Market Power

Musings by an academic economist on the power of markets and the power over markets.

Monday, March 28, 2005

Article About My Talk Last Thursday Night

Here is the text of the article in the local paper about my talk on sports stadium last night. For the most part, the author of the article got stuff right. But there were a couple of discrepancies.

Public subsidies of professional sports stadiums provide no tangible public good, a fact being recognized by more cities around the country, says an economist who's studied the issue.

"You see a lot more resistance (to taxpayer-funded stadiums) than you did in the past. I think people are seeing the evidence that the benefit isn't there," said Phillip Miller, an economist at Minnesota State University.

Miller said team owners will not invest in privately funded stadiums because the added value it brings to their franchise is negated by the debt. Owners who get stadiums built by taxpayers see their franchise's value jump about $100 million immediately. That, said Miller, easily explains why owners fight so hard for public subsidies. And they are able to apply great pressure to state and local officials because professional teams are in demand and can move to other cities and states.

First, I said that any public benefits from sports teams are going to be very small.

Second, the conclusion about why teams seek public financing is not quite right. Based on a regression model, the average baseball team (playing in a 40 year old public stadium) realizes an estimated increase of about $95 million when it moves into a new stadium. My research suggests that owning the stadium in which it plays enhances the franchise value of the team (relative to playing in a public stadium). But the marginal franchise value - the differenece between the franchise value in a private stadium and that in a public stadium - does not warrant a team privately funding most of the construction of its own stadium. Indeed, depending on the discount rate of team owners, the present value of the marginal franchise value never exceeds $125 million (approximately) and is more likely quite a bit smaller.

But he said his and others' research shows that the public gets no benefit from spending tax dollars on a sports team. That's because the teams do not pull new money into a state.

"Most of the money spent on sports and sports teams (by fans) would have been spent somewhere else," Miller said during a research lecture on campus Thursday night.

He said some new money may be pulled into a city or state by the presence of pro sports, but there is a much larger amount of money that leaves the state in the form of salaries to players and owners. "Most of the owners and most of the players do not maintain long-term homes in the cities they play in."

Some in the audience questioned whether the idea of being a "major league state" and the sense of pride and enjoyment of having pro teams is a pubic benefit worthy of taxpayer funding of stadiums. Miller said that for sports fans like himself, there is some joy in having hometown pro teams, but he sees little true public good. He argued that many other things - such as museums, quality housing and a good economy - are are more important in creating a "major league" city or state.
I didn't claim that these other things were "more important", just that these other things can also be thought of as contributing to a "major league" city.

He noted that even when fans are the happiest over their team winning, they show their happiness by buying more team merchandise - something that further enriches the owners who often are taking their profits out of state.

My point here was that much of what seems to be a public good does get captured by teams. In other words, happiness over a well-performing team is often a private good.

Miller received his Ph.D. in Economics from the University of Missouri - Columbia where he taught and began researching the economics of sports. He came to MSU in 2002 and has done more in-depth study on sports and public subsidies. He was chosen to give this year's Economics Department research lecture.

There is little optimism that this year's legislative session will produce any significant stadium legislation for either the Vikings football team or Twins baseball team, both of whom play in the Metrodome.

There is momentum for a new on-campus stadium for the Minnesota Gophers football stadium. On Thursday, the University of Minnesota announced it had reached a deal with TCF Bank to name a new stadium after the financial institution. TCF would pay $35 million over 25 years for the naming rights.

The university is seeking $94 million in state aid and hopes to raise $141 million privately for a new stadium. Gov. Tim Pawlenty has been generally supportive of the idea. The Gophers currently play in the Metrodome.