Do Professional Sports Benefit the Economy Essay

Running head: Do Professional Sports benefit the economy? Do Professional Sports benefit the economy? William S. Cooper Hodges University Directed Study in Management (MNA4704) Professor Meyers December 20, 2009 Abstract Do professional sports have a “major league” impact on the US economy? Most professional sports such as the National Football League, the National Basketball Association, the Major League Baseball and the National Hockey League have teams that are associated with a city of the United States.

Most of these professional sports teams have lower level teams that they are associated with so they can groom up and coming professionals. Across the United States, there are millions of dollars being spent on these professional sports teams and their stadiums. Where is the money coming from and how is the US economy being affected by their revenues? Do Professional Sports benefit the economy? Table of Contents Abstract…………………………………………………………………………………2 Definitions4 Literature Review5

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Methodology9 Ethical Beliefs9 Findings11 Data Collection11 Discussion12 Recommendations13 Appendix14 Consent Form14 References15 Definitions In order to grasp comprehension of this research paper, an insertion of the defined terms has been applied throughout the reading to ensure basic understanding of the text. Public Funding- A stock or capital of national debt; public securities; evidences (Stocks or Bonds) of money lent from the government, for which interest is paid at prescribed intervals.

Multiplier Effect- An effect in economic in which an increase in spending produces an increase in national income and consumption greater than the initial amount spent. For example, if a corporation builds a factory, it will employ construction workers and their suppliers as well as those who work in the factory. Indirectly, the new factory will stimulate employment in laundries, restaurants, and service industries in the factory’s vicinity. Direct/ Indirect Impact- Actual value of construction outlays, operating expenses, associated on-site and off-site spending by visitors to the cultural facility.

Indirect – Monetary and employment flows generated as a result of the direct spending (construction, operations, visitor-related) including the re-spending of wages and salaries of the personnel working at the cultural facilities and for its suppliers. Substitution Effect- is always negative: consumers always switch from spending on higher-priced goods to lower-priced ones as they struggle to maintain their living standards in face of rising prices. There is always a tendency to substitute towards inferior goods, because at the lower prices one can apparently get more value.

However many substitute’s find that the better quality goods were satisfactory in ways that the inferior goods. Literature Review Recent years sports franchises have frequently used their monopoly power to extract rents from state and local governments. Typically, a franchise owner declares an existing facility unsuitable. Perhaps it is too old, or too small, or lacks enough luxury boxes or suites to raise the necessary revenues to field a competitive team. The owner reminds the local government and business community that many other cities would like to have a team and those cities would also build a new stadium.

This issue has become a relevant topic of discussion throughout the years; Sports analysis John Thompson of NBA fast break quotes “The Cities all over the country, desperate for a professional sports team, gear up to convince the owner to move. Often, the promise of a new stadium and a flexible lease convinces the owner to stay, but some franchises move”. What justification exists for the government subsidy of professional sports? The proponents of new stadiums and franchises are always quick to point out the economic benefits of the proposed facilities and teams (Humphreys, 1999).

Cities throughout the country have struggled to attract or keep professional sports teams in recent years, and the idea that a team brings with it large economic gains invariably arises. Part of this process is the commissioning of economic impact studies that purport to show just how much benefit the city or region will reap. The owners of franchises in monopoly professional sports leagues have used the real or implied threat of moving to another city to persuade state and local decision makers and politicians to provide them with lavish new stadiums and arenas at little or no cost.

The owners appear to have profited handsomely from this stadium gambit, as suggested by the triple-digit increases in franchise values. In return, taxpayers receive non pecuniary benefits in the form of increased civic pride and image, as well as other unmeasured consumption benefits associated with living in a city with professional sports teams. Taxpayers have also been told that new teams, stadiums, and arenas create jobs and raise tax revenues and income in their city (Quirk, 1992).

Regardless of whether the team stays or goes, then taxpayers foot the bill for a new stadium, improvements to an existing stadium, or infrastructure needed to make the new stadium or arena as attractive as possible. The practice of professional sports profiting at the expense of taxpayers is not new. Although, there is the common practice of funding stadium construction using private purpose local bonds because their interest payments are exempt from federal income taxation and they therefore carry a lower interest rate. The net effect is that the federal government subsidizes construction of the stadiums and arenas built by state nd local governments for professional sports franchises (Baade, 1996). Indeed, closing the loophole in the law that allowed this subsidy has simply been replaced by explicit state and local funding of stadiums that can be turned over rent free to franchises. The recent spate of sweetheart stadium and arena deals is only the latest manifestation of owners of professional sports franchises getting richer at the public’s expense. While not entirely new, this phenomenon has become front-page news across the country in recent years.

