Market Power

Mega Events, Foxes, and Hens

The historical record on the economic impact of mega events never, ever (and I mean ever) lives up up to the before-the-fact claims of consultants and the events' cheerleading squads.  Why wouldn't, say, a Super Bowl have a massive effect on, say, San Francisco?  Because San Francisco is already a vacation and convention destination.  Having a Super Bowl in San Francisco will attract visitors, but it will also drive others to vacation elsewhere.  The economic impact, however you want to measure it, is the net impact, not the gross impact.  

Or, put another way:

But how can legions of football fans descend upon a region and not make a dent, economically? One reason is that measuring the number of people who head to a Super Bowl city for the game is a straightforward endeavor. Measuring the number of people who stay away from an overpriced, tourist-infested zoo is not. Especially in a year-round tourist destination like the Bay Area, Super Bowl visitors aren't flocking to hotels that would otherwise be empty; they're displacing would-be visitors. What's more, hotels in many Super Bowl cities triple their rates and insist on multiday packages. This drives away non-Super Bowl visitors and also leads to fans booking rooms for more days than they'll actually use — meaning those rooms aren't being occupied by actual people who could be spending actual money.

To claim an economic windfall based on visitor numbers without factoring in those who avoid the area or are pushed out "is like going to the hen-house, counting all the foxes, and saying 'Look at the economic impact of all these foxes here eating!'" Porter says. "You're not counting all the hens who are gone."

That's sports economist Phil Porter from USF. HT Skip Sauer.

The Negative Externalities of Sporting Events

From the email inbox.

The University will host the NCAA Division II Central Regional Men’s Basketball Championship at 7:00pm this evening in Taylor Center’s Bresnan Arena.  Minnesota State will take on Fort Lewis College, with the winner advancing to the Elite Eight national championship tournament next week in  Springfield, MA.  Athletic department officials are expecting a large crowd this evening.   While a good number of those in attendance will be on-campus students, nearly 75% of the total will come from off-campus visitors, which may create a few challenges in terms of traffic congestion and pedestrian flow that could cause some delays.  We expect a high number of  University students arriving for night classes and basketball fans coming to the game for a 7:00pm tip-off to simultaneously converge on the area between 5:45-6:45pm. Please plan accordingly, allow some extra time, and proceed with caution in the parking lots, pedestrian crossings, and streets surrounding Taylor Center.

When contemplating the economic impact of such events, please account for external costs and benefits.  Thank you.

Everything's Bigger in Texas, Especially High School Football

Everything's bigger in Texas, it's often said.  It's true about the size of the state and its high school football stadiums.

In a few days, the folks here will be celebrating Christmas, but it'll be another eight months before they get the present they've long desired. That's when kids from this tony suburb north of Dallas will finally get to play in a new $60 million high-school football stadium. Many see this as yet another sign of the excesses of youth sports in America.

That's Mark Yost writing about a new high school football stadium in Allen, Tx.  Before we criticize the folks in Allen, Tx., note they are not gutting their academics to pay for football.

Further blunting criticism of the $60 million stadium's price tag is the fact that Allen clearly isn't sacrificing academics for athletics. The 650,000-square-foot high school was completed in 1999 at an initial cost of $59 million and includes science labs, a student newspaper and a modern television broadcast studio where students get experience in front of and behind the camera. The school system is rated "Exemplary" by the state, and the stadium is part of a $120 million high-school expansion project that includes a new auditorium that will be used by the music and theater programs.

And, the citizens of Allen are paying for the whole thing themselves. They passed a special bond referendum that met only token resistance. For all the Internet and media chatter about the stadium, Allen isn't apologizing for the price tag.

I asked Mark what "token resistance" is and he said the bond referendum passed by more than 70%.

As readers know, I am not a fan of public funding for sports stadiums because neither a sports contest nor a stadium satisfy the definition of a public good, especially when that public funding largely ends up benefiting a small slice of the population.  And at least in college and professional sports, I'm not convinced any positive externality is not somehow captured by the program through souvenir and clothing sales.  But when a bond referendum for a stadium passes by such a large margin, it's hard to argue against public funding in that particular case.  

 

Whatever Happened to the Ballpark Village in St. Louis?

