The Pacers, Colts and the Impact of Professional Sports on Local Economies

This morning I woke up, flipped on the television set and found a meeting of the Capital Improvement Board taking place on Channel 16. Pat Early, Vice-President of the CIB was making the case for picking up an additional $15 million operating expenses of the Conseco Fieldhouse due to the Pacers continued financial loss. He made the case that the Pacers play a critical role in Indianapolis economy, and that if that economic book-end falls, the whole downtown economy could be in jeopardy.

I picked up my Indianapolis Star, and found the Star's financial columnist John Ketzenberger was making the same argument about the Pacers. In his column he notes that "the sports/convention/tourism activity generates more than $3 billion in revenue each year." Unfortunately the $3 billion figure includes two disparate groups , professional sports teams which generally attracts an audience from Marion County and surrounding counties, and convention and tourism which primarily attracts people from outside the state.

Do the professional sports have a great impact on a local economy? The vast majority of the academic research on the subject says "no." Let's examine a couple of them.

Brad Humphreys, a professor of recreation, sport and tourism at the University of Illinois at Urbana-Champaign and Dennis Coates, a professor of economics at the University of Maryland, Baltimore County, in 2004 studied the issue and were not able to uncover a single instance in which the presence of a professional sports team has been linked to a boost in the local economy.

As reported by the News Bureau, a publication of Illinois University:

“Our conclusion, and that of nearly all academic economists studying this issue, is that professional sports generally have little, if any, positive effect on a city’s economy,” Humphreys and Coates wrote in a report issued last month by the Cato Institute in Washington, D.C. The institute commissioned the professors to study the economic impact of a deal proposed by Anthony Williams, the mayor of Washington, D.C.; under terms of the agreement, the Major Baseball League would move the Montreal Expos to the nation’s capital in exchange for a new, city-built ballpark.

The professors based their report on new data as well as previously published research in which they analyzed economic indicators from 37 major metropolitan areas with major-league baseball, football and basketball teams.

“The net economic impact of professional sports in Washington, D.C., and the 36 other cities that hosted professional sports teams over nearly 30 years, was a reduction in real per capita income over the entire metropolitan area,” Humphreys and Coates noted in the report.

The researchers found other patterns consistent with the presence of pro sports teams. Among them:

• a statistically significant negative impact on the retail and services sectors of the local economy, including an average net loss of 1,924 jobs;

• an increase in wages in the hotels and other lodgings sector (about $10 per worker year), but a reduction in wages in bars and restaurants (about $162 per worker per year).

The News Bureau article continues with Humphrey's challenge to the flawed statistics used to support professional sports subsidies:

“The wonder is that anyone finds such figures credible,” Humphreys said. “Yet decade after decade, cities throughout the country have struggled to attract or keep professional sports teams, and the idea that a team brings with it large economic gains invariably arises. As it turns out, claims of large tangible economic benefits do not withstand scrutiny.

”That’s because such impact studies often are based on skewed data. For instance, when citing multipliers – the ripple effect that each dollar spent on professional supports is projected to have on the community’s wider economy – impact studies often overstate such contributions and fail to differentiate between net and gross spending.

And, Humphreys added, such studies typically don’t consider what economists call the “substitution effect.”“As sport- and stadium-related activities increase, other spending declines because people substitute spending on sports for other spending,” Humphreys said. “If the stadium simply displaces dollar-for-dollar spending that would have occurred otherwise, there are no net benefits generated.”

In 2008, Economic Professors Robert A. Baade, Victor Matheson and Robert Baumann, reached the same conclusion as Humphreys and Coates. In their lengthy report, they explain why professional sports don't raise the revenue claimed and how supporters play fast and loose with the economic figures supporting taxpayer subsidies:

Even when ex ante studies are done in a carefully considered manner, they suffer from three primary theoretical deficiencies: the substitution effect, crowding out, and leakages. The substitution effect occurs when consumers spend money at a sporting event rather than on other goods and services in the local economy. A local resident who goes to a baseball game is spending money at the game that likely would have been spent at local restaurants, theaters, or retail establishments in the absence of the game. Therefore, the local consumer's spending on a sporting event is not new economic activity; rather, it represents a reshuffling of local spending. For this reason, most economists advocate that spending by local residents be excluded from any economic impact estimates.
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A second source of bias is "crowding out," which results from the congestion caused by a game that dissuades local citizens from venturing near the playing venue during the game and thereby reduces economic activity.
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A third source of bias comes from leakages. While money may be spent in local economies during sporting events, this spending may not wind up in the pockets of local residents. The taxes used to subsidize these events, however, are paid for by local taxpayers. The income multiplier for sporting events is likely to be much lower than for general expenditures as a result of the specialized nature of the service provided. In the NBA, for example, only 29% of players live in the metropolitan area in which their team plays (Siegfried and Zimbalist 2002).

The economics professors conclude their study:

Professional sports leagues, franchises, and civic boosters have used the promise of sports franchises, new stadiums and arenas, and all-star games or league championships as an incentive for host cities to construct new stadiums or arenas at considerable public expense. In the past, league- and industry-sponsored studies have estimated that mega-events such as the Super Bowl and all-star games increase economic activity by hundreds of millions of dollars in host cities.

Similar studies claim that new stadiums or franchises also can have hundreds of millions of dollars of annual local economic impact. Our detailed regression analysis of taxable sales in Florida over the period from 1980 to mid-2005 fails to support these claims. New stadiums, arenas, and franchises, as well as mega-events, appear to be as likely to reduce taxable sales as to increase them. Similarly, strikes and lockouts in professional sports have not systematically reduced local taxable sales. While these results, like any econometric estimates, are subject to some degree of uncertainty, they clearly place doubt on boosters' claims of huge economic windfalls. Cities would be wise to view with caution economic impact estimates provided by sports boosters, who have a clear incentive to inflate these estimates. It would appear that
"padding" is an essential element of many games both on and off the field.

While it can certainly be argued that having a professional sports teams brings with it the positive (usually) intangible benefit of raising the profile of a city, the argument that those teams have such an economic impact on the local community that they deserve hefty public subsidies is simply not at all supported by academic studies. However, locally raising the food and beverage tax and innkeepers tax so that we have some of the highest of such taxes in the country, would do more to hurt tourism and the local economy than if we have to say "goodbye" to the Pacers. Yet that appears to be the unwise direction the CIB is heading in.