Economic Impact Statements in Sports

I am currently teaching a course on the Economics of Sports: An International Perspective at the Bader International Study Centre [BISC], Herstmonceux Castle, UK. This is the first time I have taught the course to students who have little or no background in economics, and it has opened my eyes a bit more to some of the major problems we will continue to face if we do not improve economic literacy. Here is what happened:

The BISC has a policy that every course must involve field trips. For our first field trip, we went to the Eastbourne Boroughs Football Club in Eastbourne to watch the World Cup match between England and Algeria. It was a great place for students (none from the UK) to watch the World Cup amidst excited fans, and yet be considerably safer than they might have been in some of the rowdier places I visited four years ago during the World Cup. 

What does this have to do with economics of sports? The economics came in the assignment given to the students. 

1. Estimate the amount of money people spent at the club during that World Cup game.
2. What do you think those people would have done with that money if they hadn't spent it at the club?
3. Based on your answers to the first two questions, what do you think was the economic impact of the World Cup on the local economy?

Two of the fourteen students suggested that the impact was probably, on balance, pretty small. The rest saw these expenditures as injections into the local spending stream that would boost demand throughout the local economy, despite having noted in their answers to the second question that the money would likely have been spent on something else within the community if it hadn't been spent at the football club.

When I read those answers, I sent the students e-mails telling them to read Chapter 13 of Why England Lose (a chapter we had not yet covered in class) and redo the assignment. In that chapter, Kuper and Szymanski point out that the economic impact is primarily to divert spending from one form of entertainment to another so that while there is a diversion effect, the net impact on an economy is minor (and might even be negative if enhanced congestion and security problems arise). 

Given my cynicism, I expect about 2/3 of the students understood the point I was trying to get across and might recognize it in a non-classroom setting; the rest just tried to give me an answer I wanted.

But if it took this process for smart students to have an "aha!" moment, i.e. to figure out and learn that economic impact statements for sporting events and stadia are often suspect and biased, imagine the difficulty of teaching this concept in general.

Our work is never-ending.

Comments

[Joshua]

I'm surprised that you haven't expressly noted, at least in this forum, any economic/business aspects to your afternoon tea jaunts particularly as they relate to the hotel and tourism industries. I know that if I had been in charge of The Lanesborough and/or The Ritz, I'd be most concerned about your recent reviews of those hotels and of Scolfe's.

[Nick Rowe]

Quite apart from the question you raise ("what would people have spent their income on otherwise?"), there's a second problem with Economic Impact Statements (or rather, with how they are interpreted).

Compare an EIS with a standard economic Cost-Benefit Analysis. In CBA, the benefits are the pleasures that people get from watching the game, and the costs are the resources used to enable them to do that. The bigger the benefits, and the smaller the costs, the bigger is benefits minus costs, and better our evaluation.

Compared to CBA, EIS looks only at the costs, and reverses the sign of those costs. The more money people spend, the bigger the economic impact, and so the better our evaluation.

To convert a proper CBA into an EIS:

1. Ignore any externalities.
2. Ignore the benefits.
3. Reverse the sign on the costs, so they become benefits.
4. Multiply by 2 (for the multiplier effect of induced spending).
5. Say "look how much benefit this brings!"

It's not surprising there's a good market in producing EIS's!

[Nick Rowe]

"Our work is never-ending."

That's why I love Carleton's motto: "Ours the task eternal"!