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The Economics of Sport: What's the Score?

Public Affairs Forum

June 15, 2011

Ed English: Hi, I'm Ed English and I'm with the Federal Reserve Bank of Atlanta, and today I'm joined by Dr. Robert Baade, professor of economics from Lake Forest College, and we're going to discuss the impact of sports on urban economic development.

Dr. Baade, you have a presentation called "Is the gamble on sports as a stimulus for urban economic development a good bet?" What is the simple answer to that question?

Dr. Robert A. BaadeDr. Robert Baade: No, well usually not, and so there are many reasons for that. But in part, we're talking about a risk-reward ratio that doesn't necessarily work in an urban economy's favor. So when we talk about the amount of money, in particular, that it costs today to build a state-of-the-art sports facility and if we talk about what the likely impact is, the risk-reward ratio certainly does not work in favor of the urban area.

Costs and Benefits
English:
One of the things, in looking through some of the work that you've done, [you've] talked about how the forecasts that proponents of subsidies will forecast rarely match the actual economic numbers once it's done. Can you talk a little bit about that?

Baade: Sure. The problem is that you really have to look at the details of any professional sports project to get an understanding for what it's likely to do to an urban economy. What we usually have happening with advocates is they ignore some of the realities, meaning that they generally understate the costs and overstate the benefits of a project, and you need a more sober appraisal than that, and objective economic research would generally indicate that it doesn't do what it is that advocates argue a professional sports infrastructure investment will do for an urban economy.

English: Are there typical costs that they might not foresee, that get left out of their equations and maybe some benefits that they overstate? What would be examples of those?

Baade: Families have limited budgets, both in terms of time and money. If they spend more time and money spectating at a professional sporting event, it means less time and money for other activities within the urban economy. So one of the things that's often ignored is, well, what do we detract from in spectating at a professional sporting event? So if it means we're not going to the bowling alley, we're not going to the movie theater, we're not going to the mall, we really have to take into account not only what it is that sport adds to spending, but we need to consider what it is that sport substitutes for in the way of spending. So to truly gauge what it is that the professional sports team or what the stadium is going to do for the urban economy, you have to consider not only the money spent on tickets and the money spent on concessions at a game, but you also have to consider where the money is not being spent and the amount of money that's not being spent as a consequence of spectating at a professional sports event.

English: Why do you think that sports don't have more of an economic impact on a local community?

Baade: We were talking before about the difference between the important fundamental difference between something called "changes in gross spending" and then "changes in net spending." You have to ask the question, "What happens to spending overall as a consequence of let's say building a stadium, attracting a team or losing a team, and let's say attracting a mega-sports event like the Summer Olympic Games?" So what actually happens to a community in terms of net spending is critical to evaluating the economic impact. Now, if you were to measure things according to growth spending, you would add up maybe the value of tickets sold. You would consider, let's say, what it is that a fan spends per diem in the community when they actually go to the community to view a game. All of those things would be part of what we call "gross spending changes." What we need to consider, though, is what happens in terms of crowding out. A lot of people will avoid a community, for example, when the Summer Olympic Games are being held because they don't want to deal with the congestion. But the reality is really something quite different when you consider all the dead time that surrounds stadiums. So stadiums are not like shopping malls where we're open from nine to nine, 365 days a year. It's absolutely critical to understanding what kind of impact teams, infrastructure, mega-events have. The stadium serves as a kind of conduit through which money passes from resident fans to nonresident players and, in some cases, even owners. How many National Football League players do you suppose stay in Green Bay over the winter months? You know, they're taking their earnings from the Packers and they're repatriating those earnings to their primary residences. Now if you were to consider, let's say, a situation where the money then passes from resident fans to these nonresident players and compare that to the counterfactual, which would be in the absence of the professional football team or whatever professional sports team we're talking about, what would the entertainment sector of that economy look like? So if, in fact, people would, in the absence of the team, spend money on locally owned and operated entertainment activities, it could be the case that the presence of professional sport actually contributes to a reduction in overall economic activity rather than an increase in it because so little of the money, relatively speaking, is being retained within the city to be spent and respent again (the famous multiplier effect).

English: As far as generation of jobs and that type of thing, what analysis do you have on that part of the subsidized stadium effort?

Baade: When you consider the jobs that result from the operation of a stadium, generally they're low wage. They require relatively little in the way of skill. They're not jobs that you can support a family on. They're really jobs that augment income rather than enabling a family to support themselves through a stadium job. When you look at revenues from professional sports and from mega-events (the Olympics, any world championship, an all-star game), generally speaking, the money goes to players and owners. So the jobs that are created are generally part-time in nature.

The "Mega-Sports Event"
English: You can add a onetime event, like an all-star game or a Super Bowl. You can also add a major-league team where you can add 81 home dates during the course of the year and maybe some play-off games. You could also have an Olympics where you have a short window, but there's a lot of infrastructure that has to be added. Is there a distinction between these types of things? Are some better for a local economy than others?

Baade: I think so. When we consider the Olympics, the way in which Atlanta or any city that hosted the Olympic Games benefits, it's primarily through infrastructure development. There is a spike in economic activity, generally speaking, during the event but once the event is over, and actually prior to the event, we see dead time with a duration of about a month. So a month before the event, visitors generally stay away. Following the event, there's the anticipation of cleanup, there's the anticipation then of what amounts to something in the way of economic disarray as a consequence of cleaning up after the event, and we see dead time following the event. So while there's a spike in economic activity during the event, before and after there isn't. The real key for making something like the Olympics work is to use it as something a community can coalesce around. So we often get disparate political forces joining forces, things are built that wouldn't otherwise get built. Barcelona would be a good example of that, a city that really remade itself as a consequence of the Summer Olympic Games. So the real key to making a mega-event work is to engage in infrastructure development and improvement that could not occur in the absence of something around which disparate political forces could coalesce.

