Creatively Structuring Contracts: Yoenis Cespedes Edition

One rumor about the Mets' pursuit of Yoenis Cespedes is that he doesn't just want an opt-out after the first season of a potential three-year deal, but after the second season as well. That's pretty extreme: the ability to opt out is a very useful one, essentially shifting an awful lot of risk onto the other side. If the player performs, he can seek a new, even bigger deal on the open market; if he doesn't, the team is stuck with what now probably looks like a not-so-fantastic contract. In no case does the team get to enjoy the normal fantastic bargain that comes when you sign a player and then they're even better than you anticipated. This year has seen an awful lot of opt-outs in star players' contracts, but mostly only one of them. (I think there's one deal that gives someone, perhaps Heyward, two opt-outs after consecutive seasons in the middle of a long-term deal.) The idea of giving the player an opt-out after every season is not super appealing for a team. It's a lot like turning every season into a player option, and player options are great. For players.

But I have an idea about how something like this design could be made to work in a way that might benefit both parties. Typically, contract years have one of four statues: guaranteed, team option, player option, or mutual option. Typically the salary of a team option year will be very high, and of a player option year very low; in both cases the side with more control is giving back some money in return. In that last category, the contract is extended only if both the team and the player want it to be; the size of the buy-out typically depends on which side declined the option. But what about combining team and player options in a different way? What if you had, basically, sequential options? So, at Step One, the team gets to exercise an option to just plain keep the player under contract, no questions asked--but, with a very high salary. Maybe even higher than a regular team option would be. If they decline that option, then the player has an option to extend his current contract at a significantly lower salary, or to become a free agent.

For the player, they get most of the benefits of an opt-out/player option, except that some of those benefits are realized not in the form of control over their own destiny but in the form of cash. For the team, it's better than an opt-out, because they have a lot more control if they decide the cash is worth it. And they get the benefit of giving the player something to play for every single year. That could be particularly relevant with someone like Cespedes, where it's rumored that teams don't want to just give him a large guaranteed contract for fear he'll get all Manny/Hanley-esque. This is a way to do that on a truly perpetual basis without giving up the insane amount of control that an opt-out after each year would give up. In principle I could see a contract structured like this over a basically indefinite period, if the dollars were balanced the right way on each side. (This would probably mean that the player option's value would decline substantially after a few years.) It's designed to make each side okay with whatever the other side does at any time. That way, a player and a team who aren't quite comfortable just signing on with each other for a term of six or eight or ten years might nonetheless be willing to sign on to a framework of perpetual tolerable uncertainty covering just such a term.

I feel like this is the logical next step after this off-season's opt-out craze.

Chris Young Just Earned His Salary for a Long Time

Boom.

A minute or so ago, there was a curious little exchange in the Mets game against the Miami Marlins. Ruben Tejada had drawn a walk with one out, bringing up the pitcher's spot. Terry Collins sent up Chris Young to pinch-hit, and the Marlins responded by removing starting pitcher Tom Koehler and bringing in right-handed reliever Brian Morris. The Mets' announcers were speculating that this might have been a cagey move on Collins's part: by sending up Young, he got the Marlins to bring their righty reliever into the game, and he could then respond with Bobby Abreu, who is (a) left-handed, and (b) better than Chris Young. Had he just sent Abreu out initially, they would have brought in a lefty reliever instead. Apparently that wasn't what Terry was thinking, though: he left Young in there, for one pitch.

Because Young homered on that pitch. To tie the game.

I immediately commented to a friend on IM that Chris Young had just earned his salary for the month. The thing is, I'm not sure I was wrong. He's being paid $7.25 million this year, and the season is obviously about six months long, so the monthly salary is something like $1.2 million. Now, the current understanding is that the market price of one Win Above Replacement on the free agent market is something like $6 million. One WAR is approximately equivalent to ten net runs, either added on offense or saved on defense (including, obviously, pitching). If we assume that Young's home run was worth +2 runs, that's +0.2 wins, which translates to... $1.2 million. Of course, a replacement-level player wouldn't necessarily have resulted in zero runs in that spot, so we can't really think of what Young did as being worth +0.2 WAR all by itself. Actually, though, FanGraphs says that CY has been worth 0.2 WAR today, so my calculation is pretty accurate.

