Economic Fallacies

Key Takeaways

• Public Funding Dilemma: Public funds are often used to construct sports stadiums, promising economic and social benefits that frequently fall short.

• Market Inefficiency: Government subsidies for sports stadiums can lead to market inefficiencies and societal costs.

• Opportunity Costs: Stadium subsidies overlook the potential for more economically efficient ventures like retail outlets that could benefit local economies.

• Policy Challenge: Despite leaders recognizing the issues with public funding for private stadiums, progress in policy reform has been slow.

Introduction

The New York Jets may not have the best win-loss record (133-189 since 2003), but they certainly score in one aspect - private funding for their stadium, Metlife Stadium. Only three of the 19 NFL stadiums built in the last 23 years received no public funding: Gillette Stadium, Sofi Stadium, and Metlife Stadium (USA Today, 2022).

However, this doesn’t mean these stadiums received no public benefits. The New York Jets and Giants, who share Metlife Stadium, received 75 acres of New Jersey State land to build the new stadium complex, 20 acres each for practice facilities, and $250 million of infrastructure benefits (New York Times, 2013). All in exchange for $6.3 million in annual lease payments to New Jersey State.

That sounds like a good deal, right? It gets even better. Many teams, including the Jets and Giants, are not required to share their stadium revenues with the state, even when public funds subsidized their construction and operation. Moreover, it isn’t just states and cities doling out these subsidies. Federal tax subsidies, primarily through tax-exempt municipal bonds, have resulted in $3.7 billion in lost federal tax revenue from 2000-2015 (Brookings, 2016).

All this public funding is occurring at the same time as the North American Sports Market saw a 45% increase in total market size from 2009 to 2018, representing an average annual growth rate of 4.14% (PWC, 2019) and $22.33 billion in added market value for team owners, many of whom consist of America’s wealthiest individuals.

Public Funding of Private Goods

Why does this all matter? You may recall that in last week’s randonomics post, we concluded that underfunded public goods (e.g., street art) could be successfully provisioned by private corporations looking to increase brand loyalty, time spent in shopping centers and stores, and ultimately per-customer profitability.

While it answered an important question, I will let you in on a little secret. Big companies don’t like giving stuff away to the public for free or, at minimum, an undefined future payoff. In reality, corporations, including manufacturers, airlines, and defense contractors, love to receive defined government benefits in exchange for ill-defined public returns in the future. This is especially true about sports teams. So today, I’d like to examine the arguments for and against the public funding of private goods, a practice affectionately known as corporate welfare. Specifically, are government subsidies for sports stadiums in the public’s best interest?

As a brief refresher, private goods are both excludable and rival, meaning consumers must compensate the good/service provider before consumption (i.e., excludable), and consuming a private good must prevent other individuals from consuming the same good (i.e., rival). This is the exact opposite of a public good, which is both non-excludable and non-rival. Meaning no one can be prevented from consuming these goods (i.e., non-excludable), and an individual’s consumption of a public good does not prevent others from consuming the same good (i.e., non-rival) (recall back to image two from last week’s Randonomics).

Live sports are inherently a private good; one ticket equals one attendee, and once you have bought your ticket, someone can’t use that seat for the game unless you sell it to them. So why do the governments still subsidize the construction and operation of live sports venues? While strong corporate lobbies may be partly responsible, it likely stems from a longer-held belief that stadium subsidies generate long-term positive economic and social benefits.

Arguments Against Stadium Subsidies

For these subsidies to make sense, governments must believe that they will recoup their investment through additional revenues, such as higher property values increasing property tax revenues, greater commerce increasing sales tax revenues, or more jobs leading to higher income tax revenues. This, however, rarely pans out this way, as many of these subsidized projects are too narrowly focused or occur too infrequently to have a substantial economic impact.

For example, the average NFL team drew 69,442 attendees per game during the regular season (Sports Business Journal, 2023), which, when averaged out over the year, translates to 1,617 average daily customers (see work shown #1), which is 16.2% of the average daily customers of a typical Walmart Supercenter (i.e., 10,000 per day for the average Walmart Supercenter). Even when considering sports with higher stadium usage, such as baseball, that leaves only 81 home games, which translates to an underutilization rate of 77.8% (see work shown #2) when excluding post-season and non-MLB events.

