Economic costs of hosting the Olympics and World Cup

In this audio economist Andrew Zimbalist, a professor of economics at Smith College and the author of Circus Maximus: The Economic Gamble Behind Hosting the Olympics and the World Cup (Brookings Institution Press, 2015), reveals the real economic costs and benefits of hosting mega-sporting events and discusses the prospects of FIFA following the corruption scandal.

No government cash for new Auckland stadium

Some good news is reported in the New Zealand Herald,

An Auckland central city stadium wouldn't get Government funding, Prime Minister Bill English says.

A stadium is back on the cards after Auckland Mayor Phil Goff commissioned work on the feasibility of a new central city site costing up to $1 billion.

This morning English said the Government's position remained the same - it would not put up any money towards a stadium.

"Our top priority right now is this billion-dollar housing infrastructure fund, which we're in intense negotiations with the council about right now. That's going to take all our attention and cash for a while," English told The Am Show.

"It hasn't been raised with us. It's not a high priority. We're not aiming to put money into it."

Given that all economic studies on stadiums show that they are white elephant such news will please economists, if not many non-economists. The view of economists is summarised by Dennis Coates and Brad R. Humphreys in their article Do Economists Reach a Conclusion on Subsidies for Sports Franchises, Stadiums, and Mega-Events?

This paper reviews the empirical literature assessing the effects of subsidies for professional sports franchises and facilities. The evidence reveals a great deal of consistency among economists doing research in this area. That evidence is that sports subsidies cannot be justified on the grounds of local economic development, income growth or job creation, those arguments most frequently used by subsidy advocates. The paper also relates survey evidence showing that economists in general oppose sports subsidies. In addition to reviewing the empirical literature, we describe the economic intuition that probably underlies the strong consensus among economists against sports subsidies.

Now if we could just encourage the Auckland council to follow central government's lead.

There is a lot of stupid in JAFAland

It is often said that economists don't agree on anything, well that's not quite true. One thing they do agree on is that building sports stadiums is just not worth it.

As Adam M. Zaretsky has put it,

When studying this issue, almost all economists and development specialists (at least those who work independently and not for a chamber of commerce or similar organization) conclude that the rate of return a city or metropolitan area receives for its investment [in stadiums] is generally below that of alternative projects. In addition, evidence suggests that cities and metro areas that have invested heavily in sports stadiums and arenas have, on average, experienced slower income growth than those that have not.

From Suff comes this bit of information:

Auckland Mayor Phil Goff is being praised by his Dunedin counterpart for being "realistic" about a billion dollar replacement for Eden Park stadium.

Goff has said that he would rather build a whole new stadium, on Ngati Whatua land next to Vector Arena, than invest an estimated $250 million more on upgrading Eden Park over the next 15 years.

As I have argued many on this blog the economics of sports stadiums are just awful and if Phil Goff really wants to be "realistic" about a new stadium - or an upgrade to Eden Park - he should just say no. The history of Dunedin's controversial Forsyth Barr stadium should act as a case study of the dangers of building stadiums. That stadium has cost Dunedin's ratepayer millions. Auckland has much more important problems to fix, eg the local housing market, than any issues over a sports stadium. Goff would better serve the ratepayers of Auckland by concentrating on such major and real problems than wasting time and money on stadiums.

Well done John Minto and Lianne Dalziel

Yes you read that right! Even Minto and Dalziel can be right sometimes.

Minto and Dalziel have come out against a new sports stadium in Christchurch. This morning The Press is reporting that

Minto questioned whether it [the stadium] was needed, while Dalziel labelled it as "waste of time".

According to The Press Jerry Brownlee has said the stadium is on hold until the city council clearly commits to funding it. Well all we need now is for all the other mayoral candidates to back Minto and Dalziel's position. The sooner the council refuses to fund the stadium the better.

As I have argued many times on this blog the economics of sports stadiums are just awful and its good to see some good sense from a couple of our mayoral candidates.

Latest New Zealand Economics Papers

There are actually a few interesting looking papers in the latest issue of NZEP:

Does stadium construction create jobs and boost incomes? The realised economic impacts of sports facilities in New Zealand

by Samuel A. Richardson

Government involvement in facility construction is typically justified on the basis of ex-ante predictions of economic impact resulting from events hosted at the new or upgraded facility. This paper examines the impact of facility construction on construction sector employment and real GDP across 15 New Zealand cities between 1997 and 2009. Results from static and dynamic models indicate that certain types of facilities had short-term (during construction) positive impacts on construction sector employment growth, although only stadium projects generated positive post-construction employment impacts. There is also little in the way of empirical evidence to suggest that new or upgraded facilities had any significant impact on local area real GDP either during or post-construction.

The effects of home heating on asthma: evidence from New Zealand

by Andrea Kutinova Menclova and Rachel Susan Webb

New Zealand, along with the USA and Australia, has one of the highest asthma rates among developed countries and previous analyses attribute this partly to insufficient home heating in certain neighbourhoods. International public health and medical studies corroborate this link but strong evidence of causality is lacking. In this paper, we empirically investigate the effect of home heating on hospital asthma admissions using panel data techniques and controlling for endogeneity. The hypothesis that higher electricity prices (via less adequate heating) increase hospital asthma admissions is tested and receives strong empirical support across a number of model specifications and datasets used.

and, of course, the truly magnificent - he says with all modesty

From complete to incomplete (contracts): A survey of the mainstream approach to the theory of privatisation

by Paul Walker

Privatisation is a common, yet controversial, policy in many countries around the world, including New Zealand. In this essay, we survey the literature on the theory of privatisation to see what insights it provides to the privatisation debate. We divide the literature into two periods defined by their relationship to the theory of the firm. In the period up to 1990, the literature followed the theory of the firm in using a complete or comprehensive contracting modelling framework. By the end of the 1980s, the ownership neutrality theorems highlighted a major weakness with this approach. The contemporary (post-1990) literature took advantage of incomplete contracting models to explain the difference in the behaviour of state and privately owned firms.

