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April 12, 2001

The Imbalance Sheet

The New Stadium Fallacy

by Keith Law

Recently, I had the chance to speak extensively with Brad Humphreys, Assistant Professor of Economics at the University of Maryland, Baltimore County. Humphreys has spent several years researching the true economic impact of sports teams, particularly on the debate over the merits of publicly funding new facilities for privately-owned sports franchises. His most recent work, The Stadium Gambit and Local Economic Development, debunked many of the common myths about the economic impact of new sports stadia.

Baseball Prospectus: Tell us a bit about the project, and how you gathered the data for the study.

Brad Humphreys: My co-author Dennis Coates and I were initially motivated to do this research when the then-Cleveland Browns (now World Champion Baltimore Ravens) moved to Baltimore. We read the economic impact study funded by the Maryland Stadium Authority and both thought "there is no way that attracting a professional sports team to Baltimore will have this kind of economic impact." We also looked at the existing academic literature (executive summary: no measurable economic impact associated with pro sports) and thought there was some room for improvement.

In our research, we examine the economy in all 37 cities in the U.S. that had a professional football, basketball, or baseball franchise from 1969-1997. We quantify the "professional sports environment" in each city by constructing a bunch of variables to try and capture the different dimensions of professional sports: how many and what type of franchise, when did they leave or arrive, how big is the stadium or arena, when was it build or renovated, etc. There are about 30 different variables for each city in the sample in each year. Because there is no single number that can quantify the sports environment in a city, we tried to quantify this in as broad a was as possible.

The rest of the economic data is publicly available from the U.S. Department of Commerce as part of the Regional Economic Information System (REIS). Real income, population, employment, and other related economic variables for each Standard Metropolitan Statistical Area (SMSA) in the U.S. for the past 30 years or so are included.

We basically wanted to do a careful retrospective study of the determination of income in cities that had professional sports franchises over the past 30 years. Forget about the overblown claims in the economic impact studies, what actually happened in those cities? We would statistically control for all the factors that might affect inflation-adjusted income per person, and determine how much of the change could be attributed to professional sports and how much could be attributed to other factors, based on an econometric model.

As it turns out, we found that professional sports tended to lower income by a little bit. But the decrease was important in a statistical sense--not attributable to random variation.

BP: What was the fundamental conclusion?

BH: On average, professional sports reduces inflation-adjusted income per person by a small but statistically significant amount, roughly $40 per person per year. That figure is for every person in the metropolitan area, not just people who attended games. So professional sports do not form the basis of a viable local economic development program. ("The Growth Effects of Professional Sports Franchises, Stadia, and Arenas," Journal of Policy Analysis and Management, Vol. 14, No. 4 (Fall 1999), pp. 601-624)

Using professional sports strikes and lockouts as a natural experiment, there is no evidence that local economies suffered as a result of these events, further questioning professional sports as an engine of economic development. ("The Economic Consequences of Professional Sports Lockouts and Strikes," Southern Economic Journal, Vol. 67, No. 3 (January 2001), pp. 737-747)

In a recent working paper, we find that, based on disaggregated data, although workers in a narrowly defined sector (Amusements and Recreation - SIC 79 - the Standard Industrial Classification System sector that contains professional sports teams and stadium operations) earn more, and employment is higher in this sector, earnings and employment are lower in other related sectors like services and retail. This is consistent with the idea the spending on professional sports is not new spending; it's just a reallocation of local spending on other entertainment like going to a movie or out to dinner.

BP: How is it that owners and politicians manage to fudge the data so easily?

BH: Because nobody ever calls them on it. The media read these economic impact studies and take them at face value. They report the results as if they are facts and not wild guesses or outright overstatements.

Part of the problem is that the impact studies use methodologies that might appear reasonable to a layperson. It's sort of like using batting average as the ultimate measure of a baseball player's offensive output.

Also, nobody ever goes back and looks at how many jobs were actually created, or how much additional tax revenue was generated. There's just no assessment. Except in the academic literature to which not many people pay attention.

