This Labor Day Weekend, Baltimore played host to its first Grand Prix race, part of the IndyCar series. The establishment of the race was strongly backed by local and state politicians. At a press conference back in 2010, Gov. Martin O’Malley and Mayor Stephanie Rawlings-Blake called the race a “game-changer” that would inject millions of dollars into the city’s economy. It’s too soon to know how successful the race will be, but a number of academic studies should give us reasons to be skeptical.
A little known discipline called Sports Economics applies economic principles to the study of sports, teams and athletes. Repeated research by sports economists has concluded that the regional economic benefits of sporting events rarely equal the predictions of the stakeholders who advocate for these events. A lot of the research has focused on government subsidies for sports stadiums, but the basics findings would appear to apply to an event like the Baltimore Grand Prix as well.
To understand the skepticism raised by economists in the academic literature, one must first understand the methodology used by advocates of the new stadium or sporting event. When a governor or mayor touts impressive statistics supporting a new sporting initiative, they are typically quoting from studies commissioned by special interests supporting the project. As opposed to an academic study, these advocate studies are hardly impartial or based on sound economic principles. The advocate studies typically overstate the financial benefits of constructing a stadium or hosting an event.
Let’s look at the typical benefits stated in support of the construction of a government subsidized baseball stadium. Studies typically argue that there are peripheral economic benefits to having a baseball stadium downtown. The argument goes that fans will spend money downtown at restaurants, or other stores, before or after the game. In the models used by advocacy studies, every dollar spent by a fan is considered new spending, generated by the presence of the new stadium. But a principle in economics known as the substitution effect says that spending on one item typically lowers spending on other similar items. A family that is attending a baseball game might have gone to the aquarium, circus or movies instead. In any of those cases, they may have gone to dinner as well, just as they were projected to do in the stadium study. Even where new business is generated downtown, it may be at the expense of suburban businesses. Again considering the substitution effect, a family that would have had movies and a dinner in the suburbs, may now shift that spending to the city. Therefore, the tax benefits at a county or state level may be nil. Another hidden effect of the stadium is that on game nights, people from the suburbs who were not attending the game, might be discouraged to go downtown because of traffic. Ironically, they may now choose to eat dinner in the suburbs rather than in the city.
Another important economic concept that is ignored by stadium advocates is opportunity cost. Virtually all modern baseball stadiums have been constructed with some kind of governmental subsidy. These subsidies include construction financing, subsidized rents, tax breaks and infrastructure improvements. The concept of opportunity cost looks at the value of alternative uses of funds. In the case of stadium subsidies, one must ask, could those funds have been used in a way that would have exceeded the benefits of the stadium? Alternatively stated, what was not accomplished by the government because the funds were spent on the stadium?
If you’d like to see the specific statistical findings associated with government subsidized stadiums, I’ve included links at the end of this post that provide lots of useful data and analysis. The consistent conclusion of these academic articles is that taxpayers are effectively providing subsidies to team owners and players. There appears to be no measurable correlation between the presence of a major league sports team and regional economic benefits.
If there is such consistent evidence that subsidizing teams doesn’t benefit local citizens, why do so many politicians support these new projects? The phenomenon appears to stem from a number of factors. As stated earlier, many of the fallacies of advocate backed studies are hidden effects, not easily seen by laypeople. The substitution effect and opportunity cost involve seeing what could have happened as opposed to what did happen. This is not an intuitive concept for most people.
The approval process is typically driven by a coalition of team owners, developers, development agencies and politicians. While these entities are a numerical minority, they are highly motivated and well-funded, with a lot at stake financially. They are willing to invest huge amounts of time, money and energy to see the project approved. On the other hand, the large majority of average citizens have little at stake. Even if they could compute the tax burden going forward, it would be insufficient to motivate them to match the effort and resources of the advocates.
Until the general population becomes more attuned to the economic way of thinking, subsidized sporting venues and events will continue to be approved. The focused resources of special interest groups will continue to win favor with uninformed politicians and citizens.
In part II of this post, I’ll look at how these same hidden effects can distort project approvals and decision making in the corporate world.
Links to Research: