The salary cap and why the Parsons contract is the new normal

The reason that the free agent price is inflating at a rate much higher than the rate of increase in the cap number is this: "discretionary" cap space.

The economic concept of discretionary income is defined as one's after tax income minus all "compelled payments" that are necessary to meet essential living needs (housing, food, medical care, etc.....). It's the portion of income that you can actually choose what to spend on.

One fact about discretionary income is that, if your compelled payments stay constant, a relatively small % increase in total after tax income will result in a much higher % increase in discretionary income.

For example, lets say your after tax income is $30,000 and the compelled payments total $25,000. Your discretionary income is $5,000. But if your after tax income increases to $32,000 while the compelled payments stay the same, your discretionary income is now $7,000.

In this case, your total (after tax) income rose by 6.7% ( (32000-30000)/30000 = .067 = 6.7%) while your discretionary income rose by a much higher 40% ( (7000-5000)/5000 = 0.4 = 40%).

Something similar to the above example is happening to the NBA, except it's happening in both directions. On one hand, the cap rose by 7 or 8%. On the other hand, the teams also have less "compelled payments" (i.e. guaranteed salary remaining on the books) than they did before because shorter NBA contracts and lower % increases allowed under the new CBA mean that more contracts are expiring each summer than it did in prior seasons and those that remain tend to take up less cap space than they otherwise would have with higher % increases.

So, a 7% or 8% increase in cap level (combined with other factors) may well lead to a 30% or maybe even 50% increase in many teams' "discretionary" cap space.

Lets say that a fairly typical team under the old economic conditions had a total team salary of $48M going into the summer when the cap was $58M. Then it would only have $10M in cap space tops. It may even choose to just use to use the MLE and BAE instead of the cap room if it had any free agents of its own that it wanted to retain.

Now, lets say that a fairly typical team under the new economic condition had a total team salary of $43M (because one more contract expires, and its big $ players don't get huge % increases) and the cap is $63M. This gives that team $20M in potential cap space, allowing it to spend significant $ on free agents like Frye and Parsons.

So we are talking about a 8.6% increase in the cap level (58M to 63M) and a 10.4% decrease in "compelled payment" salaries (48M to 43M), but this resulted in a 100% increase in "discretionary" cap space and turns a team that may well have spend only the MLE and BAE into one who can go chase a $14M or $15M free agent and still have the ability to add another mid-level guy.

 

First, it's not a position thing this year. Every type of player is getting paid. Back-up PGs (Vasquez, Collison), stretch 4s (McRoberts, Patterson, Frye), young small forwards (Parsons, Hayward), traditional C (Chris Kaman), small shooting guards (Avery Bradley, even Ben Gordon)

Second, while there have always been players signed to bad contracts-- it's the nature of competitive bidding-- there are just more higher $ contracts this year around when you adjust for player quality because teams have more available $s and cap flexibility with which to participate in the bidding.

Chris Kaman, for one, played for $3.2M last season. He is getting $5M next year. And he played about the same as a Lakers as he did in the years before.

Channing Frye got 5 years, $30M, $6M/yr, at age 27 in 2010. He just got 4 years, $32M, $8M/yr, at age 31.

It's just math. If the cap was still $58M and not $63M, DAL would have a much harder time clearing the kind of cap room needed to make the $14.7M offer to Parsons even with Dirk taking a discounted $10M contract.
Meanwhile, a cap figure of $5M for the Rockets would also foreclose certain of the options that it plans to pursue (like chasing Chris Bosh with a $20M or so offer).

 

The Nick Young and Jordan Hill contracts lends further support to my argument, I think. Those two had pretty decent seasons for a bad Lakers team. But neither of them exactly showed himself to be a whole level better than people thought they were.

Still, they got huge pay increases over their last contracts.