BP: Are there any situations in which a publicly-funded stadium might make sense for a region or municipality?

BH: Sure. There are non-monetary benefits associated with professional sports. Economists refer to these as "consumption benefits:" The image of a "world class city," civic pride, good feelings, some local thing that residents can identify with, etc. These things have some value to the residents of a city. If a municipal area values these things highly enough, then they should go ahead and subsidize a stadium and franchise. But it doesn't make sense to subsidize professional sports on the grounds that it will improve the economic well-being of the residents of the area.

BP: What kind of reaction have you gotten to the study from readers, politicians, or baseball types?

BH: Politicians and local development types refuse to believe the results and often say, "You are clearly wrong," even when they have not read any of the papers. I guess that they are smart enough to understand the methodology and statistical analysis by osmosis, or some such way. I was booed a little when I gave a talk at a local economic development conference recently. A politician from Louisville, Kentucky, came after me pretty hard on a local call-in show a few months ago (Louisville is still trying to attract an NBA franchise) and said that I obviously didn't know what I was talking about.

My co-author and I were down at the Cato Institute for a symposium last week. The symposium was titled "Home Run for Corporate Welfare: Taxpayer Subsidies for Sports Stadiums." Several executives from the Virginia Baseball Stadium Authority (the people trying to bring a MLB team to DC/Northern Virginia) were there, and those guys were openly hostile to our research. When we were introduced, they referred to us as the "infamous Coates and Humphreys." Of course, they're trying to get the taxpayers in Virginia to pony up $300 million for a baseball stadium. But it was a little surprising to get that kind of reaction.

Other economists typically say, "That's about what I expected" or "You confirmed my prior research about this." A respected economist was recently quoted in Business Week saying that he thought our research was a significant cut above previous academic research in the area.

I gave up my Orioles season tickets shortly after the Albert Belle signing, so I'm not sure what Peter Angelos thinks. Actually, I've not gotten much feedback from any pro sports people. People who know me also know that I am a huge baseball fan and understand that I'm not against professional sports or even the public subsidization of stadia. I just do not believe that these subsidies are justified on the grounds of direct economic benefits flowing from professional sports.

BP: Have you been asked to comment on any pending stadium deals?

BH: I testified before the Massachusetts state legislature regarding the proposed new Fenway Park last summer. I probably get five calls a month from print reporters asking for comments on a stadium deal somewhere or other. After appearing on the front page of the Wall Street Journal last summer I did about 10 radio interviews. My co-author was interviewed on TV in New Orleans at the end of January.

BP: In your mind, what research remains to be done on this subject?

BH: There's a lot of additional research to be done. Stadiums clearly have a differential impact on different markets in a city. The bars and restaurants immediately surrounding a ballpark clearly benefit. But the negative overall impact we find suggests that other markets in the city are also affected. How? And by how much? Some other people are pursuing the contingent valuation (or willingness to pay) of the non-pecuniary benefits angle, which is important. How much would taxpayers in a given city be willing to pay to keep a team? How much do they value the non-pecuniary benefits flowing from a particular team?

I'm currently working on a project that uses microeconomic data--data data on the earnings and other characteristics of individual people who live and work in cities with professional sports--in order to get a better idea about the transmission mechanism through which professional sports has a negative impact on local economies.

To learn more about Mr Humphreys's research and results, check out the following articles:

"The Growth Effects of Sports Franchises Stadia and Arenas," (with D. Coates) Journal of Policy Analysis and Management, Vol. 14, No. 4 (Fall 1999), pp. 601-624.

"The Economic Consequences of Professional Sports Lockouts and Strikes," (with D. Coates) Southern Economic Journal, Vol. 67, No. 3 (January 2001), pp. 737-747.

"The Stadium Gambit and Local Economic Development," Regulation, Vol. 32, No. 2 (June 2000), pp. 15-20. http://www.cato.org/pubs/regulation/regv23n2/reg23n2.html

Keith Law is an author of Baseball Prospectus. You can contact him by clicking here.

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