Combined with the “build it and they will come” attitude of many city governments, this method of thinking has led to a marked increase in new stadium and arena construction, franchise relocations, and negotiations between teams and local governments. Despite the beliefs of local officials and their hired consultants about the economic benefits of publicly subsidized stadium construction, the consensus of economists has been that such policies do not raise incomes. The results that we describe in this article are even more pessimistic.

Subsidies of sports facilities may actually reduce the incomes of the alleged beneficiaries (Christman, 2006). Critics argue that at best the multipliers used in prospective impact studies overstate the contribution that professional sports make to an area’s economy because they fail to differentiate between net and gross spending and the effects of taxes. In computing the benefits of the investment in a stadium, the appropriate focus is on net benefits, that is, on benefits that would not have occurred in the absence of the stadium. One could think of this concern as the substitution effect.

Specifically, because of sport- and stadium-related activities, other spending declines as people substitute spending on one for spending on the other. A key issue for getting the right sense of the value of the stadium investment is, consequently, how much of stadium- related spending substitutes for otherwise intended spending and how much is net gain in spending. An important question related to the size of these substitution effects, and on the appropriate size of the relevant geographic area. A stadium or arena will have more added effects on a very narrowly defined community than on a largely encompassing community.

The reason for this is that the more narrowly the host community is defined, the more of the spending at the stadium and the nearby restaurants, bars, and hotels will come from outside the community. Professor Mullins from Journal of Urban affairs Quoted “However, that spending will come largely at the expense of the home communities of the fans that travel into the stadium from outlying areas. The substitution effect for the broadly defined area is quite large, but for the narrowly defined stadium community it is much smaller.

What this points out is that stadiums and sports teams may be a tool for redistributing income in which the people from suburbs subsidize businesses in the city” (Mullins, 1994). The pros and cons of this issue reflect many views based on whether consumers in the cities of professional sports teams should be taxed in order to fund the development. According to an article in the Harvard Journal on Economist,” The big – four accounting firm Price Waterhouse Cooper, “Tampa Bay was expected to earn about $150 million from tourism related to the Super Bowl in 2009.

That number is 22% down from last year’s Super Bowl in Arizona”. The study protocol consist of dramatic interventions which all consist of pros and cons, which can only be determined through moral ethics on what is right and wrong? However, others argue that the loyalty of fans to their sports teams come unappreciated due to the fact that organizations still insist on charging so much money for tickets, foods, and associated items of purchase. The year is 2009 and the country is faced with some of its darkest days in history. The U. S economy is on a steady downfall and its only getting worse.

Many people who make a living on Wall Street are starting to zip up their pockets to try and save some money here and there. It seems as though every industry in America is suffering- and in fact, they all are being affected throughout the world because of the slumping economy. Methodology It has long been thought by many that sports are recession proof. The blind vision that the fans for many teams will always come to games and thus these teams will be able to shell out money for talented star players. The purpose of this study is to determine whether professional sports produce economic benefits for society.

This study used by league and event promoters estimates the number of visitors an event or team is expected to draw, the number of days each spectator is expected to stay in the city, and the amount each visitor will spend each day. Other factors to consider will be based on how much taxes should be raised to fund such developments. The data will be recorded and studied to see if professional teams are beneficial or a hindrance to the economy. Ethical Beliefs Stadium and team advocates, for example, raise the issue of civic pride and the image of cities.

According to this logic, only cities with professional sports teams are truly world class. The gain in civic pride is, of course, very difficult to measure. The benefits that accrue to individuals who never or rarely attend games at the stadium but who derive enjoyment from following the team in the newspaper or via the radio and television broad casts are also difficult to measure. Such benefits are the result of an externality, a good or service provided by one individual or group that provides benefits to other individuals or groups and for which the latter provide no compensation to the former.

The existence of these external benefits could justify some public participation in the provision of stadiums and sports franchises. SWOT Analysis If as prospective team owners, developers, and politicians would have us believe, professional sports can be an important engine of economic growth, how can our estimates be correct? The following key SWOT terms are vital elements which will inform readers on the possible alternatives of acquiring a professional franchise team in their city. Strengths Increase employment rate (Jobs) Tourism Attraction Potential growth in culture/ ventures Revenue of sales Weakness Tax burden Traffic increase

Impact of town developments to new locations. Loitering on main streets Opportunities New advertising methods Develop new innovations (Projects) Promoting tourism Obtaining grants for new developments Threats Too dependent on tourism Financial impact of continually increasing regulations Interest rates/ taxes rising Increased cost of productions. Findings In stark contrast to the results claimed by most prospective economic impact studies commissioned by teams or stadium advocates, the consensus in the academic literature has been that the overall sports environment has no measurable effect on the level of real income in metropolitan areas.

