The Fund for American Studies’ Institute on Political Journalism
The local sports franchise is in trouble. The owner says the old stadium is economically obsolete and the taxpayers must rush in to save the day, or else he will be forced to move the team elsewhere.
The voters, scared to lose the team they love, give in. A new stadium is built and the area around the stadium is revitalized. Restaurants, bars and shops pop up. The city retains its identity as a “major-league city,” and through the magic of the multiplier effect the local economy grows as a whole.1
Voila. The owner wins. The fans win. The city wins. Heck, sometimes the team even wins — games!
It’s a great story, but — like the notion of a Cubs‘ world championship — it’s largely a pipe dream. The real story is that taxpayer subsidization of professional sports facilities is almost always a losing bet, economically speaking.2
The economic impact studies employed by politicians, the news media, and pro sports owners to support government-financed facilities are beset by methodological problems and don’t count all the relevant costs.3
The real story is that taxpayer-financed sports facilities are a boon to owners and players, the news media and especially politicians, but average taxpayers — particularly those too poor to afford to attend sporting events regularly and those who don’t follow sports to begin with — wind up on the losing end.4
The construction of sports facilities has skyrocketed in the last 15 years. According to economists Roger Noll and Andrew Zimbalist, thirty-one new stadiums and arenas were built between 1989 and 1997 alone.5 They also estimate that $7 billion will be spent on new facilities before 2006, and most of that money will come from public sources.6
The idea that taxpayers should pay to build a sports facility and then let the team owner reap most of the profits seems a little far-fetched.7 How has this happened? Sports owners claim poverty (relative to other owners) because as ticket and broadcast revenue-sharing in sports leagues has increased, one area where owners can still keep most of their gains is from team memorabilia, concessions, parking, hotels, luxury boxes and all the other amenities associated with live sports nowadays.8
Other owners use these newfound profits to buy higher caliber talent, which leads to better on-field performance, which leads to yet another round of profits. Without taxpayer subsidies for a new facility that will allow them to extract these non-shared income streams, owners say they cannot compete. But as economist Mark Rosentraub has written, “It is difficult to find any real evidence that team owners or players need subsidies or welfare support.”9 Still, a team’s threat of leaving often proves too much for politicians to bear, which will be explored more in-depth later.
We know why owners want new facilities, but what arguments are put forth to justify them to the public at large? It is usually argued that a new facility will actually prove to be not just a subsidy for an ailing sports franchise but a boon to the local economy as a whole. This is usually done through the economic impact study, and a key economic theory expounded in these studies is the multiplier effect.
“The theory is supported by a simple observation,” explains economist William J. Hunter. “When an individual purchases goods or a business pays salaries, the recipients of these funds will in turn spend the money. This additional spending tends to increase income and employment, which in turn generates still more spending, and so on.”10
Hunter goes on to add, “While it is no doubt true that this process takes place, the common belief that the results of this process can be accurately measured and manipulated by the government is mistaken — and genuinely dangerous.”11 One major problem, Hunter explains, is the “local production fallacy,” where the “local economy is presumed to benefit from all the jobs, primary and secondary, ‘created’ by the public works project.”12
Much of the money that is spent both in the construction of facilities and in the operation of the facility and the franchise winds up going elsewhere. “A multiplier might appear to some to be the magical mystery tour of any economy,” says Rosentraub, providing an example to prove his point. He and a friend go out to dinner in Indianapolis, but how much of the money they spend actually stays in town?13
The food was purchased from farms or ranches in other states. The money that was invested probably came from multinational banks not even based in town. So to assume that all the money put into a project multiplies locally is to deny the reality of a modern economy.
