Sunday, May 17, 2009

Sports Economics 101 - A Conversation With Andrew Zimbalist

I cannot hide my gratitude or my excitement over this. Much of my understanding of sports economics has come from the writings and opinions of Andrew Zimbalist, and he was kind enough to answer a few questions for Let There Be Light(house). Professor Zimbalist has greatly added to my knowledge of public spending for sports facilities, as well as the economic benefits of sports facility construction. I hope you enjoy this interview, which is wholly geared toward public support for stadium/arena construction. Due to his numerous time commitments, Prof. Zimbalist was not able to provide analysis that is specific to the Lighthouse Project. However, there is an addendum to this piece that includes some analysis wholly based on his answers and known facts about the Lighthouse.

Now, a brief introduction to our honored guest...Andrew Zimbalist is the Robert A. Woods Professor of Economics at Smith College in Northampton, MA. He is recognized as one of the most prominent sports economists in the world, if not the most prominent. He is best known for his observations on baseball, but that is not his only area of expertise. He is frequently called as an expert witness for either a community or a sports team in the event of a dispute or legal issue. He has also written numerous books, including In the Best Interests of Baseball?, Baseball and Billions, May the Best Team Win, and The Bottom Line: Observations and Arguments on the Sports Business. I am very grateful to him for being so accessible and willing to share his serious analysis of an issue too many people write off as trivial.

The Questions

Let There Be Light(house): Why do communities provide public funds for sports facilities?
Andrew Zimbalist: There are many reasons, but underlying them all is that sports are enormously popular in our culture. Having a sports team produces a variety of intangible benefits for a community.
(Blogger's Note: In an interview with the New York Times Freakonomics Blog, Prof. Zimbalist compared this to the practice of subsidizing a public park or a symphony orchestra, even if those entities did not provide measurable economic benefit)

LTBLH: Percentage-wise, what is the average share the public contributes to construct a new sports facility?
AZ: Over the last 15 years, the average public share in financing is around 65%, but this share varies significantly from case to case.

LTBLH: Do these facilities on their own ever prove a worthwhile investment for the community, or should the community consider this investment a sunk cost?
AZ: Some projects generate positive net revenue for the public coffers; more typically they are a net drain on the government budget and can be expected to have a neutral economic effect overall.
(Blogger's Note: In the same Freakonomics interview, Prof. Zimbalist points out that the economic benefits of a sports facility may not be what they seem, as some of the money spent in a sports facility could just be redirected spending from other activities, like dining out or going to the movies)

LTBLH: Some communities provide extraordinary benefits to entice sports franchises (e.g. Washington, DC paid 100% of the cost of Nationals Park as per a relocation agreement with Major League Baseball, and Kansas City is offering its brand-new Sprint Center rent-free in an attempt to lure an NBA or NHL team). Is there any economic reasoning behind doing this?
AZ: The economic reasoning is that teams produce positive externalities, consumer surplus, and public goods effects; generally, it is not that they produce an increase in area employment or per capita income.
(Blogger's Note: In economics, an externality occurs when a party is affected by an economic transaction despite not being directly involved in that transaction)

LTBLH: Sports facilities are often used as vehicles to revitalize downtown areas (e.g. the arena district in Columbus around Nationwide Arena, and Washington, DC using the Verizon Center to revitalize the Chinatown area). Does this work, and is there real economic benefit to this model?
AZ: Sports facilities, with proper planning and management, can certainly relocate spending within a larger metropolitan area.

LTBLH: Do sports facilities provide measurable ancillary benefits to communities (e.g. increased tourism, convention business, etc.)?
AZ: Yes, but the methodologies used to estimate this impact are still young. So, estimates can be made, but they are very rough.

LTBLH: You are an expert in the economics surrounding constructing a baseball stadium, and many people here in New York are trying to use the prism of Citi Field and the new Yankee Stadium to understand the Lighthouse Project. In what ways would a baseball stadium differ from a multipurpose arena in terms of its economic impact?
AZ: The answer depends on the scale of the investment outside the sport facility, the financing for the project, and the nature of the area's economy.

LTBLH: As the economy slows, and communities have to cut basic services, do you think these communities will be less willing to provide public money for sports facilities?
AZ: Yes, of course, but it is still important to study each project carefully. Some projects may be a net plus for the public sector budget. In such a case, there is no trade-off between the sports facility and other, more urgent, social needs.

