Weekly Update
December 19, 2007 — Ballpark Estimates
If you build it, will economic progress come too?
By Brian Gaines
Along the Anacostia River, finishing touches are being applied to the Washington Nationals' new baseball stadium. Like others across the country, the approximately 41,000-seat, $611 million ballpark was built in no small part with public funding, in this case, from the District of Columbia. Will it be worth it?
In Washington-speak, it depends on the meaning of "worth." Financially, new stadiums usually don't turn out to be engines of economic growth as projected. But some studies show that there are intangible, nonfinancial benefits.
When a city attempts to attract a new franchise or retain an existing team by building a stadium, the local government usually sponsors an economic impact study to assess how the project would affect the local economy. These studies are generally positive and tend to predict an increase in jobs and spending. For example, the impact study conducted for the Nationals' baseball stadium in southeast Washington predicted that fan spending outside the facility would generate nearly $48 million annually.
One problem with such studies is that they often fail to account for what economists term the "substitution effect." Since most consumers face a fixed budget for leisure, their spending is simply shifted from one form of entertainment to another. For example, someone may choose to see the Nationals play in their new waterfront stadium instead of eating at a local restaurant in Georgetown or catching a concert at the Verizon Center. As a result, the actual net gain in local spending is zero or close to zero.
Another flaw in many economic impact studies is they don't use the correct multiplier, which calculates how spending on tickets, concessions, and other goods and services associated with a major league team spreads into the economy. A study by economists John Siegfried of Vanderbilt University and Andrew Zimbalist of Smith College estimated that using the incorrect multiplier can overstate the effect on the economy by more than 400 percent.
Take the earnings of a team's players and owners: Most of their salary is exported, either to their region of residence (which usually is not where the team is located) or to the federal government through taxation.
In general, economists use a more retrospective analysis to estimate the effects of a major league team on a local economy. In contrast to impact studies, their research has almost universally found that teams have a small but negative impact. In a September 2003 paper, economists Dennis Coates of the University of Maryland, Baltimore County, and Brad Humphreys of the University of Alberta, found that employees in the food services, lodging, retail, and amusement/recreation sectors experienced an average decrease in real earnings of about $48 a year due to the local presence of a professional sports team.
While it doesn't seem like the economic returns are worth the public investment in a major league stadium, there are other considerations. "The claim of economic growth, income increases, and job creation are not supported," Coates says, "but that does not mean there are no economic benefits."
In fact, there are several positive externalities — or byproducts — associated with a professional sports team. Although they are much more difficult to measure, some research has attempted to quantify them. Early results indicate that they are not trivial.
For instance, fans who attend games are able to enjoy a considerable amount of consumer surplus, which is the difference between their willingness to pay and the market price. At the same time, fans who do not attend games still benefit from following the team and watching them on television. Additionally, there is the civic pride and enhanced public visibility that a team can bring to a community.
Brian Gaines is a research associate in the Richmond Fed's Research Department
