Sports Economics

An important issue that often comes up in various cities around America is the decision for the city government to subsidize the construction of a new sports stadium. These stadiums are usually subsidized in order to attract professional sports teams to make the city (and the newly built stadium) their new home. While the stadium costs, as expected, are staggering, the city government usually justifies this by saying that the economic benefit of the stadium and the sport team’s presence in the city will offset the construction costs of the stadium. These benefits include higher tax revenue from sports complementary industries (hotels, airports, travel agencies) as well as by boosting the local economic conditions of the area in the vicinity of the stadium. There are also non quantifiable positive externalities to the construction of the stadium such as public satisfaction and a better image for the city. However, some detractors are calling this the spending of public money for private good. Some critics of these policies point out that the economic good of stadium construction is far below their construction costs and that it is the professional teams that ultimately benefit from stadium subsidies.

In this paper, we will try to study all the proposed benefits and theoretical costs of subsidized stadium construction. We will also look at the actual observed effects of stadiums in cities across the United States. However, we must first examine a brief history of stadium subsidies in the United States.

Background of Stadium Construction Subsidies

The only club that was using a public stadium before 1950 was the Cleveland Indians.  The norm before was for teams to play in their own private arenas. As these ball parks started to reach the end of their useful life in the 1960s and the 1970s, the teams needed to locate replacement arenas. It was during these times that many cities built stadiums for their respective teams to prevent the teams from moving out. By the 1970s, nearly 70% of sports teams played in public stadiums. This trend continued, by the 1980s, 84.5% of teams were playing in public parks. By the 1990s, this percentage stabilized. (Quirk and Fort)

While the number of teams playing on public stadiums remained steady, the costs of constructing and subsidizing stadiums kept on increasing. The average stadium cost in the 1960s was an average of $25 Million. This rose to 55$ million a decade later, a figure that kept pace with the rate of inflation. On the other hand, the price of new stadiums have been growing a rate 50 to 100 percent faster than inflation. Between 1990 an 1999, the average cost of construction shouldered by the public was $122.1 million, a number that grew to $165 million at the start of the 21^st century. (Quirk and Fort) These rising costs have been attributed to the construction of larger stadiums as well as the inclusion of newer features such as luxury seating, and the increasing specialization of the stadiums (Weiner).

These numbers reflect only the public cost of stadium construction. Cities also offer financial assistance for stadium construction in other ways. Aside from subsidizing construction, cities may also give favorable lease conditions, direct cash payments or by giving lower interest rates. Cities may also spend on ways to improve the locale of existing stadiums such as constructing new transport lines or renovating the arena’s locale.

Drivers for Stadium Construction

Weiner cites four main drivers for stadium construction: the value of sporting in contemporary American society, the way sports “acts as an economic engine”, the monopoly held by sports teams and the influence of local politics.

Sports and athletics have always been a major part of American life. Many people read solely the sports pages of the local paper. News broadcasts often dedicate significant chunks of their programming time to covering sports news. The Superbowl, the final four, a “level playing field”,  “three strikes”, these are just some of the major sporting events and terms that have embedded themselves into the American psyche. Major players are also held in high regard as heroes and role models for the youth.

Due to the social importance of sporting in America, a major local team has the ability to build a sense of “collective identity”. The team becomes a rallying point for the local citizenry, a common cause to cheer on independent of race, gender or other social strata. This helps build a sense of unity for the city. There is also a sense of civic pride attributed to having a “major league” team play in a city. There is a conception that the presence of these major league teams gives legitimacy to a city’s position as a major city.

Aside from the legitimacy a sports team gives to a city, proponents of city stadiums also point to how a major league team will act as an ‘economic engine’. Some purported benefits include attracting businesses, tourists as well as improving the standard of living and image of the city to outsiders. These are the cited reasons how a city justifies subsidizing a sports stadium seeing how the subsidy “will pay for itself”. The existence of stadiums are also a way for city governments to revitalize the district where the stadium will be built.

Sports teams also almost always have the upper hand in negotiating with cities. Aside from the purported benefits that sports teams bring to a city’s people and economy, a condition of scarcity always benefits the sports teams. As leagues only allow a limited number of teams, there will always be more cities who want to have sports teams than actual sports teams, a situation where demand (for sports teams) out paces supply. This ultimately benefits the sports teams as they are free to go to the city which offers the best conditions.

Local politics is also a driver for subsidies. No New York mayor wants to be the one in position when the Yankees leave town, same for Boston and the Red Sox. Mayors are under pressure from the populace to keep the treasured teams within city limits. The electoral process also plays a part in the amount of subsidy that teams receive. Elections for sports subsidies are always close as teams always ask for the highest possible subsidy that they thing 51% of the voting populace will vote for.

