Daniel Sutter: Economic development that doesn’t work

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Alabama and other states actively recruit companies in the name of economic development using tax breaks, regulatory relief, and government assistance. Manufactures lured to Alabama with such incentives include Mercedes-Benz, Honda, Hyundai, Remington and Polaris.

States’ use of incentives offers benefits and costs. Facilitating the escape of businesses from states like California and New York with excessive taxes and burdensome regulation benefits our economy. But if taxes and regulations burden businesses too heavily, securing relief becomes almost as important as investment capital, giving public officials too much influence over business success. I would prefer to let venture capitalists, like those on the TV show Shark Tank, and not government bureaucrats make business investment decisions.

The cost of government economic development includes the poor investments. Cities and states across the nation repeatedly invest tax dollars in stadiums and arenas for pro sports teams. Sports and development seem to make an irresistible cocktail for politicians. Wisconsin Governor Scott Walker, whose reforms have saved the Badger State billions of dollars, supports a taxpayer funded arena for the NBA’s Milwaukee Bucks, while the bankrupt city of Detroit is financing a new arena for the NHL’s Red Wings.

If proponents’ promises of new jobs and growth were true, we should be in the midst of a stadium-driven economic boom. Over twenty years of research by economists, however, has failed to document growth attributable to teams or stadiums. Studies have looked for impacts on income, employment, and taxes, and for the metro area as well as just the host community. If sports drove so much economic activity, then we would also expect that strikes should produce downturns and lengthy playoff runs to yield mini-booms. Again, the evidence shows otherwise.

How can this be, given the millions of dollars spent at games? The spending is almost entirely diverted from other activities. A family that spends $200 to go to a game spends $200 less on other things, like movies or bowling. We consequently merely shift employment for ticket takers and concessions from movie theaters to stadiums.

Proponents point to studies promising jobs and tax revenue growth from the new stadium. Are such studies reliable? In short, no: they use dubious assumptions and methods to generate numbers justifying building the arena. If the projections were valid, economists should be able to find evidence of growth in employment, income, or tax data.

Sports and stadiums should be viewed as what they are, consumption. Pro sports increase the richness and quality of our entertainment options, and this improves our lives. An economic argument could be made to subsidize sports, but it does not involve growth. Team sports are what economists call public goods; people can enjoy following a team and talking baseball or football without paying the team. For example, many Alabama fans have enjoyed the Tide’s football success under Nick Saban without paying to attend a game. Sports produce immense value to society. If teams can’t capture enough of this value as revenue to stay afloat, we might choose to spend tax dollars to sustain the leagues.

The evidence, however, shows that pro teams clearly capture enough revenue to pay for stadiums. Consequently taxpayer funding merely increases salaries for players and coaches and profits for owners. I have no problem with people making millions from playing games, but the money should come from voluntary purchase of tickets, merchandise and telecasts. Taxing ordinary Americans to enrich millionaires is wrong.

We might hope to better control public officials so that they use development incentives only for the “right purposes,” like to attract manufacturing. Yet such control is illusive, in part because negotiation of deals requires secrecy and discretion. Our choice is whether or not to let our public officials play the economic development game. If we decide to let our politicians go (metaphorically) on Shark Tank and invest our tax dollars, we will get the projects they pick for us, including inevitably some white elephants.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. Respond to him at dsutter@troy.edu and like the Johnson Center on Facebook.

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