Sunday, September 21, 2014

PF Sep/Oct 2014 - Public Subsidies for Pro Sports - Con

Resolved: On balance, public subsidies for professional athletic organizations in the United States benefit their local communities.

For part one of this series, click here

Balancing Act

The resolution specifically states "on balance" and so requires a comparative framework in which we examine the advantages and disadvantages of an issue or the costs and benefits which result from the costs.  Clearly, if we are talking about public subsidies, we are talking about public funds, which come at a cost.  Usually these funds are raised through increased taxes, diverting funds from other programs (such as improving roads) or a combination of both.  Such an investment makes sense if, on balance, we find the upfront expenditure of public funds results in sufficient economic benefits to claim it was worth the cost and then some.  How much "then some" will vary according to the mindset of the judge listening to your case.  What Con will find with very little trouble is the economics of public subsidies for professional sports do not return "and then some". In fact, more times than not, the return is not even close to offsetting the cost.

Zimbalist and Noll 1997:
Economic growth takes place when a community's resources—people, capital investments, and natural resources like land—become more productive. Increased productivity can arise in two ways: from economically beneficial specialization by the community for the purpose of trading with other regions or from local value added that is higher than other uses of local workers, land, and investments. Building a stadium is good for the local economy only if a stadium is the most productive way to make capital investments and use its workers... A new sports facility has an extremely small (perhaps even negative) effect on overall economic activity and employment. No recent facility appears to have earned anything approaching a reasonable return on investment. No recent facility has been self-financing in terms of its impact on net tax revenues. Regardless of whether the unit of analysis is a local neighborhood, a city, or an entire metropolitan area, the economic benefits of sports facilities are de minimus.

Measurement Criteria

Researchers and economists who study this issue will pretty much universally agree that professional sports venues make bad investments for public funds.  The results can be measured in two primary ways.  If the sports facility attracts people from outside of the community to come spend their money in the community, then flow of money coming in is called export sales and that can be measured and tracked. Another important measure of return is called import substitution and this tracks how residents of a community spend their money.  If residents decide to go spend their money at the sports facility rather than, perhaps go to the local amusement park, then money that would normally be spent in one way, and spent another way, does not introduce any new spending in the community.  But if the sports venue can coax residents to spend money at the sport facility in addition to the other places, then more money is circulated and the community benefits.  This is called import substitution and is another criteria for measuring the financial benefit of public subsidies.

Baade 1994:
In standard economic models, metropolitan economic growth comes from new “export sales” and “import substitution.” Increased export sales result from attracting net new inflows of spending from outside the area. This regional increase in exports might occur if, for example, people from another region decide to attend a baseball game in the area, rather than go to their local movie theater. If, on the other hand, people from another region spend money at an area stadium rather than at a movie theater or restaurant near the stadium, the stadium is not increasing export sales-it is simply shifting them. Import substitution occurs when a community keeps money that residents might have spent elsewhere. If residents choose to go to a local football stadium instead of an entertainment event outside the area, it can be said that the stadium has become an import substitute. If, however, residents spend money at the stadium rather than at other local businesses, the stadium causes only a shift in spending, and no import substitution occurs.

Zimbalist and Noll 1997:
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.

Evidence tends to show the claims of economic benefit for host communities are overstated.

Baade 2005:
Professional sports leagues, franchises, and civic boosters, have used the promise of an all star game or league championship as an incentive for host cities to construct new stadiums or arenas at considerable public expense. In the past, league and industry-sponsored studies have estimated that Super Bowls, All-Star games and other sports mega-events increase economic activity by hundreds of millions of dollars in host cities. Our analysis fails to support these claims. Our detailed regression analysis of taxable sales in Florida over the period from 1980 to mid-2005 reveals that, on average, mega-events ranging from the World Cup to the World Series have been associated with reductions in taxable sales in host regions of $34.4 million per event. While this figure, like any econometric estimate, is subject to some degree of uncertainty, it certainly places on doubt boosters’ claims of huge economic windfalls. Cities would be wise to view with caution economic impact estimates provided by sports boosters, who have a clear incentive to inflate these estimates. It would appear that “padding” is an essential element of many games both on and off the field.

Playing Monopsony: Do Not Pass Go

One must consider the financial cost of supporting a monopoly, or at least an entity which appears to be a monopoly whether legally recognized as one or not.  Generally speaking, citizens have endured monopolistic practices by big business for decades, but legal actions are taken when other entities, attempting to compete, complain to the government about unfair practices by the dominate entity.  In the case of the professional sports leagues, it seems they have simply absorbed their competition and shared the wealth.

Perhaps it is an oversimplification but when an entity is capable of limiting competitive buying power, it is exercising monopsonistic power. A monopsony is in principle, little different than a monopoly. Under league rules, in the NFL for example, the player draft transfers exclusive property rights (basically the players talents) to the owner (the team which picked the player) the player has no bargaining power.  Thus the team functions as a monopsony with respect to the player. Such an arrangement also makes it possible for teams to disproportionately profit from the skills of drafted players. The teams then unite under a league structure which limits the number of teams and tries to limit outside competition.  According to some analysts, the collection of monopsonies is evolving into a monopoly.

