I reprised this post at a symposium on CEO pay at Otago University on Friday.Here’s my presentation – I had a half-hour to generally survey the lit on why CEOs are paid what they’re paid. Note that I here overestimated the pay ratio in New Zeala…
CEO Pay May 07
Dairy costs? May 06
No, the external costs of dairying in New Zealand are nowhere near either dairy’s export earnings or dairy’s contribution to GST GDP [my typo, sorry].A peer-reviewed study authored by Massey University scientists has claimed that worst-case scenar…
Harford on inequality May 06
At his blog Tim Harford has been writing on The truth about inequality. He says,
How serious a problem is inequality? And if it is serious, what can be done about it?
Myths abound. Many people seem to believe that Thomas Piketty’s Capital in the Twenty-First Century showed that wealth inequality is at an all-time high; instead, his data show that wealth inequality has risen only slowly since the 1970s, after falling during the 20th century. In Europe we are thankfully nowhere near the wealth inequality of the past.
Another common belief is that the richest 1 per cent of the world’s population own half the world’s wealth (almost true) and that their share is inexorably increasing (not true). The richest 1 per cent had 48.2 per cent of the world’s wealth in the year 2014, according to widely cited research from Credit Suisse, but that share has fallen and risen over the past 15 years. It is lower now than in 2000 and 2001.
Neither is it clear that global inequality is rising. Average incomes in China and India have risen much faster than those in richer countries; this is a powerful push towards equality of income. But inequality within many countries is rising. Research from Branko Milanović, author of The Haves and the Have-Nots, suggests that the two forces have tended to balance out roughly over the past generation.
One final myth is that inequality in the UK has risen since the financial crisis. In fact, it has fallen quite sharply. “Inequality remains significantly lower than in 2007-08,” said the Institute for Fiscal Studies last summer. That conclusion is based on data through April 2013. The IFS did add, though, that “there is good reason to think that the falls in income inequality since 2007-08 are currently being reversed.”
Harford then makes an important point about the need to take income redistribution into account when looking at inequality.
The UK already redistributes income extensively. As Gabriel Zucman of the London School of Economics points out, the UK’s richest fifth had 15 times the pre-tax income of the poorest fifth, but after taxes and benefits they had just four times as much.
I would think that if we were to look at consumption, which to me seems the important thing, the gap between “rich” and “poor” would decrease even more.
Of course there are those who would have the government redistribute even more but my previous post on To eat the rich, first they must stay still should act as a warning as to what could happen when the top income rates are raised.
I would suggest there is one addition question Harford did not ask: Is inequality a problem at all? Only after having answered that question yes should we ask how big the problem is and what can we do about it.
Sheep guts May 04
Exciting new developments over in the Ag Sciences area: new compounds to cut livestock methane emissions.
This week researchers at the New Zealand Agricultural Greenhouse Gas Mitigation Conference announced that they had identified several promising compounds which could cut livestock emissions. The compounds inhibit the activity of methane-producing bacteria that live in the gut of sheep and cows.Speaking to Radio New Zealand, Agresearch Principal Scientist Dr Peter Janssen said the results so far show impressive reductions in two-day trials in sheep.“These initial steps are relatively short-term trials in sheep and they show that you get a reduction of methane between 30 to 90 per cent,” he said. “It’s a very exciting result but there’s still a lot of checking to be done before you actually get something that a farmer can use safely.”
Now if this pans out, the New Zealand government should consider releasing the technology for everybody in the world to use, as New Zealand’s substantive contribution to the fight against greenhouse gasses.
If high-end methane reductions maintain, New Zealand on net very likely will have done far more good in reducing agricultural methane than it could have done with a $30/tonne carbon charge.
If everyone in the world were doing carbon trading or carbon taxes, we’d want to as well. But, realistically, if New Zealand were to disappear into outer space tomorrow, it’s pretty unclear that the entire abolition of New Zealand’s net greenhouse gas emissions would do much on aggregate warming outcomes. Maybe we’d delay the onset of any particular level of GHG accumulation by a half day over a century. In that case, New Zealand could perhaps do better by picking high variance plays despite their lower expected mean. Pour money into biotech research for low GHG pastoral systems and give the resulting technology away to anybody who wants to use it. Lower expected returns, but if it pans out, it could reduce GHG emissions by a heck of a lot more than NZ could achieve on its own via domestic incremental reductions in carbon or methane emissions.
