Monday, June 8, 2015

Why Stadium Subsidies Are Anything But a Slam Dunk

I recently talked to one of my friends about a taxpayer-funded subsidy towards building a new stadium for the Milwaukee Bucks. I might not live in Wisconsin anymore, but geographic location doesn't minimize my aggravation when a government makes poor spending decisions. Apparently, me living in Washington D.C. doesn't make me immune from this sort of absurdity because it's also happening with the D.C. soccer team. Proponents argue that such a capital investment is a great way to market the city. They think that it will generate more revenue, more jobs, and greater economic growth for a city. Sounds plausible. Plus, I enjoy a sporting event as much as your average American, so what's there not to like?

Over the past quarter-century, 101 new stadiums have been constructed, and just about all of them with public funding (Baade and Matheson, 2011). When accounting for initial costs, maintenance costs, and foregone property taxes, the public cost becomes an average of $177 million per stadium [in 2005 dollars]. Adjusting that figure to 2010 dollars would put it at $241 million! Multiply that underestimation by 101 new stadiums, and you have over $24 billion in taxpayer dollars spent in the last decade on sports stadiums. To annoy you even more, about 78 percent of the public-private partnership falls on the city (read: taxpayers), whereas only 22 percent has to be paid by the team itself.

Think of what that money could have been spent on otherwise, or in economic terms, the opportunity cost. That money could have been spent on the poor, improving roads, the fire department, a new community get the idea. The same goes for the land that is used for a stadium. Housing, office space, and retail are all better uses of the land in terms of long-term investment.

There is also the matter of the substitution effect. Most families set aside a certain amount of money for entertainment purposes. If they did not spend it on the basketball game, it would have probably be spent on bowling, the waterpark, or some other place. Given consumption patterns, the money most probably would have been spent on some other entertainment venue, so we're not seeing an increase in entertainment consumption spending so much as we are seeing a consumer spending shift.

Although the reports are dated, the St. Louis Federal Reserve Bank found that taxpayer funding of stadiums was bad policy, and the Kansas City Federal Reserve Bank found that back in 2000, taxpayers spent $188M per annum while only receiving $44M in return, which puts the ROI (return on investment) at a measly 0.23. If I were a mayor or governor, I personally would want my community to receive more benefits than that, but the allure of lifetime box seat tickets and political favors does have that uncanny ability to blindsight.

Some have found no connection between stadium construction and economic growth (Siegfried and Zimbalist, 2000), and there can actually be a negative impact on economic growth (Baade and Dye, 2006Moylan, 2007). The reason why sports stadiums do not generate the economic growth to a community or state, also known as the multiplier effect, is because the money is not being spent in a way in which the community who footed the bill experiences a rate of return (Johnson, 2011).

It also isn't the job creator that it seems like because sports venues are seasonal, and only open a few hours a year. Owners, administrators, and players are the ones receiving the bulk of the funds, and they typically do not spend in the team's city. Since the stadium is spent on stadium parking, concessions, restaurants, and box seats, the overall economic impact that taxpayers feels, directly or indirectly, is minimal since the spending is very localized. Although there is the theoretical possibility that stadium subsidies are at best a cost-shifting mechanism to fund Big Business, the cited studies make it more probable that the economic benefit is truly small in comparison to other forms of spending.

Stadium subsidies are merely a form of redistribution to line the pockets of already-rich, billionaire stadium owners while perpetuating the lavish incomes of overpaid athletes. Although the taxpayer is footing the bill, the impact on the taxpayer isn't quite large enough where they would lobby against such nonsense, whereas stadium owners have the incentive and money to do so. Proponents like to argue that these subsidies help with the economy. Not only does the economic literature show otherwise, but all the subsidies show is that the economy is developed enough where heads of government think they can lavishly spend money on stadiums. Economists generally agree that stadium subsidies are a bad idea, and what's more is that these subsidies are unnecessary because the stadiums can successfully be funded privately (Chodosh, 2011). Instead of striking out with giving more money to Big Business, how about we enact laws that prohibit such subsidies?

4-6-2017 Addendum: I recently came across a 2016 Brookings Institution study that shows that since 2000, taxpayers have paid $3.2 billion for 36 stadiums, as well as a nice description of how stadiums are not economically efficient investments.

7-6-2017 Addendum: I found this University of Chicago survey of expert economists, and the consensus is that the costs greatly exceed the benefits of stadium subsidies.

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