Arguments for Stadium Subsidies

While stadium subsidy advocates may argue that these figures don’t account for post-season games and offseason events, such as concerts, this argument fails to consider the inherent infrequency of such ‘extracurricular’ events as the frequency of these events is highly varied and skewed towards larger metropolitan areas with new stadiums.

Another argument is that the added jobs from the stadium and surrounding economic activity, such as bars and restaurants, lead to higher income tax revenues. However, this argument is relatively weak when considering the inherent seasonality of sports, stadium concerts, and the jobs accompanying these events.

But the argument for stadium subsidies really falls apart when considering the hefty opportunity costs associated with stadiums. Let’s use Metlife Stadium as an example to calculate the potential opportunity costs for sports venues. Sitting on 75 acres, the stadium consumes the equivalent acreage of nearly 18 Walmart Supercenters (i.e., Average Walmart Supercenter sits on 182,000 square feet or 4.17 acres, see work shown #3), which drive on average about 6.18 times more daily customers (see work shown #4), thus making Walmart Super Centers approximately 111 times more economically efficient than NFL stadiums when considering average daily customers and property footprint (see work shown #5).

While the purely economic arguments for stadium subsidies largely fail the smell test, it is an open question whether sports’ cultural and societal gains compensate for the extensive government subsidies. Are the potential increases in public enjoyment and camaraderie worth the public expense? Although this is an important consideration, it fails to factor in that live sports is a huge business that is overwhelmingly owned by the wealthiest Americans and well-capitalized private equity firms.

Some advocates for stadium subsidies argue that without government subsidies, teams will leave for another more accommodating city (e.g., Oakland A’s Move to Las Vegas). However, intervening in the free market of sports stadiums only furthers the disparity between the economic value and the total cost of new stadiums, resulting in a market inefficiency, which is “when an asset’s price does not accurately reflect its true value” (Investopedia), and a dead weight loss, or a cost to society caused by a market inefficiency.

Conclusion

At the end of the day, live sports is a private good, meaning that the primary benefits of the good are for the consumer (i.e., the fan) and supplier (i.e., the team). Introducing government subsidies furthers the divide between the supply and demand for sports stadiums, causing a deadweight loss (aka a cost to society caused by a market inefficiency).

This problem has not gone unnoticed at the Federal level, with there being bipartisan efforts to rein in spending on public funds diverted to professional stadiums since 2015, including proposals to outlaw tax-exempt bonds for pro sports venues. However, despite initiatives from the Obama and Trump administrations and proposed legislation like the No Tax Subsidies for Stadiums Act of 2022, significant progress has yet to be made in turning these proposals into law (CNBC, 2022). While it is clear that live sports have significant community benefits, policymakers and the general public must consider the relative costs and benefits of stadium subsidies to ensure a more efficient allocation of public resources and foster more sustainable local economies.

I hope you have enjoyed this week’s Randonomics and stay tuned for the next one!

Jack Kurtz - [email protected]

Work Shown: Walmart Supercenter vs. Metlife Stadium Comparison

1. Average NFL Attendance Averaged Over the Calendar Year: (Average NFL Game Attendance Average Number of Home Games) / Number of Days in a Year => (69,442 8.5) / 365 = 1,617 people per day

2. MLB Stadium Underutilization for Regular Season Home Games: 1-(Number of MLB Regular Season Home Games / Number of Days in a Year) => 1-(81/365) = 77.8%

3. Stadium vs. Walmart Acreage: 75 Acres / 4.17 Acres = 17.98 times

4. Stadium vs. Walmart Supercenter Average Daily Customers: Average Walmart Daily Customers / Average NFL Stadium Attendance => 10,000 / 1,617 = 6.18 times

5. Stadium vs. Walmart Economic Efficiency Comparison: 17.98 * 6.18 = 111.12 times