Finding the Bottom Line for Sports: Observations from an Academic

New professional sports venue proposals are major business stories in many cities. As soon as one such controversy gets settled, another one quickly pops up elsewhere.

I have examined the details of many stadium financing deals and economic impact studies, and done scores of interviews around the country. The details differ, but the basic story surrounding stadium or arena deals is similar.

In my experience, journalists sometimes overlook several important issues when covering these stories. Here, I provide perspectives on economic issues surrounding the financing and construction of stadiums, and practical advice and specific questions to ask to get to the heart of the matter.

The controversy stems from public subsidies used to construct and operate professional sports facilities. U.S. professional sports teams are profitable, privately held companies. And yet, few have made significant financial contributions to stadium construction.

Unlike other entertainment industry firms, which operate in a competitive environment, professional sports leagues use their monopoly power to extract large subsidies for their stadiums from state and local governments. Some critics point out these subsidies amount to corporate welfare.

Unlike manufacturing plants or warehouses, professional sports teams generate non-financial benefits like civic pride and world-class city status for their host communities. Yet these benefits don't seem to justify the public spending needed to build a 21^st century stadium. Instead, proponents justify those subsidies with claims of economic benefits the surrounding community will collect. According to these claims, a new facility will create thousands of new jobs, generate millions of dollars of new income for residents and add additional millions of dollars to state and local coffers.

The decision facing local officials appears to be a "no-brainer:" For the bargain price of $500 million to $2 billion, the city keeps its beloved sports franchise, gets a shiny new facility and a powerhouse engine of local economic development.

Unfortunately, economic research consistently finds no evidence supporting these claims.? My own research, published in peer-reviewed academic journals, and based on past economic performance of all U.S. cities with a professional football, basketball or baseball franchise since 1969, concludes that professional sports teams and facilities increased employment and earnings in only one small sector of the economy -- the recreation and amusement industry. It actually reduced earnings and employment in related industries like hotels, bars and restaurants.

Overall, professional sports reduced real per-capita income in their metropolitan areas by about $40 per year.

Now, the Evidence -- Two Competing Sources

A proponent's primary source of evidence that professional sports franchises and facilities generate significant new economic benefits is typically an "economic impact study." Economic impact studies are forecasts. They use relatively simple methods to quantify complex economic events. There is no widely accepted standard methodology for generating these forecasts, so the authors face many choices in how to run these studies, ultimately affecting the size of expected benefits.?

To my knowledge, nobody has ever done a retrospective study of the accuracy of these forecasts -- perhaps thanks to the lethargy induced by the lavish buffet and open bar at the gala stadium opening party.

The forecasts are meant to immediately convey that the proposed sports facility will produce large tangible economic benefits to a wide audience. They focus on the final results and bury key details deep in appendices. Even though these studies are forecasts, they are frequently treated as factual by local officials, team spokespeople and the local media.?

Contrast economic impact studies with polling results, which include a margin of error that recognizes the unavoidable uncertainty in the polling process. Forecasting economic impact -- like any forecast -- also involves unavoidable errors and uncertainty. But I have never seen a margin of error in an economic impact study.?

On the other hand, the primary source of evidence that professional sports teams and facilities do not generate significant tangible benefits is scholarly research published in peer-reviewed academic journals.

Academic research goes through the peer review process, and papers with important flaws in methodology, data or technique are typically not published. But peer-reviewed academic papers are not accessible to non-specialists, so reporters rarely see them. Researchers care about both the conclusions and how those conclusions were reached, so academic papers contain mathematical equations, long detailed methodological discussions, footnotes and citations.

So Why the Striking Difference?

Journalists face two competing claims: Impact studies forecast large tangible economic benefits from professional sports, while published research finds no evidence of that. Stories about proposed new stadiums must address these different conclusions. Based on my experience, these differences can be reduced to three issues:

A lot of economic activity occurs in and around sports facilities. Thousands attend games, and nearby bars and restaurants are packed on game day. People spend a lot of money in and around a stadium. But all this spending is not new spending. Spending by local residents is probably not new spending.

People have fixed entertainment budgets that can be spent on eating out, bowling, movies or video rentals. A new stadium shifts entertainment spending away from outlying neighborhoods to the ballpark. So much of the observed economic activity would have occurred elsewhere, although impact studies often label such spending as new.

The new economic benefits generated by a sports facility concentrate in one sector of the economy: the recreation and amusements industry. The economic winners from these projects are people who work in the stadium -- team owners, coaches, players, ushers, concessionaires and cleanup crews. So the benefits are easy to observe.

But there are also economic costs related to professional sports that offset those benefits. These costs -- things like fewer meals served at neighborhood restaurants located far from the stadium, fewer patrons at neighborhood bars on game night and other relatively small events -- are scattered and hard to observe, and often dismissed as unimportant. But they are inevitable results of a city redirecting local entertainment spending to an area surrounding a sports facility. These costs are omitted from economic impact studies, but across a metropolitan area and over time, they add up.

Economic impact forecasts are subject to many types of uncertainty. A good economic forecast explains that degree of uncertainty in an understandable way. Forecasts are not very useful without that estimate of uncertainty, and an omission of that suggests a false degree of accuracy. A thorough journalist should highlight this omission.