Interesting papers forthcoming in NZEP

New Zealand Economic Papers has some interesting papers due to appear in future issues.

From complete to incomplete (contracts): A survey of the mainstream approach to the theory of privatisation.

Abstract
Privatisation is a common, yet controversial, policy in many countries around the world, including New Zealand. In this essay, we survey the literature on the theory of privatisation to see what insights it provides to the privatisation debate. We divide the literature into two periods defined by their relationship to the theory of the firm. In the period up to 1990, the literature followed the theory of the firm in using a complete or comprehensive contracting modelling framework. By the end of the 1980s, the ownership neutrality theorems highlighted a major weakness with this approach. The contemporary (post-1990) literature took advantage of incomplete contracting models to explain the difference in the behaviour of state and privately owned firms.

The effects of home heating on asthma: evidence from New Zealand

Andrea Kutinova Menclova and Rachel Susan Webb

Abstract
New Zealand, along with the USA and Australia, has one of the highest asthma rates among developed countries and previous analyses attribute this partly to insufficient home heating in certain neighbourhoods. International public health and medical studies corroborate this link but strong evidence of causality is lacking. In this paper, we empirically investigate the effect of home heating on hospital asthma admissions using panel data techniques and controlling for endogeneity. The hypothesis that higher electricity prices (via less adequate heating) increase hospital asthma admissions is tested and receives strong empirical support across a number of model specifications and datasets used.

Does stadium construction create jobs and boost incomes? The realised economic impacts of sports facilities in New Zealand

Samuel A. Richardson

Abstract
Government involvement in facility construction is typically justified on the basis of ex-ante predictions of economic impact resulting from events hosted at the new or upgraded facility. This paper examines the impact of facility construction on construction sector employment and real GDP across 15 New Zealand cities between 1997 and 2009. Results from static and dynamic models indicate that certain types of facilities had short-term (during construction) positive impacts on construction sector employment growth, although only stadium projects generated positive post-construction employment impacts. There is also little in the way of empirical evidence to suggest that new or upgraded facilities had any significant impact on local area real GDP either during or post-construction.

Should cities pay for sports facilities?

Over at the Offsetting Behaviour blog Eric Crampton comments on how bad the business plan for a new $156 million cycleway for Christchurch is. But here in the People's Republic of Christchurch there are plans afoot not just for cycleways but also for other big ticket items such as a big new, super-sized stadium. Sports stadiums are a favourite of cities all over the world, not just in New Zealand. And you can be sure that they all come with (bad) business plans or economic assessment reports to show how great they are.

As Adam M. Zaretsky says when writing about the building of stadiums in the U. S.,

[...] cities with home teams are often willing to go to great lengths to ensure they stay home. And cities without home teams are often willing to dangle many carrots to entice teams to move. In either case, the most visible way cities do this is by building new stadiums and arenas.

But should cities pay for sports facilities? This is the question Zaretsky looks at in an article in the The Regional Economist, a publication of the Federal Reserve Bank of St. Louis,.

Zaretsky writes,

Between 1987 and 1999, 55 stadiums and arenas were refurbished or built in the United States at a cost of more than $8.7 billion. This figure, however, includes only the direct costs involved in the construction or refurbishment of the facilities, not the indirect costs—such as money cities might spend on improving or adding to the infrastructure needed to support the facilities. Of the $8.7 billion in direct costs, about 57 percent—around $5 billion—was financed with taxpayer money. Since 1999, other stadiums have been constructed or are in the pipeline [...], much of the cost of which will also be supported with tax dollars. Between $14 billion and $16 billion is expected to be spent on these post-'99 stadiums and arenas, with somewhere between $9 billion and $11 billion of this amount coming from public coffers. The use of public funds to lure or keep teams begs several questions, the foremost of which is, "Are these good investments for cities?"

The short answer to this question is "No." If you are a 'just read the executive summary' kind of guy then you can stop reading here since what follows just makes the case for the answer already given.

Zaretsky goes on to say,

When studying this issue, almost all economists and development specialists (at least those who work independently and not for a chamber of commerce or similar organization) conclude that the rate of return a city or metropolitan area receives for its investment is generally below that of alternative projects. In addition, evidence suggests that cities and metro areas that have invested heavily in sports stadiums and arenas have, on average, experienced slower income growth than those that have not.

When stadiums are build with ratepayers money, Are they worth it?

The dollars being invested in sports facilities are quite substantial considering the overall contribution the industry makes to the economy. In testimony before the U.S. Congress, economist Robert Baade said that Chicago's professional sports industry—which includes five teams—accounted for less than one-tenth of 1 percent of Chicago's 1995 personal income. Baade further commented that even when compared with the revenue of other industries, professional sports teams contribute small amounts to the economy. He noted, for example, that "the sales revenue of Fruit of the Loom exceed[ed] that for all of Major League Baseball (MLB), while the sales revenue of Sears [was] about thirty times larger than that of all MLB revenues."

