Don’t Cheer for public stadiums: a hidden concentrated benefit dispersed cost problem

Alexander C. Cartwright & Tarun Sharma

 

Those familiar with the typical arguments in favor of government intervention in Economic affairs are familiar with the market failure theories that big government advocates use to legitimate their actions. However, just as market failure theory seeks to explain when markets make systematic errors, Public Choice economics responds by pointing out government failure by explaining when government makes systematic failures.

One of the most common types of government failure is personified in the implementation of legislation that concentrates benefits on a privileged few and disperses costs amongst all other citizens. Many times the benefits of legislation are so concentrated on such a small group and the costs so dispersed that citizens aren’t even aware such policies exist- much less do citizens know that they are sub optimal. Occupational licenses, farm subsidies, taxi medallions etc. are all policies that concentrate benefits on the law’s advocates and disperse costs on the rest of us.  Most government programs that create concentrated benefits and dispersed costs are obviously things the public would not support if it weren’t for the high transactions costs of opposing them, but it has become increasingly obvious that a commonly celebrated government subsidy is nothing more than a concentrated benefit dispersed cost problem: public stadium construction and operation.

Since the 1950s, public funding has been the norm because team owners have convinced municipal governments that new stadiums are a necessity for teams to compete. Local governments are that bringing a team into a city will boost civic pride, which will in turn encourage businesses and individuals to move into the city. They also argue that new stadiums will boost commerce in the city as individuals come to see sporting events and use the services that other businesses in the city have to offer.  Even though widespread centralized economic planning is not something we continue to engage in, ‘enlightened experts’ in government still believe that they can plan and engineer public policy that will stimulate economic growth; the facts show that the results of subsidies for public stadiums are not close to what local government ‘planners’ hope for.

Judith Long of Rutgers University conducted a study on subsidization, which showed that since 1909, $32.2B of taxpayer money had been spent to subsidize the construction of professional stadiums. Most often, subsidies are given in the form of tax-free bonds and eminent domain takings. These bonds carry high interest rates that result in high debt service payments, which sap these budgets. For example, Hamilton County Ohio paid 16.4% of their budget this past year in debt services on Paul Brown Stadium, which houses the NFL’s Cincinnati Bengals. Since the stadium opened in 2000, the team has only been to the playoffs twice, but the county has had to sell off a public hospital, end a property tax rollback, and cut numerous programs.

Furthermore, evidence shows that stadium construction leads to a net loss in per capita income. Dennis Coates, in his piece “The Stadium Gambit and Local Economic Development,” examines two studies that both show that publicly-funded stadiums cause a net loss in per capita income. According to the city-specific study, a new basketball arena costs approximately $6 per person annually, and a new baseball park costs John Q. citizen nearly $10 per person per annum. There are a few reasons for this, including substitutions in public and private spending. A substitution in public spending means that the money spent to subsidize the stadium could have been spent on the maintenance of local capital and the improvement of infrastructure, which might have actually attracted more private sector activity to the local economy. A substitution in private spending means that the money that individuals spend at the ballpark is money that is not being spent at the movies, the bar, or the restaurant. The loss of these wages results in a lowered per capita income.

There is a set of three public goods that stadiums are said to create. These are touted by subsidy advocates: spillover costs, entertainment value, and civic pride. The primary motivation behind calling a stadium a public good is to qualify it as a beneficiary of eminent domain takings. Regarding spillover costs, though, stadiums aim to be an all-inclusive entertainment package—encompassing the atmosphere, concessions, and entertainment. This leads to less being spent on all other services not related to the park. Secondly, even if stadiums provide some entertainment value, we don’t see government subsidize movie theatres and arcades, despite their inherent entertainment value. Additionally, there are only a few winning teams, but a litany of bad teams. A team’s poor performance may in fact create a negative entertainment value that would exacerbate the budget shortfall at the end of every year and lower local morale. Local morale is an element of civic pride, and stadiums have been shown to increase morale. However, the emotion has been shown to be fleeting, much like purchasing a new car, and unfortunately the staying power of the stadium’s finances is greater than that of the bump in local morale.

Stadiums don’t qualify as public goods, nor do they bring economic development to a city- except in rare instances when a team happens to be really great (yet a team’s performance is not a result of public versus private funding of their stadium). Stadiums continue to be publicly subsidized because the benefits they do create are concentrated on a few powerful and politically influential individuals – the politicians who advocate for the stadiums will win votes, donations, and other favors from all those businesses in a position to gain from the stadium, and of course the stadium owners who don’t have to meet the demands of public investors but simply please local governments. If the stadium turns out to be a net loss – economically- the team owner can simply move his team and the politician will be on to a new office.

Sporting teams play a significant part in creating a local identity and enriching a cities culture, but there is no reason why subsidizing stadiums is a necessary or desirable function of government; in fact some basic public choice theory illustrates that the incentives team owners and politicians face encourage them to behave in ways that aren’t in the public interest.