Some lotto investments are worthwhile.
GST at the border May 04
Bronwyn Howell kindly walked me through what seems the least hassle-ridden way of collecting GST at the border (other than Seamus’s proposal): offload it onto the domestic end of the good’s shipment. The mechanism, if I understand it properly, would work as follows, with all confusions being mine.
When you order something online from a foreign shipper, they have to get it to you. Whoever they’re using for the international leg has arrangements with a domestic shipper to get it to your door. And there aren’t that many courier companies running the domestic side of things here, plus NZ Post.
On the local delivery agent getting a heads-up that a package is on its way, it would also have to get a heads-up on the goods’ stated value. The delivery agent would then be liable for GST on the shipped item.
That agent would then contact the recipient of the good seeking payment – when you order something online, you’re giving them an email address anyway. When you get the email, you’d go to another website to pay the tax so that the shipment could get to you immediately on landing in NZ. If you don’t get around to doing it before the product gets here, or if it gets lost in your spam filter, you’d have to pay the courier when the item gets to you or pick it up from the courier office and pay there. In a competitive shipping market, we’d expect the shippers to figure out easy ways to facilitate payment, like keeping your credit card details on file (if you agree) so that you can be automatically billed for any future GST charges without having to get an email.
So, in a best-case world, if you’d already paid GST once through that shipper and hadn’t changed credit cards since, you’d just get an email noting that the shipping company was going to charge your card GST on a shipment that’s coming through, with opportunity for you to object if something didn’t make sense.
That would be pretty hassle-free, after the initial hassle of having to set up accounts with the different shippers.
I note, though, that UPS in Canada always managed to charge us about $40 for the service of paying the duties and tax on our behalf at the border. Note that these fees are over and above any actual taxes collected. One hopes that New Zealand’s domestic shipping industry is sufficiently competitive that that wouldn’t happen here, but I doubt that the shippers would agree to become tax collectors for free either.
I also wonder whether the process might provide a mechanism for griefing shippers and others, if anyone were so inclined: ship a thousand envelopes each with a very high customs valuation for a photocopied picture inside to a bunch of unwitting recipients. The automated systems would either charge them automatically for the GST on something they’d never ordered, or would trigger collection and confusions, or would require the shipper to send back the envelopes while explaining to Customs that no GST was collected on the items. Maybe there are no griefers out there who’d try it though.
We’re then weighing up the transaction-deterring hassle costs (albeit perhaps smallish in this case), combined with the extra cost imposed on consumers by turning the shipping companies into tax agents, against the allocative efficiency gains from removing a tax distortion and the prevention of the erosion of a part of the tax base. And, at the same time floating around in the background, the expectation that if the system does wind up doing too much to deter consumer-led parallel importation, domestic retail prices would likely go up proportionately.
The system seems worth IRD’s investigation. But assessing the benefits of it really shouldn’t begin with the numbers in the ISCR report commissioned by BooksellersNZ. The report has a lot of good stuff in it – it’s where I saw the scheme noted above, and why I got in touch with Bronwyn.
But the report does have a few …issues.
- The report gives, as one option, requiring foreign sellers to register with IRD. While I can buy that a lot of large online retailers would find it worthwhile to sign up to the kind of multilateral system they describe, I doubt that that is also true for lots of the smaller online US retailers. For many of them, any international shipping already seems a hassle: that’s one reason YouShop was set up, right? To forward on packages from US retailers who don’t want the hassle of international shipment?
- The report suggests that, under the system where foreign firms would register with IRD, local firms would have to pay taxes to the US on shipment there through some OECD coordinating mechanism. But wouldn’t that kind of system, for shipping to the US, be next to impossible absent the US sorting out its mess of local sales taxes? I mean, they’ve not yet been able to sort things out for internet sales taxes within the US; there was some talk a couple years ago about having a set of states that agree to a reasonably common base also agree to collect sales taxes for each other, but I don’t think it’s gone anywhere, has it? There are thousands of local taxing jurisdictions in the US with really divergent rules over, for example, what precisely counts as an ice-cream sandwich (and what doesn’t) for sales tax purposes.
