Defending the virtues of liberty, free markets, and civilization... plus some commentary on the passing scene.

Freedom's Fidelity

Wednesday, January 07, 2004

The Economics of Arenas

Perhaps the most personally important class I ever took in college was Principles of Economics. It was during my freshmen year, we were given an article called "Pitching Socialism." Intriguing title. I headed back to my dorm, juiced for a libertarian-esque diatribe against some obcure government regulation. Instead the subject was.... sports stadiums. Huh?

That must have been early '97 - the era of modern sports stadiums, loaded to the gills with all sorts of restaurants and entertainment for all ages. Every owner needed a new stadium to compete with the rival team that just got their new stadium and are now going to the playoffs on the heels of The Big Off Season Free Agent Acquisition -- made possible by increased revenue from the brand new stadium (and skybox suites). Who can argue with that? I live in Chicago, I know that Soldier Field was in dire need of renovation.

So who should pay? The team owner of course, after all he is the benefactor, right? Not exactly, while the franchise is the benefactor, it is the taxpayer who bears the cost and reaps little reward.

But don't we all benefit from the increased economic activity of people spending their money at the Bears and Cubs games?

No, we don't, at least not enough to justify the cost (renovating Soldier Field cost just over $600 million). When a team - say the Bears - wants a new stadium they generally approach the mayor of the city - say Daley - who certainly doesn't want to be the guy who let the Chicago Bears become the Schaumburg Bears. So he finds a consultant that can help sell the plan as economically beneficial to the voting public, it goes something like this: The cost of building a new stadium is $(x), the estimate of increased money spent by spectators at the new stadium multiplied by some number of sporting events equals an increase in economic activity that far surpasses $(x) cost. Therefore the increased tax to pay for the stadium should really be thought of as an investment with a guaranteed positive return. After all, people aren't going to stop going to Bears games.

It seems so simple, so logical. I suppose that is why the premise often goes unchallenged. Nevertheless, it contains some fatal flaws. First it ignores the negative effect of higher taxes on the local economy. Businesses that pay more in taxes have less to spend on their own growth -- taxes retard private sector investment, and hence expansion. Second, and more significantly, the substitution effect is ignored. Most households have a fixed amount of income to spend on leisure events and some will choose to spend that at sports events and some will spend it on other entertainment. A new stadium does not increase or decrease the amount of "leisure income" of consumers in a given market. If the local team (or stadium) is not attractive those leisure funds will simply be spent on other events such as dining out, movies, or the theatre, but money will still be spent. A new stadium does not create wealth, it only reallocates it. Sure the Bears would see an increase in profits, but so would Lowe's if a 50 screen multiplex theatre was built for them at the taxpayers expense. Why not publicly finance that? Both situations amount to corporate welfare.

Of course there are always exceptions. And it's the exception of my beloved Green Bay Packers that got me pondering this in the first place. This is a storied franchise with fans all over the country, the newly renovated Lambeau Field (at a cost of about $300 million) brings economic activity from far and wide to the little town of Green Bay. Lambeau is loaded with restaurants, pubs, and of course the Packer Hall of Fame, all the while preserving the historic interior. It is a true tourist attraction. Consider the benefits heaped upon Green Bay after the wild results of two Sundays ago handed the Packers an unexpected home playoff game, a local hotel manager, Todd Casper had this to say:
"I thought, maybe we should send a fruit basket to this guy, because he's just dropping money into our lap," Casper said of the Cardinals receiver. "Usually we have a plan in case something like this happens. But this time, (a home game) was so unexpected."
Casper said the hotel was already booked Sunday night, with the phone ringing off the hook the minute the outcome of the Cardinals-Vikings game was decided.
He wasn't the only one:
The Lombardi Avenue hotel opened in September, just in time to reap the benefits of a full slate of regular-season and postseason Packers games.

"The phone has been ringing constantly. People already staying here rushed to the desk to re-book for the weekend," Spees said. "It makes us happy to know we're going to have a full house."
Out of towners that managed to snag tickets are extending their stays to tour the new facilities. The new Atrium is full of ways to spend money, including the Packers Hall of Fame, the Pro Shop, and Curly's Pub, the revenues go directly to the team and of course help buoy the sales of local merchants.

What do the above mentioned spending sprees have in common? They are all primarily the result of tourists. That is what makes the Green Bay situation unique, it attracts a relatively large amount of out of town money that, if not for the Packers, would not have been spent in Green Bay.

I went to one Bears game this year, between tickets, tailgating, and concessions I spent $80-100. If Soldier Field hadn't been renovated I would have gone to the old Soldier Field and spent the same. If the Chicago Bears didn't exist I would have spent that $80-100 somewhere else in Chicago be it on beer, a night at the clubs, a nice dinner, groceries, something.

So, next time you find yourself wondering how the owners can afford to pay those exorbitant salaries (which I have no problem with) ask yourself how much extra spending you could do if the NFL were to finance your house.


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