Friday, November 13, 2009

A Cautionary Tale About Claims of Economic Benefits 

More than 10 years ago I read an economic impact study claiming that a new football stadium in Baltimore would create thousands on new jobs and increase local income by hundreds of millions of dollars each year. I didn't believe it for a minute, and spent quite a bit of time and effort over the past decade demonstrating that sports facilities do not generate tangible economic benefits. Despite the research that many of us here at TSE, and other economists have done, many people continue to believe claims of huge economic impact from many different local economic development projects. For example, just a few weeks ago a press release from the office of California Governor Arnold Schwarzenegger claimed that a new football stadium in Los Angeles would "generate 18,000 jobs and $760 million in annual revenue."

In 2005, the Supreme Court of the United States, on a 5-4 decision in the Kelo v. City of New London case, ruled that local governments could use eminent domain to transfer private property from one person to another if the takings served the public interest by promoting economic development. The case emerged from the desire of New London, CT, to tear down an existing residential neighborhood in order to create a mixed use commercial/residential "urban village" anchored by Pfizer, a big pharma corporation. Last week, Pfizer announced that it was leaving New London. What is the legacy of the Kelo takings?
Pfizer said it would pull 1,400 jobs out of New London within two years and move most of them a few miles away to a campus it owns in Groton, Conn., as a cost-cutting measure. It would leave behind the city’s biggest office complex and an adjacent swath of barren land that was cleared of dozens of homes to make room for a hotel, stores and condominiums that were never built.
At the time that New London began using eminent domain to take private property, the city claimed that the new development around the Pfizer facility would have a huge positive economic impact on the surrounding community. A majority of Supreme Court justices believed these claims. The opinion can be found here. It's one of the worst decisions the court ever made, in my opinion. Here's a quote from the opinion

The City has carefully formulated an economic development plan that it believes will provide appreciable benefits to the community, including–but by no means limited to–new jobs and increased tax revenue. As with other exercises in urban planning and development, the City is endeavoring to coordinate a variety of commercial, residential, and recreational uses of land, with the hope that they will form a whole greater than the sum of its parts. To effectuate this plan, the City has invoked a state statute that specifically authorizes the use of eminent domain to promote economic development. Given the comprehensive character of the plan, the thorough deliberation that preceded its adoption, and the limited scope of our review, it is appropriate for us, as it was in Berman, to resolve the challenges of the individual owners, not on a piecemeal basis, but rather in light of the entire plan. Because that plan unquestionably serves a public purpose, the takings challenged here satisfy the public use requirement of the Fifth Amendment.
So much for the careful economic development plans of New London. The important lesson here is that it is relatively easy to make seemingly credible claims about future economic benefits from an urban "revitalization" project. Five justices of the Supreme Court were so convinced by the purported economic benefits that would flow from the planned New London "urban community" that they let the government use eminent domain to take private property from local residents to make it happen. But realizing those benefits is a much more difficult accomplishment, even if the planners mean well. The final outcome in New London should serve as a warning to those who swallow claims of future economic benefits hook line and sinker.


Tuesday, February 24, 2009

Olympic bust 

Some choice quotes from a fascinating article by Barbara Demick in the LA Times:
Reporting from Beijing -- "Empty," says Jack Rodman, an expert in distressed real estate, as he points from the window of his 40th-floor office toward a silver-skinned prism rising out of the Beijing skyline.

"Beautiful building, but not a single tenant.

"Completely empty.


So goes the refrain as his finger skips from building to building, each flashier than the next, and few of them more than barely occupied.

...The government spent $43 billion for the Olympics, nearly three times as much as any other host city. But many of the venues proved too big, too expensive and more photogenic than practical.

...The National Stadium, known as the Bird's Nest, has only one event scheduled for this year: a performance of the opera "Turandot" on Aug. 8, the one-year anniversary of the Olympic opening ceremony. China's leading soccer club backed out of a deal to play there, saying it would be an embarrassment to use a 91,000-seat stadium for games that ordinarily attract only 10,000 spectators.

The venue, which costs $9 million a year to maintain, is expected to be turned into a shopping mall in several years, its owners announced last month.

A baseball stadium that opened last spring with an exhibition game between the Dodgers and the San Diego Padres, is being demolished. Its owner says it also will use the land for a shopping mall.
In sum, waste on a massive scale. Thanks to Kevin Stovall for the link.

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The economic development pitch ain't sellin' or workin' 

If stadiums were economic stimulus, you'd think the Vikings' pitch for a subsidy would be flying high in Minnesota right now. But it was unceremoniously "brushed aside" in the legislature:
The Minnesota Vikings' already wobbly prospects of getting public financing for a new stadium this year got no firmer Monday at the State Capitol, where legislators said the state's dire financial picture made the project nearly unthinkable.

