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Announcement | Audio | Transcript Transcript

Pro Team Sports: Are Politics and Corruption Winning?
March 7, 2000
Roger G. Noll, Rodney Fort

Contents

Introductory Remarks by David Theroux

It is pleasure to welcome you all tonight, despite the rain, despite the election competition we had. We may have other people straggling in depending on the weather and so on, whether they’re happy with the vote outcome, I suppose. For those of you new to the Independent Institute, hopefully you picked up a packet when you registered.

The Independent Institute is a non-profit public policy research institute. We are an academic research institute and produce many books. We have a quarterly journal called The Independent Review. Steve Shmanske, who’s here tonight, has been a contributor to it. And we organize many conference and media programs based on that work. Our interest is not to play politics or to get involved in battles of different types, but more to hopefully illuminate different ideas and get to the heart of issues that are affecting people.

Also in your pack, you’ll find a sheet on today’s program, but also it lists two upcoming events. The next Policy Forum that we’ll be holding will be on April 25th. It’s going to be a debate on the issue of affirmative action. It’ll be a debate, “Affirmative Action: Pro and Con,” between two regents of the University of California—Ward Connerly and Bill Bagley. And Ward Connerly has a new book that’s just come out, Creating Equal, so we expect that one to be a ferociously interesting one. The second program, “Pearl Harbor: Official Lies in an American War Tragedy?”, is going to be on the issue of war and government propaganda and the State itself. The two speakers for that will be Robert Stinnett who many of you may know used to be a reporter here at the Oakland Tribune. He’s the author of number of books, the most recent of which from the Free Press is a book called Day of Deceit, and is based on the new releases of information on the archives regarding Pearl Harbor.

Tonight’s program is, I think, a fascinating one on many levels. Our two speakers are renowned sports economists and economists in other fields. Roger Noll and Rodney Fort will be examining issues pertaining to professional sports teams, stadiums and many other issues. Roger is co-author with Andrew Zimbalist of the book from Brookings that some of you have picked up called Sports, Jobs and Taxes which have just come out in paperback, and Rodney is co-author of the new book with James Quirk called Hard Ball: The Abuse of Power in Pro Team Sports.

Over a couple of hundred years ago, as many of you know, Adam Smith wrote a book called The Wealth of Nations, at least that’s the shortened title, and in the book, he critiqued the use of government privileges as, what he considered to be, the source of monopoly. The system then was known at mercantilism, and it was a system of government subsidies and tariffs and royal privileges of licensing and many other benefits that are bestowed upon certain people in society, largely business people, who were considered to be favored in some respect, and those that didn’t have that privilege bestowed upon them, simply could not pursue either those occupations or they’re at a distinct disadvantage. In so doing, Smith showed that government privileges resulted in monopoly that made it difficult for other firms to compete. It would be similar to a situation if The Independent Institute suddenly was awarded in our day, hundreds of millions of dollars and we were given a coliseum to hold events like this in, and many other benefits. How that would affect other sources of information in society, I can leave that to you. Anyway, Smith’s proposal was to abolish such privileges, and that what’s led to a lot of the Industrial Revolution, in our opinion, as far as the liberalization of economic behavior and the end of autocracy.

Many people have claimed that professional sports are different, and especially this is true on the municipal level. As you know, Americans love pro baseball and football and hockey and basketball, and increasingly other sports like soccer and golf and so forth. The question is, has this passion blinded them to the realities of the way professional sports interfaces with government policy?

In the Bay Area here, there are numerous different sports complexes. There’s a new one going up in Sacramento right now. Of course, there’s one about to be opened in San Francisco. These different stadiums and other complexes are involving governments in different ways, and that’s part of what our discussion will be tonight.

I was going to start with Roger Noll, and Roger is the Morris Doyle Centennial Professor and director of the Public Policy Program at the Department of Economics at Stanford University. He received his BS from Caltech, and his Ph.D. in economics from Harvard. In addition to the book, Sports, Jobs and Taxes, I mentioned, he’s the author of the book Challenges to Research Universities, and many articles and scholarly journals. His current research work focuses on studies of the legal system and judicial review, the politics of utility regulation, but especially this field of sports. So I’m delighted to introduce Roger Noll. (applause)

Roger Noll

It’s terrible when the person who introduces you encapsulates your whole talk in about three sentences, because now I’ve got to figure out a way to keep you awake through the 45-sentence version of exactly what he said about Adam Smith. But basically, the point is right. If we think about the sports business, it’s an entertainment business. It’s not unlike actually a lot of other aspects of the entertainment business which are recipients of public subsidies, the opera, some theaters. Many communities provide public subsidies of theaters. They provide subsidies of symphony orchestras and ballet, and there’s a whole bunch of other things in the entertainment business that receive some sort of public subsidization. And in that sense, one might think, “Well, gee, maybe this is sort of like that category.” On the other hand, the vast majority of the entertainment business does not receive subsidies.

In fact, the things that account for most of the money have to do with motion picture theaters, and movies, and television, and, at one point a long time ago, the television industry was given the electromagnetic spectrum, rather than having to buy it, as has been the case for radio telephones. But aside from that sort of once-and-for-all giveaway of the spectrum, it’s not subsidized either. So the very first point we can ask ourselves is, is this really a smart thing to do? Is it smart to pick out one particular industry, namely professional team sports, which receives the lion’s share of these subsidies, and provide public subsidies for that, and thereby competitively advantage it against other parts of the entertainment industry which have to compete for your dollar, your entertainment dollar without such subsidies? And indeed, as David said, there’s been a number of arguments advanced as to why indeed it might be so, that it makes sense to subsidize professional sports.

Now what both Rod and I are going to tell you is that as an economic matter, the arguments put forth as to why one needs to subsidize professional sports are fatuous. This is fact, just a straight forward subsidy. It falls in the same category of most other subsidies we think of, such as agricultural price supports and whatever, which is that a particular interest or a particular industry finds itself in an important bargaining power position relative to elected political officials and simply extorts them, simply demands these subsidies or else it will go away and play its games somewhere else. But let’s go through what the arguments are and sort of figure our why we will tell you, we will sing this song to you about the illegitimacy of these subsidies.

First of all, we can just quickly dismiss the view that indeed a local government will generate sufficient tax revenues from the business surrounding the stadium, not only the in-stadium activities but the gas stations and sports bars and whatever that are built in the neighborhood of the sports facility. There has yet to be a stadium built in the last 20 years for which that is true, and the reason it’s true is this point I made before about competition. That sports facilities basically are filled with people who live in the local community. The act of creating the sports facility doesn’t cause them to have more income to spend. It reallocates the income they spend, and it pretty much reallocates the discretionary income they spend on recreation and entertainment from other activities to attending the sporting events.

So as a result, for every increase in the sales of gas stations near the sport facility, there’s a decrease in sales of gas stations three or four miles away, for every increase in sales of sports bars and restaurants near the sport facility, there’s an equivalent decrease in places elsewhere in other neighborhoods that are not near the sports facility. All the evidence indicates that indeed there is no effect at all on the local economy in terms of total expenditures on recreation and entertainment, that indeed, all that it does is reallocate it from other things into the sports team. And there may be a slightly higher tax rate on tickets to sporting events. Around here it typically is 10 percent instead of the sales tax at 8 1/2 percent, so there may be a little of incremental tax revenue, but not enough to pay for this facility.