Tying it to the Lighthouse

Prof. Zimbalist's insight has helped me better understand he nature of sports economics, and it also confirmed much of my previous thinking about the Lighthouse. This quote from the Freakonomics interview really stood out for me:
"Sports teams can have a powerful cultural or social impact on a community. If that effect is valued by the local residents, then they may well decide that some public dollars are appropriate. However, if the public or its political representatives are trying to make the case that a team or a facility by itself will be an important development tool, then the electorate should think twice before opening its collective wallet." - Andrew Zimbalist
Those advocating for "Just the Coliseum" say that just a new building can spur needed investment, and this further proves that line of thinking is incorrect.

Nassau Coliseum must be considered a very unique case in arena construction, when you think about the following:
  • The average public share for a sports facility is 65%, and Nassau County is unable/unwilling to provide public funds.
  • Nassau Coliseum has one major tenant, the New York Islanders
  • Nassau Coliseum is not the only major multipurpose arena in the metro area. It has to compete with Madison Square Garden, the Continental Airlines Arena, and the brand-new Prudential Center for travling shows, as well. Therefore, the time of guaranteed occupancy is lower than average.
  • We already proved, through numbers, that "just an arena" will not generate enough revenue to justify the $400 million investment
  • While facilities themselves are generally drains on the economy, they can generate positive externalities and re-direct spending into new parts of a major metropolitan area.
Given these truths, it is natural that Charles Wang, Scott Rechler, and Tom Suozzi decided to develop the surrounding property as a destination point. It is also not surprising that this is an increasing trend among sports teams in North America. For example, the Staples Center in downtown Los Angeles, which was privately financed, could be considered a special case because it houses the NHL's Kings, both the NBA's Lakers and the NBA's Clippers, and the Sparks from the WNBA. This means that this venue, which is the most viable multipurpose arena in the 2nd-largest market in the United States, already has 140 guaranteed dates booked. Nassau Coliseum can never compete with a situation like that, and even the owners of Staples Center are spending $2.5 billion to develop the surrounding area into a complex called LA Live.

The Lighthouse is the only solution that makes economic sense for both the Islanders and the surrounding community. A "just the Coliseum" solution does not work unless the public ends up providing a significant portion of the financing, and Prof. Zimbalist's research proves that public investment in a sports facility has a neutral economic impact. Let us continue working to educate the public on this fact.

Thanks again to Professor Zimbalist for his time and expertise. Please let me know, via email or comment, whether you would like this interview series to continue, or if you have a suggestion for somebody to interview in the future.

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  1. Great Work Nick! A very solid interview article that explained both sides of the point well. Hopefully, any new people to your site get a chance to read it and educate themselves on the situation.

  2. You're doing phenomenal research here...I am worried that Kate Murray and the rest of the baby boomers in control of our interests just don't have our "best interests" in mind...

    Think about it, Murray is more like a grandma who is not in touch with younger generations and I just don't think she even cares about the overall economy and whats good for the long term...As long as she has a "cushy" job, bringing home a nice salary, generating bribes and donations, what will ever motivate her to actually care about the majority, the people she's swarn to represent???

    Murrays a baby boomer and shes living a more than comfy life on our dime who has her eyes closed to the realities facing Long Island...

  3. Any update on when the Dems will be announcing their challenger to KM?

  4. Also, an FYI to you Nick. I've posted probably about 8 or so comments on your blog over the past couple months. Literally every time, my comment fails to publish on the first try. I always need to attempt to submit it a second time for it to work. I know you probably can't fix that, but I never have that problem on anyone else's blogspot sites.

  5. Anon - the Nassau Democratic Party is holding its convention next Thursday, May 28, at the Cradle of Aviation Museum. If there is no announcement this week, expect to find out then.

    About the comments - I've heard a few other people say that, and I tweaked some settings to make it easier. If you're still having issues, I'll take another look, and thanks for telling me.

  6. Nick, Any idea when the Lighthouse developers are going to resubmit the environmental documents? Isn't the ball in their court still? Ra said public comments in June and we are just about there.

  7. Mike 8 - I've asked for comment and am waiting for a response.