How the NBA Takes Money From People Who Don’t Like Basketball

The Arco Arena. (Photo: Eric Fredericks)

The Sacramento Kings will continue to exist. This week, the City Council approved a plan to finance a new home for the Kings in Sacramento. The price tag, though, is pretty steep.  The arena will cost $391 million, and $255.5 million will be coming from the city of Sacramento.   

Opponents of this plan – and there were just two on the nine-member Council – noted that sports arenas don’t provide much economic benefit. Furthermore, they questioned why public money should be given to a private business. 

As Councilwoman Sandy Sheedy – who voted no – observed: “This city is on the verge of insolvency. As far as I know, we still technically qualify for bankruptcy under federal law.”

Proponents of this plan, though, argued that this plan will create jobs and economic benefits.  And it was this argument that apparently persuaded the majority.

So we have two perspectives and one question: Do sports generate jobs and economic growth? 

This is a question that has been addressed numerous times by economists.  And these studies – summarized by economists Rob Baade and Victor Matheson — tend to reveal two answers.  When the study is completed by paid consultants prior to the public money being spent, the benefits from sports are numerous are large. However, when independent researchers – who are not paid by professional sports teams or leagues – look for these benefits after the fact, evidence of more jobs and economic growth are hard to find. 

Baade and Matheson offer three reasons the impact suggested by proponents of sports fail to appear:

  • The Substitution Effect: Sports are just one form of entertainment.  If the Kings didn’t play in Sacramento, the people in Sacramento would simply spend the portion of their entertainment budget currently dedicated to the Kings on something else (i.e. dining out, movies, etc…). 
  • The Crowding-Out Effect: Sporting events attract crowds. When people know those crowds are going to appears, those who are not attending the sporting event tend to avoid the general area.  For example, Baade and Matheson note that the 2008 Olympics in Beijing failed to increase the number of tourists in Beijing in August of 2008 relative to what the same city saw in August of 2007.
  • Leakages: The Kings do employ very high-priced labor.  But many of those players probably don’t live in Sacramento.  This means that the income earned by these players doesn’t stay in the Sacramento economy.

Given these three effects, the empirical evidence suggests quite strongly that sports do not create many jobs or generate much economic growth.  And such evidence has proven to be quite persuasive.  In fact, a survey of economists by Gregory Mankiw noted that 85% of economists agree that local and state governments should not subsidize professional sports. Mankiw also notes that only five issues have more agreement among economists. 

Of course, economists are not voting on the Sacramento City Council.  So why did the City Council ignore what independent economists have noted for years?

It’s possible that the majority on the City Council believes the jobs story.  And in a city with 10.9% unemployment, maybe the proponents of this plan think this new arena will help.  Of course, given all we know about the economic impact of sports, one shouldn’t expect to see this arena make much dent in the current unemployment rate.

And I suspect that the proponents of this arena probably suspect this is true.  At least, I think the jobs argument is not the main issue motivating the proponents. 

If we look back at this debate we see another motivation for the supporters of this arena.  A year ago, it looked like the Kings were going to depart Sacramento for the city of Anaheim.  In response, Kevin Johnson – the Mayor of Sacramento (and former NBA All-Star) – staged an immense effort to keep the Kings in Sacramento.  That effort culminated in the city of Sacramento giving $255 million to a new arena and it is important to emphasize, that money is not just coming from basketball fans.  These are funds the city could have used for other projects.  Therefore, this money is coming from people who may not even like the product sold by the Kings and the NBA.

Such a story clearly suggests that the Kings used the threat of re-location to elicit a substantial subsidy from the people of Sacramento.  Although the Kings do not have much economic impact on Sacramento, the Kings do make basketball fans happy.  And if they departed, those same people would be very unhappy with Kevin Johnson.  Consequently, the Mayor has an incentive to do what he can to keep the Kings in Sacramento (although it not entirely clear if making the non-basketball fans unhappy is good politics).

This tale illustrates the monopoly power of the NBA.  Currently there are a number of cities in the United States that a) have more people than Sacramento and b) do not have an NBA team.  Because the NBA restricts the number of teams, they can – and clearly have in Sacramento – threaten any city that currently hosts an NBA team.  And these threats can lead to lucrative payments to the NBA. 

Consequently, professional sports in North America have evolved into a very odd industry.  Typically we tend to think that firms need capital and labor to produce goods; and owners of the firm are responsible for providing the capital.  But in sports, much of the capital is provided by the state (see the Baade and Matheson study for how much the public subsidizes professional sports arenas and stadiums).  Given this trend, what are the owners providing?  In other words, why does Sacramento need the Maloofs (the “owners” of the Kings)? It certainly doesn’t appear to be for managerial expertise.  The Kings currently rank among the worst NBA teams.  One wonders if basketball fans in Sacramento wouldn’t be better off denying the Kings this subsidy and simply rooting for one of the three other NBA franchises in the state of California. 

Pre-emptive comment: Someone might argue that this arena was necessary to make the Sacramento Kings competitive.  Before you offer this comment, please read my discussion of this issue last year.

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  1. Brett says:

    Hidden due to low comment rating. Click here to see.

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    • Armando says:

      But the Kings are far, far from top-level. Unless you mean NBA as top-level, and not top-level WITHIN the NBA itself.

