Three Hard Economic Arguments Against Public Spending on Sports Facilities

Starting to look cool, but what else could $255 million in City money buy?

Starting to look cool, but what else could $255 million in City money buy?

As the girders of the new “Golden One Pavilion” arise from the hole in the ground where the eastern portion of Sacramento’s downtown plaza used to be, it seems grouchy, even vaguely disloyal, to say that this gorgeous new public and private investment is almost certain to fail to contribute to regional economic growth in and around Sacramento. But even though thoughtful people can and do make non-economic arguments for spending on the project (I ventured three of my own in a previous post), the painful truth is that economists not working as paid consultants to the professional sports industry overwhelmingly find that sports facilities are a poor investment of public dollars. Here I’m going to outline three reasons why.

Economists like theories, and the most basic argument against spending on new professional sports facilities has to do with a theory sometimes labelled the “substitution effect.” The idea here is that new sports arenas simply induce people to substitute spending on professional sports for dollars they might

Weird how this dome theater, which I've always liked, is coming down just as the Kings arena is going up. In economic terms spending at at the new arena will substitute for spending that would have happened here (and elsewhere) unless we see regional income growth that increases the size of household entertainment budgets

Weird how this dome theater on Ethan Way is set to come down just as the Kings arena goes up. In economic terms spending at at the new arena will substitute for spending that would have happened here (and elsewhere) unless we see regional income growth very unlikely to emerge from even the best pro sports franchise.

otherwise have spent on restaurants, movies, musical events, outdoor recreation, or other entertainment options. Stated simply, the first economic argument against spending on sports arenas is that sports facilities simply redistribute a fixed pie of household entertainment budgets.

To argue against this theory, one would need to make the case that sports facilities create income and job growth sufficient to grow the pie of dollars households across the region have to spend on entertainment. Regional-level economic growth, however, comes from an interconnected process of skill specialization, innovation, and resulting out-of-region export activity. None of this is likely to emerge from even the most successful basketball team.

The second economic argument against spending on professional sports facilities is empirical: arenas and stadiums are not correlated with growth in income or jobs. Here the academic research is almost overwhelming in its unanimity. See, for example, this famous literature review by University of Maryland economist Dennis Coates, which finds, as Coates puts it, that “stadiums and franchises are an ineffective means for creating local economic development, whether measured in income or job growth.” (Coates article)

It turns out that studies looking across space/place have failed to establish that there is any more income and job growth in regions that have invested in new sports facilities than in regions that haven’t invested in such facilities. Studies looking across time within regions, similarly, have failed to establish a correlation between sports facility construction and increased income and job growth after such construction. In the face of this litany of rigorous after the fact (“ex post”) studies from economists writing in peer-reviewed journals, it is difficult to impossible to take seriously any glossy study describing the supposed future multiplier effects of new arena construction.

One could stop here, but there is a third argument economists make against new sports facility construction that establishes a point that is as obvious as it is important: sports facilities sit unused much of the time. Put another way, given that state and municipal governments have limited resources available for new infrastructure investment, there is a very substantial opportunity cost to investing those resources in something that (unlike say new schools or roads or water infrastructure) is used only a couple of nights a week at best.

College of the Holy Cross economist Victor Matheson presents a clever take on this last argument in an extended 2014 opinion piece for FiveThirtyEight dealing with last year’s men’s world cup in  Brazil (Matheson article). After noting that, “From a development standpoint, the only thing worse than an expensive, publicly financed stadium is an empty, expensive publicly financed stadium,” Matheson goes on to cull data from last seven world cups in presenting two novel (to me) but revealing data measures.

The first of these generated statistics is the “Stadium Use Index,” or SUI. The second is the “Fan Cost Index,” or FCI. Table 1, below, shows how Matheson calculated these measures.

Screen Shot 2015-06-24 at 4.31.35 PMFor a detailed description of Matheson’s findings, I recommend turning to the original FiveThirtyEight piece. Among the highlights, however, is that Matheson projects an average FCI of over $1,000 in stadium cost construction per fan in attendance at Brazilian soccer stadiums four years after last year’s world cup, or in 2018. One thousand dollars per rear end in seat, obviously, is a very large price tag for stadium construction in a developing country like Brazil. Matheson’s analysis shows that other countries have shown somewhat less problematic SUI and FCI numbers after their world cup experiences, especially the United States, which largely used existing facilities for the 1984 World Cup, and Germany, where Bundesliga teams have packed stadiums year in and year out after the 2010 World Cup, just as they did prior to the cup. On the other hand, as Matheson points out, it’s hard to even imagine how low the SUI will be and how high the FCI will be for a world cup in a small country like Qatar that lacks well-developed professional sports leagues to fill new stadiums after cup play.

What will the FCI and SUI look like for the new Kings arena? I haven’t yet run the numbers, but we do know that the City contribution to the arena project is capped at $255 million of what is expected to be a $507 million total project cost, not including the value of parking and billboard space essentially given away to the Kings. Based on this information, it should not be too hard to calculate a FCI for the Kings arena. Readers can expect to see one in a future post.