Still, cities are driven by the idea that playing host to professional sports teams builds civic pride and increases local tax receipts from the team-related sales and salaries. When it comes to salaries, however, economist Mark Rosentraub noted in a 1997 article that there is no U.S. county where professional sports accounts for more than 1 percent of the county's private-sector payroll.

Although sports facilities certainly generate tax revenues from their sales, the pertinent question is whether these revenues are above and beyond what would have occurred in the region anyway. To address this question, city proposals to use taxpayer money to finance sports facilities are routinely accompanied by "economic impact studies." These studies, which are often commissioned by franchise owners and conducted by an accounting firm or local chamber of commerce, generally use spurious economic techniques to demonstrate the number of new jobs and additional tax revenues that will be generated by the project. The assumptions that are made in these studies—such as how much of the newly generated income will stay in the region and how many "secondary" jobs will be created—often cannot be substantiated by economic theory.

Estimates of income that will be generated and, hence, spent in the region are often overstated. Most of the "big" money in sports goes to the owners and players, who may or may not spend the money in the hometown since many live in other cities. And because athletic careers are usually short-lived, much of the players' income is invested. Moreover, league rules often require ticket revenues be shared with franchise owners in other cities as a way to subsidize teams in smaller markets. In the case of the National Football League, every visiting team leaves town with 34 percent of the gate receipts from each game.

On top of all this, the value of the subsidy a team receives when a city foots the bill for a new stadium or arena often shows up as a higher team resale price, which then ends up in the owner's pocket. For example, Eli Jacobs bought the Baltimore Orioles for $70 million in 1989, just after the team had convinced the state of Maryland to build it a new $200 million ballpark from lottery revenues. The enormously popular Oriole Park at Camden Yards opened in 1992. The following year, Jacobs sold the Orioles for $173 million. The sale netted Jacobs an almost 150 percent return, with no money out-of-pocket for the new ballpark.

But what about the economic impact studies that show tax revenue increases from a stadium.

Economic impact studies also tend to focus on the increased tax revenues cities expect to receive in return for their investments. The studies, however, often gloss over, or outright ignore, that these facilities usually do not bring new revenues into a city or metropolitan area. Instead, the revenues raised are usually just substitutes for those that would have been raised by other activities. Any student of economics knows that households have budget constraints that are binding, which means that families have only so much money to spend, particularly on entertainment. If the family chooses to spend the money at the ballpark, for example, then those funds cannot be spent on other activities. Thus, no new revenues are actually being generated.

Public funds used for a stadium or arena can generate new revenues for a city only if one of the following situations occurs: 1) the funds generate new spending by people from outside the area who otherwise would not have come to town; 2) the funds cause area residents to spend money locally that would not have been spent there otherwise; or 3) the funds keep turning over locally, thereby "creating" new spending.

Very little evidence exists to suggest that sporting events are better at attracting tourism dollars to a city than other activities. More often than not, tourists who attend a baseball or hockey game, for example, are in town on business or are visiting family and would have spent the money on another activity if the sports outlet were not available.

Economists Roger Noll and Andrew Zimbalist have examined the issue in depth and argued that, as a general rule, sports facilities attract neither tourists nor new industry. A good example, once again, is Oriole Park at Camden Yards. This ballpark is probably the most successful at attracting outsiders since it is only 40 miles from the nation's capital, where there is no major league baseball team. About a third of the crowd at every game comes from outside the Baltimore area. Noll and Zimbalist point out that, "Even so, the net gain to Baltimore's economy in terms of new jobs and incremental tax revenues is only about $3 million a year—not much of a return on a $200 million investment."

The claim that sporting facilities cause residents to spend more money in town than they would otherwise is harder to substantiate. To prove such a claim, the agency performing the analysis would need for its report both detailed information about the spending patterns of households and the ability to ferret out the information about their spending in other regions, which, at best, is extremely difficult and may even be impossible. Without such information, the report's authors could back into this claim only with some fancy footwork and shaky assertions. That is, they would have to contend that residents are spending more in town because of higher incomes that enable households to devote more of their entertainment budgets toward local sporting events. Then, the authors would have to demonstrate that incomes are up because money was spent on the stadium. If they can't, the argument falls apart since the only conclusion is that incomes rose for unrelated reasons; throwing tax dollars at the stadium did not affect households' spending patterns.

The most spurious economic concept applied to stadiums is the "multiplier".

Of the three circumstances described that purportedly generate new revenues, the third—funds keep turning over locally, thereby "creating" new spending—is probably the most spurious from an economist's viewpoint. Such a claim relies on what are called multipliers. Multipliers are factors that are used as a way of predicting the "total" effect the creation of an additional job or the spending of an additional dollar will have on a community's economy. It works something like this: A stadium is built, which creates new jobs in the region. Because more people are working, they spend money in the area (for lunch, parking, etc.), which in turn requires local businesses to hire additional workers to support the increased demand. These extra workers further increase demand for goods and services in the area, requiring more new jobs...and so on. That is, the dollars keep turning over locally. The story is the same for fans spending money at the arena, which provides income for arena workers, who then spend the money, generating incomes for other workers...and so on.

On their faces, these are compelling arguments. Some researchers have even attempted to quantify these effects, developing precise multipliers that tell analysts how much the new spending or job creation should be "multiplied" by to arrive at the "total effect" the spending or job creation will have on the local economy. These multipliers are often specific enough to distinguish between various industries, occupations and locations. Thus, economic development specialists and planners will generally latch onto multipliers and confidently proclaim that the 1,000 new jobs created by this industry will actually create 4,355 new jobs and generate $5.5 million in new revenue in the community when all is said and done. Makes for great headlines, but are such outcomes believable?