An aquarium, a 20-story residential tower, a massive underground parking garage built in the hole left by the old Busch Stadium. Nearly a half-million square feet of top-notch office space. Streets lined with stores and restaurants unique to the region. A development that could exceed $600 million, creating hundreds of new jobs and the jolt sorely needed to revitalize downtown.

A 24-hour place to live, work and play.

Story by Doug Moore in the St. Louis Post-Dispatch here.  Sports stadiums are frequently pitched as boons of economic development, a sort of "if you build one, it will come" promise.  So what happened?

However, when it came time to bring baseball's best together in St. Louis, all the Cardinals could offer was a softball field and a parking lot to greet fans.

Nothing happened.  But guess what?

But to the surprise of city leaders, the developers were back at the table before a city board earlier this month, saying financing is in place and tenants are ready to move in.

All we need, they said, is the money from the taxes to make the project come together.

If the village is going to be that great of a place, it doesn't need subsidies to get off the ground.  The developers should have no trouble making a pitch to private investors. 

Here in Minnestoa, the Metrodome in Minneapolis has collapsed due to the weight of the snow from yesterday's Snowmageddon.  I'm sure we'll hear the same pitch about how the city needs a new stadium not for the obvious reason but because of the economic development.  That was one of the selling points of the Cards' stadium and it hasn't panned out.

 

The Tax Reform Act of 1986 and Sports Construction Projects

When we think of sports subsidies, three main ones come to mind:  operating subsidies that help pay day-to-day bills, infrastructure subsidies that improve, for example, roads and highway off-ramps near a sports facility, and - the biggie - stadium construction subsidies.  But there is another.  Ameet Sachdev of the Chicago Tribune discusses the often hidden subsidy that comes from the tax-exempt status of interest on municipal bonds.  Here's Mr. Sachdev:

Such bonds offer a discounted cost of capital to private individuals in the form of below-market interest rates, paid for through the exemption of the bonds' interest income from federal income taxes.

The exemption can result in a large subsidy. The municipal-bond market has been a mess lately, but let's assume a 2 percentage-point differential between tax-exempt and market interest rates. A $225 million stadium renovation financed 100 percent with 30-year tax-exempt bonds, assuming an equal portion of the principal is retired every year, would result in interest savings of $37.7 million, according to Dennis Zimmerman, a retired economist who studied the economics of stadiums at the Congressional Budget Office.

Considering the lower interest costs, it's easy to understand why sports owners keep eating at the public trough.

Yes it does.  Skip Sauer at The Sports Economist found the next few paragraphs about the TaxReform Act of 1986 by Sachdev particularly interesting.

Before 1986, professional teams generally repaid publicly financed stadium debt through revenue generated by the facility, such as tickets, parking and concessions. Such user fees met little resistance from taxpayers because general taxes were not being levied to pay for the stadium, Zimmerman said.

The 1986 Tax Reform Act placed limits on bonds issued for private activities by determining that no more than 10 percent of the debt service can be repaid by revenues from the project itself. Congress also removed sports facilities from the list of projects that remain eligible for tax-exempt financing.

Yet stadiums still manage to qualify for the tax exemption. A loophole allows owners and host cities to push 90 percent of the construction costs onto taxpayers. In other words, public revenues such as sales taxes, lottery proceeds or amusement taxes must be used to repay the bulk of debt. And owners pocket the stadium revenues.

One quick reaction I had to this was that the stadium building boom here in the states began within a few years of the passing on the Tax Reform Act.  Is this a coincidence?  Possibly. 

Considering facilities in use in the 2003-2004 NBA season only 4 of the 28 American facilities were built before 1986.   In 2004, 14 of the 32 facilities in the NFL predate the Act.  Of the 24 American facilities in use in the 2003-04 NHL season, 6 predate the Act.

The NFL numbers are skewed because 5 of the teams that played in facilities built before the Act was passed have new stadiums now (Arizona, Dallas, the Jets, the Giants, and Indiana) and 5 others saw their facilities get major facelifts (Chicago, Kansas City, San Diego, Oakland, and Buffalo - the Superdome underwent massive renovations after Katrina, so I leave that one out) after the Act was passed.  An argument can be made that some of the renovations and new facilities were needed to update old stadiums, but it's hard not to think that the incentives in the Act at least quickened the pace.

