My colleague Phil recently highlighted a comment by bobby, one of our many great readers. Bobby is concerned that we here at TSE tend to focus on employment, income, or tax collections as a measure of welfare associated with sports rather than the sum of producer and consumer surplus. Bobby’s concern is well-founded, but let me take a moment to explain why we so often talk in terms of these other measures.
First, those of us who talk employment or income are generally responding directly to claims made by sports boosters rather than making estimates while starting with a blank slate. When faced with a claim like, “The Winter Olympics will generate 129,000 jobs for Vancouver in 2010,” the natural response is to estimate economic models that will predict actual employment changes rather than changes in welfare. Similarly, when a reporter calls and asks about a $500 million predicted impact from the Super Bowl, it is good to have an apples to apple comparison to talk about.
Second, most of us critical of mega-events and stadiums are primarily concerned with the public funding involved. If we are talking about $300 million in public funding to build a new stadium. It is fair enough to argue that the benefits associated with the stadium include not only what people actually pay for the events taking place there but also any associated consumer surplus. However, if one measures benefits in that way, then one should also include the not only the $300 million direct subsidy as a cost but also the consumer surplus losses associated with the spending that consumers would have engaged in had their money not been taxed away to pay for the stadium. This is a much harder comparison, so typically the consumer surplus gains associated with the stadium are ignored along with the consumer surplus losses associated with the higher taxes. As a first order approximation, we assume that these pieces will roughly cancel each other out.
Third, there are some very good economists, including Bruce Johnson and John Whitehead who use contingent valuation methodology to estimate not just what people actually do pay to attend sporting events but what they are willing to pay, capturing the consumer surplus aspect. These studies also tend to show that the public subsidies that stadiums receive typically exceed consumers’ willingness to pay as measured by CVM.
Finally, most of us, like both Phil and Allen Sanderson, who is quoted in Phil’s post, are quite quick to admit that there are benefits from sports franchises that aren’t captured by things like employment and income data. In fact, I close almost every interview with a reporter with the line, “These events may make us happy, but they don’t make us rich.” Similarly, the NBA lock-out is likely to to make a bunch of fans unhappy, but it is unlikely to cost many jobs or reduced city GDPs by a measurable amount.
So, in conclusion, I am sympathetic to bobby’s concerns, but there is a method to our madness, and I can assure you that we haven’t all simply forgotten everything we learned in Principles of Microeconomics.
“if one measures benefits in that way, then one should also include the not only the $300 million direct subsidy as a cost but also the consumer surplus losses associated with the spending that consumers would have engaged in had their money not been taxed away to pay for the stadium. This is a much harder comparison, so typically the consumer surplus gains associated with the stadium are ignored along with the consumer surplus losses associated with the higher taxes. As a first order approximation, we assume that these pieces will roughly cancel each other out.”
This calculation is exactly the gist of my reply to bobby in the original article: https://thesportseconomist.com/2011/10/12/the-economic-impact-of-cardinals-postseason-on-st-louis-is-unclear/#comment-1880
I think any reasonable attempt would find the surpluses of those that use the stadium would be well lower than the surplus losses incurred by those uninterested in the stadium, if no other reason than the owners and players’ ability to capture that surplus for themselves. Because of the limited quantity and nature of ticket pricing (monopolistic pricing by the team, scalping when extra surplus remains) the fan at the game will not be able to capture a large part of the surplus. Taxpayers that dont use the stadium would incur all of the negative surplus and have no way to avoid it.
Michael c.,
Good comments both here and earlier. Thanks for your input.
Cheers,
Victor
playing with the devil’s tools does not cleanse you of the sin.
to me, it is madness to talk about rectangles in these matters. we have all been taught better, and, at a minimum, each and every discussion should have a disclaimer or caveat that the meaningful part of the analysis is being discarded in favor of expediency or politics, or some call to relevance.
it does not serve our profession or our standards well when we capitulate to the journalists, politicians, and others who have either their own personal agendas or some other goal in minds. in my mind we should plow harder to make the argument in terms that our principles guide.
and, who cares about wealth if we are happy? isn’t the goal of income, wealth, and consumption to make us such? or did i miss that lesson too?
Victor, i am sorry. i don’t buy the framework. its not right, it stands outside standard economic analysis, and there is no reason for us to play by rules others have made. let’s play our own game, by our own rules, on our own field.
and i don’t know what Clemson Memorial Stadium cost to build, but i know the satisfaction of watching Sammy Watkins play there as a freshman is one giant sum larger than the sums required to build it, at least based on the ticket prices which include a stadium bond fee. as far as i can see it would be a true miscarriage of justice, economics, and plain common sense to say that i only got $56 worth of happiness (the face price of my ticket) out of watching clemson beat unc-ch today like a red headed step child. and had you been there for even a small part of the game, i doubt you would have thought that i was the only one somewhat giddy and surplused.
thanks for the chance to speak on this. its a treat to be able to chat about these things in a civil and congenial way.
bobby,
I commented on Phil’s post saying that we need to educate on the issue. Part of educating is pointing out error as well as explaining the correct why to do a problem.
In your terminology, I am a sinner because I play with the devil’s tools. On the other hand, what I also try to do is show that even using the stacked rules of the devil’s game, the devil’s claims are wrong. Beating them at their own game is, for me, as sweet as beating them at my game. Watching Clemson, or anyone else, go into Cameron Indoor Stadium and beating the Blue Devils, is even more satisfying than watching that happen when Duke is the visitor or on a neutral court.
Like Victor, I always tell reporters and politicians the correct way to view the benefits and costs of stadium subsidies and hosting mega-events, and I tell them that the studies that have been done generally find that peoples’ stated willingness to pay rarely covers the public subsidies. I also tell them that the right way to make decisions is to compare the correctly measured net benefits to the correctly measured net benefits from alternative uses of the moneys. Unfortunately, the reporters and politicians control the megaphone so that part of the interview rarely makes it into print or onto the air or into their decision calculus.
That isn’t surprising to me, since I don’t believe their objective is the maximization of the net social surplus but is, rather, the maximization of their own net surplus.
Again, I think Dennis and I are often simply trying to answer a different question than bobby. Bobby wants to know the value of sports to society while Dennis often simply want to ascertain whether claims of direct economic benefits (i.e. employment, tax revenues, personal incomes, etc.) to local economies made by team or event boosters are true.
While I think bobby’s question is ultimately more important than the question Dennis and I routinely answer, as long as sports promoters continue to trot out direct economic justifications for stadium and event subsidies, Dennis and I will continue to shoot these false claims down with the available data. People should be making public finance decisions based on the correct information.
When the boosters start claiming that the subsidies don’t have big direct economic benefits but are still justified purely for an increased quality of life in cities with exciting sports teams, you’ll hear a lot less squawking from us (or at least any potential squawking will use a completely different methodology).
my daddy always told me, and maybe he was right, you be the judge, “two wrongs don’t make a right.”