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In a story that's managed to fly under the radar in the Canadian press so far, the Blue Jays are trying once again to exact a monetary payment from Major League Baseball "to compensate for the weak Canadian dollar." The commissioner's office is reviewing six possible plans that would create a continuing contribution from MLB to the Jays to offset revenue disparities between the US and Canada. One would like to think the Expos would also benefit from this, but one would like to think a lot of things.

Anyway, it's an interesting effort by Toronto, and it might actually work: Paul Godfrey and Ted Rogers certainly talk Selig's language whenever he needs them to (e.g., labour issues), and getting some love from MLB on the currency-exchange front appears to be one of the benefits. Even if it does go through, however, I don't expect to see the team's payroll grow accordingly: at Rogers Inc., as at all big companies, this kind of rebate would go straight to the bottom line.

But this did put me in mind of a fascinating pair of discussions at Primer and FanHome that conclusively showed that this whole situation has very little to do with "currency exchange" or the like. It has to do with the fact that Canada is, in comparison to the United States, a noticeably poorer country.

The Baseball Primer thread started out from a throwaway comment in a Rob Neyer column that generated very interesting commentary, featuring a number of BB regulars. The link to the Fanhome discussion unfortunately no longer works, and I can't find the cache on Google either, but RickJay's summary of his article in the Primer thread expresses much of what was there.

The essence of the argument was that when the Blue Jays blame the exchange rate for the fact they lose a lot of money, they're being disingenuous. The problem isn't currency conversion, the problem is that Canadian money doesn't buy as much as American money in real terms. Our economy isn't as productive: we have higher tax rates on both personal and corporate income, we have much more extensive public funding for infrastructure (health care would top that list), and at the end of the day we don't churn out as much product as the Americans do.

Accordingly, things like local TV rights and season-ticket sales are bought in Canadian currency, while the American teams sell the same items and get paid in American dollars. But that's not the whole story, because the Jays usually charge $5 to $10 more per ticket in actual dollar amounts than, say, the Orioles and Indians do. So while the Jays would like people to think, as Godfrey has said in the past, that they're "earning in Canadian dollars and paying out in American dollars," that's not entirely true.

Now, this is as far as I'm going to summarize, because I'm an economics idiot, frankly, and I'm at the outer reaches of my understanding of the interplay between the US and Canadian economies right here. But I thought I'd lay this out there for people's edification and discussion. Enjoy.
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_Mike - Tuesday, March 11 2003 @ 02:51 PM EST (#93817) #
Canada is a poorer country than the United States; that is reflected to some extent in the exchange rate. The difference between collecting revenue in a weak currency and paying expenses in a strong currency is huge. To suggest this is not a majot part of the Jays' problem is not factually accurate.
_Mike - Tuesday, March 11 2003 @ 02:57 PM EST (#93818) #
According Doug Pappas, the average ticket price in 2002 in Baltimore and Cleveland was $18.23 and $22.33, respectively. The avaerage price in Toronto in US dollars was $15.54.
_Matthew Elmslie - Tuesday, March 11 2003 @ 03:05 PM EST (#93819) #
Speaking as the guy who (as far as I know) did the most to bring RickJay's post to everyone's attention, I'm glad to see that this discussion hasn't disappeared.

If you think about it, what this is is revenue sharing based on market size. Toronto's market is smaller than its population numbers suggest, because one Canadian fan is only worth a fraction of an American fan due to the economies of the two countries. So they're getting money to compensate for the size of their market. Other cities, which are smaller than Toronto whether you adjust for Canuckity or not, are being left out of this process.

But it's not necessarily necessary - if you will - anyway. Sure, the Canadian economy is weaker than the U.S. economy, but the Toronto economy is stronger than the Canadian economy as a whole. So the exchange rate, which is supposed to sum up the whole country, is misapplied when used as a barometer for the Toronto area alone.

I suppose you could turn that around and say that the economies of American (baseball-hosting) cities are stronger than the economy of America as a whole, and therefore the exchange rate really is a good way of comparing a Canadian city's baseball-sustaining ability to an American city's, but I'm not sure that it evens out; I suspect there's a greater economic falloff from urban to rural Canada than there is from urban to rural U.S.A.