- They suggest a few methods for evaluating whether shifting the regime would be a good idea and argue that a social welfare maximisation approach is strongly preferable to a government-centric approach in calculating the appropriate de minimus value or in setting other parts of the collection regime. I agree, but have a couple of worries on this front.
- Absent a system that is able to collect these fees pretty seamlessly, from the consumer’s perspective, we need to watch for spots where we might impose fixed costs on purchases from abroad that do not obtain for shopping domestically. For example, it seems likely to be pretty distortionary and welfare-reducing if customers are deterred from buying from abroad because of a few days’ processing lag at the border, or because of a requirement to go pick up the item at a NZ Post Office across town and there pay the duties, or an additional step when shopping requiring you to go buy a customs stamp from a Customs website.
- There’s no note of that easy ability to parallel import from abroad can serve as substantial constraint on price-setting in domestic retail markets. That magnifies that harm that could be done if we unduly deter customers from using foreign shopping options due to expected hassle-costs. Sure, it’s a second-best-worlds consideration, but we’d need some accounting for it in a social-welfare-maximisation setup.
- I’m really not sure that the elasticities they’re using from Einav et al, for example, would really apply here – they’re there used to estimate how much change there would be to shopping patters with the 15% GST being applied on international low-value purchases based on tax elasticities across US states. Shipment from different US states, from the point of view of the consumer – there’s really not much difference other than price. Whether you buy in-state or from out-of-state, you’ll have whatever you ordered in 2-5 days. Here, that’s not quite so: domestic shopping is far more immediate than shipping in from abroad. Since they’re not nearly as close of substitutes for one another, the price elasticity of demand between foreign and domestic should be lower, right? Further, because the NZ market is much thinner, there are plenty of products you just can’t get here: again, this lowers the expected price elasticity and means that you might be overestimating the effects of the de minimus thresholds.
- On this one, I’m really willing to put money on it with any of the authors. If a seamless collection of 15% GST at the border is implemented, I am willing to bet that the decline in demand for Book Depository in New Zealand is less than 20% (they predict 45-60%). It’s range of products and ease of getting the books that’s driving demand for Book Depository, as well as price differences well in excess of 15%; an extra 15% charge is trivial – or at least that’s my bet. But only conditional on shipment’s being seamless. I’m more than happy to bet that you could kill demand for Book Depository by making it a hassle to receive shipment.
- I am curious that they’re counting as benefit the jobs that would be created in New Zealand subsequent to deterring imports by imposing substantial delays on importation. Mightn’t we need some modelling of whether those workers would be drawn from other actually productive sectors? It looks to me like we’d be imposing large and real costs here to effect a transfer from domestic consumers and foreign retailers to domestic retailers. Some accounting for the elasticity of domestic prices with respect to degree of foreign competition also seems likely to be relevant.
- I was interested in their choice of counterfactual at the end where they invite the reader to imagine the benefits of a $5k tax-free threshold if only we could lower the de minimus threshold. Do they believe that this is the relevant counterfactual? Really?
“This enhanced demand at domestic retailers not only results in increased producer surpluses, but firm growth leading to increased employment. Jobs created by a reduction in the de minimis threshold increase the economy’s productive capacity, clearly benefiting the rest of the country. Enhanced domestic employment results in increased consumer spending, and through the multiplier effect, enhanced growth throughout the economy.”
Emphasis added. Jeez.
As the economy changes so should competition policy. But does it? The “new economy” or the “information economy” or the “knowledge economy” or whatever you want to call it has altered the way the economy works. Changes in technology, in particular information and communication technology (ICT), have become the major drivers of change in the economy and of economic growth. But has competition policy kept up with this change? May be not.
The European Commission’s antitrust case against Google is the latest in a series of attempts to prevent tech giants from “monopolising” EU markets, or so we are told. But it can be argued that past cases against Intel and Microsoft demonstrate the need review what may be an outdated competition policy in the EU. And not only in the EU.
