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The Economics Of Professional Sports Franchises And Stadium Sports
The first waves of government subsidization for the purpose of stadiums dates to between 1917 and 1926, which created the first boom in stadium construction. In 1926, an article entitled The Playground said the goal was for the stadium to have as broad a use as possible. (Coates, 294). The rationale for the facility was to serve the broad public interest by hosting events such as pageants, parades, and festivals, as well as sporting contests of all sorts from track and field too football and baseball. Stadium subsidization today focuses on a single use, hosting professional sports franchises, which usually have substantial control over the facilities availability for any alternative other events. The article notes that, ‘Not only universities but cities and high schools and private agencies are also joining the stadium ranks and building large structures to accommodate the crowds who attend the athletic activities, festivals, pageants and other large community events’ (Coates, 295). A building boom was in progress at the time as the number of stadiums rose from 11 in 1917 to 70 in 1926. By contrast 65 ‘new’ facilities have opened since 1990 and in the five years from 1921 until 1926, 56 stadiums had been built. Construction of the 70 stadiums built between 1917 and 1926 cost in total about $295.65 million in today’s dollars (Coates, 294). The Playground article refers to shape and size as the most important characteristics of stadiums that communities should consider before construction. The modern day focus on sport-specific stadiums places far less value on stadium adaptability than in the early 21st century. The transition from public provision of venues available for a wide array of events to public subsidization of privately controlled facilities is fairly recent. The change occurred gradually and it may have begun to occur with baseball-franchise relocations such as the Braves relocation in 1953 from Boston to Milwaukee, the Browns in 1954 from St. Louis to Baltimore, or the Athletics in 1955 from Philadelphia to Kansas City. In these cases the new or recently renovated publicly owned facilities were made available to the baseball franchises on quite generous terms. For example, The New York Times reported on March 15, 1953 that the Braves were offered a flat rental of $1,000 for the first two years on the new County Stadium in Milwaukee.
The most basic question in the research about stadiums, is the extent to which these expenditures contribute to the vitality of the local economy. It has been argued by economists that public ownership of stadiums was justified if, private enterprise could not provide the service which the public demanded and at the same time realize an adequate profit on its investment (Coates, 3). This discussion raises the question of the possible theoretical justification for the subsidies we see today. Subsidies can be justified either on efficiency or distributive grounds. A subsidy can be justified if the unsubsidized market supplied to little of the desired good for society. This is the classic situation of positive externalities, the subsidy would induce greater provision. Alternatively, subsidies could be justified as a means of redistribution such as how public education is paid for out of taxes. Wealthier individuals paying more in taxes than the cost of the services they receive and poorer individuals paying less than the full cost of the education. To justify a stadium subsidy on efficiency grounds requires an explanation of how marginal social benefit from the stadium exceeds the marginal social cost. The debate often ends up focusing on building or not building a facility, not about increasing the seating capacity by an additional seat. The market outcome may be no construction of a stadium or an arena at all, and consequently no sporting events. This is the market failure justification implicit in the build it and they will come strategy of cities whose intent is to poach an existing franchise away from some other city or to induce a professional league to grant an expansion franchise. It is also the justification for a city to replace an existing facility to keep the current team from moving. A recent example from the NBA illustrates the kind of poaching that often occurs. The Seattle Supersonics were unhappy with their former home and sought to have the city of Seattle build a new arena. Seattle refused the attempts and the team explored moving, which would require breaking their lease with the City of Seattle. A lawsuit ensued that was settled out of court, with the team moving to Oklahoma City and having too paying Seattle tens of millions of dollars to break the lease. Oklahoma City attracted the team by promising to spend $100 million renovating its existing arena to bring it up to current NBA standards and an additional $20 million to construct a brand new practice facility. (Coates, 250). The existing arena in Oklahoma City was built without an occupant during the 1990s as part of a downtown redevelopment plan. Professional sports leagues restrict entry to the market and through restrictions can play one city off against another to extract the best subsidy deal from the most desperate. It is cases like this one that show how teams exploit the cities where politics can most effectively tap the taxpayers into paying for new constructions.
It can be stated that economists arent very fond of subsidies for sports. The consensus among economists on the question of sports facility subsidies likely stems from the basic economic intuition that government subsidies ought to address some kind of market failure and without one economists sense that there is no compelling case to be made for sports subsidies. The argument for a subsidy always comes from a local context, when a city wants to attract a new team or hold on to an existing one. One can also assess the subsidy argument from a global perspective. The Seattle-Oklahoma City case is a perfect example of the case against subsidies. The Oklahoma City offer was a much larger subsidies than Seattle was willing to make, so the franchise left Seattle for Oklahoma City. This resulted in the basketball fans of Seattle losing, basketball fans in Oklahoma City gaining. Perhaps there are more fans in Oklahoma City than in Seattle or possibly fans in Oklahoma have a more intense preference for basketball than fans in Seattle, so there might be a gain in average welfare resulting from the franchise move. However, a franchise changing cities is a zero sum game for basketball fans. The team is drawn by the larger subsidy that is available in Oklahoma, but the move is not a Pareto optimal improvement in the allocation of resources. From a social perspective, an improved approach to maximizing welfare might be for the NBA to increase the number of franchises so that more basketball fans across the country had their own teams to root for. That, of course, is not in the best interests of the current league members who derive substantial benefits, like the subsidies, from their restriction of supply.