And if I wanted to get a bit less context-independent, I could say that I was underestimating the value of what Young just did. Right now the Mets are a team that's been struggling all year but which has been playing well of late and has dreams of sneaking onto the fringes of contention at the All-Star break. Moreover, as I said a while ago, there are reasons to think this team should get better as the year progresses. Winning this series against the Marlins is important for keeping that momentum; if they could, for instance, sweep the Marlins, they'd get to just five games under .500 at the break. That sounds a lot better than seven games under, or even nine games under if they lose both of these games. This is, in other words, a pretty important game. And Young added a lot to their chances of doing just that. His blast increased the Mets' Win Expectancy by 35.6%. To put that in context, a team that wins a game has a total Win Probability Added of +50.0% for the day, since they started out with a 50% chance of winning and end with a 100% chance of winning. So +35.6% WPA is basically like adding 70% of a win, in fully context-dependent terms. And that's a win above average, a slightly more stringent standard than mere average. If we give Young credit for adding seven-tenths of a win instead of two-tenths, then that one swing on that one pitch that Young just faced was worth somewhere around $4 million, or over half of Young's salary for the entire year.

Think about that: with one swing, Chris Young may have just justified his presence on this team for the entire first half of the season.

Of course, teams should never, ever pay for "wins" in the WPA-derived sense I'm describing. There was no sense in which anyone, in March or earlier today, could have predicted that Young would hit such a meaningful blast. You pay for what you can expect to receive, and your expectations have to be largely context-independent, except perhaps for relief pitchers and maybe for elite pinch-hitter types. Besides, of course, it's not like that swing was the only thing Young has done this half-season; he's also hit .199/.280/.354 over 233 plate appearances (including that one today), which, combined with poor outfield defense, has been worth -0.3 WAR. (It was -0.4 WAR prior to his pinch-hitting appearance, presumably because of rounding effects.) So it's not like he's actually been worth a net positive amount of money so far.

But even though you can't pay for context in advance, you might be able to use context in retrospect to feel okay about the purchases you made. No matter how much we can't let ourselves think that the home run Chris Young just hit affects his "true talent" or what he's really worth, it was still worth a lot to this team. If the baseball gods had appeared to Sandy Alderson during that pitching change and asked him how much he would be willing to pay for a home run on the next pitch, it's possible that he would've said something in the range of $4 million. Chris Young delivered that value right there, and in a certain sense nothing takes that away. Through yesterday his contract may have been like lighting money on fire, but today, for one glorious pitch, Chris Young was worth every penny.

How Do You Poll the Platinum Coin?

According to PublicPolicyPolling's Twitter account:

"Public opinion running about 5:1 against the Trillion Dollar Coin on the first night of our Florida poll among those with an opinion on it."

I wonder how they worded this question. No, really, I wonder. Because I think it's an intrinsically difficult thing to poll. The economics are a bit involved, the legal analysis is highly involved, it sounds so extremely silly, and the case for doing it is so extremely contextual. If you just ask people whether they would favor or oppose the minting of a $1 trillion platinum coin to fund the government, even without any explicitly biased language, of course they'll be opposed: it's ridiculous, which is why we don't do it most of the time. But suppose you gave the following introductory paragraph:

Congress limits by statute the amount of debt the federal government can issue. Economists predict that if the debt limit were hit, and the government could not borrow enough money to fund all its obligations, the consequences could be disastrous for the world economy. The federal government is currently at this limit, and for the past month the Treasury Department has been executing financial maneuvers to keep the government funded, but those maneuvers will only be successful for about another month. Observers have speculated that the Republican-controlled House of Representatives might not raise the debt limit by this deadline. One option the Administration would have should the debt limit not be raised would be to exploit a loophole in the coinage laws that would allow the Secretary of the Treasury to mint a platinum coin with a $1 trillion denomination, and use that money to fund the government until Congress raises the debt ceiling. Do you think this would be an acceptable response by the Administration were Congress to fail to raise the debt limit in the next month?

That would pretty much spell out the logic of even considering the platinum coin in the first place. Note that it's not entirely biased, either; I very deliberately decided to refer to the mint-the-coin option as "exploiting a loophole," which is what it is. The key is really that I've framed it as a response to a crisis. I bet if you gave that introductory paragraph, the people still on the phone by the end (because, let's be honest, it's pretty damn long) wouldn't be so opposed anymore.

Except, of course, this really would be a messaged result, and while those can be interesting, as they suggest how much support something could get if it got its message out really well, it's certainly quite questionable to simply ask a poll with that much messaging and present it as a straight-up result. Perhaps you could do a comparison within the same poll, i.e. ask  the bare-bones question first and then give a little description of why in the world someone might think it was a good idea to mint a $1 trillion platinum coin, and see how much support for the coin increased between the two. But it's hard, I think, to meaningfully gauge public opinion on a topic like this that is just so damn esoteric—not, of course, because people are idiots or because they couldn't understand such things, but because most people haven't taken any economics courses or any law courses or even any public policy courses, and don't spend their time reading blogosphere posts about stuff like the law and economics of the platinum coin.