Furthermore, what is most overlooked in economic impact studies is the opportunity cost of the project. What could have been produced by alternative uses of the same capital and land in the private sector?14 Indeed, if the multiplier theory made sense, almost no public project would be a net loss, Hunter argues. “By increasing public expenditures, even greater increases in community income can be effected through the multiplier’s ripple effect … Certainly if one bridge can generate far more community income than additional cost, several bridges connected by new highways will bring even more income.”15
The truth is, Hunter says, that “government spending does not ripple through the local economy, and does not swell private incomes.” Why? Because of the opportunity cost of the consumption and production “forgone by citizens who must pay taxes to support public spending.”16 Indeed, there is a deadweight loss from taxation that also goes uncounted by most economic impact studies. According to Noll and Zimbalist, “the social cost of taxation exceeds tax collections by about 25 percent.”17 This means that the true cost of, say, a $200 million sports facility would actually be $250 million.
So economic impact studies are seriously flawed, but what does the empirical research tell us about the actual economic effects of taxpayer-subsidized sports facilities? First, while sports get a great amount of media attention, they are a very small part of any local economy. Most franchises have annual budgets of $60 to $100 million, and while that’s certainly a valued contribution to the local economy, Rosentraub explains, “businesses of this size are quite small when compared to other organizations in urban areas.”18
How small a contribution do sports franchises make to a local economy? Rosentraub’s got the data. As of 1992, pro sports make up only .06 percent of total private-sector employment in all U.S. counties with 300,000 or more residents.19 The U.S. county with the largest concentration of direct employment in 1992 was Georgia’s Fulton County, where the Braves, Hawks and Falcons play — a mere 0.32 percent.20 Here’s another stunning figure, again courtesy of Rosentraub: As of 1997, Sears Roebuck & Co. reported annual sales approximately 30 times the revenues of all of Major League Baseball.21
While it’s true that the evidence seems to indicate that many sports facilities are not attractive private investments (since 1953, approximately 71 percent are publicly owned), there may be a crowding-out effect at play, argues economist Robert A. Baade.
“Subsidization by the public sector of stadium construction is one rendition of an old saw,” Baade writes. “Do not spend your private funds when the government will financially accommodate your private ambition. It is quite plausible that the private sector has not often invested in stadium construction because it has not needed to.”22 The empirical results of taxpayer-subsidized sports facilities, however, are crystal clear.
Noll and Zimbalist deliver one of many death blows: “A new sports facility has an extremely small (perhaps even negative) effect on overall economic activity and employment. No recent facility appears to have earned anything approaching a reasonable return on investment. No recent facility has been self-financing in terms of its impact on net tax revenues.”23 They do not stand alone in their harsh judgment.
According to Baade and Richard F. Dye, “Independent research has not supported the notion that direct economic benefit exceeds cost.”24 Their regression analysis of sports facilities built from 1965 to 1983 concluded, “The presence of a new or renovated stadium has an insignificant impact on area income for all but one of the metropolitan areas.”
The exception was Seattle, which also gained a new football franchise.25 Economist Dean V. Baim concluded in 1990 that “stadium construction is not a low-risk investment.”26 In fact, Beam found that for the years 1953 to 1986, teams received an “aggregate subsidy of $139.3 million to play in municipal stadiums.”27
Baade and many others argue that sports facilities do not increase economic activity but merely divert entertainment spending from one source to another. “The leisure budget of a family or an individual is limited, in terms of both money and time,” Baade writes. “It seems likely, then, that a dollar spent at the Spectrum in Philadelphia may well be a dollar less spent at a movie theater in Bucks County.”28 Rosentraub redoubles the argument, saying, “If the economic activity would have taken place if the team did not exist, then there is NO overall economic impact, just a transfer of economic activity.”29
So sports facilities lose money and merely divert economic activity from one item to another, but that’s not all. Analysis has shown that sports facilities actually worsen the local economy, because they result in seasonal, low-wage, low-skill service sector jobs. “An area development strategy which concentrates on these types of jobs could lead to a situation where the city gains a comparative advantage in unskilled and seasonal labor,” write Baade and Dye.30
There’s nothing wrong with such a comparative advantage, but it could probably be achieved without massive taxpayer subsidy, and what remains unknown is what kind of jobs and industries would have developed had taxpayer dollars not been taken in the first place.