If the overall sports environment has limited impact on the local economy, perhaps a one-time large attendance event like the Super Bowl or hosting an Olympic Games will aid additional growth and increased development of the local economy. However, evidence on this issue is mixed. Coates and Humphreys (2002) examined the impact of hosting the Super Bowl as well as participation in the league playoffs or championships in baseball, basketball, and football. In their research they found no true statistically significant effect on local income. The one effect they did find to be statistically significant for the home city of the winner of the Super Bowl. In the year the team wins, income in the home city statistically is larger than it would have been. Unlike the economic impact of sports teams and facilities have on incomes and employment, there is some evidence that mega sporting events like the Super Bowl or the Olympic games may have a beneficial effect for urban economies. However, this positive evidence is offset by compelling evidence that these events also simply re-distribute spending to different parts of the urban economy much like the results building of the stadium end up producing. As such evidence of positive economic benefits from mega sporting events should be considered weak at best and more research should be done if large scale events truly have major economic benefits.
Calls for subsidies at the local level come from interest groups and their consulting firms who talk up local benefits of sports franchises, stadiums, and mega-events. The promotional ideology often suggests that if the city attracts or retains a sports franchise, its people derive specific economic benefits from the presence of the team, including more local jobs, higher local income, and increased local tax revenues. In addition, some promoters suggest that the presence of a franchise generates intangible economic benefits for the city. Promoters argue that having major league sports raises the prestige of the city and brings added national recognition that enhances the business prospects and even the self-esteem of the community. An example of this is, Oklahoma Citys pursuit to raise the city sales tax by one cent to fund improvements to its existing arena the campaign went by the name Big League City . The possibility of a game being broadcast nationally from the stadium or arena is touted as an advertisement of the citys virtues and a great way to show off the cities positive aspects. These benefits are used to justify a local government subsidy for the construction of the facility. Within the promotional ideology, proponents of stadium subsidies argue that subsidies are warranted because of the local economic development benefits of building a stadium or arena, including the big league city benefits. (Coates, 299). This ideology does not support subsidies based on the consumer surplus that is derived by game attendance or from consumer external benefits that occur from activities such as talking about the teams or following them through multimedia sources. The economic development benefits of interest to boosters are predominantly identified with income and job creation, and sometimes as increased tax revenue. Because the proponents of stadium subsidies focus on jobs, income, and tax revenue enhancement, the academic literature mostly focused its attention on these purported benefits. Some subsidy advocates have implicitly justified them as enhancing redistribution. The justification is that building stadiums or arenas downtown, in the central city of metropolitan areas, will bring economic activity to those neighborhoods and aid in their revitalization. Downtown areas have become stagnant and decayed over time as people and businesses moved towards the suburbs. Those areas are argued more deserving of assistance, even at the expense of the outlying areas. This justification rests on the downtown stadium bringing new job opportunities as well as new businesses into the decaying downtown area.
There is no doubt that professional sports franchises and stadiums generate a significant amount of economic activity but is the impact on the local economy positive, negative, or neutral economists would ask. Proponents of this base their arguments on that public subsidization for sports stadiums is justified based on the economic impact it will have on the community. A potential new stadium holds the promise of new development taking root nearby, such development might include new restaurants and bars or commercial uses like condominiums and office space. This will cause interest in the area to grow which in turn grows the value of existing commercial and residential property. Stadium construction can be proposed as an economic development initiative by possibly choosing to build in an underprivileged or underdeveloped area. The goal is that the new economic activity created and increased traffic will lead to revitalization of the undeveloped areas. In addition, all the extra spending and income gets taxed when it is spent and earned and respect again. The additional tax revenue then offsets some of the cost of the subsidy. Proponents of the subsidies often suggest that professional sports and new stadiums help build civic pride and can be beneficial marketing tools for the city’s image as people around the country to watch games televised from the new stadium. In spite of these major economic arguments, economists generally oppose public subsidization of professional sports stadiums. It is the use of public taxpayer money in the form of these subsidies that economists generally oppose. Most economists choose to highlight an important pitfall when considering the economic impact of stadiums that is usually left out of the equation; the failure to include opportunity costs. The opportunity cost is the value of the next-best alternative compared to the decision that is made. In the case of subsidizing sports stadiums, both ‘seen’ and ‘unseen’ economic activity should be considered as opportunity costs. The unseen spending tends to be overlooked. Consumer spending at a sports stadium is easy to see as it is obvious and measurable. What is unseen is how consumers would spend their dollars otherwise. If they were not spending on sporting events they would instead spend their incomes on museums, movies, concerts or restaurants. Due to the fact that consumers tend to have very limited entertainment budgets, dollars that are spent at a new stadium would not alternatively be new spending but rather diverted spending. Included in the unseen costs, taxpayer money to subsidize a stadium also has opportunity costs. Government can choose to spend taxpayer money on a variety of things that help public welfare things like roads, bridges, airports, law enforcement, education, environmental improvements, parks, all of which have benefits for society. Economists as a result often suggest options that increase productivity for the society as a whole and see this spending as investment instead of redistribution. Economists prefer these types of investment because the increased productivity it provides has the potential to increase the rate of economic growth and increase the standard of living for the society as a whole.
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