Chapter 10 Subsidies and Economic Impact Analysis

1. Chapter 10Subsidies and Economic Impact Analysis To Accompany Sports Economics 2ED Rodney Fort (PrenticeHall, 2006)

2. Overview Sports team externalities can justify subsidies to owners. It can make sense to subsidize an owner that is losing money on the team. Cost-benefit analysis provides a useful framework for subsidy analysis. Sports teams do not produce enough new economic activity or development value to justify the subsidies to their owners. Buyers’ surpluses and external benefits may justify subsidies, but estimates vary.

3. Introduction Without the Chiefs and the Royals, Kansas City would be nothing but another Wichita… or Des Moines… or Omaha.” - Kansas City mayor Emanuel Cleaver, 1997.

4. The Logic of Subsidies Construction is the well-known subsidy. But don’t forget subsidies during operation Streets, water, game-day safety, crowd control. Property tax exemption. Generous revenue portions; low rent. Maintenance and capital cost forgiveness. But why subsidize billionaire owners to pay multi-millionaire players for the enjoyment of a distinct minority of taxpayers that are fans?

5. Fairness Arguments In the name of fairness, some people support stadium subsidies and others oppose them. Economics is useful in sorting out the emotion from the impacts of subsidies. Let’s start with the economic logic of subsidies.

6. External Benefits and Subsidies Sometimes production creates benefits that the producer cannot capture, called external benefits. This happens two ways in sports: Measurable (sports writer income, for example). Difficult to measure (unity, loyalty, pride). The result is inefficiency from external benefits.

7. External Benefits Add external and collectable values to get social value: MEB + V for all levels of attendance.

8. The Result: Inefficiency An inefficiently small level of output: Fan value exceeds the costs of additional output, but owners won’t give it to them because the value can’t be collected: AC*<AS*

9. Subsidies and External Benefits If it is paid to owners in a way that gets them to buy better talent and increase attendance, then a subsidy can result in the efficient level of these benefits to fans. [Taxes (penalties) could work, too, but have never been used.]

10. Subsidizing Owner Losses Our analysis in Chapter 2 makes us skeptical of losses claimed by owners. But losses are not impossible. Usually, when there are losses, firms leave the market and team owners would be no exception. Question: Is it possible that fans would be better off covering losses than losing the team altogether?

11. Answer: Sometimes If enough buyers’ surpluses exist, owner losses can be covered and, by the definition of demand, fans are better off with the team than without it: only when the area of DADB exceeds the area of DBEC.

12. Subsidy Issues Collection issues: One definition of fairness is that the subsidy is collected from those enjoying the benefits. But the difficult nature of collecting often results in others paying as well. Not just any old subsidy level: The minimum subsidy gets the job done but (as we’ll see in the next chapter) a good case can be made that more than the minimum is given to owners. So an important issue is determining the size of the benefits relative to the subsidy paid.

13. Cost-Benefit Concepts The cost side is easy relative to the benefit side: Infrastructure. Operations. Construction (stadium subsidies). Be careful to assess all of the opportunity costs, not just the dollar costs!

14. Basic Subsidy Formula Annual Subsidy = Net Operating Revenue – (Depreciation + Opportunity Cost of Funds + Forgone Taxes) Just calculating the subsidy can be informative: What is paid for the benefits received, even if the benefits are tough to calculate.

15. Calculating Benefits Economic Activity Development Value Buyers’ Surpluses and External Benefits Let’s examine each.

16. Economic Activity Benefits: EIA Economic Impact Analysis (EIA) seeks to assess the economic activity generated by the stadium and the team. Direct: At the stadium, during and after construction. After, all measurable activity generated by stadium and team operations. Indirect: benefits to other businesses that do not pay anything to the team for those benefits. *New is what matters: Is there any economic growth attributable to the stadium? If not, then economic activity benefits are zero! Especially pertinent if the subsidy just keeps the same team in town.

17. Development Value Recall K.C. Mayor Cleaver’s statement in the introduction. The idea is that pro teams are a vitality signal. And the more team, the more vital a city/county becomes. This is measured by differential growth rates: It is claimed that cities with pro teams (and more of them) have higher economic growth rates than other cities.

18. Buyers’ Surpluses & External Benefits Ask your friends: How much would you pay to keep your pro sports team around, over and above spending on attendance and advertised products, and over and above any income you earn due to the presence of the team? While difficult to measure, these values may be very important in considering the size of a subsidy that taxpayers in a given location would be willing to pay.

19. Subsidy Estimates Early on, economist Benjamin Okner used a close version of our Annual Subsidy Formula and found that 25/30 stadiums required a net operating subsidy over time. Amount: $92.5 million in today’s dollars. Later on, economists Quirk and Fort used precisely our Annual Subsidy Formula and found subsidies to 25 publicly owned stadiums around $245.5 million in today’s dollars. Zimmerman adds that the federal addition to subsidies on the Quirk and Fort sample was another $31.8 million. Subsidies are positive and more than doubled over these two periods of analysis.

20. Subsidy Estimates Most recently, Judith Grant Long at Rutgers. Using the same logic of our subsidy formula: Current dollar subsides over the length of all the periods for all 99 major-league facilities… $18.5 billion. Public share is closer to 79%.

21. The Verdict? Economic Activity: EIA’s overstate the value of economic activity. Siegfried and Zimbalist: “…independent work on the economic impact of stadiums and arenas has uniformly found that there is no statistically significant positive correlation between sports facility construction and economic development.”

22. The Verdict? Development Value: Controlling for other economic factors, based on the presence of pro sports team or the number of them: There is no difference in growth rates, and no difference in income with teams.

23. The Verdict? Buyers’ Surpluses & External Benefits: The work has only begun, but these appear to exist. Surpluses: Might be as large as $17 million annually (MLB). External benefits: $4 million annually (NHL). Tens of millions (NFL). Much more work needs to be done. But these have a chance to be large enough to cover annual payments on a $200-$300 million project.

24. Are the Costs of Subsidies Worth It? It appears that buyers’ surpluses and external benefits will be the primary determinants of the value of subsidies. But remember that the estimation of buyers’ surpluses and external benefits is only just beginning and caution must be exercised in any conclusions. Besides, big issue is whether government should spend on such issues, even if the benefits to some exceed the costs.

25. Summary Sports team externalities can justify subsidies to owners. It can make sense to subsidize an owner that is losing money on the team. Cost-benefit analysis provides a useful framework for subsidy analysis. Sports teams do not produce enough new economic activity or development value to justify the subsidies to their owners. Buyers’ surpluses and external benefits may justify subsidies, but estimates vary.