My own research suggests that professional sports may be a drain on local economies rather than an engine of economic growth. The larger major league franchises build their stadiums around the team. They want to attract the hard core baseball fans. Also, because of heavy ticket prices, parking, etc, much more money is going to be spent on the baseball experience. The major leagues are for the major spenders. The larger major league franchises, both baseball and football, can derive revenue from hosting other activities such as concerts and championship games.

Data Collection Almost a half a decade ago, prospective NFL team owners in Jacksonville, Florida, claimed that a new NFL franchise would generate $340 million in new income in the city and create 3,000 jobs. In a recent case, the Baltimore Sun reported in April of 1999 that a new study supported tearing down the existing 36-year-old Baltimore Arena and replacing it with a new $200 million dollar facility. This investment, the study claims, will raise city taxes by $3. 8 million and state taxes by $6. 3 million.

In addition, the facility could generate up to $100 million in new earnings for the citizens of the city of Baltimore. Contrast these recent figures with information from the 1994 edition of the County and City Data Book (Coates, 1999). In 1990, the last year for which city and state tax collections are reported, Maryland and Baltimore collected $3. 4 billion and $528 million in taxes, respectively. For the city, the tax gain from the replacement arena is, if the figures are correct, only about 0. 7 percent of 1990 tax collections.

For the state, the new tax collections are less than two-tenths of a percent of 1990 tax collections. Earnings in Maryland were $68 billion and personal income in Baltimore was $13. 9 billion. Projected earnings from the arena are about 0. 15 percent of state earnings for 1990 and about 0. 72 percent of Baltimore’s total personal income. Although the absolute numbers seem large and impressive, they are small compared with the existing tax revenues and local economy even if one grants that the proponents’ estimates are correct.

Discussion It was discovered from the data that the policy implications of our results are no different from those of the previous studies that found no relationship between the professional sports environment and local economies. Still, they bear repeating. The evidence suggests that attracting a professional sports franchise to a city and building that franchise a new stadium or arena will have no effect on the growth rate of real per capita income and may reduce the level of real per capita income in that city.

Yet government decision makers and politicians continue to try to attract professional sports franchises to cities, or use public funds to construct elaborate new facilities in order to keep existing franchises from moving. According to public finance theory, the decision makers who attempt to attract a new franchise or build a new stadium or arena must value the total consumption benefits, including all no pecuniary benefits, more than the total costs, including the opportunity costs.

However, regardless of the size of the no pecuniary benefits, one thing is clear from the evidence on professional sports franchises: owners are reaping substantial benefits in the value of their teams because they are so skilled at the stadium gambit. Recommendations Based on the research study, the following recommendations have been made to enlighten readers and viewers on the issues of whether professional sports have statistically significant impacts on the level of real per capita income in our sample of metropolitan areas, and the overall impact is negative.

The presence of professional sports teams, on average, reduces the level of real per capita income in metropolitan areas. This result differs from much of the existing literature, which generally has found no impact at all. However, a broader and longer panel of data and a richer set of variables reflecting the sports environment than previous studies. The data developed a wide variety of measures of the sports environment in which many of the individual elements have a positive impact that is offset by another element that carries a negative impact.

The idea of bringing a franchise to a new city is far more detrimental to the tax payers because new taxes will be implemented to accommodate the expenses to endorse the business venture. This clearly takes money out of the working class citizen accounts and into the funding of a sports arena for the sole purpose of entertainment. Appendix A Certification Statement I hereby certify that this paper constitutes my own original work and is properly quoted and cited where I have used the writings of another.

Further, this paper has not been submitted for credit in any other International College class or other college course or for publication elsewhere. __________William S. Cooper_______ Student Signature References Roger G. Noll and Andrew Zimbalist. Sports, Jobs, and Taxes: The Economic Impact of Professional Sports Teams and Stadiums. Washington, D. C. : The Brookings Institution, 1997. Borade, G. (2008, Feb). Sports economic media? Economic Inquiry. Oct 1993. Vol. 31, Iss. From Proquest Research Library database. Porter, M. 1980). Competitive strategy. New York:: The Free Press. Sack, A. (2008, March 7). Economic Effects on Professional Sports? Christian Science Monitor, 100(71) p. 9. Retrieved October 10, 2009, from Academic Search Complete database. Dennis Coates and Brad R. Humphreys. “The Growth Effects of Sport Franchises, Stadia and Arenas. ” Journal of Policy Analysis and Management 18 (1999): 601. Robert A. Baade. “Professional Sports and Catalysts for Metropolitan Economic Development. ” Journal of Urban Affairs 18 (1996): 1.