The Economics of Subsidizing Sports Stadiums

The Economics of Subsidizing Sports Stadiums
by Scott A. Wolla
Federal Reserve Bank of St. Louis, May 2017

 

“The idea that sports is a catalyst for economic development just doesn’t hold water.”
—Robert Baade, sports economist

Professional sports give people pride and a sense of community. But who should pay for the stadiums? From 2008 to 2010, three NFL stadiums were built: the $710 million Lucas Oil Stadium for the Indianapolis Colts, the $1.1 billion AT&T Stadium for the Dallas Cowboys, and the $1.6 billion MetLife Stadium for the New York Jets and Giants.¹ The newest NFL stadium is the $1.1 billion U.S. Bank Stadium for the Minnesota Vikings (2016), of which $498 million was paid for by the state and city governments.² Of course, the controversy rests on the fact that any government subsidy for building a new stadium is funded by taxpayers.

It’s All About Spending

Proponents say that subsidizing sports stadiums is justified because of the economic impact it will have on the community. First, sports stadiums are huge construction projects. In fact, they are often compared to the medieval cathedral in their attempt to dominate the skyline and inspire civic pride.³ And, like the cathedrals of old, they are expensive, massive building projects that require years of intensive labor. Proponents of a new stadium often laud the project’s ability to generate new construction jobs. For example, the proposed stadium for the Los Angeles Rams in Inglewood, California, was predicted to cost $3 billion and add 22,000 construction jobs to the economy of Los Angeles, California.⁴

Although construction jobs eventually disappear once a stadium is built, once the games begin, so does consumer spending. For example, more than 3.5 million people⁵ saw the St. Louis Cardinals play at Busch Stadium in 2015 (the second-highest home game attendance in Major League Baseball that year).⁶ Baseball fans who attend games also pay for parking, eat in restaurants, and buy food and drink at the ballpark. All that spending generates revenue and jobs for the local community. And, as those parking attendants, restaurant workers, and stadium workers spend their earnings, the money circulates again through the economy. Economists call this the multiplier effect, whereby one dollar of spending (by consumers, businesses, or government) creates more than one dollar in economic activity. The estimated economic impact of those millions of people who attended St. Louis Cardinals home games in 2015 was $343.9 million.⁷

A potential new stadium also holds the promise of new development taking root nearby. Such development might include new restaurants and bars as well as condominium and office space. As interest in the area grows, the value of existing commercial and residential property is likely to improve. In a similar vein, stadium construction can be proposed as an economic-development initiative by choosing to build in a blighted or underdeveloped area. The hope is that the new economic activity and increased traffic will lead to revitalization of that area. In addition, all the extra spending and income gets taxed when it is spent and earned and respent again. The tax revenue then offsets at least some of the cost of the subsidy. Finally, proponents often suggest that professional sports and new stadiums help build civic pride and can be beneficial marketing tools for the city’s image as people around the country (and the world) watch games televised from the new stadium. In fact, many consider the presence of a professional sports team to be a status symbol and essential to being considered a first-tier city.

The Economist’s View

In spite of all of these economic arguments, economists generally oppose subsidizing professional sports stadiums. When surveyed, 86 percent of economists agreed that “local and state governments in the U.S. should eliminate subsidies to professional sports franchises.”⁸ Perhaps economists just do not like sports? Actually, many economists love professional sports—including former Federal Reserve Chair Ben Bernanke, an ardent Washington Nationals fan.⁹ Rather, it is the provision of taxpayer money in the form of subsidies that economists generally oppose. In a 2017 poll, 83 percent of the economists surveyed agreed that “Providing state and local subsidies to build stadiums for professional sports teams is likely to cost the relevant taxpayers more than any local economic benefits that are generated.”¹⁰ In their book, Sports, Jobs, and Taxes, Roger Noll and Andrew Zimbalist present a comprehensive review of stadium investments. In all cases, they find a new sports facility to have extremely small (or negative) effects on overall economic activity and employment. Furthermore, they were unable to find any facilities that had a reasonable return on investment.¹¹Sports economist Michael Leeds suggests that professional sports have very little economic impact, noting that a baseball team (with 81 regular-season home games per year) “has about the same impact on a community as a midsize department store.” His research suggests that if every professional sports team in Chicago (including the Cubs, White Sox, Bears, Bulls, and Blackhawks) were to suddenly disappear, the economic impact on Chicago would be a fraction of 1 percent.¹²

Consider the Opportunity Costs

In their critique, most economists highlight an important pitfall when considering the economic impact of stadiums: the failure to include opportunity costs. The opportunity cost is the value of the next-best alternative when a decision is made; it is what is given up. In the case of sports stadiums, both “seen” and “unseen” economic activity should be considered. The unseen spending, however, tends to be overlooked. Consumer spending at a sports stadium is easy to see—it is obvious and measurable. What is unseen, however, is how consumers would spend their dollars otherwise. If they were not spending on sporting events, they would instead spend on museums, movies, concerts, theater, restaurants, and so on. Because consumers tend to have limited entertainment budgets, dollars spent at a new stadium would not be new spending but rather diverted spending.