What is my position on the Jays getting free money that they're not necessarily justified in getting? I can't quite bring myself to say, "Good for them!"
_Mike - Tuesday, March 11 2003 @ 03:24 PM EST (#93820) #
I don't buy your assertion that the exchange rate is misapplied when used for the Toronto area. If the Jays sell 2 million tickets at an average cost of $US15.54 their revenue from ticket sales is $US31.1 million. If their payroll is $50 million, they are $19 million in the hole right off the bat, before taking into account local revenues, costs of operation, etc. That problem is not ameliorated by the relatively strong Toronto economy; the advantage of a stronger economy is that more people can afford to buy tickets.

If the other owners are willing to give Toronto a break because of the currency exchange, that is all the justification that is required.
robertdudek - Tuesday, March 11 2003 @ 04:02 PM EST (#93821) #
Some comments:

The US currency has been consistently overvalued since 1995. Did you hear a peep about the exchange rate in 1992? I doubt it.

The GTA is a wealthy region. If you account for lower costs of living (restaurants, accomodation) real per capita income in the GTA is probably not significantly lower than all but the wealthiest American agglomerations (I think here of NY, LA, Bay area, perhaps Dallas).

The US currency is going to take a beating over the next 5 years. This is almost inevitable because a) it's overvalued and b) they are going to be running fiscal and trade deficits for the forseeable future. It's not unlikely that the CDN currency will hit the 75 cent mark within 3 years.

I say, sure take the money if they are offering, but the CDN economy is not inherently weaker than the US. Ontario tax rates are now lower than some states (like NY). What we spend on health-care and education is offset by what the US spends on the military. I wonder how much the US government is going to spend on security over the next few years.
_Spicol - Tuesday, March 11 2003 @ 04:07 PM EST (#93823) #
I apologize for my HTML spasm.
_Mike - Tuesday, March 11 2003 @ 04:12 PM EST (#93824) #
The average exchange rate in 1992 was 1.21 and in 2002 it was 1.57, a decline of almost 30% in the Canadian dollar. And you don't think that is significant for a business whose major cost is in US dollars?
_Mike - Tuesday, March 11 2003 @ 04:25 PM EST (#93825) #
"Ontario tax rates are now lower than some states (like NY)."

The highest marginal tax rate in Ontario is about 46% which kicks in at about $CAN100,000. The highest marginal federal rate in the US is 38.6%, but it does not apply until you reach $US307,000. The NY tax rate is 6.85%. State taxes may be a deductible expense in calculating federal taxes but I'm not sure (they are for corporations). I'll check that.

The US currency is going to take a beating for the next 5 years? I seriously doubt it.
robertdudek - Tuesday, March 11 2003 @ 05:10 PM EST (#93826) #
"The US currency is going to take a beating for the next 5 years? I seriously doubt it."

Why? All the fundamentals are against it.

"The average exchange rate in 1992 was 1.21 and in 2002 it was 1.57, a decline of almost 30% in the Canadian dollar. And you don't think that is significant for a business whose major cost is in US dollars?"

And why, exactly, is it that it can't return to that level? Were we not yet "Soviet Canuckistan" in 1992? Since then Canada has put it's fiscal house in order (comparatively speaking).
robertdudek - Tuesday, March 11 2003 @ 05:13 PM EST (#93827) #
Yes, I do think a 30% decline in currency value is a serious business issue. I do think that much of that decline will be reversed (some of it already has been), therefore it is only a temporary problem.
Mike D - Tuesday, March 11 2003 @ 05:22 PM EST (#93828) #
Mike, I value your contribution. But which "Mike" are you? Are you not Mike Moffatt? Because I'm Mike Denyszyn, he of the thus-far largely unjustified author byline and pending series of articles.

When you have a unique, ethnic name like we do...you gotta add a surname initial, bro. People are e-mailing me to argue with your points.

(I'm defending them as best as I can!)

