Tuesday, 3 March 2009

The new stadium in Dunedin: bad economics

Homepaddock writes
Today there’s happier news with the announcement that the government will underwrite the $15 million shortfall in funding for a new stadium in Dunedin [...].
The news that the government will underwrite the $15 million shortfall is not welcome. The taxpayer, via local or central government, shouldn't be putting any money at all towards this stadium. As I noted in my posting on News Flash: Economists Agree, number 7 on Greg Mankiw's list was "Local and state governments should eliminate subsidies to professional sports franchises" with which 85% of economists agree.

In an earlier posting on this subject I wrote about an article in the journal Econ Jounal Watch in which Dennis Coates and Brad Humphreys ask Do Economists Reach a Conclusion on Subsidies for Sports Franchises, Stadiums, and Mega-Events?(pdf). The answer is yes, and economists are opposed to such subsidies.

The, lengthy, abstract/introduction to their paper reads
State and local governments in the United States have long been called upon to subsidize the construction of stadiums and arenas. Indeed, the first wave of government subsidization dates to the years between 1917 and 1926, the first boom in stadium construction. Since then, one thing that has changed substantially is the rationale for public-sector support. In 1926, The Playground said the goal was for “the stadium to have as broad a use as possible.” It recommended the once-familiar horseshoe shape because it facilitated egress via the open end and included a long straightaway suitable for a procession. The implicit rationale was for the facility to serve the broad public interest by hosting pageants, parades, rallies, and festivals, as well as sporting contests of all sorts from track and field to football and baseball. Today, stadium subsidization focuses on a single use, namely, hosting professional sports franchises, which usually have substantial control over the facilities’ availability for other events.

The change from public provision of venues available for a wide array of events to public subsidization of largely privately controlled facilities is a fairly recent phenomenon. The change occurred gradually. The first steps may have occurred with baseball-franchise relocations –the Braves’ relocation in 1953 from Boston to Milwaukee, the Browns in 1954 from St. Louis to Baltimore, and the Athletics in 1955 from Philadelphia to Kansas City. In each case, new or recently renovated publicly owned facilities were made available to baseball franchises on quite generous terms. For example, The New York Times reported on March 15, 1953 that the Braves were offered a flat rental of $1,000 for the first two years on the new County Stadium in Milwaukee.

Ralph Wulz (1957) argued that public ownership of stadiums was justified if “private enterprise could not provide the service which the public demanded and at the same time realize an adequate profit on its investment.” However, Wulz did not foresee private businesses being subsidized in their use of these facilities, stating that subsidization might be suitable for “governmental activities and perhaps activities at which no admission is charged,” but that “commercial type activities pay the full cost of the services or facilities which are provided” .

Wulz’s (1957) discussion raises the question of the possible theoretical justification for the subsidies we see today. Subsidies can, in general, be justified either on efficiency or distributive grounds. For example, a subsidy could be justified if the unsubsidized market would supply too little of the good. This is the classic situation of positive externalities. The subsidy would induce greater provision. Alternatively, subsidies could be justified as a means of redistribution. For example, public education is paid for out of taxes, with wealthier individuals paying more in taxes than the cost of the services they receive and poorer individuals paying less than the full cost of the education. We will address each of these justifications for stadium and arena subsidies in turn.

To justify a stadium subsidy on efficiency grounds requires an explanation of how the market outcome will result in “too little” quantity. That is, one must explain how marginal social benefit from the stadium exceeds the marginal social cost. A difficulty in this case is that sports facilities are very lumpy; the debate often focuses on whether to build a facility, not about increasing the seating capacity by an additional seat. The market outcome, therefore, may be no construction of a stadium or an arena at all, and consequently no sporting events. This is the market failure justification implicit in the “build it and they will come” strategy of cities whose intent is to lure an existing franchise away from some other city or to induce a professional league to grant the city an expansion franchise. It is also the justification for a city to replace an existing facility to keep the current team or teams from moving.

A recent example from the NBA illustrates the kind of thing that often goes on now. The Seattle Supersonics were unhappy with their former home, KeyArena, and sought to have the city of Seattle build a new arena. Seattle refused and the team explored moving, which would require breaking their lease with the City of Seattle for KeyArena. A lawsuit ensued and they settled out of court, with the team moving to Oklahoma City, for the 2008-2009 season, and paying Seattle tens of millions of dollars to break the lease. Oklahoma City attracted the team by promising to spend $100 million renovating its existing arena to bring it up to current NBA standards and an additional $20 million to construct a practice facility. The existing arena in Oklahoma City was built without an occupant during the 1990s as part of a downtown redevelopment plan. The Seattle-Oklahoma City case suggests relevant lessons: Professional sports leagues are able to restrict entry and play one city off against another to extract the best subsidy deal. In doing so, there is a significant positional element—one city’s fan-base loses, another gains. And teams exploit the cities where politics most effectively taps the taxpayers.