Stadium Subsidies
English: Atlanta has hosted an Olympics, but it's also hosted those onetime events (the Super Bowl and an all-star game). What about the economic impact of those type of one-shot events?

Baade: When you look at the economic impact of something like the Super Bowl, it is going to be very important, because after all, it's going to be used as the primary justification for the public spending, the public support for the stadium construction. So if you're talking about a project that's going to cost $700 million for an open-air stadium, $350 million of that will come from the public sector, as I understand it. Well, you have to have a rationale for using public funds in this way, particularly in these challenging economic times. So I think the promise of the Super Bowl is something that those who support the construction of the stadium can hang their hat on. They can say, "Well, we're going to be able to make up in one fell swoop, with a single event, what it is that we're investing in the way of money to build this stadium." In fact, if you look at the statistics, you'll find that the NFL has determined that a Super Bowl can bring in as much as $350 million in the way of taxable revenue to a community.

English: Now, data's existed for some time that says that subsidizing a stadium construction stimulates the local economy. You and others have documented a number of cases, yet in the decade between 1996 and 2005, there were between 40 and 50 stadiums proposed or built. And those effortsthe people, the taxpayers, or whoever that approved thoseshould have had the benefit of seeing the data that would indicate that it's not an economic boost. Why do you think that data is ignored?

Baade: Well (laughs), that's a really good question, and there're several answers to that. One, of course, is that cities have been confronted with reduced revenue sharing, and in part it's trickled down from reduced revenue sharing from the federal government to state governments, and then on down to local governments. Cities have had to become more entrepreneurial, and a part of becoming more entrepreneurial has involved remaking or reinventing the city as the inner city, as a tourist destination, and a big part of that is commercial sport. There's another element at work here and you might want to refer to it indelicately as the edifice complex, and so I think that city leaders do build monuments to themselves. Stadiums have become significant, architectural icons. They're a brand and so I think that political leaders have, in many cases, built stadiums because it might be part of their legacy. It might become a symbol for their administration. There's another element at work here and I refer to that as the Pascal's Wager of Professional Sports. Pascal, the philosopher-mathematician, when asked if he believed in God, said, "Well, yes, I believe in God, because I can't take a chance that there isn't one." I think cities desperate for something in the way of financial support at this point, or for generating revenues, have to believe that there's something in the way of economic impact from commercial sport because they can't take a chance that there isn't some. There are only so many Wrigley Fields and there are only so many Fenway Parks. Those are brands that, in fact, have been able to maintain and sustain professional teams in older facilities because they have such historical significance. Now you need new brands that are increasingly expensive. Witness what's going on in New York with a $1.6 billion stadium, what's gone on in Dallas with a $1.2 billion stadium. We keep pushing the envelope with regard to the cost of building these things and what it is that they're likely to generate in the way of luxury revenues.

English: The percentage of stadiums financed by public funds appears to have peaked in the '70s. Yet some of the stuff I've read that you have indicates that they're coming up with different ways to make money. As opposed to getting a stadium paid for, owners are finding other ways to get money in their pocket. Can you talk about that a little bit?

Baade: Yes, there are new innovations all the time—luxury seating, loges, club seats, personal seat licenses. Actually, professional sports was kind of late coming to the party with things like personal seat licenses. Colleges had been doing it for a long time. If you wanted a seat on the 50-yard line, it was going to cost somebody who wanted that seat a significant contribution to the athletic department to get it. Personal seat licenses are essentially that. So, stadium naming rights, concourse naming rights—now we're naming parts of the stadium. All of these things have been seized by professional sports teams as revenue generators, and they've been very effective. The revenue generators are in fact responsible for what it is that we see in the way of economic obsolescence. Ultimately, these stadiums are built for the benefit of owners and players. The evidence is unequivocal where this is concerned. You have to take a look at what's happened to incremental revenues as a consequence of building a new stadium, what's happening to players' salaries, and the evidence is pretty astonishing where that's concerned. Huge increases in revenues for owners, which means an increase in the capital value of the team and huge increase in salaries for players since this new generation of stadiums has been built.

Cities Impart Value to Sports Team
English: Dr. Baade, what is the true value of the sports team?

Baade: Well it's all over the map really, and in part, it reflects the fact that franchises mean different things to different communities. Green Bay, Wisconsin, for example, relies to a significant degree on the Green Bay Packers. In fact, Green Bay is almost synonymous with the Green Bay Packers. There's a significant paper industry presence in the Fox River Valley, where Green Bay is located, but Green Bay is primarily known for the Packers. When the two professional football teams in Los Angeles left Los Angeles in 1995, Los Angeles didn't miss a beat and in part they didn't miss a beat because there were so many other options. So many other leisure options for residents of Los Angeles that it didn't really mean much to them, either financially or in terms of identity. And so, it very much depends on the city.

English: Thank you, Dr. Baade. You've been most entertaining and informative. You have been listening to Dr. Robert Baade, professor of economics at Lake Forest College.

For more information on this topic and others, please visit the Atlanta Fed's website at www.frbatlanta.org. If you have comments or questions, please email podcast@frbatlanta.org, and thank you for listening.