Daniel Sutter: The convention center bubble

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Government can importantly help create the conditions under which enterprise and entrepreneurship flourish. The required tasks include protecting property and contract rights, regulating sensibly, and efficiently providing valued public services. Whether active investment of tax dollars in selected enterprises helps grow the economy remains a matter of debate.

Recently I wrote about public investment in professional sports stadiums, where billions have been spent, primarily benefiting players and team owners. America has also experienced a government-driven boom for convention and exhibit halls, as detailed in Convention Center Follies by Heywood Sanders, a professor of public administration at the University of Texas at San Antonio.

First, let’s consider the magnitude of the boom. Exhibit hall space across the nation nearly doubled between 1989 and 2011, to more than 70 million square feet. City and state governments spent $13 billion on centers between 2002 and 2011, a period of stagnation in the convention business. The convention center boom has occurred in cities both large and small, and in both the Sunbelt and Rustbelt. Alabama’s four largest cities all have centers, along with Dothan, Gadsden and Ozark.

Professor Sanders documents how the rationale for public funding has changed over time. The first public auditoriums in the 1920s provided places for large public gatherings that might not make money. Such auditoriums served a reasonable public purpose.

The rationale is now growing the local economy. Convention centers can provide what local economic developers crave, dollars from outside of the community. Out-of-town convention attendees spend on event registration, hotel rooms, restaurants, and so on. Their spending benefits hotels and restaurants, and then sets off a multiplier effect when these businesses and their employees spend the money. Prestigious consulting firms provide precise forecasts of hundreds of millions of dollars of spending and thousands of jobs that convention centers will create.

Only reality has consistently fallen short of promises, as Professor Sanders documents. For instance, expansion of the Civic Plaza and construction of a 1,000 room convention center hotel was forecast to bring Phoenix 375,000 visitors a year. Two years after completion, convention attendance was less than half of the forecast, and the hotel could not make its bond payments. As Sanders writes, “Almost every convention center in the U.S. operates at a loss, not even counting the annual debt cost.”

Visitor taxes imposed on hotels and rental cars typically fund construction of convention center projects. I recently wrote about how such taxes can be exported and are portrayed as a costless way to make outsiders fund convention centers (and sports stadiums). But as Professor Sanders emphasizes, the tax dollars could be used to improve schools, repair roads, or pay for other public services.

Voters across the country have frequently turned down convention center proposals. San Diego voters rejected three proposals, voters in Cleveland and Columbus, Ohio, each did so twice, and proposals went down in Atlanta, Pittsburgh, and Raleigh. But convention center politics has evolved to eliminate voters from the approval process. End runs have been accomplished by turning to states for funding and creating special purpose authorities to impose visitor taxes and issue bonds.

Why have we seen such poor investment by governments? Professor Sanders identifies the owners of the properties (hotels, restaurants and shops) frequented by attendees are located as the driving force. This illustrates how the benefits of many state and local government economic development projects are highly localized. Government is supposed to protect property from physical invasion, not protect or raise the market value of any person’s property. Consequently, convention centers exemplify crony capitalism, or the use of government to provide benefits to favored business interests.

State and local governments have spent billions of tax dollars building millions of square feet of underutilized exhibit space. Convention centers, after sports stadium subsidies, represent a second strike against government economic development.

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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