This paper provides a layperson`s overview of the economic impact of teams, stadiums, and mega-events on local economies. While sports promoters often claim that professional sports increase incomes and promote economic development, most economists not associated with teams or leagues find no such connection. This paper describes why boosters` ex ante estimates of the economic impact of large sporting events tend to exaggerate the net economic benefits of these events and surveys the results some of the ex post studies of exploring the true impact of spectator sports.

 

The last hundred years have witnessed an incredible transformation in spectator sports from a world dominated by amateur players engaging in local recreational activities to teams of professionals earning millions of dollars playing in billion dollar stadiums to televised audiences around the world. In one of the most visible signs of this economic change, urban landscapes around the world have become dotted with gleaming new stadiums and arenas, and nowhere has the pace of infrastructure development been faster than in North America.

By 2012 in the United States and Canada, 126 of the 141 teams in the five largest professional sports leagues, the National Football League (NFL), Major League Baseball (MLB), National Basketball Association (NBA), Major League Soccer (MLS), and National Hockey League (NHL), will play in stadiums constructed or significantly refurbished since 1990. Of course, this new construction has been costly, with local taxpayers bearing a significant portion of the expense. Construction costs alone for major league professional sports facilities have exceeded $30 billion over the past two decades with nearly 60% of the cost being paid by the public. See Table 1 for a summary of construction costs for newly constructed or refurbished stadiums in various North American sports leagues. While publicly provided infrastructure represents the largest subsidy towards professional sports in the U.S., sports teams also receive other types of government largesse including tax breaks, subsidised security expenses, and even occasionally outright cash payments, so the figures in Table 1 understate the total level of public subsidies directed towards spectator sports. In addition, the figures also exclude public spending on minor league and collegiate sports as well as other popular professional sports such as golf, tennis and auto racing.

 

 

Note: Totals do not add up since some facilities are used by more than one tenant.
Source: www.ballparks.com

It is not only North America that has directed substantial resources towards sports facilities. In 2006, Germany spent 2.4 billion Euros for stadium construction and general infrastructure for the World Cup while South Africa followed with a $1.3 billion investment in new stadiums for the 2010 event. The Summer and Winter Olympic Games can be even more expensive with spending in excess of $10 billion being commonplace - China spent a record $40 billion to host the 2008 Games. The recently completed billion dollar Formula One auto racing track in Abu Dhabi, and the billions of dollars of planned expenditures for the 2014 World Cup and 2016 Olympics in Brazil highlight the truly global nature of the lavish expenditure on sporting events and venues. With such large sums being spent, it is reasonable to ask whether public spending on professional sports serves to promote local and regional economic development.

In fact, evidence suggests that public subsidies for sports are not an effective method of promoting economic development and the remainder of this paper describes why boosters` ex ante estimates of the economic impact of large sporting events tend to exaggerate the net economic benefits of these events. In addition, the paper surveys the results some of the ex post studies of exploring the true impact of spectator sports.

 

Typically, sports boosters use three general ideas for justifying public subsidisation of sports. The first common claim is that the economic activity directly generated by a sporting event, franchise, or stadium is sufficient to cover the associated costs. Nearly any large event will be accompanied by the requisite economic impact statement purporting to show a large expected windfall. For example, it is common to see the NFL claiming an economic impact from the Super Bowl of $400 to $500 million, and other large events such as the European Champions League Final generate similar figures. Economic impact estimates for multiday events such as the Olympic Games or World Cup are even larger. Consultants placed a $12 billion figure on the 2010 World Cup in South Africa and estimated an economic impact of over $10 billion Canadian for the 2010 Winter Olympics in Vancouver.