In doing so, a House panel brushed aside a new study by the Metropolitan Sports Facilities Commission, owners of the Metrodome, that said a new stadium on that site in downtown Minneapolis would generate $734 million in construction spending, create 13,400 jobs during construction and generate $32.2 million in taxes during the first year after a new stadium opened.

"To come in with a two-thirds publicly funded proposal for a brand new stadium here this session would appear to be a nonstarter," said Rep. Frank Hornstein, DFL-Minneapolis.
Can we agree then, Minnesota legislators, that stadium subsidies do not stimulate the economy?

On a related note, "The Sports Museum of America" is closing less than a year after opening for business in New York. The museum was financed by $57 million worth of "Liberty Bonds." These bonds were "part of a $20 billion package Congress granted New York City to assist an economic recovery in lower Manhattan following the September 11, 2001 attacks." Chalk up a stimulus failure on that one.

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Thursday, January 22, 2009

More Olympic Bailouts 

From The Times:
Ministers have approved a £461 million public bail-out of the London Olympics after private investment in two of the biggest venues on the East London site failed to materialise.

It will be used to pay for ongoing construction of the £900 million Athletes’ Village and a £355 million media centre, which is now a fully nationalised project. Both were due to run out of money in March after the credit crisis and falling property prices scared off commercial backers.

...The £461 million released today breaks down to £326 million for the Village, which will be turned into up to 3,000 homes after the Games, and £135 million for the media centre, which will be converted into office space.

It is likely that the taxpayer will have to cover the full cost of building the Village as well as the media centre. Ministers hope to recoup the money by selling off the flats and offices from 2013. Up to half the flats will be affordable housing and could be funded by registered social landlords.
Registered social landlords? These seem likely, to me at least, to be a drain on the public purse for decades.

Part of a continuing series. EclectEcon predicted this at TSE three years ago! No doubt we'll see more.

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Saturday, January 17, 2009

"Sports Mania Is a Poor Substitute for Economic Success" 

Jerry Bower in todays WSJ:
If there ever was a time to crow about the wonders of rebuilding a city around a professional sports team, this would be it. Three of the four teams remaining in the play-offs hail from cities -- Baltimore, Philadelphia and Pittsburgh -- that in recent years spent billions rebuilding their downtowns around pro sports facilities and other community "anchors."

Except that there's a problem. The teams might be competitive, but the cities definitely are not. All three continue to shrink in population, and have stagnant job markets and crumbling public schools.
Bower believes there is a lesson in the experience of these cities for what we can expect from the public works-focused spending forthcoming in Washington. That is, don't expect very much out of it, other than a tax bill in the future. He finishes on a clever note:
When the Steelers were in the Super Bowl in 2006 I was the host of a radio show in Pittsburgh. I argued that the franchise was an exercise in leadership excellence in a city whose politicians were anything but. Numerous callers hammered me. They said there are a lot of "Steelers" bars across the country, and that proved the city still had some national respect. Indeed, there are hundreds of watering holes dispersed across America loaded with fanatical devotes of the Pittsburgh Steelers. "Where are the Seahawks bars?" the callers asked.

In Seattle, of course. That city has gained population while Pittsburgh lost it. Steelers bars are the visible cultural artifact of a kind of economic diaspora. People in those bars are the refugees who looked at high taxes, union dominance and lousy schools and voted with their feet. They can still root for their favorite team -- from Raleigh, North Carolina. You go South or West to get your bread. The circuses can be watched on cable.

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Thursday, September 25, 2008

Welfare & the Italian national team 

Economists are used to the fact that government spending gets diverted towards strange special interests. But this example from the sports world is stunning:
European Union funds meant to help a poor region of Italy are set to be spent sponsoring the Italian national football team.

The regional government in Calabria, a southern province, wants the money to go on promotional branding during Italy's World Cup campaign.

It would cost them 1.8m euros (£1.4m) over three years.

Regional officials argue it can help raise the profile of their area, both within Italy and overseas.

The idea is that the promotion will attract more tourists to Calabria....

According to one website promoting Italian tourism, Calabria is currently "little-respected by other Italians and little-known to tourists".

It is also home to the N'Drangheta, one of Italy's most powerful and violent mafia organisations.
While I'm no expert, one possibly productive use of the money would be to fight corruption. </naivete'>