The only argument left in favor of taxpayer-subsidized sports facilities is that they help enhance the city’s image, thus attracting businesses to the area. But sports alone will not be a determining factor in a corporation’s decision to relocate to the area.31 It is only one of many factors, and since it has been shown that in many ways these facilities make cities worse off economically, it would be wiser to let taxpayers keep their money and stay away from these high-risk public investments.
It should be clear by now that taxpayer subsidization of sports facilities makes little economic sense. The question that remains is how these projects get approved by the voters when the evidence is so damning. Public choice theory tells us that when one small group has a lot to gain from a given government action and a large, diffuse group has only a little to lose individually, the former group will prevail.32 In June 1997, for example, both San Francisco and Washington held referenda on new sports facilities.
Both won by the barest of margins. San Francisco’s supporters of the stadium deal outspent their opponents 25 to 1, while Washington’s pro-stadium groups outspent their opponents 80 to 1.33 Even if stadium proponents lose the first time around, they come back again and again, because the potential profits of rent-seeking are huge.
The news media also have much to gain from new sports facilities, especially if they are built to retain or attract franchises. “Sports are a critical asset for the mass media and directly contribute, in several ways, to the profitability of newspapers, television stations, and radio stations,” explains Rosentraub.34 Sports make up as much as 20 percent of what appears in newspapers, and firms such as the Tribune Co. and Turner Broadcasting (now part of AOL-Time Warner) have even bought franchises (the Cubs and the Braves) in order to provide content for their broadcasting outlets.
For politicians, the short-term benefits of supporting taxpayer-subsidized facilities are great. They reap the rewards of an extremely visible project usually gracing the heart of downtown where tourists are likely to visit. They are hailed as saviors for keeping the local team in town or attracting a new one after the old one has left. The long-term losses don’t begin to sink in until well after they’ve left office.
When a team demands a new stadium only 20 years after its last stadium was built with taxpayer dollars, the mayor or governor who helped shepherd that deal has long gone on to greener pastures. But the taxpayers have no such escape.
Furthermore, the losses are largely invisible and hard to calculate. Whatever investment might have taken place in the stadium deal’s absence surely would not have been as concentrated and visible as the domed monstrosities that are constructed in the hearts of cities. The sports stadium scam is a classic case of what is seen and what is not seen, as the 19th century French economist Frederic Bastiat explained in his famous essay.
“This explains the fatally grievous condition of mankind,” Bastiat wrote. “Ignorance surrounds its cradle: then its actions are determined by their first consequences, the only ones which, in its first stage, it can see. It is only in the long run that it learns to take account of the others.”35 The accounting has been done, and taxpayers are on the losing end, while wealthy special interests, politicians and the news media are better off.
The wonders of government never cease to amaze.
3 Hunter, William J. “Economic Impact Studies: Inaccurate, Misleading, and Unnecessary.” Heartland Policy Study No. 21, July 21, 1988. Available: http://www.heartland.org/studies/sports/hunter.htm.
14 Bast, Joseph L. “Sports Stadium Madness: Why It Started and How to Stop It.” Heartland Policy Study, February 23, 1998, p. 5. Available: http://www.heartland.org/studies/sports/madness-ps.htm.
22 Baade, Robert A. “Is There an Economic Rationale for Subsidizing Sports Stadiums?” Heartland Policy Study No. 13, February 23, 1987, pp. 1-2. Available: http://www.heartland.org/studies/sports/baade1.htm.
26 Baim, Dean V. “Sports Stadiums as ‘Wise Investments’: An Evaluation.” Heartland Policy Study No. 32, November 26, 1990, p. 4. Available: http://www.heartland.org/studies/sports/baim2.htm.
35 Bastiat, Frederic. “That Which is Seen, and That Which is Not Seen.” 1850. Available: http://bastiat.org/en/twisatwins.html.