Typically, when citizens are provided with ballot initiatives in which to evaluate whether to support—where they have to vote on providing a public subsidy to a stadium, they’re presented with financial analyses that say, “Well, we’re going to collect this much money from various kinds of taxes on tickets and all the rest, and that’s enough to pay for the public indebtedness arising from the sports facility.” But typically the problem with that is that it measures the gross income flows in the stadium rather than the net. It doesn’t take account of the reductions in tax revenues it will accrue from other places, and moreover those financial projections are always completely based on presumption that the stadium will sell out throughout the entire life of the bond. That is to say, if we float a 30-year debt, literally every single seat in the stadium will be sold for literally every game for that entire 30 year period.

In reality there is an “attendance effect,” an important attendance effect from building a new facility, but it only lasts for about five, six, or seven years. Basically what a new sports facility does is cause people to want to go to games a little bit more when it first opens to see what the new facility is like. Typically once they get there, they see that like every other thing that goes on in the American economy, there’s actually been enormous technological progress in stadiums over the past 30 years. A brand new stadium is nicer. It’s easier to get around in, it’s easier to get in and out of, there are better concessions, there’s better line of sight in the seats, there’s more room for your feet, there are all kinds of amenities that didn’t exist in previous stadiums, so by and large it’s a more interesting experience. People like it more. Hence, all else equal, such as the quality of the team they’re coming to see, they’ll be slightly more likely to attend. And that sort of lasts for a while, but it eventually sort of wears off, and five to seven to nine years off down the road—it varies a little bit from city to city and team to team—attendance is back down to where it would have been had there been no new facility at all. So for that reason, these financial projections that somehow in the long run are not going to cost taxpayers anything, it’s going to be sell-financing, are literally always wrong. It simply isn’t true, and it’s based upon completely unrealistic financial projections.

Well, the second reason we might imagine that people invest in this, which is also an argument put forth by proponents of subsidized stadiums, is that there will be an economic development impact. That it’s not just that this story I gave before about people attending and paying taxes in the stadium, this is sort of a global economic benefit argument. And here the story is: this is really a public investment of the same sort as widening a freeway or installing the sewer systems or other kinds of public investments that would facilitate the development of other kinds of businesses. And you get two versions of this. Version number one is that it will cause increased tourism in the local area. So people will come in from out of town, they’ll attend games, they’ll stay in hotels, they’ll go to restaurants, so there will be some sort of net increase in business in the local community through all the activities of visitors who will come. That’s the first part of the story. And the second part of the story is that businesses, looking for places to locate facilities, particularly corporate headquarters, will be more likely to locate their corporate headquarters in your community if you have a spanking new fancy sports facility.

Well, what again are the facts here? To begin with, this is sort of like an infant industry argument in international trade. That you’re sort of getting something started because you think you’re going to sell a lot of it to other countries. Only here it’s not countries, it’s regions and metropolitan areas versus hinterlands. Somehow we can imagine, thinking of Oakland as in an international competition, if you will, with Sacramento, and somehow people are going to be driving down from Sacramento to attend Oakland games. There is an element of truth to this, but it again is diminutus. And indeed, the most successful stadiums are ones like PacBell Park will be next year, PacBell Park is basically now completely sold out for next season. So the likelihood of anybody in Sacramento saying, “Gee, let’s go down to San Francisco next week and go to a baseball game.” It’s impossible. You can’t get a ticket.

In other words, the more successful the facility is, the more likely it is that everything is going to be sold out to people who live in the area, and there’s going to be absolutely no tourism effect. Moreover, the argument for the tourism effect came about from some surveys of stadiums, football and baseball stadiums undertaken in the 1950s. Now, I’m one of the few people in this room who can remember the 1950s, who was even born then, but in the 1950s, you will recall, that almost all the professional sports teams in the U.S. were all packed into the Northeast corridor of the US. There were a couple of football teams on the West Coast, and a team here and there, but for the most part, you can draw a little box from Milwaukee to St. Louis to Washington, D.C. to Boston, and almost all the professional sports teams were located in that little box. The rest of the country had no major league professional sports.

And indeed, when I was 12 years old, we once planned a summer vacation to go to Milwaukee and Chicago to see baseball games. That was a reasonable thing to do for a kid growing up on the West Coast. Their parents say, when you’re 12 years old, “Wouldn’t you love to see a major league baseball game? This year we’ll spend our vacation driving to the Midwest, seeing some baseball games and driving home.” That would be totally ludicrous in the current environment, because there are so many professional sports teams. They’re all over. The vast majority of the American population lives within an hour or two drive of a major league sports team. So the notion that people are going to be planning their vacations around attending professional sporting events, even if it’s the case that all the seats are not sold out in advance to people who live locally, is not very plausible.

And now these are all the arguments why it’s true, but if we look at the actual data, there are a number of interesting studies in the last seven or eight years, comparing either the same city through time, before and after a stadium is built—before that, not just a renovation or a replacement of an existing stadium, but even bringing a new team into an area. Through-time, what is the effect on total employment, total income within the area. Is there this corporate headquarters effect? Is there this increase tourism effect? Can you pick it up in any specific industry or at for employment in general? Or, alternatively, if we take a sample of the many, many metropolitan areas in the U.S. with populations between one and three million, about half of them have a major league football, major league baseball teams, and about half of them don’t. So is there any trend through time between those that have major league teams, and those that don’t?

And the best answer, the best guess we have is that all the statistical results say that you cannot reject statistically the notion that there’s simply no effect at all. But if someone pointed a gun to your head and said you have to guess what the number is, the point estimate is minus 0.3 percent on employment and income. That is to say the act of constructing a professional sports team actually does more harm than good. Why does it do more harm than good? Well, the reason it does more harm than good is that a lot of these facilities are not used very much. And if you stick a brand new, fancy football stadium or even baseball stadium in the middle of a vibrant downtown neighborhood, you will create a depressed area, because a very small fraction of the time is actually being used in generating traffic, and the rest of the time it’s this great, big black hole of economic activity. Nothing is happening. It’s this huge, closed monstrous facility that is plunked right in the middle of your downtown area, and so it actually detracts from the attractiveness.

Indeed, the reductio ad absurdum of building facilities like this, there are actually two of them. One is the Superdome in New Orleans which has created the highest crime neighborhood in just about the US. It is completely unsafe to be anywhere near that facility if there’s not a sporting event going on there, because it’s completely wiped out the neighborhood. Another one is Pro Player Stadium in Miami. Getting back to our story about sports bars and restaurants and gas stations, the people who built the stadium in Miami realized full well that there potentially was money to be made in sports bars, restaurants and gas stations, so they designed the stadium such that it is only approachable by freeway, and it’s completely encircled by a freeway. So when you enter and leave the freeway, you can’t get to the surrounding community. You can’t get from the stadium to the surrounding community. And then inside the stadium are all these fancy things that are all operated by the teams. So the whole idea is to encapsulate all of this economic benefit in terms of localized increments to business for the benefit of the tenant, as contrasted for the benefit of the neighborhood. So all it takes, of course, to get this minus 0.3 percent as a statistical result is a handful of ludicrous examples which would cause significant effects in their localities, and then, for the rest of the cities, the best hypothesis would be it really doesn’t matter. And this, again, is consistent with the notion that basically what’s going on in a sporting facility, is simply a relocation of economic activity from one block to another block.