Most economic impact studies, however, are commissioned by the very organizations that stand to benefits from public subsidies; therefore, teams and event organisers have every reason to inflate their economic estimates in order to garner a larger government handout. In just one of many examples, in 2004 NFL commissioner Paul Tagliabue made a highly publicised visit to the Dallas area just prior to a crucial vote that would direct $325 million in local taxes towards the construction of a new stadium for the Dallas Cowboys. As a carrot to prod reluctant taxpayers to vote for the subsidy, Tagliabue offered the area the chance to host the Super Bowl if a new stadium was built. If the Super Bowl does indeed inject hundreds of millions of dollars into local economies, offering the Super Bowl in exchange for a $325 million taxpayer handout, in effect, means that the city would get their stadium for free. Ignoring obvious distributional aspects, the public`s contribution to the Cowboy`s stadium would be paid for by the money earned from the hosting the big game. Of course, such reasoning only applies if the Super Bowl does indeed provide the economic benefits claimed by the league.

Besides the inherent problem of asking organisations with vested interests to provide independent and unbiased economic advice, there are several important reasons to believe that most economic impact studies are fundamentally flawed. Most economic impact predictions are performed in a relatively straight-forward fashion. Basically, the studies` authors estimate the number of attendees at a sporting event and the average spending per fan in order to derive the direct economic impact of the game. Once the direct impact is estimated, it is common to apply what is known as an economic multiplier to the original estimate, which accounts for money in the local economy being spent and then re-spent. The multipliers used in most impact analyses tend to double the size of the initial direct impact. While this methodology is easy to understand, it also tends to overestimate the net benefits that accrue to a community as a result of professional sports, and economists typically cite three primary errors in the most common methods of impact analysis.

The first issue that tends to bias results upwards is the “substitution effect”. Local residents who spend money at a sporting event have less money to spend elsewhere in the local economy. One hundred dollars and an evening spent at the ballpark is one hundred dollars and one evening not available to be spent at local restaurants, theatres, or other entertainment or consumer spending options in the city. One intuitive example of the substitution effect in action is the “Christmas sweatshirt” phenomenon. Following a city`s team winning a league championship, a huge proportion of sports fans will open up a present on the next gift-giving occasion containing a sweatshirt, t-shirt or jersey from that local team proclaiming the big victory. Standard economic impact analyses would attribute these apparel sales as part of the local economic impact of the team. In reality, however, the lucky sports fan does not receive any more presents than usual but instead receives a team clothing item instead of a sweater, dress shirt or tie. The championship has affected the type of presents received but not the number of presents. Similarly, the presence of spectator sports generally affects the allocation of consumer spending but not the overall level; therefore, economic impact reports that include spending by local residents in their figures are incorrectly showing the gross impact of sport, not the net impact.

A second related problem is the “crowding out effect”. Crowding out occurs when regular economic activity is displaced by the crowds and congestion associated with a sporting event. Major sporting events tend to disrupt traffic, cause parking problems and reduce the availability of hotel space. In cities and during time periods when hotel occupancy is at or near capacity, the presence of a sporting event will not increase total number of visitors in a city but instead will just cause sports fans to displace other travellers. Consider the following example. Suppose a hotel is normally at 80% capacity but that during a major sporting event all rooms are filled with sports fans. A typical economic impact analysis would credit the sporting event with filling an entire hotel, However, a more careful analysis would simply note that occupancy has increased by 20%. Again, the standard methodology measures gross impact rather than net impact, and in this case overestimates the effect of the sporting event on the local economy by a factor of five.

The final important issue is that of “leakages.” While sporting events may generate a lot of economic activity in a metropolitan area, it is possible that a large portion of the money will not stay within the local region. For example, while over 90% of workers live within the same metropolitan area in which they work, only about one-quarter of major league professional athletes live year-round in the city in which their teams play. When a fan purchases a ticket to a game, the majority of that ticket price goes to paying player salaries. Since the players don`t live nearby, little of that fan spending gets recirculated into the local economy. Similarly, during mega-events, hotels may double or triple their room prices, but they don`t double or triple the wages paid to local desk clerks and room cleaners. The higher room prices simply lead to higher profits for the hotel owners, and unless the hotel is locally owned, again the money does not get re-spent in the local economy.

