The Salary Cap and economics

(DISCLAIMER: I am not an economist. I do not know the finer points of it. I understand numbers and math, and economics is all math, and I do have a strong grasp on abstract concepts and critical thinking, so I think my thoughts aren't complete bunk, however I'm not an expert either. Take what I'm saying with a grain of salt remembering I am not an expert. Just remember I know as much economics as 99% of hockey columnists and sports columnists as well so I guess what I'm saying is... I may be full of crap about the salary cap, but they are too.)

So we have all, myself included, been quick to jump on Gary Bettman's back because of the free agent signings were made by big market teams. The big bad franchises in New York Rangers, Colorado, Philly, Detroit (kind of), Toronto, and even St. Louis made nice Free Agent acquisitions while the Islanders, Oilers, Sabres and some smaller market teams lost out. At first glance it appears that Bettman's precious, his salary cap, is failing but before we admonish him for it I think it's worth taking another look into.

(This is not a defense of Bettman by any means, it's an analytical look at why the salary cap hasn't prevented the big market clubs from signing the Free Agents this season. )

The biggest reason for the increased salaries was the increase from $44M to a $50M cap. That pretty much means any team with any leftover room at all now have enough for a major Free Agent splash. Throw in some expiring bad contracts and some really good young talent, like with the NYR and Avs, and Voila! lots O'cap room. The Avs have been handicapped by the cap for the last two years, and our big Free Agent signing was Tyler Arnason, and our big trade acquisition was Michael Wall. So it's not like the Avs are buying Blake, Bourque , Selanne, and Kariya again here. They waited for bad contracts to expire and targeted a couple good players. The Rangers did the same thing (but spent more money for sure).

All those big contracts have the potential to blow up in the team's face. Briere had a couple good seasons with an excellent supporting cast. If he falls flat Philly is stuck with him... for 8 years. The Rangers paid $7M+ over 7 years for a guy whose scored 20+ goals exactly once, and another for 5 years who has never scored 70 points in a season. Ryan Smyth, takes a beating in front of the net, and could break down before those 5 years are up. Let's see how these contracts affect these teams before admonishing the NHL. The salary cap is there to keep teams from buying their way out of mistakes, not keeping them from spending money.

Those small market teams really misplayed their hands. I've gone over this before, but Edmonton could have had "Captain Canada" for a measly $500k more. Not only did they not pay him, they bad-mouthed him on his way out of town. Why would anyone ever want to play
for an organization that would do that? There's more to the Isles dismal Free Agency period than just money, as evidenced by the exodus of players the last two days. Buffalo had all season, and since their exit, to negotiate with either Briere and/or Drury and by a lot of accounts they didn't make offers until the last minute. Shouldn't they be making offers before that?

(Update: Buffalo apparently had their chances, and screwed it up too)

The big market clubs also had more money to spend this season because of three coincidental events, in my opinion. First after the lockout there was so much uncertainty, about what types of players would be good and what types of players would lose their effectiveness that most people were signed to 2-3 year contracts. No one wanted to take a chance longer than that. Well guess what it's been 2 years. It played to the Avs advantage because they signed players who were good under the old system to 2-year contracts. Brisbois and Turgeon signed, it failed, we recouped their salaries and moved on.

So now that all these players are on the open market, guess what else happened. The Canadian dollar has nearly doubled in value in relation to the US dollar in the last two years. Since the game is pretty strong in Canada revenues went up, a lot mainly because of forces way beyond anyones control. Since the salary cap is related to the revenue, well it increased, substantially. That's an advantage to big market teams. Oh yeah that % based salary cap went up too. It's now 55% instead of 54%. 1% is a a pretty significant chunk of change.

The blame lies at the short sidedness of the owners and players union, who designed a salary cap for the conditions of 2004-2005 and not thinking for a minute that economics can change. If the US dollar were strong right now then the salary cap would not have gone up as much, due to hockey's relative weakness in the US as compared to Canada. This constant ebb and flow is going to continue to happen. Unless the NHL starts bringing in constant revenue from the US, this will always happen. The Cap will be high when the Canadian Dollar is strong and weak when it's not, since that's where the game is stronger. Big market teams will always benefit from a strong Canadian dollar, since more revenue will be coming in and the salary cap will be higher.

So what's saving the NHL, and Bettman, right now is the strength of the Canadian dollar. That strength is allowing the NHL to pull in more money, comparatively, since the game is so strong there. If the US dollar ever gets comparatively strong again and the NHL hasn't gotten a foothold in a national sense in the US, well it could be in for some tough times.

The fate of the franchises, in my opinion, depends on Bettman's ability to create interest in the States. If he's able to get interest back in the States the league will have a nice steady stream of income for years to come. If that interest isn't cultivated then NHL will be a slave to the whims of the market.


  1. It just shows that the fans lost out on a year of hockey for nothing.

    Bettman's gotta go!!!

  2. Jibbles,

    I agree. The substantial bump in the cap and the glutton of FA signings was more a result of a perfect storm of unforseen circumstances than a fundamental failing of the new CBA. In the BOG's defense, at the time of the lockout, it didn't appear that there was any way in hell that the Canadian dollar would swing the way it had, from what I understand. That seems to be the only REAL oversight, IMO.

  3. So not only is it Bettman's fault for screwing the league, it's also George Bush's fault for screwing the American dollar.

  4. The didn't know when the devaluation of the dollar was coming, but it was pretty clear it would happen eventually. Greenspan held the fed funds rate pretty damn low for most of the 90s, and international demand for hard currency had to reach saturation at some point.

    Good points on the exchange rate affecting revenues though. I wonder if that's why Bettwhore was so opposed to Pittsburgh/Nashville moving to Ontario. The move would definitely increase total revenue which would bump the salary cap even higher. At this point that doesn't help the "small market" teams that aren't going to spend much more, but would allow big markets to spend even more. Another profitable Canadian team would make the salary cap even more worthless and there goes that cost certainty (what little there is anyway).

    The real problem is Bettman's strategy of growing the game from the top down. He seems to think you just put a team in a town and the fans will come. You can't get a solid home-grown fan base like that. Instead they should be moving teams out of money puts to someplace where they'll actually make money and then use that extra money to sponsor youth hockey programs. Dallas has done a great job of promoting youth hockey and that's why they're one of the few success stories in the south. That's how you spread the game.

  5. Hey jibblescribbits,...what is your assessment of this Western Conference recap?