The problem is, we are both committed to the idea of a government that is responsive to public opinion and to having the government make a serious attempt to solve any and all public policy problems that come before it, no matter how esoteric or tricky. At times like this, when it honestly seems like the best policy might be the utterly ridiculous one that, until you dig into the details, seems with good reason completely insane, those two commitments are in genuine tension with one another.

In any event, they say they won't mint any coins, which looks like it's probably a good idea politically. I'm not sure this means they actually won't be minting the coin, though, because you'd have to say you weren't going to mint it until the very minute when it became necessary to avoid some sort of default; it does seem somewhat unlikely, though. Either way, I really would like to know exactly what they plan to do when Republicans, faced with the Administration's admirable "we're just not negotiating over this, pass the damn thing already" stance, just say no. Actually having some kind of default happen would be, well, not good. It would be nice to think they do have some scheme in mind to avoid it, coin or no.

$90 million, 6 Years. Really?

Apparently the Marlins' opening offer to Reyes was $90 million spread out over 6 years. That's an average of just $15 million per year, vastly less than the nearly $26 million that Fangraphs says he's been worth, on average, in his four good years ('06, '07, '08, and '11), and barely more than the $11.5 million he was worth in a disappointing 2010. Now, here's the thing: legend has it the Mets are reluctant to go more than four years for Reyes. If that's a firm sticking-point, it's an idiotic one. Among other things, the expectation has got to be that five years from now this team will not be as hard-up for cash as it is right now. In other words, the marginal value of a dollar for the Mets is much higher now than it will be five years from now. The $15 million they might risk paying an aged or injured Reyes in 2017 will be worth a lot less to them than the $20 million they might pay him next year.

More to the point, this is a just-plain-low salary. Suppose the Mets are in the extreme willing to go to five years, and don't care as much about the dollar figure as about not exceeding five years. Well, if those five years have an average salary of $18 million, then the headline figure on the contract would be... $90 million. Add in some reasonable options for future years, maybe vesting if he stays really, really healthy in Year 5 and team or mutual if he doesn't, and you're talking about a contract that sees Jose Reyes' lifetime earnings be categorically higher than under the Marlins' offer. If you assume that a) Reyes will take the longest-in-years guaranteed contract he can find, and b) the Mets are categorically unwilling to match a six-year offer, then yeah, this blows the Mets out of the water. But a) would be a slightly strange principle on which for Reyes to be operating, and at the very least there's no reason to assume it must be true.

The Republican Obsession with Money

In a previous post, I argued that conservatives have a highly materialistic view of life, that in shaping public policy at least they tend to simply overlook personal, psychological, or spiritual needs like esteem or belonging. In this post I want to argue that the conservative outlook is highly materialistic using the overall approach to budgetary issues that Republicans have (extremely successfully) championed of late. Yes, drawing overarching conclusions about political philosophy from budgeting styles. Anyway, I'll begin by outlining how I think a rational country should approach the whole question of the budget, government spending, and taxation. Here's how it goes:

Not the Conventional Reaction, But Still...

So, we all know that recently some Republican Congressman from Wisconsin claimed that his family of seven is struggling on the Congressional salary of $174,000. Various of his constituents and commentators from the world in general criticized/mocked him for that, because, you know, that's not a bad salary. And, you know what, I agree: he's an upper-middle-class American, more materially prosperous than 99.5% or so of the world's populace. So it's silly of him to refer to himself as "struggling." But it is still true that we ought to be increasing the salaries of our elected representatives, our judges, and public servants generally. Why? Because a) these people are doing good work, serving the public, and that's something we should reward from a moralistic perspective, and b) we do want to make careers in public service attractive. In particular, if you start out being not-particularly-rich and you go to DC to be a public servant, given that the cost of living in DC is rather exorbitantly high, it's not the easiest of livelihoods. Which makes it a lot easier for people who are particularly rich to begin with to want to be public servants. Which gets us lots of rich people running our country. If, on the other hand, we pay people enough that they really can make a high-quality living being a public servant, then people who are not rich will want to be public servants somewhat more readily. Similarly, since campaigning takes up a large percentage of your time while you're, you know, campaigning, any public financing of campaigns really ought to include stipends for the candidate's living expenses. Yes, it feels like they then get to live at taxpayer expense, but it also means that the un-rich get to run for office without the prospect of spending a few months with essentially no income. It's all very well and good to talk about how all of this will give people greedy, money-grubbing incentives to want to be public servants, but if the alternative is a world where only rich people, who are likely to follow a generally pro-obtaining-money philosophy in their whole life, are public servants, you get kind of the same thing in the end, except with less equal opportunity to be, say, a Congressman.