So that is the bottom line. The way we would imagine that you would increase economic activity through attracting tourism is sort of a special case of a general kind of improving your welfare through increased trade. And economists have a really good explanation for why countries engage in trade, namely it’s a way they mutually can increase their productivity, and there’s nothing going on here in the case of stadiums that has that feature to it, where there’s some sort of gain from trade to be had from having a fancier facility. The economic logic of regional economic development, based upon tourism or any other kind of sales to other regions, is identical in content to the argument for engaging in free trade, and of course, there isn’t some big productivity-enhancing result from this kind of investment. If we asked ourselves what is the productivity consequence of building a new stadium, for the most part, all of the employment and other cost of the stadium are roughly directly proportional to how many people show up. The only workers whose productivity goes up from a new stadium are the players.

So one of the effects of a stadium is that a big hunk of the subsidy goes to increased player salaries, because there’s a competition for the players. Indeed some of the institutional rules of professional sports guarantee that a large fraction of the subsidy goes to the players. Most people know that in a couple of professional sports, in three out of four actually, there are salary caps. What they don’t know is there are also salary floors. That is to say, it’s part of the collective bargaining agreement in three of the four professional sports, that every team will spend a certain minimum amount on salaries, that minimum is expressed as a fraction of the average revenue of all teams. So a football team gets a brand new stadium. In the NFL, by the way, approximately 75 percent of the teams are at the salary cap. The cap is the binding constraint. The rest of them have the floor, which isn’t much below the cap. It’s only a couple of million dollars below the cap. So if one team has its revenues go up by $20 million, that means about 60 percent of that $20 million is going to be passed through as pay increases to players in professional spots. That is to say, $20 million in revenues means $12 million in increases in player salaries. For those at the cap, it causes the cap to go up, and the cap is a binding constraint so the salaries just go up with it. For the other teams, the floor goes up. And so they have to raise their salaries because they have to comply with the floor. And so a large part of what is going on here then is that the subsidization mechanism for professional sports, to the extent it increases the revenue flow to the team, mostly what it does, most of that revenue is simply a transfer to higher salaries for major league professional sports athletes.

Now let’s review how all this stacks up against the reasons we normally think of for why there might be some sort of an economic reason why government might want to intervene and actually spend money on something. And we think, well, one reason is, the government might want to make investments that make us all productive and encourage further private investment. Nope, that’s not going on. Secondly, we have lots of programs that are for the purpose of distributive justice, that we want to take money from one group of people and give it to another because somehow we think they’re deserving. Well, professional athletes don’t strike me as a real good candidate—I think that if I pass the hat tonight after the talk and ask you all to make donations for your local baseball and football team, I probably wouldn’t raise too much money, and I know I would never be invited back again by David. (laughter) So no matter where you stand on the political spectrum, between far right and far left, there’s no one that I know who thinks what we all should doing is taxing ourselves to give money to athletes, because they don’t quite make enough money. So it’s hard to see where the distributive justice argument comes on this. And so what are we left with? That’s why it happens.

Well, I’m going to let Rod talk a little about that, because he has a wonderful paper on this topic. But let me just briefly suggest what I think are two important reasons why we do it. The first reason we do it is that there’s another thing that government does, and that’s engaging collective consumption. We have all kinds of things that are collective consumption, where we just collectively decide through a government entity that instead of consuming things as individuals, we’re going to consume them as member of polity. Parks are like that. We decide we’re going to have a park, and indeed we can put symphony orchestras and opera into this. We just decide we’re going to have more of it than the private sector would provide at market clearing competitive prices. And there’s no basic economic reason for it other than we just are moved to do it—as collective consumption. And it’s hard—we can have an interesting debate, a philosophical debate about whether this is a legitimate role for government and is a good thing or a bad thing, but it’s real hard to get worked up about in the same sense that giving big subsidies to professional athletes is something to get worked up about.

So that sort of stands as a plausible reason when we think about the nature of professional sports, that what goes on in terms of the business side of professional sports, is actually a tiny fraction of the role sports plays in people’s lives. Sports is one of the few industries (other highly visible entertainment industries have this same feature, like rock bands and things like that) where their importance in people’s lives isn’t probably very well measured by their economic significances in industry. Why? Because we talk about it a lot. Why? Because we derive consumption benefit just from the presence of the activity and the visibility of the people engaged in it. The Oakland Raiders cannot collect a dollar from you every time around the coffee pot, at coffee break time at work, you say, “Well, what about those Raiders? Do you think they’re going to be able to make the playoff next year. What do you think about them making this trade?” The act of talking—we don’t normally sit and talk about the replacement of a manager at a department store, or did—“You’re saying Nordstrom’s got this great shoe clerk that they just hired from Bloomingdales, do you think that that’s going to take over first place against Bloomingdales in the shoe sales business in the retail trade in the Bay Area?” We normally don’t have those conversations over coffee. Maybe some of you do, but I don’t. But we do have those exact conversations about professional sports, which indicates it has a role in our lives that we, as economists, aren’t going to be able to measure very well, and certainly isn’t going to be captured by the industry, which gives us a reason to want to have more and to express ourselves to try to have more of it, in ways that wouldn’t be necessarily be captured in a market. So I think there’s a pretty interesting reason why at least some people, namely intense sports fans, are happy to throw away money at sports teams. So that’s part of it.

But there’s a second part of it as well. And that is basically, when you lose a team, it’s very hard to replace one, and that’s because the number of teams is not limited by the market. We do not have the Adam Smithian world here where we think the division of labor is limited by the extent of the market. What he really meant by that is: as the demand for a product grows and grows and grows, more and more firms get bigger, and they find better ways to make things, and there’s expansion of output to meet demand. That’s what the whole idea, the 18th Century idea of supply and demand is all about. Is it in response to a big increase in demand for something, there’ll be a supply response? Well, that doesn’t really happen in professional sports, at least to the extent it’s justified by the market process. Both in terms of the owners and in terms of the players, the people who are in the business make a hell of a lot more money from what they’re doing than from alternative ways that you can imagine them spending their time. There isn’t really a good supply response. We’ve had huge increases in the demand for sports over the past 30 years. Average revenues per team, in 1970 in most professional sports, were in the range of a few million dollars, and the really, really successful teams might have made up to $20 million, and now we’re clear into the—way, way over $100, getting into the $150 million range. Humongous increases in revenues, big increases in attendance, big increases in ticket prices, big increases in broadcasting revenues, and this has been partly responded to by expansion, but the number of teams, and the number of players per capita in major league professional sports today is lower than it was 50 years ago. In other words, the rate of expansion is less than the growth of population, let alone the growth and income and demand for sports.