Taxpayer money to subsidize a stadium also has opportunity costs. An economist might ask, “Of all the things my city could do with $500 million, is a sports stadium subsidy my best option?” Government can choose to spend taxpayer money on a variety of things: roads, bridges, airports, police, education, environmental improvements, parks, and walking paths, just to name a few—all of which have benefits for society. Economists often suggest options that increase productivity and see this spending as investment. For example, government spending on infrastructure (e.g., airports, highways, and bridges) could increase productivity because it reduces the cost (in time and money) of transporting goods and people from one place to another.¹³ Second, spending on education is seen as a form of human capital investment. Human capital is the knowledge and skills that people obtain through education, experience, and training. The education that students receive in school and college (and further training and work experience) increases their productivity. Economists prefer these types of investment because increased productivity has the potential to increase the rate of economic growth and increase the standard of living.

Conclusion

Building sports stadiums has an impact on local economies. For that reason, many people support the use of government subsidies to help pay for stadiums. However, economists generally oppose such subsidies. They often stress that estimations of the economic impact of sports stadiums are exaggerated because they fail to recognize opportunity costs. Consumers who spend money on sporting events would likely spend the money on other forms of entertainment, which has a similar economic impact. Rather than subsidizing sports stadiums, governments could finance other projects such as infrastructure or education that have the potential to increase productivity and promote economic growth.

Notes

¹ Hare, Erik. “Stadium Frenzy Ignores Economics.” MintPress News, May 8, 2014; http://www.mintpressnews.com/stadium-frenzy-ignores-economics/190351/.

² Roper, Eric. “Taxes to Pay for Now-Open U.S. Bank Stadium Rebound, Thanks to Gamblers.” Star Tribune, July 22, 2016; http://www.startribune.com/taxes-to-pay-for-u-s-bank-stadium-rebound/387999002/.

³ Schalter, Ty. “Why NFL Stadiums Are the Modern Day Cathedral.” Bleacher Report, April 26, 2012. http://bleacherreport.com/articles/1159057-why-nfl-stadiums-are-the-modern-day-cathedral. See also the following: Geisendorfer-Lindgren, Peter. “Stadiums, Cathedrals: Marks of Their Eras.” Star Tribune, September 2, 2016; http://www.startribune.com/stadiums-cathedrals-marks-of-their-eras/392207411/. McKenzie, Sheena. “Sports Stadium Architecture: Welcome the New Temples of Pleasure.” CNN, January 20, 2015. http://www.cnn.com/2014/12/15/sport/sport-stadium-architecture/index.html?hpt=hp_c5.

⁴ Slowey, Kim. “Inglewood Mayor: Near-$3B Rams Stadium to Add 22K New Construction Jobs.” Construction Drive, January 15, 2016;http://www.constructiondive.com/news/inglewood-mayor-near-3b-rams-stadium-to-add-22k-new-construction-jobs/412203/.

⁵ Cumulative attendance.

⁶ Kirn, Jacob. “Cardinals Playoff Games to Have Big Impact on Economy.” St. Louis Business Journal, October 5, 2015. http://www.bizjournals.com/stlouis/blog/2015/10/cardinals-playoff-games-to-have-big-impact-on.html.

⁷ See footnote 6.

⁸ Whaples, Robert. “Do Economists Agree on Anything? Yes!” Economists’ Voice, 2006, 3(9), pp. 1-6.

⁹ Steinberg, Dan. “Ben Bernanke Is a Huge Nats Fan.” Washington Post, September 27, 2012; https://www.washingtonpost.com/blogs/dc-sports-bog/post/ben-bernanke-is-a-huge-nats-fan/2012/09/27/964d483c-08ba-11e2-9eea-333857f6a7bd_blog.html?utm_term=.3c929678c51d.

¹⁰ Responses are weighted by each expert’s confidence. See IGM Forum. “Sports Stadiums.” January 31, 2017; http://www.igmchicago.org/surveys/sports-stadiums.

¹¹ Noll, Roger G. and Zimbalist, Andrew, eds. Sports, Jobs, and Taxes: The Economic Impact of Sports Teams and Stadiums. Brookings Institution Press, 1997.

¹² Bergman, Ben. “The NFL in L.A.? Get Ready for Near Zero Economic Impact.” KQED News, February 27, 2015; https://ww2.kqed.org/news/2015/02/27/new-nfl-team-unlikely-to-have-big-economic-impact-in-southern-california/.

¹³ Miller, Matt and Bullard, James. “Bullard: Infrastructure Plan Could Boost Productivity” (video). Bloomberg.com, November 18, 2016;http://www.bloomberg.com/news/videos/2016-11-18/bullard-infrastructure-plan-could-boost-productivity.