The Economic Engine of Major League Sports

During public debates on the issue of public subsidy for sports stadiums, many economic benefits are cited both by the major league teams and by the city government that is trying to attract the team. These economic benefits are always attributed to the existence of a major team and its net positive effects on businesses and the tax collection of the city.

As an example, teams point out that the existence of a team in the city will lead to increased business in the city. This is due to the influx of people from outside the city who come and watch the game. These people will then spend their money at the stadium or at the many restaurants, bars or other establishments they may frequent before or after the game. Thus due to the existence of the major league team, the restaurants and bars in and around the stadium’s locale will experience increased taxable revenue. It is hoped that the presence of a stadium will promote the growth of businesses around it.

City planners also point out the jobs that the new stadium will create. The stadium will create jobs during its construction. The sports team will also create jobs when the stadium is done. The DC Office of the Deputy Mayor for Planning reports that a stadium in the city would create 360 jobs worth $94 million annually (Coates and Humphreys).

Increased tax revenue is also cited as a benefit of subsidizing sports teams. While the city may subsidize the construction of new stadiums, the teams will still have to rent and thus pay the city over time for the stadium’s construction. Taxes will also be collected on ticket sales, food and other merchandise sold inside the stadium.

Lastly, there is still the unquantifiable externalities of a city stadium. A major league team residing in a city can boost the city’s image. This image boost will yield economic benefits in making the city more attractive to businesses. The better image of the city will also help the local city’s tourism industry. It is also hard to quantify the sense of unity and collective passion that a local sports team will bring to the people of the city.

Examining the Costs of Major League Sports

While sports teams and proponent city governments posit the supposed economic benefits of major league sports teams in a city, numerous economic studies have been done that demolish the merit of these supposed economic gains. Andrew Zimbalist was quoted in a DC Fiscal Policy Institute as saying that

“There are very few fields of economic research that produce unanimous agreement. Yet every independent economic analysis of the impact of stadiums has found no predictable positive effect on output or employment. Some studies have even concluded that there is a possible negative impact.” (Lazere)

While most economists do not contest the dollar amount that people will spend on the stadium, they are quick to point out the opportunity costs of these actions. Every dollar spent by an individual on sports related merchandise is a dollar that is not spent on other purchases. A family may choose to spend their weekend and money at the ballpark but that means they wont be spending their weekend and money anymore at the movies, restaurants or other forms of alternative entertainment. While it is true that sports may increase spending by the citizenry on the stadium and its complementary businesses, this spending is at the price of lost businesses by establishments that the people have opted over the sporting event. (Lazere)

For the sports stadium to actually produce an economic gain, the spending related to the sport must be “new spending”. Similarly, for the claim of increased tax revenue to be true, the tax collected from sports related retail and merchandise must be “new tax” as well. If all the economic effects of the stadium were to transfer dollars and taxes from point A to the stadium then it really didn’t have any net positive economic effect. (Coates and Humphreys)

Another hidden cost of ballparks is to be found in the preferred rental terms that the city grants the sports teams for using the publicly funded stadium. A study by Scott Walsten cited in a report by Dennis Coates and Brad Humphreys of the proposed deal between the Montreal Expos and the city of Chicago reveals that taxpayers will be subsidizing the construction of the stadium and of the rent terms of the team. Even though the rent of the team shall be increasing over a 30-year term he found that 5 years after the start of the term, inflation would have far outpaced the rent increases. This is equivalent to the taxpayers again giving a subsidy to the sports team as they are now paying a lower rent every consecutive year when adjusted for inflation. (Coates and Humphreys)

A key argument of proponents for stadium construction point to the net economic effect due to spending by people from outside of the city. Sports events will most likely draw audiences not only from inside the city but from the suburbs as well. These people from suburbia will then account for the net economic spending at the city seeing as how they brought money into the city. This is net gains as the people from the suburbs would not ordinarily spend their dollars at the city if there was no draw from the sports team. However, this new money from the suburbs will mean money that was taken away from businesses located in the suburbs. The sports stadium can then be seen as draining the money from suburban commerce. (Marasco)

While tourism from out of town may bring new money into the city due to the sports event, the question should also be asked as to how long that new money stays in the city. In these regards, a bigger city will be better off compared to a smaller city. This is because a big city is more likely to manufacture its own goods and services. A dollar that enters the city would be spent on local merchandisers who would then spend their earnings on local suppliers ad infinitum. In these cases, the new money has a larger trickle down effect and has the opportunity to be taxed more than once. This is opposed to a smaller city where the merchandise spending is quickly spent to purchase raw materials or secondary merchandise sourced from beyond city limits. In these cases, the new money that entered the city from the suburbs has quickly exited. Thus smaller cities will always get less benefits from the construction of a sports stadium than larger cities. (Marasco)