Probably not. As Mark Twain once said: "It's not what we don't know that hurts. It's what we know that just ain't true." For one thing, these new jobs most likely just lure workers away from other jobs in town and do not actually lead to a net change in jobs in the area. For another, many of the jobs are low-paying, part-time and needed only on game days. Moreover, authors of these economic impact studies often choose multipliers arbitrarily or with clients' wishes in mind to get the desired outcome. As economist William Hunter has pointed out, multiplier analysis can be used to justify any public works project because "even the smallest multiplier will guarantee community income growth in excess of public expenditures."

Even if economic impact studies are taken at face value, however, the cost of creating these jobs is usually out of the ballpark. In Cincinnati, for example, when two new stadiums were proposed to keep the NFL Bengals and the MLB Reds in town, the economic impact study claimed that 7,645 jobs would be created or saved because of the stadium investment. Since the project was estimated at $520 million, each new or saved job was reported to cost about $68,000.

When economists John Blair and David Swindell examined the $68,000 figure a bit closer, though, they discovered it was too low because the study's estimate of 7,645 new or saved jobs was too high. Blair and Swindell then re-evaluated the report, corrected for double-counting and other problems, and concluded that only 3,530 jobs would be created or saved if the stadium proposal passed. Thus, the cost per job was actually going to run more than $147,000. In contrast, state economic development programs spend about $6,250 per job to create new jobs.

And let us not forget "opportunity cost" .... but most impact studies do in fact forget it.

Another glaring omission from these economic impact studies is the value of the next-best investment alternative—what economists call the opportunity cost. "There's no such thing as a free lunch" is a favorite economist expression because it sums up exactly what opportunity cost means: When making a choice, something always has to be given up. The value of the "losing" choice must be considered when making the decision and when calculating the value, or return, of the "winning" choice. In other words, when a city chooses to use taxpayer dollars to finance a sports stadium, the city's leaders must consider not only what the alternative uses of those funds could be—such as schools, police, roads, etc.—but they must also figure what return the city would receive from these other ventures. Then, the return from the city's next-best alternative (for example, schools) must be subtracted from the total return of the "winning" choice to arrive at the "actual" return of the stadium investment. This adjusted calculation, though, is almost always missing from sports stadium impact studies. Why? Because in just about every case, the adjusted calculation would show that the next-best alternative was actually the better alternative.

Has financing sports stadiums ever been the best alternative? Research shows "No." In their book, Noll and Zimbalist—along with 15 other collaborators—examined the local economic development argument from a wide variety of angles. In every case, the conclusions were the same. "A new sports facility had an extremely small (perhaps even negative) effect on overall economic activity and employment. No recent facility appears to have earned anything approaching a reasonable rate of return on investment. No recent facility has been self-financing in terms of its impact on net tax revenues. Regardless of whether the unit of analysis is a local neighborhood, a city, or an entire metropolitan area, the economic benefits of sports facilities are de minimus.

In fact, research has shown that subsidizing sports facilities usually does not affect a city's growth and, in some cases, may even hurt growth since funds are being diverted from alternatives with higher returns. In a 1994 study that examined economic growth over a 30-year period in 48 metropolitan areas, Robert Baade found that of the 32 metro areas that had a change in the number of sports teams, only two showed a significant relationship between the presence of a sports team and real per-capita personal income growth. These cities were Indianapolis, which saw a positive relationship, and Baltimore, which had a negative relationship.

Moreover, Baade found that of the 30 metro areas where the stadium or arena was built or refurbished in the previous 10 years, only three areas showed a significant relationship between the presence of a stadium and real per-capita personal income growth. And in all three cases—St. Louis, San Francisco/Oakland and Washington, D.C.—the relationship was negative.

So what is the overall conclusion? The weight of economic evidence shows us that ratepayers end up spending a lot of money and ultimately don't get much back for their forced investment. And when this paltry return is compared with other potential uses of the funds, the investment, almost always, seems uneconomic.

Interestingly, a pamphlet from The Greens turned up at home last week arguing that Christchurch should reassess its spending on "big ticket" items, such as the super-sized stadium. A good proposal as far as it goes. What would be better is to say we should abandon the stadium idea (and a number of other projects) altogether.

A stadium as a firm

When checking out past messages on Offsetting Behaviour I came across one I had missed when it was posted. Eric Crampton commented on the idea that Dunedin's Forsyth Barr Stadium could be mothballed. Eric noted that

I really don't know whether mothballing helps: it depends what portion of the ongoing losses are sunk for the Council and what part are operational losses that could be stemmed by shutting down.

The issue here is whether or not keeping the stadium running generates quasi-rents that can be used to pay at least part of any sunk costs.

Costs in the short-run are either avoidable or sunk (unavoidable or nonrecoverable). Avoidable costs are those which do not have to be paid if the firm shuts down. Sunk costs, on the other hand, have to be paid not matter what the level of production, including zero output. Thus it is better to stay in business if total revenues exceed avoidable costs. This implies that sunk costs are irrelevant to the shutdown decision.

The difference between total revenues and avoidable costs in the short-run equals the firm's quasi-rents. Quasi-rents measure the benefit to the firm of staying in business. Quasi-rents provide a contribution towards the firm’s sunk costs.