And this simply was a wise business decision by the incumbents. There’s no point of expanding for the purpose of competing against yourself. If it’s the case that five baseball teams could survive in the Los Angeles metropolitan area, there’s really no good reason for the Dodgers and the Angels to say, “Oh, come on in, help take away some of our business.” They’re not going to do that, and so entry into these sports is controlled. Entering by creating a whole new league is extremely difficult because of the coordination problem of having all these teams and all these cities get adequate facilities and having good management, and all the rest, and so new leagues almost always fail. So as a result, there is sort of like a natural barrier to competition here, which means that we as citizens, if we lose our team, because we didn’t give it a fancy new stadium, they have all kinds of places out there that they can go where somebody will build them a stadium, and once we lose ours, it will take a decade or more to get one back, and in any case, to get one, you’re going to have to build a new stadium. So you might as well build one for the one that’s here. I think that attitude actually pervades a lot of what is going on in professional sports. This is essentially a bargaining lever. The bargaining position is on the part of the team because teams are very scarce. They can’t easily be replaced. And that makes them different from most other kinds of entertainment. A motion picture theater can be replaced. Most other things we—a restaurant can be replaced. We might feel very badly if Chez Panisse in Berkeley were to close, but somebody else would come in, and there would be other first-rate restaurants around. That same kind of supply response, if we fail to subsidize and the incumbent leaves, is not available in professional sports. And as a result, we now have two things going on. We have on the one hand, attachments of fans, and on the other hand, those fans in fear of the loss of their favorite team, which makes them, of course, politically willing to pay subsidies.

Now the last part of the story is the interesting part, and I’ll just leave this as a puzzle. Sports facilities are not good investments, they do not earn a normal return on investment. You go off and you spend $300 million on a football stadium, and the incremental revenue over costs that it generates is nowhere near worth $300 million. It’s not a reasonable return on $300 million a year. It’s not. A normal business before taxes to find it worthwhile to invest $300 million, would have to have a $50 or $60 million pre-tax increase in its revenues, and that’s just not—that never happens. That’s just way too big for a professional sports team. You have a team that’s taking in $70 or $80 or $100 million a year, it’s not going to all of a sudden shoot up to $150 because it’s got a new sports stadium.

So then we asked the question, why then do we give them stadiums? It would be a lot cheaper to give them the money. And this is legitimately true. Why build a $350 million stadium if the net effect of the $350 million is going to be to increase the growth revenues of the team by $20 million, and then $12 million of that goes to players. So only $8 million goes to the owner. The alternative is you just pay the owner $8 million. And $8 million a year is a hell of a lot cheaper than $350 million for a stadium, and I just leave it as a puzzle why that hasn’t happened. I think politically people are a little bit unwilling to face the reality that what we have in stadium subsidies is the equivalent of such a bribe, and we hide it in a way that providing the in-kind transfer rather than the strict cash transfer, just because it makes it a little bit easier and more palatable to live that way, so it’s a little bit obscure that what we’re actually doing is taxing ordinary people to give money to millionaires. (applause)

David Theroux

Thank you very much, Roger. Our next speaker is Rodney Fort. Rodney is professor of economics at Washington State University. He received his bachelor’s degree in environmental studies in Utah State. His M.A. in economics from Montana State University, and his Ph.D. also from Caltech. His articles have appeared in numerous scholarly journals, and he’s recipient of numerous awards. His research areas focus on the regulation of public policy, as well as the economics of sports. In addition to his book that I mentioned, Hard Ball, with Jim Quirk, he’s also the co-author also with Jim Quirk of the wildly acclaimed book, Pay Dirt: The Business of Professional Team Sports, which is also one of the really exceptional books in sports. I’m pleased to introduce Rodney Fort.

Rodney Fort

I have to have some notes. I just can’t do that like Roger can. I would like to thank everybody at the Institute for allowing me this opportunity to talk sports. Life can’t get any better, can it, to make a career out of talking about sports. I would like to echo Roger’s sentiment about the way we think about sports. I think about sports like my favorite Gary Larson cartoon, where you’ve got this little primordial beastie climbing up out of the ooze, and the reason that they’re doing it is there’s a foul ball, and they’ve got to climb out on the land in order to get their ball back so they can keep playing baseball. But I’m reminded during the strike, Henry Aaron—there’s an economist named Henry Aaron, believe it or not, at the Brookings Institution—and he was being interviewed at congressional hearings on C-SPAN. And he pointed out, he sort of lightly kidded the sub-committee by pointing out that baseball at that time was a little under a $2 billion industry, and that the envelope industry in America was worth about $2.25 billion, and add the paper—if you threw in cardboard boxes, it was way over $8 billion, and then who knew what happened once you threw the entire paper industry in there. And he, in essence, he told Congress, quit wasting your time on this, you’ve got bigger things to deal with than investigating the baseball strike. But as I was watching, I thought about it just like Roger did. Yeah, but there’s no cardboard box section in the newspaper. I was perfectly glad that Congress was there worrying about getting baseball back for me.

It’s dangerous to talk too much about sports in an open forum, because everybody knows more about it than you do. But I’ll forge ahead anywhere, because on the particular things that I’m going to talk about, that might not be true. I want to just sort of walk through Hard Ball. I hope that doesn’t bore some of you who might have already read it. But I’m not going to stop there, because I’m also going to continue on because the criticisms of that work that has come back to me has to do with “Oh, just some more pointy-headed intellectual, white-tower economist making absurd prescriptions about how we ought to fix something in the world that will never happen.” And I am that, but I didn’t stop there. It was just a good place to stop the book. So I’ll continue on after Hard Ball. Sports leagues exist to facilitate the market power of their member teams. If anybody tells you any different, it’s time to find someone else to talk to. That’s why they exist, that’s what they do. We like to think, well, they have to—the peculiar economics of sports—they have to have leagues in order to facilitate—the cooperation that goes on in leagues, in order to facilitate a schedule, and to have rules and officials and an appeal of the rules and set up championships, and all of that is true. It’s exactly true.

But you can—you’re already hit, even in that simple description of why leagues have to exist, you’ve already hit an economic issue. The scheduling issue has to do with why do they make New York play Milwaukee. Right? They would rather not. Right? They would rather only play other teams that generate large revenues. And so there’s this wonderful—if you haven’t seen the NFL Report that comes out from the NFL, and the inside cover of it recently was a big, long statement by George Halas in front of Congress, and he talks about how come they had to do that, how come they had to make all the big teams in the NFL play all the little teams in the NFL. And the answer was, without those little teams, they didn’t really have a league, and fan interest would disappear. That’s strictly an economic issue. So you can’t even get into the very basics of sports leagues without hitting economics already.