I agree with Spicol because he has Corey Hart on his side. The Jays should Never Surrender this argument!
_steve - Tuesday, March 11 2003 @ 05:33 PM EST (#93829) #
Off topic, but Baseball America listed some info today on prospects that didn't make it into their official handbook. There are good (and more importantly, free) write-ups for RHP Brian Cardwell and Rule 5er Jason Dubois.
Craig B - Tuesday, March 11 2003 @ 06:18 PM EST (#93830) #
real per capita income in the GTA is probably not significantly lower than all but the wealthiest American agglomerations

Well, depends on what you mean by "significantly lower". If you mean "can we measure it?" then the answer seems to be, "you bet."

The problem here is "real per capita income", which opens up a huge kettle of fish.

Suffice it to say that on a any measurable basis, Torontonians would have fewer U.S. dollars of disposable income to pay ballplayers than do Americans in most (almost all) MLB cities.
robertdudek - Tuesday, March 11 2003 @ 06:31 PM EST (#93831) #
Yes, Craig,

But how many fewer dollars.

Baseball will live or die in this town based on how many people want to watch major league baseball on TV and in person, not on economic factors.
Pepper Moffatt - Tuesday, March 11 2003 @ 06:39 PM EST (#93832) #
http://economics.about.com
I haven't posted in this thread yet. I always post with my real name and website, unless I'm pretending to be a Trever Miller sun article.

The funny thing is, I'm working on a piece on exchange rates for my economics site. The first two parts are up with the next three will be coming up this week.

The one thing that you have to remember is that the Jays probably have (and should have) forward contracts on exchange rates, so they should be insulated from short (1-2 year) deviations in exchange rates.
Craig B - Tuesday, March 11 2003 @ 07:11 PM EST (#93833) #
Robert,

Right on. Economics isn't an explanation... there isn't sufficient difference for it to make a serious dent. Toronto isn't as well-off as, say, Chicago, but demand for hockey tickets is much much higher here, and the market will support ridiculous prices (which enables the Leafs to go out and land top-class players like a 42-year-old defenceman).
_MikeJ - Tuesday, March 11 2003 @ 08:59 PM EST (#93834) #
My apologies to all the Mikes who post here; I've added my surname initial.

According to Forbes Magazine analysis, the Jays lost $US60 million from 1997-2001. That is from a combination of factors, including declining attendance and a declining dollar. Forward exchange contracts may protect you from short term fluctuations but it does not mitigate against the absolute decline in the dollar (which has been ongoing since the mid-70's).

There are a limited number of entertainment dollars to go around in any city, and economic factors enter into the equation when people are deciding how to spend them. The Leafs sell about 800,000 (?) tickets per season and they are considered a cash cow for their investors; the Jays sell 2 million tickets and they are bleeding red ink like crazy.
robertdudek - Tuesday, March 11 2003 @ 10:24 PM EST (#93835) #
Mike J.

MLB financial data is notoriously unreliable. A declining dollar has hurt the bottom line - no doubt about that. Therefore, a rising dollar will help it.
_Mike H. - Tuesday, March 11 2003 @ 10:28 PM EST (#93836) #
http://filebox.vt.edu/users/mjhansen/baseball.htm
Nor have I posted before, but I almost always use my last initial. So the search continues...

In terms of how much the US dollar is overvalued compared to the Canadian Dollar, I submit for your perusal the Economist's Big Mac Index. According to the most recent report available, the Canadian Dollar is 27% undervalued compared to the US Dollar.

As for the exchange rate dilemma, as far as I understand, the only thing that the Jays have to pay out in US dollars is player salaries, so I don't know (without actually looking at the teams books) how much of a chunk that takes out of the Jays bottom line. Also, don't the Jays recieve national TV money and other league-wide revenues in US dollars, partially off-setting the hit they make in terms of player salaries.

I'd like to know, if anyone has access to this information, how the NHL's exchange rate rebate systems for it's Canadian clubs. Something tells me it didn't help the Senators out at all. I'm not sure if owners would be willing to give yet another handout to the Jays, which unlike revenue sharing, doesn't benefit many clubs but only two (for now) Canadian teams.