In this paper we examine the economic research on subsidies for sports franchises, stadiums, and mega-events. We ask whether economists who conduct such research reach a conclusion. Our investigation suggests that such economists largely agree that subsidization is undesirable. Before turning to the economic literature, we examine the results of a recent survey, and frame the issue in terms of economic intuition. (Emphasis added.)
In their conclusion they write,
We have seen that economists in general, as represented by Whaples’s survey (2006), oppose sports subsidies. Economists reach the nearly unanimous conclusion that “tangible” economic benefits generated by professional sports facilities and franchises are very small; clearly far smaller than stadium advocates suggest and smaller than the size of the subsidies. The fact that sports subsidies continue to be granted, despite the overwhelming preponderance of evidence that no tangible economic benefits are generated by these heavily subsidized professional sports facilities, remains a puzzle.
Phil Miller at the Market Power blog draws our attention to this video from Reason TV which summarizes why sports stadiums are not net generators of economic activity. Miller notes that the video
... features an interview with Dennis Coates, professor of economics from the University of Maryland-Baltimore County, an economist who has made a nice career of studying the impact of sports and stadiums on local economies. Coates, who has been instrumental in forming what is a consensus among economists, summarizes it: sports stadiums don't generate new economic activity (i.e. jobs, spending, income, etc.) and they may actually be a net drag on such economic activity. Quite the contrary, stadiums drive a redistribution of economic activity from disparate parts of the local economy to the people lucky enough to get the subsidy. The net effect is no new spending, no new jobs, no new income: just a redistribution of activity.

Here in New Zealand Tyler Cowen wrote a report for the New Zealand Business Roundtable on the question of Should Governments Subsidise Stadiums and Events? (pdf). Cowen concluded,
The above arguments suggest that the case for stadium and event subsidies is a weak one. The option value and 'warm glow' arguments do not succeed in demonstrating significant market failure. The supposed macroeconomic benefits turn out, upon examination, to be illusory. Stadium and event subsidies do not have convincing effects on output and employment. Under most plausible scenarios, they simply redistribute outputs from one sector to another. Furthermore, the benefits to a local economy still translate into a zero-sum game for the nation as a whole.

The costs of taxation and the lessons of public choice theory provide further reasons to be sceptical about subsidies for stadiums and events. These subsidies will not generally be administered in the public interest, but rather will be controlled by special interest groups. In many instances, subsidies will be handed out to favoured local businesses, rather than to sources that will most greatly enhance efficiency.

The two most comprehensive book-length treatments of stadium subsidies both take a similarly sceptical view. Mark S Rosentraub entitled his book Major League Losers, to refer to those who foot the bill for stadium subsidies. Roger G Noll and Andrew Zimbalist offer the most thorough scholarly treatment in their Sports, Jobs and Taxes: The Economic Impact of Sports Teams and Stadiums. In the introduction, Michael H Armacost (president of the Brookings Institution) writes: "In every case, the authors find that the local economic impact of sports teams and facilities is far smaller than proponents allege; in some cases it is negative". The authors themselves write:
... an industry as localised as a sports team is not likely to generate much local economic development, especially in an entire metropolitan area rather than a city within that area. Stadium subsidies facilitate building expensive monuments to sports that benefit no one and transfer income from ordinary people to highly paid players, owners, and executives.
The burden of proof rests upon those who propose stadium and event subsidies, given their cost, the lack of a clear demonstrated benefit and given that they represent a deviation from egalitarian standards. The case for stadium and event subsidies has not been established and the case against has several strong arguments in its favour.


homepaddock said...

Happy news for Dunedin isn't necessarily good news for the rest of NZ which is why I concluded my post by syaing whether taxpayers should fund the stadium is a moot point.

You've put a very strong case against it but I think the decision is a political one not an economic one.

Paul Walker said...

"You've put a very strong case against it but I think the decision is a political one not an economic one"

I would agree. Economics, I'm sure, played little if any part in the decision.

Sally said...

Dear John & Bill

Would you please explain to me the rationale of underwriting the $15M shortfall for the Dunedin Stadium.

You obviously did not read this report http://www.nzbr.org.nz/documents/publications/publications-1999/should_governments_subsidise_stadiums_and_events.pdf

In my opinion and many others you have not listened to the people of this region that do not want this white elephant. Once more it is the special interest groups favoured rather than the overall welfare of the residents.

Your decision also has ramifications for ratepayers in the Southern regions because of those Mayors who wrote in support of receiving funding from Central Government. This they did without consulting their ratepayers. We were not given a chance to have our say before these people, who are meant to be the leaders in our communities, committed to their course of action.

This goes against the spirit of the LGA 2002.

It is NOT for councils to exert greater influence and authority over their electors, but empowering people within their communities to exercise ever greater control over their lives and over the environments they live in.

What should have been done with this sorry saga was for those pushing for the stadium to have got together, mortgaged their own homes. i.e. risked their own cash instead of other ratepayers and taxpayers.

(Politics should not have come into this awful decision!)

Sally said...

Further to my post.

God only knows what National's principles are. Certainly don't believe in free enterprise as they only pay lip service to this principle.