And after that, where you have all these joint venture activities against—in the sense of who gets to be in the league and who doesn’t, where they get to be located, we get to talk about their treatment, their behavior towards TV, how they put it up for auction and why they structure it the way they do. Their behavior towards the labor, for years and year and years, extracting as much of labor as value as they possibly could, and then their treatment of host cities, as Roger just described in gruesome and gory detail for you, so I won’t go into that. In all of those activities, the only reason that there is for leagues to get together and act on the behalf of their member teams, is that the member teams, as a group, will make more money that way than if they acted individually. That’s the only reason. All of them could make their own TV contracts. All of them could deal with their own labor issues. All of them could deal with their own host city. All of them could decide where they want to be located without league approval. The only reason to get in the way of all of those activities, is because it generates larger profit, and then as long as they had a reasonable sharing mechanism, the rest of the teams would go along with it.

The consequences of this league behavior are geographic market power for teams, market power in league output, bargaining power over labor, and then bargaining power over their host cities, and power over my favorite owner, which is Al Davis. I love Al Davis. I’ve never met him, I’d love to. I’d work for him for free if he’d just give me the chance to have lunch with him some time.

Question

Are you serious?

Rodney Fort

I’m absolutely serious, and I would love to do that because here’s a guy who looked at the way that leagues were treating him, and decided to take action that was in his interest rather than in the interest of, say, the New England Patriots or something like that. Those consequences are the things that fans see. That’s why I went through that little primer on leagues. The consequences of this market power are things that we observe every day. Prices, high sports prices, duh. When you create a monopoly, expect them to charge in excess of marginal cost, and expect them to charge it in as many and in as large as variety of ways that they can possibly dream up, to extract as much money from the people who are now held captive to their activity. If you don’t expect them to do that, then I think you should step back and read Adam Smith again.

What happens if you give it a dose of competition real quick? Well, what if teams are free to locate and play in leagues whenever they want? Well, then, of course, wherever there are positive profits, where price is in excess of marginal cost, then that’s the sure lure for another team to come in and take up some of those profits, and so with a little dose of competition, those profits go away, prices come down. That’s the essence of competition.

Salaries: High player salaries? Yes, of course they are high. I mean, look, they’re an extremely scarce talent to begin with, so even if the world was a competition place, like it might be, say, in the motion picture industry, they’re still going to make a lot of money, because they’ve got something special that we’re willing to pay as individuals, lots of money to see. But think about how much more than that they make now, because there’s two things they fight over. Right? This battle is pretty much won in American sports, but it’s a real interesting topic in European sports. They pretty much won the issue of capturing their contribution to the revenues of the team, that they generate for the team. The old marginal revenue products story and the monopsony that died with free-agency. That part of it.

But now, they are—well, why would you stop there? I certainly wouldn’t. Because now I know that what I’m contributing to is also generating positive economic profits for owners. Money in excess of what it takes to get them to continue to go ahead and put baseball out there to enjoy. I want some of that too. Why wouldn’t I? And so as long there’s market power on the output side, and there’s a battle between—in a collective bargaining sense—over that part of the pie as well, then players are going to make even more. Now what happens if there’s a good, stiff dose of competition? The market powers side, right, on the output goes away. There’s nothing really for unions and management to fight over any more except pension plans and health care—non-wage benefits. So competition will drive—well, it depends on whether it will drive salaries down or not, because it also depends, when there are more competition there’s more teams out there bidding for players, and so we’d have to wash these things out. But certainly, they’re a collection of the kinds of things Roger was referring to, the large subsidies that go to teams when stadiums are put in place, and then it goes away, and I’ll get to that in a second about stadiums.

Competitive balance, what about competitive balance? Right now, what drives competition balance problems, say, in baseball? Salary imbalance? No, absolutely not. All competitive balance issues derive from the geographic monopolies that are given to teams. So when I put a team in New York, and I put a team in Milwaukee, I have created competition imbalance. I make more money in New York, I can field a better team. I’ll buy more talent, and that will be that. OK? Well, if there’s—because of the way that I’ve put those teams out there, if New York can handle five teams instead of two, or Southern California can handle seven teams instead of two, those revenues are going to be driven closer and closer to equality, and competitive balance becomes less and less and less of a problem. More and more teams will be buying closer to equal amounts of talent, and so a good dose of competition will take care of everything except the real for real willingness to pay, in terms of side. It’ll take care of those things.

Well, what about location expansion migration of teams. We either love it or hate it, depending on whether we’re getting one or losing one. Well, if the world was a competitive place, then if there was a margin there in which I could create Rod’s baseball team and put them in place, I would, and there would be another baseball team in another place, and we would expect under competition that most, if not all viable markets, would indeed have teams. They wouldn’t be being held in reserve strategically by leagues, for example. How come LA’s empty and Houston’s got a team. Good question, huh? Well, it’s a two-edged sword. I mean, on the one hand, LA Open is an awfully nice whole card to be played by existing teams against their current host cities. OK, fine, I’m going to LA. And that’s viable. That’s a believable threat, because it’s empty. There’s no NFL team in Los Angeles. Don’t count the Charges. Don’t get me wrong, I love the Chargers, but don’t count them as being in the LA market. OK? I think you’re going to see an extremely large jump in the kinds of things Roger was describing for you, because LA’s empty. Everybody now will be setting up the LA market as the next place they’re going to be. Ken Bearing already did it. He was in the truck, leaving, heading south for Hollywood Park. Apparently, he had some sort of stadium deal cut with Hollywood, but he got dragged back because of league choices.

Now, if it’s really the case that there’s a viable open location, and there’s competition in the world, team moves in and that’s the end of that, and as many as are viable will survive but they will be in all of the viable locations, which leads us to the stadium mess. How come existing teams have the leverage that Roger described for you? How come they’re able to extort and extract? Part of it I’m going to get to shortly, but I’ll give the punch line away. It has to do with state and local politics and the way those issues work out there. But the other part of it has to do with the fact that by creating exclusive markets for teams, and an artificial shortage of teams, it’s completely believable that I can pick up my team and go someplace else, and have them build me a city. That scarcity of teams is maintained by leagues on purpose so that they have the ability to extract larger and larger subsidies from host cities.

Now in a competitive world, what will we see happen? When I would try to extract a subsidiary, some lurking, circling school of hungry sharks would see one or two things. One, it’s entirely possible that a new stadium is a valuable thing to a team. That they might actually bid for, if they could have that chance, and that they could make a go of it buying those rights from localities, but certainly we would at least expect the subsidy to fall in locations where a new, viable team would actually build its own stadium. For example, it would much rather make a bid on an existing stadium, and we might actually see subsidies turn into revenue generating devices for state and local governments instead of albatrosses around their necks. So, prices, salaries, competitive balance, location, unrealized expansion hopes, the stadium mess—all those kinds of things. All of those observed outcomes happen because of the way leagues do business. And I would argue, and have argued repeatedly that if there was a good stiff dose of competition, a lot of them would simply go away.