Vrooman 2009:
As “natural cartels” the four major North American sports leagues have historically held major-league monopoly and monopsony power. There is emerging evidence in this analysis that these leagues have become dominated by sportsman owners who are willing to pay players their average revenue product in order to win. The players’ shares of revenues have recently exceeded 60 percent in each of the leagues. Erosion of monopsony power has forced sports-league cartels to exploit their monopoly power in negotiation of media rights fees and extortion of public venue cost subsidies.  In 2007 the four big leagues generated monopoly revenues of almost $20 billion, led by the National Football League (NFL) with $7 billion and Major League baseball (MLB) with $6 billion. Given statutory exemption from antitrust law these four leagues have collectively negotiated total television rights fees that currently average $5.6 billion annually through 2011. Annual NFL rights of $3.7 billion double the national TV money of the other three leagues combined. From 1990 through the end of current contracts the four leagues will have received over $80 billion in TV rights fees, including $50 billion in the NFL. Under threats of relocation monopoly teams and leagues have also extorted public subsidies for over half of $30 billion in venue construction costs since 1990. 

Even if Pro can put forth a reasonable justification for affirming the resolution based on economic factors or even less tangible "feel good" values, Con can and should make a strong case that subsidizing professional sports organization is in effect legitimizing the monopolistic practices of the league and the owners.

The professional sports industry, which constitutes all professional sports, is one of the most unusual and perplexing industries in the United States today. Different sports have been exempted from federal antitrust laws to varying degrees, while others have been forced to comply with the law.9 The industry utilizes a unique economic structure which acts as a "cartel."' The barriers to entry are significant," giving rise to the supposition that the professional sports industry is a "collection of natural monopolies." 

Fleeting Moments of "Feel Good"

While communities and government may cite, "feel good" externalities to justify use of public subsidies for professional sports organization.  Consider what happens after the facilities are built, urban revitalization kicks into high gear and the community is feeling good.  Piatt cites one example in Texas where George W. Bush as team co-owner, pressured the city to not only finance the stadium construction but also to use eminent domain to transfer properties surrounding the stadium to team owners who then sold the team four years later pocketing millions of dollars. Despite the seemingly overwhelming advantage to the personal wealth of owners, there is little measurable evidence the communities benefited.

Piatt, et al:
The exclusive right of member franchises in Major League Baseball (MLB), the National Football League (NFL), the National Basketball Association (NBA), and the National Hockey League (NHL) to their home territory and government subsidies for the construction of facilities has fostered great economic benefit for team owners (Leeds & von Allmen, 2002). The building of facilities for professional sport teams has been a cornerstone of redevelopment programs for many central cities and many larger suburban and edge communities (Austrain & Rosentraub, 2002). For more than 15 years, governments have invested more than $10 billion in the playing facilities used by professional sports teams (Kennedy & Rosentraub, 2000). They often justify subsidies by claiming the projects create valuable public goods and positive externalities, though such benefits are difficult to measure (Johnson & Whitehead, 2000). Indeed, many argue that the public suffers with such projects. 

Additionally, once the stadium is built it becomes a bargaining chip for more and more demands as teams can leverage their position by threatening to move to other cities.

Piatt, et al continue:
At least one scholar suggests that, while eliminating competition may be good for the franchises, it imposes a cost on society and the public may not like the resulting distribution of resources (Leeds & von Allmen, 2002). Kennedy and Rosentraub (2000) document that after making substantial commitments, communities are given new demands for increased subsidies. If these mounting demands are not satisfied, teams frequently move to other municipalities. Taxpayers and sports fans are then left with unused facilities, debt obligations, and a reduced quality of life. 

Therefore, based on the fact that numerous sources show there is very little positive economic return to offset the costs of public subsidies, and considering that public funding supports the monopolistic business practices of the league and owners, and in light of the fact that public subsidies strengthen the ability of owners to exploit and blackmail communities, we urge a Con ballot.


The Heartland Institue, Policy Study, No. 62 - April 4, 1994
Stadiums, Professional Sports, and Economic Development: Assessing the Reality
by Robert A. Baade

Selling the Big Game: Estimating the Economic Impact of Mega-Events through Taxable Sales
Robert A. Baade, Robert Baumann, and Victor Matheson
December 2005

Sports, Jobs, & Taxes: Are New Stadiums Worth the Cost?
Brookings Institute, 1997
Andrew Zimbalist and Roger G. Noll

Theory of the Perfect Game: Competitive Balance in Monopoly Sports Leagues
Review of Industrial Organization (2009) 34:5-44
John Vrooman
Vanderbilt University, Department of Economics, Nashville, TN 37235-1819, USA.

H. WARD CLASSEN; Associate General Counsel, International Mobile Machines Corporation, Philadelphia, Pennsylvania. B.A.
Trinity College 1982; J.D. The Catholic University of America 1985

Contrasting the Industry Structure of Professional Sports Franchises and Large Technology Firms: The Role of Monopolies and Other Non-Competitive Models
Alan Platt, Florida Gulf Coast University
Dana V. Tesone, University of Central Florida
George Alexakis, Florida Gulf Coast University

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