The European Commission has formally charged Google with anti-competitive practices, the latest twist in a case that was first launched way back in 2010. The EU’s competition watchdog accuses the US tech giant of systematically favouring results from its own specialist search engine, Google Shopping, over competitors like Amazon and eBay. And this, it is alleged, has had an adverse impact on competition and consumer well-being.
Superficially, it would indeed seem that Google holds a dominant position online, with a 92 per cent share of the EU market for general (known as ‘organic’ or ‘horizontal’) search. Google has also been expanding its offering of specialist (a.k.a. ‘vertical’) search engines for items like flights and consumer products. Does this mean that competition online is being undermined, and that regulatory authorities should intervene to put it right?
It could of course be that they are dominant simply because they are better than the competition.
Zuluaga goes on to say that the answer to his question is, Not necessarily.
The test for any antitrust investigation must be whether competition, not individual competitors, are being harmed. And by any available measure, competition and specialisation in online search services is thriving. New players focusing on specific market niches, from SkyScanner for flights to DuckDuckGo for greater privacy, have emerged in recent years. In the specific case of comparison shopping which the Commission is worried about, it does not look like Google Shopping is catching on, despite the tech giant’s best efforts: In three key EU markets – Germany, France and the UK – Google’s own product search engine is a marginal player, with Amazon, eBay and local competitors (Idealo in Germany, Fnac in France) boasting multiple times the number of user visits of Google Shopping. What is more, the gap between Google’s own service and its leading competitors is growing, if anything.
Intuitively, this makes sense. If I want to purchase Malcolm Gladwell’s latest bestseller, I am much more likely to browse for it on Amazon, as the latter is reputed for its excellent catalogue, user reviews and related recommendations. Rather than search for it on Google and then look for the best result, I will go to the Amazon website directly. The same goes for flights, hotels, restaurants and any other topic where there is a wealth of specialist search services. Even for those who tend to go through Google, competing options are still there – one only need scroll down to see them. This makes it hard for Google to divert large amounts of traffic to its own services – and it helps explain why Google Shopping has not taken off, as we might have expected it to.
A question one could ask is, Have past actions by competition authorities in previous digital cases been appropriate? May be not, just think of the Intel and Microsoft cases.
In 2009, the Commission fined chip-maker Intel more than €1bn for offering ‘predatory discounts’ to computer manufacturers, which allegedly harmed Intel’s competitors. Yet, by all measures, competition in the chip sector was fierce during the period of Intel’s anti-competitive behaviour. Chip prices declined by up to 75 per cent, while performance grew tenfold. Far from increasing at the expense of competitors, Intel’s market share remained stuck at 80 per cent, and the fluctuations in its share are strongly correlated with new product launches, both by itself and by rivals like AMD.
How about the other previous high profile digital probe, the 2004 ruling against Microsoft? Commission officials worried at the time that the company founded by Bill Gates was strengthening its grip on all PC-related products and services, thanks to its dominance of computer software. Barely a decade later, it is astonishing how things have changed: Microsoft still provides software for a lot of the world’s PCs, but the rise of smartphones – where Google’s Android and Apple’s iOS prevail – has made its share of the overall software market (for smartphones, tablets as well as PCs) shrink to as low as 20 per cent, according to Goldman Sachs research from 2012. Innovation killed the software star.
Both the Intel and Microsoft cases illustrate the shortcomings of EU competition policy when it comes to the digital sector: Despite Intel’s large market share in the chip market, competition was no less aggressive, and consumers still benefited from steadily dropping prices and ever better performance. And even though Windows was the dominant player in software in 2004, innovation outside the PC market – which no one, least of all Microsoft, foresaw – has turned it into one among several competitors in a much larger market.
Aa obvious point is that competition policy rulings should be grounded in sound economic analysis. It is not clear that they have been.
DG Competition has enormous powers to intervene in the internal market, acting as judge, jury and enforcer of antitrust proceedings in the EU. This makes it imperative that its rulings be rooted in sound, convincing economic analysis. Such analysis seems to be lacking in the case of Google Shopping, as it was in the Intel and Microsoft rulings. The digital economy lies at the heart of economic growth in the 21st century, so getting antitrust wrong in this sector will have a longstanding negative impact on innovation and growth in Europe.