            Aside from the trickle down effect, another way for any new money to exit the city is through the sports team itself. As an example, 59% of baseball team spending goes towards player compensation. These players who are the recipients of millions of dollars of stadium related spending are not very likely to live in the same city as the sports team. Additionally, the spending attitudes of these players may also lead to an early exit of the “new money” due to their higher standards of living.  (Miller)

            While it is true that creation of a stadium will create new jobs, the substitution effect of these jobs should also be examined. Due to the seasonal nature of sports, many of these created jobs are going to be seasonal, irregular jobs. These will have low pay and limited benefits. (Lazere) A study of the construction of the Kiel Center and Trans World Dome in Missouri also demolished the purported job gains. It was found that a majority of the construction jobs created during the construction periods were simply jobs that were transferred from alternative projects which the stadium subsidy could have funded. No extraordinary wage changes were also found during the construction period of the stadiums. (Miller) The presence of sports teams tended to increase wages in the hotel and service sectors annually by approximately $10 and also in the recreational sector by $490. However, the recreational sector also includes the player whose exceptionally high salaries tend to skew the results. Additionally, sports teams also tended to reduce wages of workers in eating and drinking businesses by $162 annually. Of the 37 metropolises that had a professional sports team franchise between 1967 and 1996, none had a positive per capita income growth which could be attributed to the presence of the sports teams. The drain effect of the sports teams on the local and regional economy also resulted in a net loss of 1,924 jobs.(Coates and Humphreys)

Conclusion

The substitution and drain effect of the sports teams tend to mitigate and even negate some of their purported economic gains. Studies have consistently shown that sports teams bring in no spending that wouldn’t have been spent on other establishments. While sports does have a draw for the American people, their draw usually comes at the expense of the local and regional businesses whose patronage the city people give up in order to watch the games. Due to the nature of sports teams, particularly their high player compensation, a sports team may also be the cause for money to come out of the city due to the revenues being spent on merchandise and services from outside the city. This drain is more pronounced for smaller cities whose product basket is smaller than a larger city which leads to an early exit of the sports spending.

In spite of this, there is an undeniable intangible social benefit to the existence of a sports teams. Whether this is due to the value of sports in American culture or to the prestige the city gains with a major league team or due to the city people identifying with the local team, there is still a political benefit for city governments to attract and keep major league teams in their cities.

However important these external benefits may be, the economic gains (or even losses) coming from sports teams are not enough to justify subsidies from the city government. Seeing as how sports franchises are capable of privately financing their stadiums, the city government should not subsidize the creation of new stadiums. The subsidy going to the stadium could be better spent on other projects that wont drain other businesses or even have a net positive economic effect. Due to institutional scarcity of teams, any city that does not give the most favorable conditions to a team will almost always be assured of the team leaving for greener pastures, along with their intangible benefits and real costs. A situation that is not likely to change if the attitude of all cities in America stay the same.

Bibliography

Coates, Dennis and Brad Humphreys. “Caught Stealing:Debunking the Case for DC Baseball.” CATO Institute Briefing Papers 27 Oct 2004 13 Nov 2007 .

Bennett, Drake. “Ballpark figures.” Boston Globe 19 Mar 2006: Retrieved 23 Nov 2007 <http://www.boston.com/news/globe/ideas/articles/2006/03/19/ballpark_figures/?page=full>

Lazere, Ed. “Would a Publicly Funded Stadium Pay off for DC?.” DC Fiscal Policy Institute 29 Jun 2003 13 Nov 2007 <http://www.dcfpi.org/6-9-03tax.pdf>.

Marasco, David. “Leaky Stadiums and Other Thoughts.” The Diamond Angle. The Diamond Angle. 13 Nov 2007 <http://www.thediamondangle.com/marasco/opan/leaky.html>.

Miller, Phillip. “The Economic Impact of Sports Stadium Construction: The Case of the Construction Industry in St. Louis, Mo..” Journal of Urban Affairs 24(2002): 159-173.

Quirk, James, and Rodney Fort. Pay Dirt:The Business of Professional Team Sports. 1st ed. Princeton: Princeton University Press, 1997.

Weiner, Ross. “Financing Techniques and Stadium Subsidies in the United States.” Journal of Urban Technology, 11(2004): 41-59.