luxury-tax payments).

Of course, this is a complete and total sham.  The NBA's reasons for proposing these two policies have absolute nothing (zero, nada, zilch, nichts, etc) with helping small-market teams achieve parity, and absolutely everything (totally, all, alles, completamento) about lowering total salaries and therefore putting more money into every owner's pockets.

You see, a normal labor market, like any other market, functions on the principles of supply and demand.  Since there is a short supply of talented tall people, the NBA would really rather not have the principles of supply and demand dictate labor costs, because low supply + high demand = high prices.  For instance, if there was no CBA, no salary cap, no luxury tax, and no max contract, how much do you think LeBron James would demand on the free market?  Keep in mind that Michael Jordan was paid $30 million per year nearly twenty years ago, and adjust that for inflation.  Now consider that there are a few other players like Dwight Howard, Dwayne Wade, Chris Paul, etc that every team in the league would love to fight for.  Consider what that would do for average salaries.  Even if teams stopped paying large sums for stiffs like Darko Milicic to compensate, total salary costs would be much larger than they are under a collective bargaining agreement.

The collective bargaining agreement (CBA) limited max salaries by fixing salary costs at 57% of basketball-related-income (BRI).  This helped owners ensure that they could make a profit because as long as BRI (i.e. revenue) keeps going up.  Well, unless you are pretty incompetent at managing the 43% of BRI that you get to keep, which appears to be what the NBA is saying, since, despite the fact that revenues have doubled (or more) in the last 10 years, the NBA is now "losing money" (har freaking har, but that's another issue).  But bear in mind that in order to keep salaries at 57% of BRI, the league must have a salary cap, and adjust the salary cap each year based on the previous year's BRI. And before you ask why the players would agree to this, I'd point out that most players are not superstars. Half of the leagues players earn less than $2 million per year; if teams were paying $30 million per year or more for superstars, how much do you think that half would be earning?  The majority of players are better off under a system that spreads the money around more evenly, even if total compensation for all players is lower.

So here's where it gets interesting.  How the hell does lowering the percentage of BRI given to players help small market teams?  Let's go ahead and lower it all the way to 47%.  Now let's re-examine our first bullet point:

• Small market teams must pay a larger percentage of their revenue in payroll than large market teams, and this affects their ability to be profitable.

Uh, how has this changed?  Your small-market team's share of 47% of BRI is still a bigger percentage of your revenue than the large-market team's share of 47% of BRI.  The large-market team's financial advantage is exactly the same.  You can argue that if you lower this number below a certain threshold, a small-market team can now be profitable when it currently is not profitable.  Even if this were true (given the sales prices paid for small-market NBA teams over the last 20 years or so, the conclusion is quite dubious), you'd have to be moronic not to see that the reason the large market teams play along is that their profits skyrocket.  Again, it's not about parity, it's about owners profiting more.

Which brings us to the Super Luxury tax.  If rich teams triple their payments on poor teams, parity is achieved, right?  Sounds like a great deal, teams with low revenue can now become profitable thanks to increased luxury tax payments, right?

Of course not.  I'll quote from Mankiw's Ten Principles of Economics:

4. People Respond to Incentives: Behavior changes when costs or benefits change.

Translation:  if the luxury tax becomes prohibitive, teams will stop going over the cap. The "soft cap" with a prohibitive luxury tax basically becomes a hard cap.  Salary caps are a way of getting around the free market price of labor, by limiting the maximum amount any team can pay.  This is why the league wants a "hard cap" rather than the soft one currently allowed (and why the players don't want a hard cap).  And when the NBA introduced the Super-Luxury, all the bullshit rhetoric about parity is just the NBA's way of trying to get the average fan from Milwaukee to think that it will make his team able to compete better, when it's really just a way of making sure those average and total salary costs don't creep up anywhere near that free-market price.

Once more for the slow kids:  The owners do not give a rat's hind quarters about parity, just about profit.  If the NBA cared only about helping out those poor, struggling small market teams, they would simply introduce a revenue share.  And a revenue share shouldn't have anything to do with the CBA, since the players are negotiating about their own compensation, not about how the owners divy up their profits (why would owners consult employees about that issue?).

Categories: LeBron James, Darko Milicic, Chris Paul, Dwight Howard, Dwyane Wade