A lesson from this is that the new technology underlying the new economy has changed the way companies do business in all sorts of sectors, and competition policy, in all countries, must evolve with it. Is not clear that it has in many countries, including New Zealand.
Interesting blog bits May 03
Some weekend reading:
- Chris Dillow on Bonuses and productivity
Big bonuses for bosses can have adverse effects upon productivity
- Jérémie Cohen-Setton comments on The critique of modern macro
Do modern macroeconomic tools developed in the stable macroeconomic environment still make sense?
- Tim Worstall comments that Greek Debt Deal Looks Further Away Than Ever
Various European finance ministers and the like are meeting in Riga today. And the Greek financial markets are up a bit on hopes that everyone will get closer to an agreement on how to deal with the Greek debt crisis. No one actually expects a deal to get done today but the hopes are that some baby steps toward one might be made.
- Eric Crampton notes that All your health is belong to us
If the one paying the piper calls the tune, be careful who you let pay for dinner. Britain’s NHS is considering rationing healthcare by a measure of deservingness
- Timothy Taylor on Americans, Led by Democrats, Get Friendlier With Free Trade
A working hypothesis would be that countries with lower incomes and/or more exposure to foreign trade are more likely to see it in overall positive terms.
- Tim Harford on Paying to Get Inside the Restaurant: Is it worth it to fork over cash for a table?
The next time you’re fortunate enough to have dinner at a high-end restaurant, take a moment to enjoy not only the food and wine, but the frisson of a really good puzzle: Why do restaurants price things the way they do?
- John Taylor on A Monetary Policy for the Future
Should forward guidance be part of a monetary policy for the future? My answer is yes, but only if it is consistent with the rules-based strategy of the central bank, and then it is simply a way to be transparent. If forward guidance is used to make promises for the future that will not be appropriate in the future, then it is time-inconsistent and should not be part of monetary policy. For all these reasons monetary policy in the future should be centered on a rule or strategy for the policy instruments designed to achieve stated goals with consistent forward guidance but without cyclical macroprudential actions or quantitative easing.
- Joshua Gans on The last two digits of a price can signal your desperation to sell
Competitive options for buyers and sellers can define a limit beyond which they will not go, but there is still a range of prices that fall within those limits. Within that range, clearly sellers would like a higher price, while buyers would like a lower one, so each has an incentive to signal to the other their willingness to be a tough negotiator. Sometimes, however, you might want to send a signal that you might be willing to be less tough. Why?
- Chris Dillow on The Knowledge Problem
Was Hayek merely a Cold Warrior who is irrelevant today, or does he still have something to teach us? I ask because of two things that have happened to me this morning.
- Jason Brennan on Philosophy Departments, Cost-Benefit Analysis, and the Seen and Unseen
In the past few days, philosophy bloggers have been writing with concern about how more philosophy departments around the country are closing
EconTalk this week May 02
Leonard Wong of the Strategic Studies Institute at the U.S. Army War College talks with EconTalk host Russ Roberts about honesty in the military. Based on a recent co-authored paper, Wong argues that the paperwork and training burden on U.S. military o…
If the one paying the piper calls the tune, be careful who you let pay for dinner.
The NHS plans to dramatically increase rationing of patients’ access to care and treatment in an effort to balance its books, a new survey of health bosses reveals.
Almost two in five of England’s 211 clinical commissioning groups (CCGs) are considering imposing new limits this year on eligibility for services such as IVF, footcare and hip and knee replacements.
Smokers and those who are obese will be among those denied surgery and other treatment, according to a survey of 80 CCG leaders conducted by the Health Service Journal, in an extension of the controversial policy of “lifestyle rationing”.
So. We get tobacco excise taxes to defray the health costs of the public health system. You cannot opt out of the NHS but through the costly route of paying for NHS through your income taxes and excise taxes and then paying separately for private health care. Then smokers could be denied service because of the smoking.
Meanwhile, more paternalism’s being rolled into welfare services. There are pretty reasonable justifications for targeting paternalism towards those who’ve demonstrated a need for extra help in financial planning. Plus, a strongly paternalistic approach could have similar effect to the kind of separating equilibrium that Mill talked about. But it’s still not a nice call. If you’ve been stuck in a crappy school and then disemployed by minimum wages above your marginal product, you then get choice taken away from you on more of the remaining margins.
