Basketball Diaries, Part I

The NBA won’t begin its season because players and owners are feuding over salaries. What’s all the fuss about?

The dispute is over salary caps. Individual team owners contend they will go bankrupt without them. (Salary caps put a ceiling on the combined amount a team pays its players.) That is, ordinary contract negotiations lead owners to pay salaries they can’t afford. But wait!--to save money on salaries, why not just offer lower salaries? The owners’ counter-argument is that deep-pocketed teams (like New York and Chicago) define pay standards by offering enormous contracts to superstars. Poorer teams (from smaller cities) must spend beyond their means to remain competitive. Enforced salary caps would permit poorer teams to woo talented players without going bankrupt.

The business paradox of the NBA (and most other pro leagues) is that owners are both partners and competitors with other owners: It is in the Bulls’ financial interest for the rest of the league to field competitive teams, which increases fan interest. Balancing the partner/competitor paradox is an ongoing problem for most pro leagues.

The players say owners aren’t going bankrupt at all. (It’s hard to tell whether an NBA team is losing money or making money, since they generally keep closed books.) Greedy owners, according to the players union, are just trying to capture more of the NBA’s $2 billion annual revenues. (Currently, NBA players get 57 percent of gross revenue.) Players think they are entitled to their true economic worth–which is whatever teams agree to pay them.

What does each side propose? Players would like to keep the current system of so-called “soft” salary caps–which are hardly salary caps at all. “Soft” salary caps exempt many players from a team’s total. For instance, the Chicago Bulls have a salary cap of $25 million as a team–i.e. the sum of salaries for all non-exempt players must be less than $25 million–but one exempt player (Michael Jordan) alone was paid $30 million last year. NBA owners insist on so-called “hard” salary caps–which means all of a team’s players count against the salary ceiling.

Recently, both sides have suggested a compromise measure–a “luxury tax.” Under such a scheme, highly-paid players would give part of their salaries to other teams. That is, some portion of Michael Jordan’s salary would go to other, poorer teams. But the two sides disagree on how large the tax should be or to whom it should apply. Players accuse owners of suggesting a tax rate big enough to effectively prevent high salaries; while owners accuse players of suggesting a tax that wouldn’t sufficiently compensate poorer teams. It’s quite possible that talk of “luxury taxes” is just a way to repackage each side’s desire for higher or lower salaries.

NOTE: This is the first of two items on the NBA labor dispute. Later today: Who’s paying for the cancelled games?