There will be distributional consequences—this is the most wonderful quote, I think, I’ve ever found, even if I quote something that’s in my own book—“free market economics is the process of driving enterprises out of business. Sports league economics,” Tagliabue invented that term, “Is a process of keeping enterprises in business, so there’s nothing like a sports league. Nothing.” And he’s absolutely right. There’s nothing like a sports league. So when he runs that story, though, what he’s trying to accomplish there is, if there was competition, there would be a dramatic rearrangement in who has teams, and some teams that exist right now, because the cross subsidies are large enough, that would disappear under competition, would lose their team. We can all envision our favorite barely hanging on by a fingernail team, like the Pittsburgh Pirates, or take your pick. There would certainly be distributional consequences. I’ve heard arguments like, “Well, all you want to do is create Wal-Mart Pro Sports. Competition drives things to the lowest common denominator.” They’re just wrong, because in addition to Wal-Mart in the world, there’s also Neiman Marcus and all other kinds of places to shop, and the obvious example is the example of the continuum now between major league sports and minor league, or in college between Division One and on through. There’s lot of competition there in college sports, but we haven’t seen it all devolve into Wal-Mart college sports by any means, not as long as we’re willing to pay for it. As long as we’re willing to pay for it, they’ll produce the quality that we demand. That’s another fundamental market outcome. But there will be distributional consequences, and I think that’s really what Tagliabue is saying. He’s saying, “Boy, don’t let those guys who want to talk about competition it—don’t even let them get their foot in the door. Because some of you will lose your pro sports team.”

Prescriptions on how to do the competition vary. Community ownership. A lot of minor league baseball teams and the Green Bay Packers are community owned, for example. So that’s one way that government could—these are all interventions by government to fix all these problems that we see that have to do with market power. And they parallel the institutions that are already out there to handle market power problems. We can buy our utilities from company X or we can have a municipal water system, like I have in Pullman, Washington. We can produce it ourselves, collectively speaking. So community ownership is one alternative. An administrative agency approach has been offered up by people like Mr. Roden at the New York Times. A public utility approach. Andy Zimbalist, who offered up an idea in his book “Baseball and Billions” to create a—that baseball is special and important, and that makes it a public commodity. It’s not as, I don’t think, as important as electricity and water, but nonetheless, it’s that special thing, and we ought to regulate it, since it has market power, and we want to let it have market power apparently, we ought to regulate it then just like any other public utility. So that’s been offered.

And my favorite, of course, is—in the Ira Horowitz, Roger Noll tradition from their congressional testimony in 1976—to just split the leagues up. I just love this idea. The first time I heard it, I didn’t—I had to go look it up, because Roger told me that, “Well, I think Ira and I talked about that once.” So I found it, and it’s in their hearings in 1976. The first time I read it was by a lawyer, Steven Ross, and he made that suggestion to break up the sports leagues. It might have been in your book, Paul. And it has all kinds of beautiful aspects that I don’t want to get into, because some of them are just technical, but the basic idea is there use to be separate leagues competing, and then we made them one league again, so just bust them up. Let’s go back to that competition and just see what might happen when there’s a little competition in the world, economically speaking.

This is where Hard Ball ends, and now I need to get on with more about that kind of a prescription. Because all of those prescriptions lack acknowledgment of the politics of the situation that’s going on. To argue or to suggest that all we need is a little anti-trust is in fact futile. It didn’t bother Jim and I to stop there because it’s just economists talking about how to fix a market-power problem, and those are tried and true methods that will work—well, OK, can work, but they’re never going to happen in 10,000 years, and that is what most of my work lately has been about. I’ve got a chapter in Paul’s book about anti-trust and some other stuff.

I’m going to say this just so you pick the symposia up, not necessarily to read my junk, but the University of Toledo Law Review has a symposium out on sports. The Marquette Sports Law Journal has just done a symposium on sports. The Scottish Journal of Political Economy has just done a symposium on sports in Europe. A lot of the same issues going on there. What you need there, though, is a quick dose of rational-choice politics, and I think you actually understand this quite well. I mean, politicians make choices because they like to be politicians. They want to be elected, they want to be re-elected. They make choices that on net, not in total, but on net, keep them in office. So they’re perfectly happy to irritate a whole group of people if on net the people who re-elect them are happier.

So as long as that’s happening, politicians will make choices that enhance their net voting gains, their chance for reelection at the margin. But that’s an extremely powerful piece of logic, because even though it seems simple—and it’s powerful for two reasons. One, it helps us understand why we see the things we do. Part of my explanation for why we tax average citizens to give money to millionaires, is because we’ve always done that. We do it in a system of electoral politics that have lots of redistribution goals, because that tends to keep politicians elected. It does that for you. It gives you an explanation of some outcomes, and it also helps you to understand what you’re going to have to do in order to have some impact out there in the world of sports, and the answer is very plain and simple. You’re going to have to change the electoral margins that politicians face. Right now, we see those electoral margins favoring monopoly sports leagues, and as long as monopoly sport leagues put a team in a particular place for a particularly powerful politician at the point of time of expansion or team movement, then the politician will be perfectly happy with that. They get to stay in office, so it’s going to help you understand what you have to do about it, and the answer is, you’ve got to change those margins.

Now, that’s a glib statement in a sense, but it’s not one without some potency, because we’ve seen exactly those kinds of things happen in the old Kid Vid activity, and the movements against the Federal Trade Commission when they were making choices that were hurting kids. We also saw it—the entire environmental movement, as a matter of fact, is an example of changing political margins in large ways. So it can happen. But it isn’t going to happen because 400 people go onto some Internet thing and say “Let’s buy the Jets.” That’s not going to happen. That’s not going to change the way sports worlds work. So if you want to have some impact on sports outcomes, then you’re going to have to become politically viable, reelection potent groups and then start hitting on your Congress people to change the margins that team owners face. And until that happens, it’s just going to continue on the same.

Don’t count on referenda. My work on referenda tells me that there’s absolutely no relationship between having a referendum and having a responsible stadium outcome. None. And in fact, what’s really telling about that work is that if you look at the ones that fail, “Raah! The people spoke.” Half of them get funded, over half of them get funded anyway, and at amounts larger than they were on the ballot. So maybe all a referenda does is generate some information for people who love stadiums. I’m not a dismal scientist. I’m not a dismal guy. OK? But sometimes when you use economics, you arrive at conclusions that aren’t exactly uplifting, especially when you mix in a dose of politics. Thank you. (applause)

David Theroux

I’m sure the audience must have a few questions.

Question

For Roger Noll. If you have a coliseum arena complex, you’ve got a winter sport, summer sport and an arena that does all kinds of things. Don’t you make it financially then?

Roger Noll

Yes, there’s a spectrum of facilities, and you’ve asked a question about nuance. At one extreme is a football facility. At the other extreme is a multi-purpose facility which is not only used for sports teams, but is also used for tractor pulls and boat shows and all the rest, and is filled up most of the time. If, in fact, this is a—there is no facility in the area at all where there are tractor pulls and boat shows and all the rest, and then building the facility causes those things to come into existence, then you definitely can have a circumstance in which the revenue flow is sufficient to pay for the facility.

