Estimating the Cost and Benefit of Hosting Olympic Games: What Can Beijing Expect from Its 2008 Games?

Industrial Geographer, The, Fall 2005 by Owen, Jeffrey G

Sports economists, on the other hand, have found economic impact studies lacking both in theory and practice. Ex-post studies have consistently failed to find evidence of any economic benefits related to sports teams and facilities. In examining recent retrospective studies, Coates and Humphreys (2003, p. 6) concluded "building new sports facilities and attracting new professional sports teams did not raise income per capita or total employment in any US city." A closer look at the methodology of such studies reveals an appealing but fundamentally flawed line of economic reasoning that virtually guarantees a forecast of large economic benefits.

The simple elegance of economic impact studies, injections of money circulating over and over in an economy to create a multiplier effect, has an alluring "somethingfor-nothing" quality that is hard to refute. The mistakes made in economic impact studies are so numerous that making a lucid counter-argument can be difficult. Critics have focused primarily on the following areas of misapplication: treating costs as benefits, ignoring opportunity costs, using gross spending instead of net changes, and using multipliers that are too large.

In many cases the cost of constructing stadiums, which to a large degree is spent on hiring construction workers and purchasing materials from local suppliers, is counted as a benefit to the local economy. This is arguably the most egregious error in economic impact studies. It is backward-looking in that it looks at the production aspect of the project and ignores the effect of the actual consumption of the product. The following quote exemplifies the bizarre logic of this type of accounting:

The initial construction of a $10 million sports facility provides an initial impact of $10 million on the local economy. This is the direct impact. Clearly, the construction of the facility will require concrete, steel, construction workers, and so forth. The money spent on these materials and services comprises the indirect expenditures, or the indirect impacts. (Hefner 1990, pp. 4-5)

Clearly, the initial cost of the project has now been counted as a benefit not once, but twice; directly and indirectly. If the economy is at full employment, the workers needed for the stadium would have been doing something else: public investment crowds out private investment. During a period of high unemployment it could be argued that the project gives jobs to people who would otherwise be idle, in which case the expense of the stadium is at best a transfer from one group to another; still not a benefit. And because this method ignores the function of the project, the same employment effects could be accomplished if the government would "simply give the money to the workers as unemployment insurance, or employ half the workers to dig a hole and the other half to fill it up" (Noll and Zimbalist 1997a, pp. 6162).

Counting construction costs as a benefit is also an example of a more general error of economic impact studies: failure to recognize opportunity costs. Alternative uses of local dollars such as a hospital, education funding, or even letting taxpayers keep their money and spend it on what they want are not considered. Instead, dollars for the initial investment are assumed to have come out of thin air. Will the economic impact of the expenditure on the project be fundamentally different from the impact that would have occurred if local residents had spent an equal amount in the economy? The answer is yes, but not necessarily in the way the economic impact model suggests. The effect will be redistributive, putting money into the construction sector, and taking it away from other sectors, with the fairly safe assumption that expenditures by the general population would be more broadbased and thus less obvious.