Prosperity Without a Price Tag

Why is there such a large discrepancy between the predictions of event boosters and economists? The answer lies in the most basic tenet of economics: opportunity cost. In the case of so-called “Mega-Events” like a political convention or the Super Bowl, it is important to ask what the economic prospects of the host city would have been if the event had not come to town. This is especially important for an event like the Olympics, which often requires billions of dollars in new construction for specialized stadiums and other types of infrastructure. In addition to the opportunity costs of taxpayer dollars being used on construction, these new facilities often occupy prominent swathes of real estate in the middle of a city. After the event ends, that land often gets far less use than it would have if the stadium had not been constructed in the first place. Beijing’s famous “Bird’s Nest” National Stadium, for example, which cost over $400 million and at least two worker deaths during construction, now sits largely empty, with only a small portion being converted into an apartment complex and with Segway rides offered to tourists in the rest of the vast unused space.3

“But wait,” event organizers might say. “Doesn’t all of that spending in construction and infrastructure put people to work? And wouldn’t that generate even larger economic impacts for the host city, as those newly employed construction workers spend their earnings in the local economy?” For an answer to that, we must turn to our wise friend Frédéric Bastiat, who warned against this line of reasoning in his 1850 essay entitled, “That Which is Seen and That Which is Not Seen.” Bastiat writes,

• Between a good and a bad economist this constitutes the whole difference—the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee… Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, —at the risk of a small present evil. 4

If he were alive today, Bastiat would argue that the stadium construction and the workers earning money to build it is the seen effect. The unseen effect, however, is what that money could have been spent on if it was not used to build the stadium: the opportunity cost. If the citizens of Beijing hadn’t subsidized the construction of the “Birds Nest” to the tune of CN¥2.3 billion (or about $441 million, converted to 2019 dollars), for example, what else could that CN¥2.3 billion have purchased? Surely Chinese citizens would have invested their own money more wisely than to purchase unfilled apartment and Segway rental space if the money had not been taxed away from them in the first place. Similar arguments could be made for the taxpayers of Atlanta, which recently subsidized the construction of Mercedes Benz stadium for over $700 million, at least in part because they hoped to attract the 2019 Super Bowl.5

Even big events that don’t require new construction have economic impacts far below those that event promoters advertise. In a recent working paper with my Berry College colleague E. Frank Stephenson, we find that traditional economic impact estimates of events like the Super Bowl are usually huge exaggerations of the real economic benefits that accrue to a host city. We use eight years of daily data across three cities to pinpoint the effect of past Super Bowls on hotel rates, occupancy, and revenue generated for the cities hosting them. We also look at windows as large as a week before and after each Super Bowl, just to be sure that we capture the widest range of potential visitors to a city as a result of the pre- and post-game festivities. We find that the total effect of a Super Bowl is between about 35-65,000 extra room nights of lodging and $42-50 million of hotel revenue, depending on how full hotels were in the host cities before the Super Bowl came to town. Even though these numbers might sound big, they are only about 15-25% of the occupancy that traditional economic impact reports project. What’s more, these estimates are consistent with a sizeable body of research by economists that routinely finds that the real economic impacts of large events are much, much tinier than the numbers politicians and event promoters advertise to the public. As members of the fictional Dothraki tribe from the HBO series Game of Thrones say, “It is known.”

If it is so well known that these events don’t create economic prosperity for host cities, why do we still see, year after year, overinflated projections of economic impact touted by local chambers of commerce? Why do politicians still fall over themselves to woo these events to their cities? In this case, public choice analysis provides a powerful tool to understand why politicians and local business organizations behave as they do.6 Subsidies for big events are a classic example of a special interest issue: They provide a highly concentrated benefit to a small group of people (in this case, stadium owners and businesses in the immediate area) at costs that are dispersed across a much larger group of people (in this case, taxpayers). While the recipients of the subsidies have a large incentive to lobby their local officials in support of such measures, the people who actually pay for them face a small individual cost (even if the total cost is very high), so they don’t have a large incentive to object. Moreover, thanks to the very nature of the democratic process, average voters are unlikely to be fully informed about the true costs of a project, but they can see big, flashy benefits (what Bastiat would call the seen effects) that appear on the news in the form of stadiums and visitors to town. Politicians, therefore, have a strong incentive to pursue events like these, because the “seen” effects make them look good (and therefore re-electable) while the unseen effects, though detrimental to a city in the long run, will go unnoticed. They have every incentive to pursue, as Bastiat said, “a small present good, which will be followed by a great evil to come”, rather than “a great good to come, —at the risk of a small present evil.”

So the next time a “mega event” comes to your town and the newspaper (inevitably) comes out projecting huge economic impacts, don’t be fooled. The keys to a city’s prosperity are what they’ve always been: Institutions and a business environment that are conducive to long run growth, not some “race to the bottom” to lure in mega events with special favors, subsidies, and tax breaks. Adam Smith probably said it best in 1755, when he wrote:

• Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things. All governments which thwart this natural course, which force things into another channel, or which endeavour to arrest the progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical.7

In the modern context, Smith is warning us not to be taken in by lofty promises of economic impact when local governments “endeavour to arrest the progress of society” by taxing their citizens to subsidize mega events. Economic growth can’t be purchased with a stadium or a Super Bowl. Rather, it is generated from the everyday interactions of all of us, cooperating in the marketplace to exchange our goods and services with one another. Luckily, prosperity doesn’t need a price tag.

Footnotes

[1] Farkas, Karen. “Republican National Convention to transform and disrupt Cleveland: By the Numbers”, posted December 2, 2014. Hyde, Tim. “Are the Olympics Ever Worth It for the Host City?” American Economic Association Research Highlights. August 8, 2016.

[2] Kanell, Michael. “Super Bowl Economic Bonanza? Depends Who’s Talking.” The Atlanta Journal-Constitution. February 1, 2019.

[3] “Beijing Says 2 Died in Bird’s Nest Construction.” Reuters. January 28, 2018. Appelbaum, Binyamin. “Does Hosting the Olympics Actually Pay Off?” The New York Times Magazine. August 5, 2014.

[4] Bastiat, Frédéric. “That Which is Seen and That Which is Not Seen.” Selected Essays on Political Economy. New York: The Foundation for Economic Education, 1964. Also, What Is Seen and What Is Not Seen,” by Frédéric Bastiat, in Selected Essays on Political Economy.Library of Economics and Liberty.

[5] deMause, Neil.“Why are Georgia taxpayers paying $700m for a new NFL stadium?” The Guardian. September 29, 2017.

[6] Shugart II, William F. “Public Choice”. The Concise Encyclopedia of Economics. David R. Henderson, editor. Liberty Fund, 2008.

[7] Smith, Adam. Essays on Philosophical Subjects. Book IV, 25. Liberty Fund, 1982 [1755]. Quote, at the Online Library of Liberty.