I'd be interested in hearing how much the club made or lost during the run in the 80's/90's. Sure it was a different economic system, especially in terms of player salaries, but would that help (or hinder) the Jays case that they are at an unfair disadvantage because of the exchange rate. I'm leaning toward the idea that the only real way to make money is to make the team competitive and spend some money to make money, not to cry poverty (aka the Carl Pohlad Method)
Pepper Moffatt - Tuesday, March 11 2003 @ 10:48 PM EST (#93837) #
http://economics.guide@about.com
Firstly, the decline the exchange rate hasn't been steady at all.. the trend is downward, but from 1970 to 2002 there have been both extended periods of upswings and downswings. There was a big upswing in the exchange rate in the late 1980s. The biggest recent downswing was from 1991-1995 or so, when the BoC lowered Canuck interest rates much faster than the Fed. The Canadian prime rate was 475 points higher than the U.S. one on July 1990. It ended up being 150 points lower than the U.S. rate by the middle of 1994 and 375 points lower by March 1997. This made Canadian bonds less attractive to international investors, so the exchange rate plummeted. The Asian crisis hurt as well The exchange rate has been This will all be in my "A Beginner's Guide to Exchange Rates".

The spot exchange rate was fairly stable from 97-00, which is the period the Jays are said to lost the most money. The exchange rate plummeted fast from 91-94, a period in which the Jays made money. So the timing seems to be off. The important rate for the Jays is the forward rate, not the spot rate, so you have to keep that in mind.

The best way to think of the Jays is to see them as an company hiring American labor and selling a product in Canada. So it's not fundamentally different than, say, Microsoft selling Windows 98 in Vancouver. The hypothesis put forward by a lot of people would suggest that most U.S. companies selling a large fraction of their product in Canada would have lost money. Personally, I don't buy it, because I haven't seen a lot of evidence of it. If anyone knows of any academic research on the subject, I'd be really interested. Of course, if anyone here is likely to be familiar with the literature it would be me, and I'm not at all. :)

It's more likely that the Jays lost money because
1) The Skydome was no longer the "in" place to be
2) The improvement of the Leafs and the formation of the Raptors took away a large portion of their corporate sales
3) The Jays signed a lot of mediocre players to large contracts

None of these factors have anything to do with the exchange rate. (1) was partly due to bad market on the part of the Jays, (2) was unavoidable, and (3) was pure mismanagement.

Mike *M*
Pepper Moffatt - Tuesday, March 11 2003 @ 10:49 PM EST (#93838) #
http://economics.about.com
Err, the last sentence should say (1) was partly due to bad MARKETING by the Jays.

Mike
_Matthew Elmslie - Wednesday, March 12 2003 @ 08:11 AM EST (#93839) #
I would say that (1) was also due to stadium styles shifting to a more Camden Yards type of thing.

Also we can mention 4) the Jays losing record and in fact being the worst and most disgraceful team in the major leagues in 1995 (unless that's contained in one of yours), and 5) the sense that the Jays had achieved a sort of narrative closure with their Series wins. I don't think 6) the strike had a large effect, but it sure didn't help.
Pepper Moffatt - Wednesday, March 12 2003 @ 08:14 AM EST (#93840) #
http://economics.about.com
I agree with all three of those additional reasons. (5) in particular has been particularly underplayed in my opinion.

I expect that once people realize what a joke the Raptors are and when the Leafs starting showing their age, the Jays bandwagon will get pretty full again.
_MikeJ - Wednesday, March 12 2003 @ 08:57 AM EST (#93841) #
The financial information was from Forbes magazine, not MLB.

In 1990 the Blue Jays had total revenue of $77.5 million, salaries of $18 million and a profit of $14 million. In 2001 they had revenues of $91.0 million, salaries of $75.0 million and a loss of $20.6 million. (Alll figures in US dollars). Even if they had sold a million more tickets in 2001 they would still have incurred a loss. To suggest that this was not due to a large extent to the weak Canadian dollar is just ludicrous.
Pepper Moffatt - Wednesday, March 12 2003 @ 09:14 AM EST (#93842) #
http://economics.guide@about.com
I guess I'm going to be ludicrous, then.

First of all, are you figures in US or Canadian dollars? I would assume that they're in US.

If those figures are in US Dollars then the exchange rate should not influence the expense side of the ledger, since 70% of the Jays costs are in U.S. Dollars. Yet we see that expenses accounted for the vast majority of the Jays declining fortunes.

You have to look at both the revenue and the expense side of the equation. The reason the Jays lost money is that they paid $75 million in salary but got about $35 million in value from those players.