So the question for the Dunedin City Council is, Does the stadium generate quasi-rents? If yes then it should stay in business, at least in the short-run. Over the long term all costs are avoidable and thus the decision becomes does the stadium produce economic profit, that is, Are revenues greater than total costs? Or, to put it another way, Are the quasi-rents generated greater than its sunk costs?

Now here the stadium could have a problem. Given the nature of the assets involved, the stadium itself, the sunk costs could be very large. Interest payments, for example, on any loans taken out to finance the stadium could be large and unavoidable, in the short-run. If the council closes the stadium it could sell off the land the stadium is built on, the stadium itself won't be worth much given it can't generate at profit, and recover some of its sunk costs this way. But how much is the question. Hopefully the land is valuable for some other purpose, housing for example.

Perhaps the only positive to come from the Dunedin experience is as a warning to all other councils around the country of the dangers of building a stadium. Are you taking note Christchurch?

The ex ante and ex post benefits of events

When considering the issue of the benefits of of big events Shamubeel Eaqub writes at the TVHE blog that,

In the lead up to the RWC, we looked at a range of events. International studies of sporting events fall into two categories, those done before the event, and those done after. The studies in the lead up to events on average forecast economic boost of around 1% of GDP. The studies done after the event estimate economic boost of around 0.1% of GDP [...].

Once the initial boosterism fades, large economic benefit estimates are largely disowned and there is a greater focus on intangible benefits such as showcasing the area, long term positive association and somewhat esoteric ‘feel-good’ factor.

There is nothing wrong with events. They are fun. But the fetishist need to justify it on economic grounds is entirely unnecessary. Events provide very small, if any, tangible net economic benefit. There are many other intangible things that can be good, like speeding up the beautification of the city, or finishing off motorways in the lead up to the RWC for example. Its not that they wouldn’t have been done, but events have a habit of getting things done on a deadline.

Eaqub also points us to a working paper by Sam Richardson at Massey which looks at Justification for Government Involvement in the Hosting of Sports Events: Do Projected Impacts Materialise? As to the question in the subtitle, the short answer is no. The abstract of the paper reads,

Major sporting events are said to generate substantial economic impacts to host cities. Estimates of these impacts are typically used as justification for government involvement in the staging of such events. The majority of independent academic research, however, has found that ex-ante projections of economic impacts for host cities from major sporting events rarely materialise. This paper considers the realised economic impacts of fifteen major sporting events hosted in sixteen New Zealand cities between 1997 and 2009. Realised economic impacts are found to be the exception, not the rule.

Given that the economic impacts do not live up to the hype that comes from the ex ante studies I want to ask Why not? What are the people who writes these reports doing? How can they be so wrong so often? There seems to be a systematic basis here. Are these people just producing reports to support a predetermined outcome?

Eaqub also goes down the there are no tangible benefits so lets justify spending taxpayer's money on an event by saying there are lots of intangible benefits. He says, for example, speeding up beautification of the city or finishing off motorways is an intangible benefit. But you have to ask question about the optimal timing of such projects. If a delayed finish to these projects is optimal then you don't want them finished at an earlier date. And if an early finish is optimal then there has to be much cheaper ways of getting these projects finished earlier.

Also if you want to host events 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. And good luck with that.

A more general point, you could justify any amount of spending on anything if you allow the benefits to be some "intangibles". You can always come up with a huge amount of "intangible". Policy based on "intangibles" is policy based on nothing. And what does this say about evidence based policy. What evidence can you have for intangibles?

And what else could be done with any money spent on an event? How many hip operations could be done with that money? How many child cancer patients would receive quicker treatment if that money went to them? How many schools could be kept open with that money? Opportunity costs are real costs.

Christchurch stadium, again

The issue of a new sports stadium for Christchurch in in the news again with a couple of recent articles on Stuff ("Stadium concept 'would be money maker'" and "New stadium plan 'smart, bold'"). Fortunately there are those at Massey who are on the ball when it comes to stadiums. Massey economist Sam Richardson writes at his blog Fair Play and Forward Passes:

A stadium will only ever be used sparingly. That is reality. Westpac Stadium is used for between 40-50 event days per year - and it has been making operating surpluses since it has been opened. Westpac Stadium was also built with a mere 1/3 of its funding from local and regional government. It is not clear yet where exactly the funding for Christchurch's stadium plans is coming from, but it is fair to say that it will be largely funded by taxpayers - locally, regionally and nationally to some degree. As such, if my taxpayers money is going into funding a stadium, I would like to see some evidence that this amenity is going to be at least self-sustaining, and should not be detrimental to the local area. The idea that office buildings will make the stadium profitable is missing the point. If the office blocks are the profit-making parts of the venture, why not just build the office blocks? If they must be built as part of a stadium plan, we have to acknowledge that the rents earned by stadium offices will simply be transferred from other office spaces elsewhere within the city. It may well be the case that office space is at a premium in Christchurch, in which case the stadium offices may be beneficial to the city of Christchurch in that clients who were previously unable to obtain office space may now be able to do so. If, however, the offices are simply populated by clients who relocated from the suburbs, then this isn't making money (nor necessarily welfare enhancing either) at all - it is merely redistributing the rents on office space from the suburbs back into the CBD.

It is exactly the same argument as the claim that stadiums generate conference revenues too - which is only beneficial if the conferences wouldn't have been held in the city in the first place without the stadium conference spaces.*

Sure, the office rents may make the bottom line of the stadium better (if indeed things pan out as projected). But from a wider (city or regional) perspective, is it really regenerating or simply redistributing? That's the question that ratepayers need to be asking of their policymakers.