"Economic Impact and the Substitution Effect", teh PRON, and NFL Games

Web traffic data from the porn site Tube8.com (which we obviously won’t link to since it’sdefinitely not safe for work) shows that that traffic from NFL markets rises by an average of 9.2% when a city’s team has a bye week. Without the local team playing, people clearly find other things to do like going shopping, visiting museums, playing at the park, and yes, watching porn. All of these other activities generate economic benefits that replace the loss of economic activity from the local NFL team shutting down for the week. 

That's Victor Matheson at TSE.  I discovered this information while looking at TSE's Twitter feed and had never heard of Tube8 before.  Seriously.

Dennis Coates on the US World Cup Bid

"Give the World Cup bid a Red Card."

Economic Impact Statements

The economic impact statements written by consultants for sports subsidy seekers describe research that goes something like this:

Assume that the total amount of direct spending that will happen if, say, a stadium is built is X and the multiplier is M.  The total of direct and indirect spending that will therefore occur is X*M.  There are similar multipliers for jobs and the process of calculating a jobs number is exactly the same as in the expenditure calculation.

One problem with this type of study is that it makes use of assumptions about the future which may or may not be rooted in historical fact.  But that's not a fatal problem even though making assumptions about the future is always going to involve some sort of forecast error (as the good folks in Kansas City are finding out the hard way (Via Eric Parsons)). 

The fatal problem with this type of research is that there is nothing to compare it to, no control group.  It's like running a research trial on a new drug with no placebo.  If everyone in the drug study gets better, how do we know it's the drug and not something else?  Because of the lack of a comparison group, such studies should be looked at with skepticism, even when a respected economist/government advisor performs the study.

It may be that the last people in America who believe that the $862 billion economic stimulus of February 2009 created millions of net new jobs are Vice President Joe Biden and the staff economists in the White House. Yesterday, President Obama's chief economist announced that the plan had "created or saved" between 2.5 million and 3.6 million jobs and raised GDP by 2.7% to 3.2% through June 30. Don't you feel better already?

...All of these White House jobs estimates are based on the increasingly discredited Keynesian spending "multiplier," which according to White House economist Larry Summers means that every $1 of government spending will yield roughly $1.50 in higher GDP. Ms. Romer thus plugs her spending data into the Keynesian computer models and, presto, out come 2.5 million to 3.6 million jobs, even if the real economy has lost jobs. To adapt Groucho Marx: Who are you going to believe, the White House computer models, or your own eyes?

Or, as Milton Friedman used to say, "there's no such thing as a free lunch." The money government spends does create some jobs—the folks working on road projects, say—but that money has to come from somewhere, which means taxing or borrowing it from areas of the private economy that are nearly always more productive. This doesn't mean that government spending is always a bad idea, but it does mean that government spending as economic stimulus is fanciful.

The same goes for government subsidies for sports.  If a sports project is so good for an economy, why does it need government help to get started?  There should be plenty of private interests lining up to get a crack at such a great investment.

Is Having Butler in the Final Four a Bad Thing, in a Tourism Sense, for Indianapolis

Story here via Brad Humphreys.  An excerpt:

It’s the feel good story of the tournament: The little guys from Butler playing in their hometown of Indianapolis in the Final Four.

But Butler being in the tournament means it takes a spot from another team that could travel from farther away, fly in, stay in more hotel rooms and spend more at restaurants.

There are quotes from Vic Matheson, Brad, Andy Zimbalist, and Mark Rosentraub.

A Broken Windows Fallacy Video

Why aren't natural disasters and terror attacks a good thing for the economy?  No.  Resources that are used to fix what gets destroyed would have been used in alternative ways.  That's the basic premise behind the broken windows fallacy which is nicely described in this video (via Cafe Hayek).

The same criticism can be given regarding sports subsidies.  The money used to subsidize sports, whether they be stadium construction subsidies, infrastructure subsidies, or operational subsidies, has to either come from taxes or borrowed.  While the subsidies encourage economic activity, taxes discourage economic activity, offsetting any effect a subsidy would have.  Borrowing to finance subsidies crowds out other investment activities, another offset.