Now think about Guaranteed Income Proposals. I wonder what private behaviours would become of public regulatory interest when we all reckon not only that the neighbour is doing something we don’t like, but that we’re helping subsidise him to do it.
Over at the Offsetting Behaviour blog Eric Crampton comments on how bad the business plan for a new $156 million cycleway for Christchurch is. But here in the People’s Republic of Christchurch there are plans afoot not just for cycleways but also for other big ticket items such as a big new, super-sized stadium. Sports stadiums are a favourite of cities all over the world, not just in New Zealand. And you can be sure that they all come with (bad) business plans or economic assessment reports to show how great they are.
As Adam M. Zaretsky says when writing about the building of stadiums in the U. S.,
[...] cities with home teams are often willing to go to great lengths to ensure they stay home. And cities without home teams are often willing to dangle many carrots to entice teams to move. In either case, the most visible way cities do this is by building new stadiums and arenas.
Between 1987 and 1999, 55 stadiums and arenas were refurbished or built in the United States at a cost of more than $8.7 billion. This figure, however, includes only the direct costs involved in the construction or refurbishment of the facilities, not the indirect costs—such as money cities might spend on improving or adding to the infrastructure needed to support the facilities. Of the $8.7 billion in direct costs, about 57 percent—around $5 billion—was financed with taxpayer money. Since 1999, other stadiums have been constructed or are in the pipeline [...], much of the cost of which will also be supported with tax dollars. Between $14 billion and $16 billion is expected to be spent on these post-’99 stadiums and arenas, with somewhere between $9 billion and $11 billion of this amount coming from public coffers. The use of public funds to lure or keep teams begs several questions, the foremost of which is, “Are these good investments for cities?”
The short answer to this question is “No.” If you are a ‘just read the executive summary’ kind of guy then you can stop reading here since what follows just makes the case for the answer already given.
Zaretsky goes on to say,
When studying this issue, almost all economists and development specialists (at least those who work independently and not for a chamber of commerce or similar organization) conclude that the rate of return a city or metropolitan area receives for its investment is generally below that of alternative projects. In addition, evidence suggests that cities and metro areas that have invested heavily in sports stadiums and arenas have, on average, experienced slower income growth than those that have not.
When stadiums are build with ratepayers money, Are they worth it?
The dollars being invested in sports facilities are quite substantial considering the overall contribution the industry makes to the economy. In testimony before the U.S. Congress, economist Robert Baade said that Chicago’s professional sports industry—which includes five teams—accounted for less than one-tenth of 1 percent of Chicago’s 1995 personal income. Baade further commented that even when compared with the revenue of other industries, professional sports teams contribute small amounts to the economy. He noted, for example, that “the sales revenue of Fruit of the Loom exceed[ed] that for all of Major League Baseball (MLB), while the sales revenue of Sears [was] about thirty times larger than that of all MLB revenues.”
Still, cities are driven by the idea that playing host to professional sports teams builds civic pride and increases local tax receipts from the team-related sales and salaries. When it comes to salaries, however, economist Mark Rosentraub noted in a 1997 article that there is no U.S. county where professional sports accounts for more than 1 percent of the county’s private-sector payroll.
Although sports facilities certainly generate tax revenues from their sales, the pertinent question is whether these revenues are above and beyond what would have occurred in the region anyway. To address this question, city proposals to use taxpayer money to finance sports facilities are routinely accompanied by “economic impact studies.” These studies, which are often commissioned by franchise owners and conducted by an accounting firm or local chamber of commerce, generally use spurious economic techniques to demonstrate the number of new jobs and additional tax revenues that will be generated by the project. The assumptions that are made in these studies—such as how much of the newly generated income will stay in the region and how many “secondary” jobs will be created—often cannot be substantiated by economic theory.
Estimates of income that will be generated and, hence, spent in the region are often overstated. Most of the “big” money in sports goes to the owners and players, who may or may not spend the money in the hometown since many live in other cities. And because athletic careers are usually short-lived, much of the players’ income is invested. Moreover, league rules often require ticket revenues be shared with franchise owners in other cities as a way to subsidize teams in smaller markets. In the case of the National Football League, every visiting team leaves town with 34 percent of the gate receipts from each game.
