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So your team says they have no money

Multiple teams are signaling an unwillingness to spend on free agency this off-season. Why?

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Kansas City Royals owner John Sherman watches from the Crown seats during the game against the Chicago White Sox at Kauffman Stadium on May 07, 2021 in Kansas City, Missouri.
Kansas City Royals owner John Sherman watches from the Crown seats during the game against the Chicago White Sox at Kauffman Stadium on May 07, 2021 in Kansas City, Missouri.
Photo by Jamie Squire/Getty Images

The MLB off-season is always a much less exciting affair than its close cousins in the NFL and NBA. That will likely be true as long as those leagues withhold free agency until later in their respective off-seasons - allowing teams to build up a collection of done deals that they can’t announce yet - while MLB only makes teams wait a scarce handful of days after the end of the season, meaning the news will always trickle in.

That said, we are already seeing multiple teams signal that we should absolutely not expect big spending this off-season. The Padres leaked the news that they paid part of their salary obligations during the 2023 season with a loan. The Brewers are hinting that they’re ready to completely tear down their roster despite being in the playoff hunt late into the season. The Cardinals say they’re going to be “prudent with their expenditures.” On and on it goes.

Last year MLB teams combined to set a record of $3.7 billion spent on free agents, but all this jabbering should give you pause if you think the record might be set again. Even with superstar Shohei Ohtani re-entering the free agent market after proving he could more than hack it in MLB. Why?

Baseball is a business

There once was an era where it was easy to believe that owners cared more about winning than anything else. It may not have been true - though it certainly seemed to be for some! - but the perception was that baseball owners wanted to compete for bragging rights and did so by trying to put together the best baseball teams. These days, there’s not a single owner who seems concerned about whether his team wins or loses. At least, not in comparison to how much he cares about how much profit his team makes.

As our own Matthew LaMar has pointed out repeatedly, MLB team revenues are almost certainly much greater than their spending in every case. And, despite protestations of sustainability, with owner median net worth at $3.2 billion, many of them could afford to “sustain” their franchises at $100 million in the red annually for decades before they had a real issue.

They, of course, don’t want to do that. They want to make a profit. Which is fine, I guess. But because baseball teams are a business, that means they do things in ways that make sense for them as a business and not necessarily in service of the wins we, as fans, so crave. And that means that MLB free agent spending this year (as in most years) is going to be driven more by business concerns than by competitive ones.

The Padres’ situation is an excellent example of this. Rumors have been flying around that they not only won’t be spending big on free agents this off-season but that they will likely make a strong effort to shed payroll obligations. Given what I pointed out above, if winning was the primary concern, trading Juan Soto away wouldn’t make any sense. They should have the money to pay him.

The Padres, knowing that people were questioning their decision to break up a very talented roster rather than trying to fix it, were blessed by the leaked news that they had to take out a loan of $50 million late in the year to meet their payroll obligations. Now, instead of looking like a team that is shedding payroll when they should be going for it, they look like a team that gambled they could make the playoffs if they overspent and are now paying the price for it.

Most of us only take out loans if we are making a very large purchase or if we are in a bind. Businesses, of which baseball teams are a type, do things differently. Here’s a great thread if you want to understand it a little better:

The key takeaway from that thread is that, when interest rates are low, businesses will regularly attempt to expand and take out loans to cover their expenses, including payroll. When interest rates are high, they will attempt not only to stop using loans to pay their expenses, but they will attempt to shrink so as to keep as much capital in the bank, making money for them with little to no risk, as possible.

Interest rates have been way down for the past few years because the government wanted to encourage spending in the wake of the COVID-19 pandemic, leading to growth, especially in tech. They started raising rates again this year, and suddenly layoffs happened all over the tech sector. Similarly, Baseball teams were willing to spend more to chase wins in the past couple of years because the rates were so low that taking out loans to cover their expenses and potentially earn more money with a playoff berth, made sense. Now that interest rates are going back up we should expect to see teams go back into their shells and do things much more conservatively again.

In the article I linked about the Padres from Evan Drellich of The Athletic above, he even notes that baseball teams regularly take out loans to cover payroll obligations. It’s a standard part of doing their business. Now, the Padres probably regret having to do that this year because of the interest rate hikes, but that’s what’s leading to the likely sell-off in San Diego. And it will influence other teams to probably try to spend less, as well.

Some teams, naturally, will buck this trend. They may have more ready cash at hand and think the gamble of additional playoff money when other teams are signaling an unwillingness to try is worth spending it versus putting it in the bank. Others - *cough* the Royals *cough* - might spend more money this off-season because they’re trying to get people to fund their new real estate development project and people are more likely to support them if it looks like the team is actually trying to win. The general attitude of selling assets may create a “buyers’ market” and benefit those teams. If they’re willing to go for it.

If you’re looking for a tl;dr, it is this: When a team says they don’t have any money to spend on free agents or extensions, what they actually mean is that they determined that the team would profit more from not signing those players, regardless of how many more wins they might lead the team to. When the Padres leak that they took out a loan, or the Bronx Bombers try to tell you that bunting is the future of baseball, just remember it’s all a deception to convince you that it’s unfortunate but necessary or even somehow in your best interests for them to spend less money.

Small ball isn’t back, just small roster expenditures.