Why Big Public Spending Projects Often Produce No Significant Economic Benefit

Big public investments including sports stadiums and government-owned broadband often are controversial because the claimed benefits (new economic activity, especially) cannot actually  be shown to exist.

In the case of public funding for sports stadiums, the purported new economic activity is simply shifted from other expenditures in the same community, with no actual net increase in economic activity.

“NFL stadiums do not generate significant local economic growth, and the incremental tax revenue is not sufficient to cover any significant financial contribution by the city,” said Roger Noll, a senior fellow at the Stanford Institute for Economic Policy Research.

“A new sports facility has an extremely small (perhaps even negative) effect on overall economic activity and employment,” an analysis  by the Brookings Institution has found.

In a 2017 poll, 83 percent of the economists surveyed agreed that "providing state and local subsidies to build stadiums for professional sports teams is likely to cost the relevant taxpayers more than any local economic benefits that are generated."

Sports economist Michael Leeds suggests that professional sports have very little economic impact, noting that a baseball team (with 81 regular-season home games per year) "has about the same impact on a community as a midsize department store." Doubtless that small an impact would normally be thought unreasonable for the large amount of public cost.

Leeds suggests that if every professional sports team in Chicago (Cubs, White Sox, Bears, Bulls, and Blackhawks) were to suddenly disappear, the economic impact on Chicago would be a fraction of one percent.

Moreover, most economists highlight an important pitfall when politicians or stadium funding advocates tout the economic impact of stadiums: the failure to include opportunity costs.

The opportunity cost is the value of the next-best alternative when a decision is made; it is what is given up, whether that is in roads, bridges, schools, parks, riverfront improvements or anything else with expected positive economic impact.

Also ignored is the fact that what is spent by consumers at stadiums, and for stadiums, simply displaces spending that would have occurred elsewhere.

If they were not spending on sporting events, they would instead spend on museums, movies, concerts, theater, restaurants, and so on. Because consumers have limited entertainment budgets, dollars spent at a new stadium are simply diverted from other spending.

That might also be true for government-owned broadband networks that compete with private broadband suppliers.

In a new study, The Rewards of Municipal Broadband: An Econometric Analysis of the Labor Market, Phoenix Center Chief Economist Dr. George Ford and Phoenix Center Adjunct Fellow Professor R. Alan Seals (Auburn University) use data obtained from the U.S. Census Bureau’s American Community Survey to quantify the economic impact, if any, of the county-wide government-owned network (GON) in Chattanooga, Tenn. on labor market outcomes.

“Across a variety of empirical models, we find no payoffs in the labor market from the city’s broadband investments,” they conclude. “We find almost no statistically significant effects for a wide range of important labor market variables, with the possible exception of a reduction in labor force participation.”

The study looked at private-sector labor force participation, employment status, wages, information technology employment, self-employment, and business income, “all of which appear unaffected by the GON,” the researchers say.

Though Chattanooga’s Mayor Andy Berke has claimed that the city’s nearly $400-million network was responsible for a decline in unemployment in the city from 7.8 percent to 4.1 percent over the 2012 to 2015 period, over the same post-recession period the nationwide unemployment rate fell from 7.5 percent to 4.7 percent, they note. So it is hard to isolate any impact other than general economic conditions for the decrease.

There are some key caveats. A new Volkswagen factory, planned before the GON was launched, did open at about the same time as the network began operations. “Marginal employment effects in auto manufacturing closely match the plant’s employment levels,” the researchers note.

Also, since Chattanooga’s system is an overbuild of multiple private providers, “we stress that our findings may not be generalized to areas where broadband services are not available absent the municipal system,” Ford and Seals say.

“Also, our results cannot speak to the benefits of high-speed Internet services generally, since broadband Internet service was and remains available in Chattanooga absent the municipal system,” they say. “Thus, our results indicate only that building a government-owned network in markets where privately provisioned broadband is generally available has no favorable effect on labor market outcomes.”

“The data suggest local governments must look outside the labor market to justify the sizable investments in municipal broadband systems,” the authors say.