Wednesday 18 September 2013

Economists versus the cup 2 (updated)

Previously I blogged on comments made by three economists on the economic benefits, or otherwise, of having the America's Cup defence in Auckland. Now JamesZ at the TVHE blog has also commented on the three economist's views. James tells us that The America’s Cup is not about the money. Well actually yes it is. Given the amount of money that central and local government will waste on the defence and given there is no economic justification for that spending, it really is about the money.

At one point James writes,
It’s a bit like going on holiday: it’s only a bad use of money if you don’t end up enjoying the break. The financial return is hugely negative but that’s fairly irrelevant when one’s enjoying a hike in the French Alps or lounging on the beach in Mallorca. What we really need to ask is whether the public gets sufficient enjoyment from hosting events like the America’s Cup.
To say the financial return to you holiday is hugely negative is to say the financial return to all consumption is hugely negative. Of course it is, we spend the money to gain the utility from the consumption. Going on a holiday of your choosing is about utility maximisation. You are spending your money to purchase a consumption bundle of your choosing. Having the America's Cup here is more like someone telling you that you will go on holiday, whether you want to go or not, telling you where you will go, whether or not you want to go there, and telling you how long your holiday will be, no matter how long you want it to be. And to cap it all off,  they then make you pay for it! A forced holiday isn't about maximising your utility, you get the consumption bundle whether you want it or not. You suffer a hugely negative financial return with no guarantee that you get any utility from it at all. Someone else's utility is being maximised and you, as a ratepayer and/or taxpayer, get to pay for it.

James continues,
The obvious answer is ‘yes’, nations compete to host events and have done for as long as historical records exist. Hosting is incredibly prestigious and competitive, which suggests that there is no shortage of benefit from hosting. It isn't as if the legacy of hosting large events is unknown, yet cities and nations continue to bid huge sums for them despite that.
There may be benefits to hosting such events but those benefits go to a very small group who pay very, very, little of the costs of hosting. The people who make the decisions about hosting don't pay the bill. That they may well make an inefficient decision is hardly surprising given this.

James ends by saying,
So long as people know what they’re paying for the thrill, we shouldn’t worry too much about the money.
But if you want to host on the grounds that some people will get positive utility from the "thrill" of hosting then you have to net out the negative utility that other people suffer from hosting. You must consider both sides of the ledger. It's the net-thrill that matters.

Update: Brennan McDonald makes the sensible point that If We Host The America’s Cup, Kickstarter Financing Is The Only Responsible Choice

1 comment:

Peter said...

Can't comment on Brennan's so will pop it here - am not sure why you both assume that the Cup's defence has to be in NZ. An international tender for the location is quite consistent with Kickstart financing. For the NZ population at large, it is very difficult to conceive of a bigger happiness dividend than we're getting in San Fran watching the races at a great hour with the atmos of a beautiful city backdrop ... with far greater int'l coverage for NZ than would likely be achieved down here.