On top of all this, the value of the subsidy a team receives when a city foots the bill for a new stadium or arena often shows up as a higher team resale price, which then ends up in the owner’s pocket. For example, Eli Jacobs bought the Baltimore Orioles for $70 million in 1989, just after the team had convinced the state of Maryland to build it a new $200 million ballpark from lottery revenues. The enormously popular Oriole Park at Camden Yards opened in 1992. The following year, Jacobs sold the Orioles for $173 million. The sale netted Jacobs an almost 150 percent return, with no money out-of-pocket for the new ballpark.
But what about the economic impact studies that show tax revenue increases from a stadium.
Economic impact studies also tend to focus on the increased tax revenues cities expect to receive in return for their investments. The studies, however, often gloss over, or outright ignore, that these facilities usually do not bring new revenues into a city or metropolitan area. Instead, the revenues raised are usually just substitutes for those that would have been raised by other activities. Any student of economics knows that households have budget constraints that are binding, which means that families have only so much money to spend, particularly on entertainment. If the family chooses to spend the money at the ballpark, for example, then those funds cannot be spent on other activities. Thus, no new revenues are actually being generated.
Public funds used for a stadium or arena can generate new revenues for a city only if one of the following situations occurs: 1) the funds generate new spending by people from outside the area who otherwise would not have come to town; 2) the funds cause area residents to spend money locally that would not have been spent there otherwise; or 3) the funds keep turning over locally, thereby “creating” new spending.
Very little evidence exists to suggest that sporting events are better at attracting tourism dollars to a city than other activities. More often than not, tourists who attend a baseball or hockey game, for example, are in town on business or are visiting family and would have spent the money on another activity if the sports outlet were not available.
Economists Roger Noll and Andrew Zimbalist have examined the issue in depth and argued that, as a general rule, sports facilities attract neither tourists nor new industry. A good example, once again, is Oriole Park at Camden Yards. This ballpark is probably the most successful at attracting outsiders since it is only 40 miles from the nation’s capital, where there is no major league baseball team. About a third of the crowd at every game comes from outside the Baltimore area. Noll and Zimbalist point out that, “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.”
The claim that sporting facilities cause residents to spend more money in town than they would otherwise is harder to substantiate. To prove such a claim, the agency performing the analysis would need for its report both detailed information about the spending patterns of households and the ability to ferret out the information about their spending in other regions, which, at best, is extremely difficult and may even be impossible. Without such information, the report’s authors could back into this claim only with some fancy footwork and shaky assertions. That is, they would have to contend that residents are spending more in town because of higher incomes that enable households to devote more of their entertainment budgets toward local sporting events. Then, the authors would have to demonstrate that incomes are up because money was spent on the stadium. If they can’t, the argument falls apart since the only conclusion is that incomes rose for unrelated reasons; throwing tax dollars at the stadium did not affect households’ spending patterns.
The most spurious economic concept applied to stadiums is the “multiplier”.
Of the three circumstances described that purportedly generate new revenues, the third—funds keep turning over locally, thereby “creating” new spending—is probably the most spurious from an economist’s viewpoint. Such a claim relies on what are called multipliers. Multipliers are factors that are used as a way of predicting the “total” effect the creation of an additional job or the spending of an additional dollar will have on a community’s economy. It works something like this: A stadium is built, which creates new jobs in the region. Because more people are working, they spend money in the area (for lunch, parking, etc.), which in turn requires local businesses to hire additional workers to support the increased demand. These extra workers further increase demand for goods and services in the area, requiring more new jobs…and so on. That is, the dollars keep turning over locally. The story is the same for fans spending money at the arena, which provides income for arena workers, who then spend the money, generating incomes for other workers…and so on.
On their faces, these are compelling arguments. Some researchers have even attempted to quantify these effects, developing precise multipliers that tell analysts how much the new spending or job creation should be “multiplied” by to arrive at the “total effect” the spending or job creation will have on the local economy. These multipliers are often specific enough to distinguish between various industries, occupations and locations. Thus, economic development specialists and planners will generally latch onto multipliers and confidently proclaim that the 1,000 new jobs created by this industry will actually create 4,355 new jobs and generate $5.5 million in new revenue in the community when all is said and done. Makes for great headlines, but are such outcomes believable?