One further question I would ask is about the opportunity cost of any taxpayer money used for the stadium. There are many other (better?) things to use money on in Christchurch right now. Sam's response to that question is,

Is a stadium an essential or luxury for Christchurch? I know they have the 'temporary' stadium, but surely there are more compelling alternative uses of scarce government funds at this time. Decisionmakers should at least be open about the fact that it is highly unlikely to be a money maker for the city. If you build it for public good purposes, show us the value of the public goods it will generate.

I have to agree with Sam about seeing evidence about the value of any public goods a stadium will provide. Off the top of my head I can't think of any. So those backing the stadium need to front-up with details as to what the real reasons for the stadium are.

Cost of the Olympics

The New Zealand Herald tells us that

The British government says the London Olympics cost about $NZ786 million (400 million pounds) less than expected.

The final financial report for the games projects that the cost will be $17.6 billion from an original budget of $18.33 billion.

But Sam Richardson over at Fair Play and Forward Passes notes that

It sure is a significant achievement. Especially when you are aware of this information, taken from Brad Humphrey's piece in on the economic impact of the Olympic Games in the New Palgrave Dictionary of Economics (well worth a read in general if you are at all interested in the economics of mega sporting events):

London expected its 2012 Games to cost under $4 billion, but they are now projected to cost over $19 billion (Carlin, 2007; Simon, 2006; Sports Business Daily, 2008a). As expenses have escalated for London, some of the projects have been scaled back, such as the abandonment of the planned roof over the Olympic Stadium. The stadium was originally projected to cost $406 million and will end up costing over $850 million. Further, its construction will be financed by taxpayers and the government has been unsuccessful in its effort to find a soccer or a rugby team to be the facility’s anchor tenant after the 2012 Games. This will saddle the British taxpayers with the extra burden of millions of dollars annually to keep the facility operating. It is little wonder that the London Olympics Minister Tessa Jowell stated: ‘Had we known what we know now, would we have bid for the Olympics? Almost certainly not’. (Sports Business Daily (2008b), citing a story in Daily Telegraph (2008). The Olympic Village was to be privately financed, but the plan fell through and will instead cost the taxpayers nearly $1 billion. The government hopes that the apartments will be sold after the Games and the financing will be recouped.)

So yet another warning, approach mega sporting events (and the building of stadiums) and the claims made about them from the organisers  with much caution.

Problems with sports stadiums in Auckland

Sam Richardson has been blogging on what to do about Auckland's stadium situation at his blog Fair Play and Forward Passes. He writes,

On the one hand, as Brian points out, the decision is easy if you subscribe to the efficiency-of-use argument. The three big stadiums in Auckland (Eden Park, North Harbour Stadium and Mt Smart Stadium) all depend on local government to a greater or lesser degree. Indeed, the issues paper released by Regional Facilities Auckland (RFA) in June (linked here) indicates that Eden Park breaks even each year and has a large debt to service of $55m post-Rugby World Cup, Mt Smart is facing an upgrade bill of some $60m and requires local government funding each year, and North Harbour Stadium is very much dependent on local government funding to stay viable. There appears to be an argument, on the surface, that there are potential efficiencies to be gained by rationalising their use (the 'collaborative strategies' option presented by RFA).

I guess my first question about this is , What does break even mean for Eden Park? What get countered in such a calculation and what doesn't? How much local government support does the park get? Or, if it was a private business, would it still be in business?

My other question comes from the EconTalk interview with Roger Noll of Stanford University. Noll noted that

[ ... ] an arena that has multiple uses, say, it's going to have a basketball team and/or a hockey team, has other potential uses, like concerts and tractor-pulls, all kinds of stuff. And so a well-managed arena can be occupied 250-300 nights a year. And they can break even.

So my question would be, If around 300 nights of use a year is the break even point, can any stadium, even a multi-use one, be used 300 times a year in Auckland?

What do economists really think?

In a new paper Daniel B. Klein gives us an answer. His paper is The Forsaken-Liberty Syndrome: Looking at Published Judgments to Say Whether Economists Reach a Conclusion.

The abstract reads,

Do economists reach a conclusion on a given policy issue? One way to answer the question is to survey economists at large. Another is to look at the published judgments of economists who have gone on the record. Relative to an anonymous survey, going on the record makes for much greater accountability, and presumably more personal responsibility. I discuss eleven studies of economists’ published judgments. Several of them show greater support for liberalization than found among economists at large. This is offered as evidence of what I call the forsaken-liberty syndrome. I discuss the nature of this test of such syndrome and point to some of the larger questions to which it relates.

At one point Klein writes,

But, first, we look at three cases on which the on-record support for liberalization is high but about the same as for at-large economists. On the governmental subsidization of sports franchises, stadiums, and mega-events, Coates and Humphreys (2008) find a strong consensus among on-record economists. Meanwhile, a sample of at-large economists were asked by Whaples (2006) about whether “Local and state governments in the U.S. should eliminate subsidies to professional sports franchises.” Eighty-five percent either agreed (strongly or simply), and only five percent disagreed. It is fair to say that on-record and at-large economists are about the same on this issue. In my humble judgment, sports subsidies are an exemplary case of corporate welfare and public foolishness. On this matter, the Journal of Economic Perspectives has taken care to educate economists at large, publishing a fine analysis by Siegfried and Zimbalist (2000).

But what influence will this consensus have on local or national politicians? I'm guessing very little. :-(.

