Foundation Briefs Advanced Level September/October Brief Resolved

Con Counters

Statistics from Sports Institutions are Inaccurate

Jeanette Mott Oxford, who was an antisubsidy activist before being elected a Missouri state representative, says it’s easy for her colleagues to be distracted with flashy claims. “Unfortunately, it doesn’t appear that elected officials are much into evidence-based decision-making,” she explains. “Folks believe the threat that jobs will be lost, that somehow the team will move. Then there’s the civic pride element around the status of having a team. I think that too often, those motivate people no matter what the evidence says.”

• Author biases. Economic consulting firms hired by franchises obviously have an incentive to find positive results. Academics may have bias as well, although there is no reason to assume that all academics would be biased against stadium construction. Yet all of their findings have been that stadiums do not create economic growth.

• Method. Franchise consultants create estimates based on assumptions about projected future economic activity for one metro area. Academic economists are analyzing past economic activity. Academic studies look at multiple metropolitan areas and analyze economic activity controlling for other factors that will likely affect economic growth.

• Ignoring the substitution effect. Franchise consultants often anticipate spending that would happen in and around the new stadium without taking into account spending that may be reduced in other recreational activities as fans divert their spending. Assuming families have relatively fixed entertainment budgets that they split among many activities, increased spending at a new stadium will mean decreased spending at other entertainment facilities (movies, amusement parks, museums, etc.). Thus, we can expect little economic growth from local families redistributing their entertainment budgets. Some economic growth can come from those outside the metro area choosing to spend their money at the sports stadium rather than spending near their home.

• Ignoring visit motivation. Franchise consultants count every dollar spent by out-of-town fans as dollars brought in by the stadium. However, many out-of-town fans attend games, but would have visited the metro area without the stadium. Many attend games while being in town for a conference, a wedding, to see an art exhibit, etc. Their spending on hotels, restaurants, etc. should not be included in stadium benefits if the motive for their trip was not the stadium.

• Overstating the multiplier. Franchise consultants have used multipliers to estimate economic benefits such as job creation as high as 2.5. That is, one job created by the stadium directly leads to 2.5 jobs being created indirectly. Academic studies have found that a more reasonable multiplier would be 1.25. The lower multiplier is justified because a large portion of spending goes to purchase goods produced outside the metro area and the athletes typically live outside the metro area (at least during the off season).

• Focusing on gross rather than net jobs. Jobs lost are often not included in the analysis done by franchise consultants. While the new stadium may employ 1000 people, if the old stadium employed 900, net jobs increased 100.

• Overstating the importance of the stadium in the local economy. Sports stadiums positive impacts are often small relative to the economy of a metro area. In fact a sports franchise has about the same scale of economic effect as a large grocery store. A civic leader in Sacramento claimed, “The Raiders coming to Sacramento would be an event the magnitude of the Gold Rush.” During the Gold Rush 300,000 people moved to California in the six years following the 1848 discovery of gold in Sacramento. The Raiders would have played 8 home games a year there. Many find it surprising that a sports stadium does not generate more economic development however; sports franchises are really small businesses. The Jazz generates about $10 million dollars - that is 0.029 percent of the Salt Lake economy which generated $33.6 billion dollars in personal income in 2005.21 Real Salt Lake will generate create 175 jobs or 0.027 percent of jobs in a metropolitan area that has 625,800 nonfarm employees.

Economic impact studies entirely ignore opportunity costs DAT

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.

Small markets vastly oversell themselves to justify excessive funding of local teams DAT

Changes in geographical boundaries of the area of impact are likely to lead to changes in multiplier size, because the magnitude of a multiplier depends on the structure of the host community. That is, the degree to which businesses at which visitors spend their money proceed to trade with other businesses within the defined area, rather than with enterprises outside the defined geographical area. It is generally assumed that a smaller community tends not to have the sectorial interdependencies that facilitate retention of monies spent during the first round of expenditures. Hence, much of the expenditure would be respent outside the local region leading to a low local economic multiplier. Conventional wisdom posits that the larger is the defined area's economic base, then the larger is likely to be the value added from the original expenditures, and the smaller is the leakage that is likely to occur.

Almost all professional sports franchises are located in major metropolitan areas. Hence, revenues the franchises receive from out-of-town visitors and other external sources such as television, tend to stay in the local area. For example, Schaffer and Davidson (1984, p. 15) concluded that about 70% of expenditures by the Atlanta Falcons were made locally. They reported that 79 percent of the players and staff of the team live here all year; 39 of 58 players and 46 of 50 staff members live in Atlanta. Most field personnel are local residents, printing is local, the team uses Atlanta banks as well as an Atlanta based airline, and the team is locally owned.

Thus, much of the visitors' revenues received by the Falcons is respent inside the local region leading to a relatively high economic multiplier.