Tuesday, 3 June 2008

The economics of sports stadiums (updated)

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. Organisers of the Rugby World Cup in 2011 in New Zealand may wish to take note. 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.
Update: The arguments against subsidies for stadiums and events are summarised in this article from the Otago Daily Times 11 August 2006.

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