• Coates, Dennis and Brad R. Humphreys. 2008. "Do Economists Reach a Conclusion on Subsidies for Sports Franchises, Stadiums, and Mega-Events?" Econ Journal Watch 5(3): 294-315. Here.
• Whaples, Robert. (2006). “Do Economists Agree on Anything? Yes!” Economists’ Voice 3(9), art 1. Here

Blogging on stadiums

Thanks to Close Up the economics of stadiums is back in the news. I'm not sure what planet Gerry Brownlee is on when it comes to economics but his defence of a Christchurch stadium wasn't great. He didn't have any answers to the points raised against stadiums in the Close Up video.

Sam Richardson from the Fair Play and Forward Passes blogs starred in the Close Up video but he has also blogged on the topic of stadiums a number of times: see his label Stadiums. Eric Crampton at the Offsetting Behaviour blog has also blogged on stadiums, see his label Stadiums. I have also blogged on the economics of stadiums, see my label Stadiums.

Stadiums and opportunity costs

John Spry, an economist with St. Thomas University in the Twin Cities, has written an opinion piece in the St. Paul Pioneer Press in which he takes issue with proposals to build a new stadium for the St. Paul Saints (an independent league baseball team) and to renovate the Target Center, the arena for the NBA’s Minnesota Timberwolves.

Spry make a number of points against these ideas, but one of the most important is

Finally, politicians erroneously claim that construction spending for these sports facilities will create jobs for Minnesotans. These claims ignore the basic economic concept of opportunity cost. Instead of building duplicative facilities, we could have either more productive public spending, such as improved courts or roads, or reduced taxes on private-sector investments.

Thinking about the opportunity cost of such proposals is important in any situation but it is doubly important for cities like Christchurch were there is so much that needs to be done.

(HT: The Sports Economist)

EconTalk this week

Roger Noll of Stanford University talks with EconTalk host Russ Roberts about the economics of sports. Noll discusses the economic effects of stadium subsidies, the labour market for athletes, the business side of univeristy sports, competitive balance in sports leagues, safety in sports, performance-enhancing drugs, and how the role of sports in the lives of children has changed.

The interview begins with a discussion of the financial impact of sports stadiums. Noll makes the point that for a stadium to just break even it has to be used around 250-300 nights a year! This is something to keep in mind when you hear local councils arguing that their city should have a new sports stadium. Ask yourself, Will it be used 300 days a year?

The above comments refer to multiple-use stadiums. As for single use stadiums, rugby/cricket here in New Zealand, baseball/football in the U.S., Noll says,

Baseball and football stadiums, however--there aren't any that have been substantially subsidized where the local community has received anything remotely resembling a reasonable return on investment. They are financial black holes.

Hype v. reality

As Sam Richardson and Eric Crampton have been interviewed for a Close Up segment, that will air early next week on TV One, on the economics of sports stadiums Sam has written a brief summary of why people should not be taken in by the hype around a stadium build. Sam writes,

Tangible economic impacts from sports facilities often fail to materialise for a variety of reasons. These include:

1. A substantial proportion of the crowds at stadiums are local rather than visitors. Some estimates I've seen in the literature suggest that it ranges from 80 to 95% of attendance being local.

1a. Spending by locals within a city on attending games is usually substituted from elsewhere within the local economy, for example, movie theatres, video rental stores, and other entertainment venues. A game merely redistributes spending rather than generates it.

2. Spending within a city often leaks outside the local area, as not all goods and services purchased by event attendees are produced locally, so a proportion of the spending has to go out of the local economy to pay for imported goods and services.

3. Government spending on stadiums, contrary to popular opinion, is not costless. That is, the funding has opportunity cost that must be considered. Money spent on a stadium could have been spent elsewhere in the local economy, and as such alternative activity is forgone. A benefit is only observed if the stadium activity more than outweighs the lost activity elsewhere.

4. Stadiums are almost always underutilised. Westpac Stadium in Wellington has around 45-50 event days per year. That is around one day per week. Game days are usually a hotbed of activity, but six of the seven days there is nothing going on. Surrounding development feels this too. Are businesses located nearby dependent on stadium activity going to survive with more off days than game days? It is unlikely.

5. Much of the projected activity that a new facility attracts comes from within the city at the expense of other facilities. Things such as conferences, conventions, trade shows, etc would by and large have been hosted elsewhere within the city at another venue. Thus we see another form of substitution in action here, which works towards reducing the overall realised impact of a new facility.

6. A replacement facility can not realistically be expected to do a lot more than a pre existing facility. Research in the US has suggested that there is a short term honeymoon effect of up to ten years where attendances spike due to the novelty of the new facility, but beyond this the experience has been that attendance returns to pre facility levels.

What about the intangible benefits? Surely they matter?

Relevant intangible benefits include consumer surplus that locals enjoy from attending games at the facility as well as the public good aspects. They are recognised as benefits but there are weaknesses in their ability to justify government funding. Firstly, consumer benefits are often captured to a greater or lesser degree by event organizers through ticket pricing structures - season tickets, family/adult/children, concessions, etc. It is in the organizers interest to capture as much of this as possible so as to maximize event profits. Secondly, it isn't just within the stadium that these benefits are appropriated. To watch your team elsewhere, you pay for it via Sky TV subscriptions. To read about your team you pay for it via newspapers, magazines, internet access, etc. A lot of benefits can be captured privately. Thirdly, one can argue that just about any activity or enterprise has some intangible benefits, but this doesn't mean we should subsidise every activity that generates intangibles!