Probably not. As Mark Twain once said: “It’s not what we don’t know that hurts. It’s what we know that just ain’t true.” For one thing, these new jobs most likely just lure workers away from other jobs in town and do not actually lead to a net change in jobs in the area. For another, many of the jobs are low-paying, part-time and needed only on game days. Moreover, authors of these economic impact studies often choose multipliers arbitrarily or with clients’ wishes in mind to get the desired outcome. As economist William Hunter has pointed out, multiplier analysis can be used to justify any public works project because “even the smallest multiplier will guarantee community income growth in excess of public expenditures.”
Even if economic impact studies are taken at face value, however, the cost of creating these jobs is usually out of the ballpark. In Cincinnati, for example, when two new stadiums were proposed to keep the NFL Bengals and the MLB Reds in town, the economic impact study claimed that 7,645 jobs would be created or saved because of the stadium investment. Since the project was estimated at $520 million, each new or saved job was reported to cost about $68,000.
When economists John Blair and David Swindell examined the $68,000 figure a bit closer, though, they discovered it was too low because the study’s estimate of 7,645 new or saved jobs was too high. Blair and Swindell then re-evaluated the report, corrected for double-counting and other problems, and concluded that only 3,530 jobs would be created or saved if the stadium proposal passed. Thus, the cost per job was actually going to run more than $147,000. In contrast, state economic development programs spend about $6,250 per job to create new jobs.
And let us not forget “opportunity cost” …. but most impact studies do in fact forget it.
Another glaring omission from these economic impact studies is the value of the next-best investment alternative—what economists call the opportunity cost. “There’s no such thing as a free lunch” is a favorite economist expression because it sums up exactly what opportunity cost means: When making a choice, something always has to be given up. The value of the “losing” choice must be considered when making the decision and when calculating the value, or return, of the “winning” choice. In other words, when a city chooses to use taxpayer dollars to finance a sports stadium, the city’s leaders must consider not only what the alternative uses of those funds could be—such as schools, police, roads, etc.—but they must also figure what return the city would receive from these other ventures. Then, the return from the city’s next-best alternative (for example, schools) must be subtracted from the total return of the “winning” choice to arrive at the “actual” return of the stadium investment. This adjusted calculation, though, is almost always missing from sports stadium impact studies. Why? Because in just about every case, the adjusted calculation would show that the next-best alternative was actually the better alternative.
Has financing sports stadiums ever been the best alternative? Research shows “No.” In their book, Noll and Zimbalist—along with 15 other collaborators—examined the local economic development argument from a wide variety of angles. In every case, the conclusions were the same. “A new sports facility had an extremely small (perhaps even negative) effect on overall economic activity and employment. No recent facility appears to have earned anything approaching a reasonable rate of 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.
In fact, research has shown that subsidizing sports facilities usually does not affect a city’s growth and, in some cases, may even hurt growth since funds are being diverted from alternatives with higher returns. In a 1994 study that examined economic growth over a 30-year period in 48 metropolitan areas, Robert Baade found that of the 32 metro areas that had a change in the number of sports teams, only two showed a significant relationship between the presence of a sports team and real per-capita personal income growth. These cities were Indianapolis, which saw a positive relationship, and Baltimore, which had a negative relationship.
Moreover, Baade found that of the 30 metro areas where the stadium or arena was built or refurbished in the previous 10 years, only three areas showed a significant relationship between the presence of a stadium and real per-capita personal income growth. And in all three cases—St. Louis, San Francisco/Oakland and Washington, D.C.—the relationship was negative.
So what is the overall conclusion? The weight of economic evidence shows us that ratepayers end up spending a lot of money and ultimately don’t get much back for their forced investment. And when this paltry return is compared with other potential uses of the funds, the investment, almost always, seems uneconomic.
Interestingly, a pamphlet from The Greens turned up at home last week arguing that Christchurch should reassess its spending on “big ticket” items, such as the super-sized stadium. A good proposal as far as it goes. What would be better is to say we should abandon the stadium idea (and a number of other projects) altogether.