RWC Economics

I've been more than a bit sceptical about the benefit numbers postulated for the Rugby World Cup. But Sam Richardson has been watching things more closely than I've been. And, he's now blogging! He writes:

If the best case scenario eventuates, and the event costs the taxpayer $26m (that is, 2/3 of $39m), then to be economically justified, we should see additional economic benefits of at least $26m. Of course, as has been reported, the costs of the tournament to local, regional and central government are quite a bit larger than $$39m. Thus we should expect to see substantial benefits to make the tournament worthwhile. Will we? Time (and research) will tell.

I'll look forward to seeing Sam's updates. You don't necessarily need measurable economic benefits of $26m to make the spending worthwhile - if the joy experienced by hosting the event were sufficiently large, it could be justified as consumption expenditure. But we'd also want to tally the economic losses suffered by sectors that saw a drop in custom custom as people were scared off by rugby traffic. And we'd also want to be careful to compare the feel-good benefits of the RWC with the benefits we could have achieved through other spending, and to put some weight on the losses experienced not only by the sports atheists like me but also by those who like rugby but don't like the congestion, parades, and diversion of public amenities. Sam looks to the increase in spending with the tournament:

The net change in spending is where we see changes in things like the tax take (GST, etc), which are listed in the expected benefits from the tournament. Gross figures are all well and good, but they are very difficult to substantiate or refute. Literature on previous mega events pretty much says the same thing - that the realised economic impacts are highly likely to be significantly less than initial projections.

Further, if rugby tourists consume amenities costly at the margin or otherwise rivalrous, then GST revenues too are an overestimate of benefits.

Against spending on stadiums and events

I'm scheduled for Jim Mora this afternoon to chat about the economic benefits, or otherwise, in investment in mega-events like the Rugby World Cup. Here's some of the relevant literature for listeners there who want to check my sources:

• Zimbalist and Noll. "Sports, Jobs, and Taxes: The Economic Impact of Sports Teams and Stadiums". Brookings Institution, 1997. The book's key findings are summarized here. They come out strongly against such spending, noting that government investments in stadiums are regressive, with the main benefits going to rich folks (players, team owners). The key takeaway for NZ purposes:

  As noted, a stadium can spur economic growth if sports is a significant export industry—that is, if it attracts outsiders to buy the local product and if it results in the sale of certain rights (broadcasting, product licensing) to national firms. But, in reality, sports has little effect on regional net exports.
  
  Sports facilities attract neither tourists nor new industry. Probably the most successful export facility is Oriole Park, where about a third of the crowd at every game comes from outside the Baltimore area. (Baltimore's baseball exports are enhanced because it is 40 miles from the nation's capital, which has no major league baseball team.) Even so, the net gain to Baltimore's economy in terms of new jobs and incremental tax revenues is only about $3 million a year—not much of a return on a $200 million investment.

• Dennis Coates's work. he has a lot of papers out on the topic, but the main findings are summarized in this article in The American. Note that Brookings, above, is a top notch center-left think tank; AEI runs center-right. In one telling paper, he finds that strikes in professional sports leagues impose no economic cost on cities that have sports franchises; if the economic benefits of stadiums and sporting events are high, we'd expect serious losses. Instead, there's no effect. Others have found the same thing, or that effects are relatively small.
• John Crompton, "Economic Impact Analysis of Sports Facilities and Events: Eleven Sources of Misapplication". He lists some of the ways folks fudge the numbers when they want to purport that stadium spending confers large national benefits. It would be mildly interesting to run it as a tick sheet against benefit estimates for the RWC.
• Baade and Dye, "The Impact of Stadium and Professional Sports on Metropolitan Area Development".

  The evidence presented here is that the presence of a new or renovated stadium has an uncertain impact on the levels of personal income and possibly a negative impact on local development relative to the region. These results should serve as a caution to those who assume or assert a large positive stadium impact.

  See also Baade 1996
• Paul Walker's summary of the literature
• And of course Cowen's classic "Should Governments Subsidize Stadiums and Events?". He notes some of the big problems with benefit estimates.

As for this year's New Zealand Rugby World Cup, see these:

• Problems with the MasterCard study touting $1.2 billion in benefits.
• Sam Richardson's analysis of the economic benefits of RWC
• Why is the government subsidizing RWC broadcast bids?
• Are ticket revenues a national benefit? Only if the government is on the hook for deficits!
• Is consumer surplus sufficient reason for rugby subsidies?

Intervening for the surplus

Paul Walker asks whether consumer surplus can ever justify government intervention. Arguing against Sam Richardson's contention that consumer surplus from the Rugby World Cup can justify government intervention, Walker notes:

Three question came to mind for me: 1) If CS is a reason for government involvement in a project then isn’t this a reason for government involvement in almost everything? I meant the CS generated by computer software, for example, must be huge and thus should the government not subsidise Bill Gates?! 2) If there really is enough CS to justify government involvement doesn’t this tell us that that real issue here is one of the pricing of the event? If the council priced in such a way as to capture the CS, e.g. some form of price discrimination, then evaluation of its investment would be easy, just look at the profits generated. 3) If there is a large amount of CS to be captured then why have the council involved at all? Why not just let the private sector run/build the event/stadium, pricing in such a way as to capture the CS, and let the event stand on its own economic feet? No government involvement is necessary.

What's Walker missing? If there's a market failure preventing the realisation of potential consumer surplus. Imagine that the local folks putting together a bid for the RWC set up their bid optimally with respect to maximal extraction from those who could attend games: lots of tiered pricing, lots of tied sponsorship arrangements, lots of merchandising. And the bid were just shy of making it. And, suppose further that each and every Kiwi got $10 in warm fuzzies just from pride in knowing the event were here being held. If there's no market in which they can express their preference for the event's being held, and if the event wouldn't be held absent the contribution from those folks who'd never attend a game but who would enjoy benefits, then that can be an argument for government intervention.

Now, the warm fuzzies can be internalized through sponsorship arrangements: if those not attending the game get warm glow from the games, sponsors may capitalize on that warm glow. But we'll specify that the $10 per person is over and above any amount that can be capitalized on by sponsors.

In that case, you could argue for government involvement. You need a market failure of some sort to make the CS argument for intervention hold. It's not nonsensical on first principles. But it's rather unlikely that we've been made better off by the investment. Why?

First, we'd have to know that the potential CS made it worth the cost.

Second, we'd have to ask why alternative mechanisms for solving the coordination problem among those experiencing warm glow weren't attempted. KickStarter is an awesome mechanism for this. You put up your project and your required funding threshold; folks pledge money and are only called on for funds if the collective willingness to pay is high enough. Sure, there could be free rider problems, but there are ways of turning assurance contracts into dominant assurance contracts. If RWC never even bothered trying KickStarter and went instead immediately to the guys who can use guns to force your contribution, we might be sceptical that they really believe that there are net gains to the public (or that the latter is just easier for them).

Finally, we'd have to weigh up whether the losses from bearing the market failure - the forgone benefits - really justify the costs of intervention.

I'd put 20:1 against that the NZ government's investment in RWC meets any kind of sane cost-benefit analysis. There are states of the world in which such investments can be optimal; we're just rather unlikely to be in that world.