But what it does require is that you’re just not just displacing something else. Right? That it is the case that prior to the building of the facility, you didn’t have tractor pulls and boat shows, and you also didn’t have a hockey team and a basketball team, and if all those favorable circumstances come into existence, then at the far end of the spectrum, which is a San Jose facility in a community that had nothing, and all of a sudden has all these things, it’s used almost every night of the year, then indeed it can break even. But just break even. There’s no—no city has ever gotten rich building these.

And then there is the other problem which is that usually your sports teams will not let you keep it for the amount of time necessary to pay it off. One example is the Salt Palace in Salt Lake City. Another example is the facilities, the sequence of facilities for the San Antonio Spurs in San Antonio. Usually sports teams will demand that you build a new facility for them about every 12 to 15 years, whereas it takes 25 to 30 year intervals to be able to pay it off, and so in Salt Lake City, the old Salt Palace is torn down about 20 years into its life, replaced with the Delta Center, which seats about 4,000 more people. You would never, ever, ever have torn down that facility and replaced it for $250 million to get an extra 4,000 seats. The economics is just not—it’s just a terrible investment to do, but the Utah Jazz says, “If you don’t give us a facility that generates a revenue stream for us that’s comparable to the other teams in the league, we’re leaving, or we’ll go somewhere else that’s willing to support a championship quality team.”

And so, yes, in principle it can work. As a practical reality, it only works in the biggest cities with the biggest markets, where the teams, as Rod says, have less of a credible threat to move. And then as you move back, and you get single-use facilities, you’ll note that in all professional sports, there has been an increasing trend toward single-use facilities. And usually the argument given is an aesthetic one, which is not completely dumb, from anybody who likes baseball games, and has seen what is done to an Oakland A’s game because the renovation of the stadium for the Raiders. It definitely diminished the aesthetic quality of watching a baseball game in the Alameda County stadium to have it be reconfigured to be a big football stadium. So there is an element of truth to it. But the main reason that teams want to have single-use facilities is that usually they can extract as part of the deal, that they actually have control of all the other revenue events. That is to say, they have the rights to the concessions, or they have the rights to the parking, or they have the rights to generate a fraction—get a share of the revenues. They have the right to have their luxury boxes go for a higher price because they will entitle people to use them during the other events.

So again, because of this threat of movement, teams can force cities away from the thing that works, which is a multiple-use facility in which the revenues are going to the city, and into a single-use facility in which control of access to the stadium is given to the team. So again, as a practical matter, we have almost no recent examples of facilities that come anywhere near breaking even, even on a gross revenue basis, not taking into account the substitution effect. And the vast majority of them lose tremendous amounts of money. Tens of millions of dollars a year.

Rodney Fort

If I could, could I add two things. One is that if it’s really going to make it, it’s unlikely that the owners of the team are going to let those revenues go anywhere, so in the kinds of multi-use facilities that Roger was describing, you find a much higher proportion of private ownership of those things than you do of single purpose facilities, and the second part is that you have to remember the lease. One of the reasons that they don’t break even is that in many instances, not every one, and in fact, you have to read every lease to know this, in many instances, though, the revenues—it’s a turnkey situation. The public builds it and then simply hands the keys, and in fact, the rights to all of the flow of revenues from sport and non-sport activities, in convention center combinations, even, they hand those over to the primary sports tenant.

Question

Thank you. About two years ago, I was fortunate enough to debate Don Beaver, who attempted to buy the Minnesota Twins. And I said to him that the dirty little secret in baseball is that there are no more markets for any teams to move to, because if you take disposable income and population as the two major criterion for moving, any area that could have a team already has one, at least a viable team, and that’s why Minnesota, Pittsburgh, Montreal, Kansas City can’t—they all can’t move, because there’s no where else for them to go. And Mr. Beaver very profusely denied that that was the case, and that places like Charlotte, San Antonio and other parts of the country could handle a team. Could people such as yourself, in the academic world, and politicians take that perspective and just say, call their bluff and say, “Go ahead, move, because there really isn’t anywhere for you to go.”

Rodney Fort

Well, my answer would be that he’s right and you’re wrong. I mean I think there are plenty of places where a major league baseball team will be completely viable. Certainly the Southern California complex will hold another baseball team, and almost certainly New York would hold another baseball team. Almost certainly the continuous population from New York down through the seaboard states will hold at least one more team. There seems to be any number of places. And we get this sort of movement into international stuff that we have to be careful with, because that’s a union deal as well. I don’t think the union would let their players play in Mexico City for example, but I think there are plenty of places to put baseball teams.

Roger Noll

I think the important point here is that in all of professional sports, the basket case franchises were not recent expansion franchises, and for the most part, recent expansion franchises were in the worst markets. That there are basket case franchises, and if you were to say the experience of Montreal and Pittsburgh say, defines the lower bounds for a city that could support a baseball team, then you would conclude there aren’t a lot of sites out there. But on the other hand, there are all kinds of cities in that same population and income range where the teams are perfectly successful. Then you could ask the question, “Why are Pittsburgh and Montreal failing?” Well, the Paul Tagliabue reason is basically what’s at stake here—that ordinary business, if you have incompetent management will fail. But not in sports. Because the whole system is rigged to keep the incompetent going. Revenue sharing, holding up cities for more subsidies. All this kind of stuff. And I think Rod’s point is exactly right. If you actually just do the basic finance cash flow story for all professional sports teams, you find that if a well-managed team, a team that could field a reasonably competitive team, not a cellar-dweller, not a Warriors, but a reasonably competitive team, and is good in its marketing, can survive in metropolitan areas of 1.5 million to 2 million population, and only about half of those now have a team in the average league of professional sports.

Question

Sure. As Roger probably knows, in Oakland here, we didn’t just build a stadium, we gave Al Davis 50 some odd millions of dollars as a non-recourse loan.

Roger Noll

They can sell out. They’re guaranteed to sell out.

Question

Well, I think there’s some other people in the audience here who would disagree with that. In fact, in 1991, I led the referendum drive that killed the deal back then, and may have proved Rodney’s point—I hope not. The question I have is one about politics and what to do about the situation if we can’t have referenda and require that it be on the ballot to do, as we do to have to build schools or to do anything else, just about, that includes bonds. They have to be approved by the voters, which I think would at least slow down the ability of a team to say, “If you don’t build me a stadium, I’m going to move somewhere else.” They at least have to go through a process of going to a vote somewhere else. And we were told when the Raiders came back here, that it had to be done. It’s now or never, both times that they tried to come back here. And that led to a lot of secrecy, and we’ve got to do it quickly. If we don’t do it, if there’s a public vote, they won’t do it.

But my question about politics is this, and there’s an interesting book written by Charles Euchner called Playing the Field: Why Sports Teams Move and Cities Fight to Keep Them. And his point that it’s symbolic uses of politics. That no mayor wants to be the one that lost the professional football team or baseball team, and to be known as that, and that to be a major league city, cities have to have a team, or you’re somehow not a greater place to live in.

Roger Noll

Think of poor Los Angeles now. They don’t have a football team.

Question

Yeah. Right Exactly.