The bottom line is that if tangible benefits don't materialise, the intangible benefits have to be substantial and international evidence suggests that while they aren't insignificant, they are nowhere near the size of subsidies given to build sports facilities and/or attract sports franchises.

People in Christchurch should think about these points very carefully and ask, Can spending $500 million on a new covered stadium really be justified? I can't help thinking the answer is no. I would also like to see the justification that CERA or the City Council or the government have for the idea of a new stadium.

More on the Christchurch rugby stadium

As noted in the previous post Sam Richardson has been continuing his thinking on the feasibility of a new covered rugby stadium for Christchurch over at his Fairplay and Forward Passes blog. He writes,

If tangible benefits and costs exist for these projects, then it is worth considering whether intangible benefits (and costs) do too. There is a small but not insignificant area of research that have examined the nature of intangible benefits and quantified them, using techniques such as demand analysis, travel cost methods and contingent valuation (all of which have been borrowed from recreational demand and natural resource economics). What is needed in the stadium context is some measure of net intangible benefits - that is, the 'warm fuzzies' from the stadium itself (which includes the retention of the franchise(s) it plays host to) less 'warm fuzzies' from the next best alternative, say repairing the east side of Christchurch. If the net warm fuzzies are positive, this suggests the project might well have some justification. What is the likelihood of this happening? A $500 million facility would be twice as expensive as the Forsyth Barr Stadium, and they've found the going tough. It would also be the largest amount ever spent on the construction of a sports facility in this country. Is the argument going to be that $500 million is going to pump some badly needed capital into the city and has to translate into some tangible benefits? Or will we see those behind the stadium blame the state of the local economy if the expected benefits don't materialise?

I agree that if we are to include "intangibles" in our calculus then it is the "net intangibles" that should be included. I guess my problem is whether or not we should include such things in the first place. First there is the question as to what gets measured, and how well it's measured, by the types of methods Sam mentions, but I will leave that aside. I want to make two other quick points. One, if we are to include intangibles for deciding on the subsidies for rugby stadiums, why not for all goods? Don't all goods have intangibles attached to them? I'm sure there are many, and large, intangibles that go along with Microsoft Windows so why don't we include these to justify a subsidy to be paid to Microsoft? Second, if there are intangibles with a rugby stadium what can't these benefits be turned into tangibles? For example, if there is a large amount of consumer surplus generated by a rugby stadium why can we turn that surplus into revenue for the stadium via, say, some form of nonlinear pricing? If this is done then the stadium should be able to be justified on a straight forward cost-benefit analysis.

Stadiums in the context of natural disasters

Sam Richardson has been writing on the topic of stadiums in the context of natural disasters, in particular with regard to Christchurch, over at the Fair Play and Forward Passes blog. At one point he writes,

At the heart of this dilemma is a point that Matheson and Baade make beautifully, so I'll post it here:

Sports yields hedonic value, in other words, and the quality of life benefit it imparts is a luxury affordable in affluent communities rather than an activity that helps a community achieve affluence. Sport for the most part is properly viewed as a luxury good and not a productive resource.

What this seems to be saying is that if you are rich you can afford lots of warm fuzzies and if you are poor you can't. I would point out that Christchurch is really poor right now. I would also note that most things generate warm fuzzies to some degree, so if we are to count fuzzies for the calculation on whether or not to spend money on sports stadiums we need to count them for all good and services that the council could spend money on.

Sam continues,

Therein lies the crux of the argument, and it is here that we are likely to see the more passionate divergences of opinion. There is no doubting the importance and potential quality of life value of sports in Christchurch. The initial call of whether the investment makes sense is largely dependent on this value, I believe, and how it stacks up to the costs. This is a complex value, as one must also factor in the role of the sports environment including the new temporary stadium, as well as the impact on other facilities in the city and surrounding areas. As I have mentioned in my earlier posts on this issue, complicating matters further is the role of sports in the context of the rebuilding city's priorities. Do Christchurch policymakers see the stadium as a luxury good or a potential productive resource?

As Sam himself points out,

There are sound reasons why a facility in Christchurch is unlikely to generate tangible benefits, [...]

So productive resource doesn't look likely. Thus we are left with, "luxury good". The problem I see here is that even if we accept the idea of including warm fuzzies in our calculations my point above about most goods producing them comes in play. As Eric Crampton has noted

The covered rugby stadium is tipped to cost $506 million

You would have to generate a lot of warm fuzzies to justify spend $500 million and if you are going to spend that amount of money is a rugby stadium the most cost effective generator of warm fuzzies. I mean just how many hip replacement could you do for $500 million or how many cancer treatments could people get for that amount? Won't these thing also generate a lot of warm fuzzies? Improved health would I'm sure increase the quality of life for many people. Or how many warm fuzzies could be generated by spending $500 million on repairing the east-side of Christchurch?

There is also the obvious question of how do you include warm fuzzies in any analysis? It is far from clear how you could measure such things.

Spending other people's money: more on stadiums

The Press reports that

A new uncovered, rectangular stadium seating 35,000 contains two of the three elements sought by Canterbury rugby bosses.

That was the sentiment from Canterbury Rugby Football Union (CRFU) chief executive Hamish Riach yesterday after news the annual-plan recommendation to go before Christchurch City councillors next week contained two things he had hoped for in a new stadium.

He said it was disappointing the recommendation was not for a covered stadium.

Hamish Riach may want a covered stadium but is he willing to pay for it? The CRFU seems to be getting excited a covered stadium but appears rather less excited about paying for it. The Union's view would carry more weight if they were saying that they are willing to spend their money rather than other people's money.