You haven't shown ANY evidence that the Jays profit situation is due to the exchange rate. The numbers you posted support the alternative hypothesis.

Mike *M*
Pepper Moffatt - Wednesday, March 12 2003 @ 09:18 AM EST (#93843) #
http://economics.about.com
Oops.. I missed the part where you said they were all in U.S. Dollars. My bad.
_MikeJ - Wednesday, March 12 2003 @ 09:37 AM EST (#93844) #
I'll try to write slower.

In Canadian dollars revenue was $141 million, payroll was $116 million and the loss was $32 million. If the exchange rate had been 1.25 instead of 1.55 the loss would have been $10 million instead $32 million, a more reasoanble result , don't you think?

Nowhere did I say their losses were due entirely to the exchange rate; I merely said that to deny it is a problem is to deny reality.
Pepper Moffatt - Wednesday, March 12 2003 @ 10:23 AM EST (#93845) #
http://economics.about.com
No, it's not at *all* reasonable.

First of all, not all of their expenses are in U.S. Dollars, and not all their revenue is in Canadian Dollars. IIRC, it's like something like 70% of their revenues are in Canadian Dollars, and 70% of their expenses are in U.S. Dollars. That makes a big difference.

Secondly, you can hedge against both short and long term exchange rate fluctuations and I'm sure the Jays are heavily. If they're not, they *deserve* to lose money. The *spot* exchange rate is irrelevant... only the forward rate matters. And I doubt the forward rate has been 1.25 in the last 15-20 years, though I don't have the data in front of me right now.

Just a rough sketch would suggest to me that the expense is close to $2-3 million given that they can't hedge against all fluctuations, and the hedges will have a transaction costs.

If the Jays are losing more than $5 million due to exchange rate fluctuations, they should just hire someone from Rotman for $50K a year to deal with all this.

If you live in Toronto (I'm not sure if you do), you'd know how much apathy there has been about the Jays since '95 or so. *That's* the real reason for their problem.

Here's all the statistics you need to explain why the Jays' revenue hasn't increased all that much:

http://www.baseballreference.com/teams/TOR/attend.shtml

I'm sure if the Jays were still selling 3-4 million tickets a year they'd be rolling in cash.

Mike
_Matthew Elmslie - Wednesday, March 12 2003 @ 10:52 AM EST (#93846) #
I suppose there's an argument to be made that the declining attendance numbers result from the worsening exchange rate. However:

- I'm not sure that the two things correspond closely enough to support the argument,
- the Leafs and Raptors haven't had any attendance problems and they charge more for their tickets than the Jays do.
Pepper Moffatt - Wednesday, March 12 2003 @ 11:20 AM EST (#93847) #
http://economics.guide@about.com
Matthew: That's true if the Jays rose their ticket prices in response to the exchange rate drop, but I don't think that happened. If anyone has data on Jays ticket prices, I'd be interested in seeing it. I have a feeling the Jays increased their ticket prices like all teams did, but at a much slower rate than the average team.

Mike
_Mike and Mike - Wednesday, March 12 2003 @ 11:21 AM EST (#93848) #
Forget the Canada/US exchange rates. What about the Blue Jay Way/Dome exchange rates. I want some insight into the exchange rate for a hot dog inside or outside the dome.

By my calculations the exchange rate must be close to 2, $2.25 outside and $4.50 inside. But when you factor in the size of the dog and the bun is the exchange rate really higher, say 2.5?

We need an economic model to figure this out.

Then if I buy peanuts outside, versus inside, the exchange rate is .......
_MikeJ - Wednesday, March 12 2003 @ 11:22 AM EST (#93849) #
Declining attendance resulted from the worsening exchange rate?

How could anyone possibly make that argument? I don't see the relationship between the two.
_Matthew Elmslie - Wednesday, March 12 2003 @ 11:33 AM EST (#93850) #
MikeJ: What I had in mind is, the declining exchange rate acting as an indicator that people are getting poorer. Therefore they can't afford to buy baseball tickets as much. I'm not saying that such an effect exists; I was just trying to anticipate the argument.
Pepper Moffatt - Wednesday, March 12 2003 @ 11:38 AM EST (#93851) #
http://economics.about.com
I think a more direct effect would be that there's a decline in the exchange rate, so the Jays jack up ticket prices in response and it drives off a lot of customers.