Roger Noll

We don’t even think of them anymore. (laughter)

Question

So my question about politics though is, what do you do with a situation where people that want the stadium built, that want the money to go to the teams, are organized and it benefits maybe some areas or some people, people that pour the concrete or whatever, and the general public is not benefited, and these special interests are very well organized? What do you do about that, and wouldn’t a referendum and the ability to put this on a ballot help with that? Or will they just buy the election?

Rodney Fort

Well, we want to be careful of that. Paul Allen paid to have an election occur. It’s not clear that he bought the election, but I can only—it’s always difficult to relate statistical analysis of essentially averages to anecdote. To say there’s no relationship that I could find statistically between what I think this room full of people would call a responsible stadium outcome and an irresponsible one, isn’t to say that there aren’t some. I mean, San Francisco is a perfect example in some sense. We’ll know shortly whether it’s a perfect example or not, but there all the way back to pre-McGowan, San Francisco said, “No, no, no.” And so did the surrounding San Jose, Santa Clara area—“No, no, no.” So it’s not that it can’t have some impact. It’s just that if you look at the big picture, it’s not clear that it has a systematic and predictable impact in the way that we would hope it would. And so that’s—I just have to go back to the data and say, I don’t think so. And as to your other question about, “Well, what do you do about it?” The answer is: you have to get organized and get politically potent. If you don’t, then you won’t.

Roger Noll

Let me just add one point. Take Camden Yard as an example in Baltimore where the net financial cost taking into account not only the direct, but the indirect effects, and net financial cost to the people who live in Baltimore, having Camden Yard, is probably on the order of $11 or $12 million a year in a metropolitan area that has a population of about a million and a half.

So what does this mean?

It means that the typical person, the per capita cost of that per year to people who live there is under $10. And remember again the draconian threat, which is “Give us a stadium or we will move.” And it’s not surprising to me that you find a substantial number of citizens, when faced with the choice no team or tax myself $7 or $8 a year, would probably choose tax myself $7 or $8 a year, because that’s less than the ticket price of a single game.

So if you are a sports fan, and that’s the choice you face, it’s not irrational that you would vote to subsidize the team to keep it. That’s why the thing that Rod said at the end of his talk, is the important fact. The issue is not: given the choice people face, why do they choose to subsidize? The issue is: why do they get into that position to begin with? And the reason they get in that position to begin with, is because of scarcity of teams. That you know.

We know that Baltimore is a legitimate major league baseball city. It is a place where a team can make a profit, a team playing in Baltimore is worth $200, $250 million as a business asset. There’s no issue here about Baltimore being a viable place to have a baseball team. But nonetheless, it’s credible for the owner of the Orioles to say, “Give me a team or I’ll leave, and you won’t be replaced, at least for a long period of time.” And it’s that credible threat to cause people in that draconian situation to say, “OK, I’ll subsidize.” Because the stakes are not that great and given that most people are interested in sports, it’s not surprising that in most cases they will support elected officials who come up with a substitute.

Rodney Fort

In a really interesting twist on—if you’re aware of this international measurement device called the price of a Big Mac. This is apparently, my macro colleagues tell me, a real common way to describe currency exchange rates. How much is a Big Mac in Japan? And how much—well, the Seattle issues that I just watched go by, almost a billion dollars worth of stadiums, were phrased in exactly those terms. “How can you say no to this? It’s less than the price of a trip to McDonalds for your family. Would you give up a trip to McDonalds to have burgers?” And it’s put in exactly those terms. It’s one of the reasons, for example, that international trade restrictions survive and thrive and continue on for so long, and I think the parallels there are striking. It’s going to happen because in this case, we like what we’re getting, and because the costs individually are small and hard to figure out and spread out across everybody, and as long as it’s true, it’s going to be difficult to convince people to organize and be comfortable, if you will. The environmental movement had different characteristics altogether though, didn’t—and so that’s why that one got the steam, the political steam.

David Theroux

Time for one more questions. Rod’s going to have to catch a flight.

Question

I think you make a persuasive case for the—at least, it’s a net wash at best for the regional economy, but you seem to conspicuously neglect the notion of the cross-political boundary benefits perhaps of having a sports team, for example, something like the Shark Tank, or something, brings people into the city of San Jose from a lot of relatively richer surrounding areas. Are they making money on the Shark Tank, or that sort of thing.

Roger Noll

Well, be careful. I mean, the correct comparison is what is the spending jurisdiction? So if it’s a city issue, and the city is trying to decide whether it should rob from the surrounding counties, then you’re exactly right. Of course. If it’s just a city issue and we pass the bonds and build a new Shark Tank, and all of the outlying bars, the sports bar move down town, well, yeah, you included a whole bunch of activity, but it’s an interesting kind of jurisdiction, and the larger those jurisdictions get, then just all you have to remember is one thing, right, if there ain’t no new income, there can’t be any new spending. That’s all there is to it. That’s just a simple accounting identity.

Question

You’re just go moving it around.

Roger Noll

Well, and in your case, the people downtown would be happy as they could be, because they move some business from the surrounding towns.

Rodney Fort

No, I think the argument is correct at the level—has been correct at the level of a few suburbs that are relatively small and have built sports facilities. At the level of large central cities, it turns out that they’re always financially losers. All right? And the part—there’s a very good explanation for this, why it’s a loser.

If the athletes actually live in the city in which they play, then you might expect that there would be, through the spending activity of the athletes, and their rising incomes as the cost of the stadium, and you could imagine this actually happened. But for the most part, athletes don’t live where they play, and a very large fraction, on the order of two-thirds of the revenue of the sports team is going to the athletes and the managers and the coaches and the top executives. And they typically don’t live there. And that’s where almost all the revenue is going. So that, all that, it’s not that—all these—and it’s true, people will be driving from Palo Alto to San Jose to see a Sharks game, and they’ll plunk down 45 bucks, and then 30 bucks of that goes into the pockets of the people who are playing on the team or managing the team, and they don’t live in San Jose.

So it’s a little bit different than thinking about it as a restaurant which would hire ordinary people at incomes of $30 or $40,000 who live near where they’re working. But that’s not the case with the athletes.

David Theroux

You can imagine what it would be like if the Nordstrom’s or the Wal-Marts or other facilities were funded in the same way and had the same kind of economic arrangements. It would be quite a different world.

I want to especially thank Roger Noll and Rodney Fort for their presentations and their superb work. This is a field, as has been suggested, that cuts across American culture, but also it cuts into the core of municipal politics, and for those of you interested in public choice school, there’s all sorts of interesting dynamics that come into play in this whole discussion.

There are copies of Hard Ball and Sports, Jobs and Taxes upstairs for those of you who haven’t gotten a copy, and I’m sure that everybody would be interested in getting a copy of both of these books. Fortunately, this one’s out in paperback because the hardcover was pretty expensive, but this is a real treat to have this. Also we have copies of Pay Dirt. If you haven’t seen that, that Rodney was involved in earlier, and we’re delighted that you could join with us. Those of you who haven’t had your books autographed, I’m sure that our speakers would be happy to do so, and we hope that you’ll join with us for our next program.

Thank you for joining with us. Goodnight. (applause)

END OF EVENT



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