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The Worst Economic Impact Estimate Ever? (Well, maybe not…)

2014 July 15
by Victor Matheson

UPDATE:  Maybe the title should be changed to “worst reporting about economic impact ever”. Bloomberg reported yesterday that Ed FitzGerald, the Cuyahoga County Executive, said that LeBron’s return would boost the Cleveland economy by $500 million. FitzGerald appears to have said nothing of the sort. According to the Cleveland Plain Dealer, with LeBron on the team, FitzGerald’s office stated that the total economic impact of the Cavs on the region might reach as high as $500 million, but James returning is most likely to increase the total economic impact on the region by only around $50 million. I would say that is still high due to the issues I detail in the original article below, but a $50 million claim doesn’t even come close to “worst ever” status.

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Bloomberg reported yesterday that Ed Fitzgerald, Cuyahoga County Executive and Ohio gubernatorial candidate, announced that LeBron James’ return to Cleveland will provide an economic boost of $500 million to the local economy.  I would guess that the true number will  be roughly 95-98% less than Mr. FitzGerald’s claim Bloomberg’s absurd reporting, so I am going to go ahead and call this the worst economic impact estimate ever. (UPDATE:  Again, Mr. FitzGerald actually claimed a much lower marginal impact which, while probably high, isn’t all-time worst material.)

Even before getting into the more serious economic problems with the study, let’s look at the raw data itself. With a metropolitan area population of 2.1 million, a $500 million impact on the area would mean that every single man, woman and child the region will be engaging in an average of $240 in Caviliers related spending every year for the rest of James’ career. Possible, but unlikely.

More specifically, in 2009-10, LeBron’s last year in Cleveland, the Cavs sold 20,562 tickets per game at an average price of $55.95 for a total regular season gate sales of $47.2 million. Last season, attendance was down to 17,329 and ticket prices were only $43.31 for a total gate of $30.6 million. LeBron’s return will certainly bring team gate revenues back to at least $50 million, but an increase in $20 million still leaves $480 million of Fitzgerald’s claim Bloomberg’s reporting yet to be explained. John Carroll University professor LeRoy Brooks claims that ticket prices are much higher than face value when James is in town based on ticket resale data, but resale data is not a random sample of ticket prices and only represents a small fraction of tickets purchased. Just because one guy scalps a courtside seat for $3,000 doesn’t mean that the typical ticket buyer is paying prices like this.

In fact, the Cavs’ entire team revenue including all sources was only $159 million in James’ last year and $145 million last year. Even the Knicks, the highest earners in the league, generated only $287 million last year. And James’ Miami Heat only generated $188 million in revenue last year. Unless LeBron James can somehow generate 2 1/2 times as much revenue in Cleveland as he did in Miami, we will have to look for other places to find that $500 million.

Bars and restaurants near the arena should benefit, but attendance will only be up about 20% next year. And even if people are willing to pay a lot more to see the Cavs if James is playing, they aren’t willing to pay a lot more to eat before the game. So what about hotels? Well, don’t count on lots of out of town visitors coming in to watch LeBron since tickets will be impossible to get. I am not aware of any data that suggests teams with big stars have more non-local fans at games than any other teams.

Of course, these are really just small issues. The bigger problem with FitzGerald’s claim is that it falls prey to one of the most serious fallacies in economic impact analysis:  the failure to account for the substitution effect. Any money spent by local residents at Cavs games is money not spent elsewhere in the local economy. The extra 150,000 fans that will be going to watch LeBron next year are 150,000 less people going out to nightclubs, restaurants, and theaters. The higher ticket prices that fans will be paying leaves less disposable income to spend on Indians or Browns games, or movie tickets, or bowling, or free-style skydiving, or whatever it is that Clevelanders would do, and have been doing, without being able to watch LeBron win games. Similarly, every kid in Cleveland will be getting a LeBron jersey for Christmas or Hanukkah this winter but this doesn’t mean they will be getting more presents, just different presents. The jersey manufacturers’ gains are equally matched by losses for the makers of ugly sweaters.

It is a great time to be a sports fan in Cleveland, and there is no doubt that LeBron will make many Clevelanders happy. He is just unlikely to make many of them, other than Cav’s owner Dan Gilbert, rich. And FitzGerald Bloomberg reporter Mark Niquette does a great disservice to the community that he governs writes for by inaccurately throwing around reporting numbers that have absolutely no basis in reality.

I think I am still comfortable calling this the worst economic impact estimate ever, but  Now that this is no longer the worst economic impact report ever, I am inviting any of my colleagues to nominate other candidates for this ignominy.

4 Responses
  1. Duane Rockerbie permalink
    July 15, 2014

    Maybe he means $500 million in psychic income. Of course, even the market for psychics is not that large.

  2. July 16, 2014

    Economists like to throw around the term “substitution effect” but I’ve never seen it validated. Certainly people have a limited amount of disposable income to spends on entertainment but people can and do change their budgets (i.e. save less?) or try to earn more to buy tickets. Even though you claim that there is no data showing people come in from out of town to see star players, there is no data showing that they do not come to town to see star players. I live in Seattle and take a couple trips a year to go see a few NHL games. If Seattle had a team, I would more than likely take that travel money and spend it on games here. Similarly, there are a lot of people that come in to town for Seahawks and Mariner games from Eastern Washington, Canada and Portland. It is likely that people will come into Cleveland from near by cities.

    I don’t know if the impact will be $50M but there is an impact and I would love an economists that is not paid to say it, at least acknowledge there is an impact.

  3. Victor Matheson permalink
    July 17, 2014

    I am happy to oblige, John. LeBron James will have a positive economic impact on Cleveland. Having James in town keeps some spending in town that would otherwise leave and likely attracts some additional spending from outside the region. Without question, James will cause spending on the Cavs and related businesses to rise by somewhere around $50 million as a back-of-the-envelope guess. The question now is how much of that is new and how much will simply be cannibalized from other spending options. That’s not an easy question to answer. It is not 100% substitution, but it is also not 0%. If I had to bet on a number, I would go with a $10 to $20 million positive net impact for LeBron’s return. That is obviously less than $50 million and WAY, WAY, WAY less than $500 million.

    There is lots of both direct and indirect evidence that the substitution effect is real and large enough to significantly effect economic impact estimates, but that is a bigger question than can be easily addressed in a reply comment.

  4. Frank permalink
    July 21, 2014

    For evidence of one sort of sub effect, see Mike Leeds paper about the increase in skiing in Colorado during the SLC Olympics.

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