Heavy Lifting - thoughts and web finds by an economist
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Monday, May 11, 2009

Government spending in sports

From this week's Sports Business Journal:
Of the $100 million coming to the Magic, Martins said the team will put $50 million directly toward construction of the new arena, which is set to open in October 2010. The rest of the debt is earmarked for pre-opening costs, including capitalized interest costs and unspecified debt reserve requirements. That portion of the funds also includes $12.5 million for the construction of five new community gymnasiums as required by the team’s arena deal with the city.

Most of the $480 million arena cost, which includes a $100 million land-purchase price, is publicly funded, with the Magic responsible for $50 million in construction costs. The team will also pay $1 million in annual rent and will pay for any cost overruns.
The city of Orlando will pay about $430 million for a new arena for the basketball team and in return they get $1m in annual rent and $12.5m for five community gyms? That's one heck of a return on investment.

I know, there are people (usually non-economists) who argue that the events held in the arena will generate some amount of new spending. Perhaps, but work done by myself and Dennis Coates (working paper here) suggests that events held in an arena generally have less of an immediate impact as proponents predict. The main reason? Most of those who attend the event are locals who simply redirect their entertainment (and perhaps food) spending to the event rather than generating new spending. How would locals generate NEW spending? One way would be to pull money from savings to spend today, but even then the total economic impact is ambiguous.

Sports economists have argued for years that spending on arenas, at least at the levels that cities have been spending in the past ten years or so, is not justified. The vast majority of the benefits of a new stadium are internalized by the team owner (here is a general-audience presentation concerning MLB stadiums and the associated academic paper and a general-audience presentation concerning NFL stadiums.) thus a proper burdern-sharing has more construction and maintainance costs on the shoulders of the team. Alas, the curernt political economy of sports arenas leads to the public picking up 2/3 of the bill on average (see slides 7 and 8 of these lecture notes).

BTW, the $1m in annual rent is approximately 0.23% of the arena's initial value. This is equivalent to renting a brand new $100,000 house for $19 per month. How sweet it is to be a major league franchise.

More links:

Skip Sauer on EconTalk concerning stadium economics (MP3 audio)
Devin Leary-Hanebrink: "Socialized Sports: Your Money at Work" (MP3 audio)



Cross posted at Division of Labour

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