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Monday, September 22, 2008

New York PILOT Decision, Part II 

I was in Washington DC last Thursday testifying in a hearing that is part of the ongoing investigation by the House Committee on Government Reform, Subcommittee on Domestic Policy into the financing of the New Yankee Stadium in the Bronx. For those who have not been following this controversy, here's a brief summary:
  • 1986: Congress passes a law (the Tax Reform Act) that says sports facility construction projects can only be financed with tax exempt bonds if the principal and interest are paid using tax revenues.
  • 2006: The IRS issues Private Letter Rulings that allow New York City and the Yankees (and later the Mets) to finance the construction of two new baseball stadiums using tax exempt bonds and pay off the principal and interest on these bonds using payment in lieu of taxes (PILOTs), and not tax revenues collected by New York City or the State of New York. This ruling effectively guts the 1986 Tax Reform Act. The rationale for this decision was that these stadiums would generate significant positive economic impact in the community, and thus serve the public interest.
The Subcommittee web page has a lot of information on this issue, including video of the hearing and the written statements of all the witnesses. A lot of interesting information came to light in this hearing, including the fact that the justification given by the City of New York for pursuing this course of action was that both teams threatened to leave the city if they didn't get what they wanted, and that the City fudged the assessed value of the New Yankee Stadium significantly in order to make the project qualify for PILOTs.

The PILOT issue is interesting for several reasons: it's a clear example of the tensions that arise between the people who make the laws (Congress) and the people who implement the policies that are dictated by those laws (the IRS in this case); it makes for great political theatre, as the parties involved are high profile organizations; and as Dennis Zimmerman pointed out in his testimony at the March 29th 2007 hearing, the PILOT decision has a desirable, although probably unintended consequence of forcing the one group of taxpayes who benefit most from the new stadium (sports fans) to pay for the majority of the financing.

Somewhat predictably, the Yankees and NYC have stuck to their orginal claim that the tangible economic benefits justify the ruling, rather than the more creative position that, despite the bad intentions surrounding the PILOT decision, it actually results in almost good economic policy. I say almost good because the lower interest rates on those tax exempt bonds represent an implicit subsidy from every taxpayer in the United States to baseball fans in New York City.

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Monday, April 21, 2008

Problems in St. Louis' Downtown Revitalization. 

A couple of weeks ago, Skip had a post on the lack of development beyond the left-field wall at St. Louis' Busch stadium. The vacant field, seen clearly in this picture and in this image from Google maps, was to become a ballpark village. But that plan has at least been temporarily scuttled by Centene's plans not to relocate to new office space there.

A recent St. Louis Post-Dispatch article notes how difficult it has been for new development projects to get up and running in downtown St. Louis, even with a brand new stadium. The author notes a kind of multiplier effect: when one project fails, several other unconnected projects may also fail.
Business owners usually revel in vanquishing their competition. But when Steve Roberts wears his hat as a downtown St. Louis developer, he roots for competitors.

Indeed, Roberts, a principal in St. Louis-based Roberts Brothers Properties, is concerned about the broader impact of projects stalling or dying.

If the adage that success breeds success, then the reverse could be true: Failure is contagious.

"When you have projects or developers failing it raises suspicions in the minds of potential investors, retailers and even residents," Roberts said. "I don't think one particular project can take down the whole downtown renovation effort, but if you have multiple ones for different reasons, it hurts those of us who have been sowing our fields for many years."
Frequent readers of TSE know that we here generally (generally?) do not support public funding for stadiums. Although the a-priori studies claim stadiums are magnets for development and economic activity, the ex-post studies tell a much different story.

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Thursday, December 06, 2007

Threat Point - The Vikes 

This week in Sports Economics I talked about the effect sports teams and sports stadiums have on their local economies (not much). That doesn't keep owners from trying to get public subsidies. The Star Tribune notes that Vikings owner Zigi Wilf seems to be publicly turning up the heat to get public funding for a new Vikes stadium.

"The Vikings and the NFL understand and respect the priorities and pressing issues facing the state, but at the same time, the stadium issue needs to be resolved in the near future," Wilf said. "Construction costs are rising significantly each year that we delay and there is an urgency to reach a solution."

Given the subprime mortgage crisis, might this not lower the rate of inflation of construction costs? But I digress.

The state's answer puts the project — a retractable roof stadium along with housing and business development on the Metrodome site — up against a tight deadline.

Sports economists agree: sports stadiums are not the boon of economic development that they are often portrayed to be and, thankfully, public money has not been as easy to come by in many instances. That's why some recent public financing packages include plans to have ballpark villages developed as a part of an agreement for public financing. Otherwise the secondary development is not likely to happen.

The development is unlikely to occur because the returns for the development do not justify private investment. Otherwise we'd see a lot more "spontaneous" economic development surrounding stadiums. In other words, the people who frequent stadiums don't really care all that much about shopping/bars/restaurants/condos etc. around ballparks. They want to go to the event, do what they do there (get their private benefits), get in their cars, and go home. So politicians are seemingly more resistant, thankfully, to giving subsidies just for stadiums by themselves. But package in some secondary development (which, if it draws any extra economic activity to the site, will probably draw it from elsewhere in the region) with the subsidy request and see if you can get the necessary votes.

But if private financing isn't forthcoming for the housing and business development, is it really that good of an investment for the government? In other words, what are the public goods associated with the ballpark villages?

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