Numerous researchers not associated with teams, leagues or stadium developers have looked at economic data after the fact, and the scholars typically find little or no direct economic benefits from new playing facilities, sports franchises or big sporting events. Before the fact predictions apparently bear little resemblance to after the fact reality. See Table 2 for a comparison of claimed versus realised benefits for a variety of sporting events obtained through statistical analysis of employment, income or taxable sales before, during, and after these events. For further reading both Matheson (2008) and Coates and Humphreys (2008) provide good overviews of the scholarly literature on this topic.

 

 

Source: Adapted from Baade and Matheson (2010)

Even if the immediate gains from spectator sports are small, a second justification for subsidising sports is the potential long-run benefits of a team, event or new stadium. Mega-events “put cities on the map,” and new stadiums can serve as anchors for generating neighborhood rehabilitation. Unfortunately, the long-term growth effects of spectator sports have also not been shown to be particularly significant. While tourists may flock to host cities during major sporting events, the surge in visitors tends to be short-lived. For example, foreign tourism in Sydney, the host of the 2000 Summer Olympics, actually grew more slowly following the Games than in the rest of Australia during the same time period. New stadiums also typically fail to revitalise local areas. Modern sports facilities are generally not good neighbors as they are designed to drive economic activity within the stadium walls. The new Dallas Cowboys stadium has over 60 restaurants and concessions stands as well as 30 bars and multiple retail establishments leaving little reason for a thriving commercial district to exist in the area surrounding the stadium. Indeed, many modern sports facilities appear to be walled fortresses surrounded by a protective moat of parking lots keeping dollars inside the stadium and away from local neighborhoods.

While the long-run benefits from sporting events may not be forthcoming, the bills from hosting these events still must be paid. While there are many stories of stadium debts that lasted longer than the stadiums themselves, one particularly tragic tale is that of Greece. Even though the country had become much more fiscally responsible after joining the European Union in the late 1990s, Greece pulled out all of the stops for the Athens Olympics in 2004. Government deficits rose every year after 1999 peaking during the year of the Games at 7.5% of GDP thanks in large part to the event`s 9 billion Euro price tag. For a relatively small country like Greece, the total cost to host the Olympics came to roughly 5% of the annual GDP of the country. Predictably, to economists at least, the Olympics didn`t usher in an economic boom and the country`s debts spiraled out of control following the Games until they reached a crisis stage in 2010. While it would be a mistake to place all of the blame for the current Greek meltdown on the Olympics, the lingering debts from the Games undoubtedly exacerbated an already difficult situation.

 

The final reason given for public subsidies for sports is indeed the one that is most justified. Sports teams and events, it is claimed, lead to improvement in the quality of life for a city`s residents as sports are an important cultural amenity enjoyed by millions. Her,e the economic data is much more sympathetic to the boosters` claims. For example, over 90% of Chinese citizens surveyed by a Pew Research poll thought the 2008 Olympics would improve the country`s image, and economist Wolfgang Maennig noted in his analysis of the 2006 World Cup in Germany, that the most important lasting impact from the event was not “increased turnover in the retail trade, overnight accommodation, receipts from tourism and effects on employment” but instead “effects such as the improved image for Germany and the feelgood effect for the population.” (Maennig, 2007)

 

Although evidence of significant short-term or long-term economic benefits from sporting events, franchises and stadiums is lacking, it is equally clear that improving citizens` quality of life is clearly an important goal for public policy makers, and there is evidence that sports are a valued amenity for local communities. However, one should take care to view boosters` claims of an economic windfall with a healthy dose of scepticism. There are several well-known reasons, including leakages, crowding out and the substitution effect, why standard economic impact predictions overestimate the true effect of sports on local economic economies. It is the overwhelming conclusion of economists who have studied the effects of professional sports that their real effects on economic variables such as employment, income or taxable sales are negligible. Perhaps the best answer that an economist can give to the question of whether sports are a boon or a burden is simply that sports may make a city happy, but they are unlikely to make a city rich.