I don't think that happened, but I think it's the best argument that could be made.
_Spicol - Wednesday, March 12 2003 @ 11:53 AM EST (#93852) #
Sorry, don't have a link but I have heard Paul Godfrey discuss in the past how the Jays are hedging against inflation quite heavily.

What if we don't think of the $5M as making up for the exchange rate and instead think of it as money to ensure the vitality of what is likely going to be the only Canadian team to survive past 2003 or 2004? It's only being veiled as exchange relief, which is easier to sell to the media and the common fan.
Pepper Moffatt - Wednesday, March 12 2003 @ 12:04 PM EST (#93853) #
http://economics.about.com
I suppose, but it's pretty unnecessary. The Jays aren't going anywhere.

If the exchange rate is really hurting the Toronto market, then won't this be accounted for in the revenue sharing plan? The whole thing seems to me to be double counting. I suppose it's nice if you can get paid twice for the same thing, tho.
robertdudek - Wednesday, March 12 2003 @ 12:05 PM EST (#93854) #
Another thing that happened in the 90s was the emergence of newer parks.

In 1989, Skydome was a brand new facility with lots of seats for corporate big wigs. It was the first of the "mall" parks and so allowed a large jump in revenue over the competition. This partly explaines the profitability of the Jays in the early 90s (everything came together: great team, shiny new park - which we may hate now but was certainly a revenue generator compares to the Ex - equals gobs of money).

Then Camden opened, the Jake, Coors, the Ballpark (later Enron, PacBell, Safeco, PNC, Comerica, Miller). It allowed those teams the same revenue advantages previously conferred on the Jays. It created an extra impetus to rising salaries, since some teams were now generating much more revenue than previously, allowing them to bid higher for players.

Cleveland is now going through what the Jays had to endure in the mid-90s - declining performance on the field and the wearing off of the allure of the park. They have correctly anticipated this and cashed in veterans to collect prospects which will hopefully be the basis of their next competitive team. The Blue Jays payroll, once the highest in baseball, drifted back to the median. That wasn't fast enough, since their revenue relative to other teams was falling due to a combination of many factors (only one of which was the exchange rate).
_MikeJ - Wednesday, March 12 2003 @ 01:21 PM EST (#93855) #
From 1994 to 2002 the increases in average ticket prices for a selection of teams:
Cleveland 85%
Yankees 68%
Baltimore 64%
Boston 194% !!
Toronto 12% in US dollars; 29% in Canadian dollars
Pepper Moffatt - Wednesday, March 12 2003 @ 01:24 PM EST (#93856) #
http://economics.about.com
Since the increase for the Jays in *Canadian* dollars didn't match that of those teams in American dollars, it really does look like the problem is a lack of demand and not the currency.
_MikeJ - Thursday, March 13 2003 @ 12:46 PM EST (#93857) #
Assume the Jays payroll is $US 50 million and further assume 3 different scenarios: 1. currencies are on par; 2. exchange rate = 1.25; 3. exchange rate = 1.50. Same players, just different exchange rates.

The Jays payroll in these 3 cases in Canadian dollars is $50 million, $62.5 million and $75 million. Are you saying it makes no difference to the bottom line whether the payroll is $50 million or $75 million? That is effectively what you are saying when you suggest that the exchange rate is irrelevant.
Pepper Moffatt - Friday, March 14 2003 @ 12:19 PM EST (#93858) #
http://economics.about.com
No, I'm saying your holding everything else to be equal. Which doesn't make *any* sense.

You keep assuming that the Jays are not going to hedge against the exchange rate, and act the same way no matter what the exchange rate is. Both assumptions are absurd.

Mike
_Not Mike - Saturday, March 15 2003 @ 03:26 AM EST (#93859) #
Hey all you Mikes you there ... I feel your pain. But it's simple: change your name(s).

Hugs and kisses from another named after the archangel,
Mick
Pepper Moffatt - Saturday, March 15 2003 @ 09:39 AM EST (#93860) #
http://economics.about.com
Actually, my whole family calls me "Mick". But I suppose it wouldn't help to call myself that here. :)
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