      Hot debate. What do you think? Thumb up 11 Thumb down 10
      • Brett says:

        Yes, I meant NBA as top-level (and phrased it that way in an attempt to include MLB and NFL), as opposed to the NBA D-League, IBL, PBL, ABA, etc. (or minor league baseball, arena league football, etc.). I think some of the comments below about civic pride and the city’s public image get at what I was trying to ask. It’s hard to measure things like that, but there’s got to be some benefits along those lines from being a “major league city.”

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    • Michael says:

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      • Victor Matheson says:

        Exactly who do you think is paying me and my colleague Professor Baade to find no impact? We are paid by our respective colleges neither of which cares whether we find big or small economic impacts.

        Maybe, just maybe our work is hardly neutral because several decades of research suggests that the impact of sports is typically overblown. Most biologists are not neutral about evolution because that’s where the data take them. The fact that Mankiw cites a huge level of agreement among economists that sports subsidies are wasteful is similarly not some grand conspiracy.

        Anyway, not neutral, yes. Paid to be so, completely false.

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      • Paul Sommerstad says:

        Victor’s retort was so well written that I’m not going to add anything more. This is solid research that politicians/taxpayers in Minnesota should read (along with Zimbalist’s work) before they gleefully vote for a Vikings stadium subsidy.

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    • SC says:

      In other words, you’re referring to prestige. Frankly, from where I sit, the City of Sacramento may gain prestige by having and keeping a NBA franchise around, but the means by which they (Sacramento and the NBA) have gone about that task damages that prestige factor more than it is offset in a positive light by merely accomplishing said task. And, as a footnote, this is certainly not isolated to Sacramento, or the NBA. Professional sports sanctioning bodies, their franchises, and the cities they reside within regularly use thes tactics to get shiny new facilities, etc. Sadly, it’s typically all about image – yes, that unholy prestige factor. And anyone that believes there are long-term economic gains from merely having a high-profile professional sports franchise in their area is delusional. And that “stature” you refer to – that prestige factor- is only coveted by those with (self-)image problems, anyhow. Acting like Rodney Dangerfield, in a non-comedic venue, is not going to gain you any respect from anyone that matters.

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    • Damon says:

      I’ll take cash over false pride any day of the week and twice on Sunday.

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    • Dwight K Schrute says:

      by that logic, newark will improve and brooklyn will decline when the nets leave next year and move to brooklyn. The nets have been a pretend basketball team for more than 5 years. THat is fine with me because New Jersey suffers enough let alone put up with mediocre basketball or even worse paying a ransom to retain a mediocre team. The Prudential Center was built primarily for the Devils and is a very fine arena for most sports events.

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  2. Eric M. Jones says:

    Again….Why is it that the public should finance these private enterprises that make huge profits for the “ultra-rich pigs at the public trough” and don’t financially benefit the public?

    Oh…Bread and Circuses.

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  3. EL says:

    Normally, I am not one for more regulation, but does it make sense in this case? The government pretty much guarantees a monopoly for major sports leagues. Would it make sense to just outlaw such funding or give taxpayers a share of stadium revenue?

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    • Phil says:

      My understanding is that the NBA guarantees the monopoly, not the government. Anyone with the resources is free to set up a competing basketball association, as colleges have.

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      • Brent says:

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      • Dwight K Schrute says:

        The league gives each team a franchise (exclusive territory rights for a geography) but the government gives the league exemption from anti-trust rules, which helped bring a quicker resolution to the NBA and NFL strikes.

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    • Desmond says:

      Well in this case you’re relying on delegates to regulate delegates. It’s not really solving the problem, just hoping that someone else wil lhave better judgement.

      Having the taxpayers get some stadium revenue makes sense in that it won’t be a total loss on their part. However, this then raises questions of what financial investments taxpayers should chase. Should Punxsutawney try to corner the market on groundhog collectables? Certainly they have a vested interest in the success of such an item, but is that really the best way to go?

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  4. Ian says:

    Economics is often the study of rational behavior. And I’m afraid that sports allegiances are most definitely an irrational behavior. I’m a Kings fan, went to high school in Sacramento and would do anything in my power to keep them there. And I don’t even live there anymore! I live in Brooklyn, NY but the idea that the Kings remain a part of Sacramento is important to me. And I acknowledge how irrational this is. If you were to divide the $255 million on a per person basis and they sent out a survey to people asking “would you pay a one-time $250 to keep the Kings in Sacramento?” I would absolutely sign it. I’d send them that money from Brooklyn.

    Sports are one of the few things left that bring about civic pride in people. That passionate irrational belief that where you are from is better than anywhere else. Once you have the arena in which to root for your team it’s hard to let it go.

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    • Steve S. says:

      I agree with the civic pride point – has anyone ever tried to calculate the value of a bolstered sense of “city-wide jingoism?

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      • Victor Matheson says:

        First, as full disclosure, I’m one of the guys David Berri cites in the blog above debunking the NBA growth myth. That being said, yes, people such as economists Bruce Johnson and John Whitehead have attempted to measure the civic value effect and generally find the civic value as best they can measure it is lower than the level of public subsidies granted to franchises. A bit of that literature is summarized near the end of my paper that Prof. Berri links to above.

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    • Ian says:

      Maybe that makes more sense? What if the city took up a collection or a kickstarter page asking for donations. Is that a good idea or a terrible idea? It couldn’t hurt, right?

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    • Rick says:

      ” Sports are one of the few things left that bring about civic pride in people.”
      I find this hard to comprehend. There are so many other things to take pride in like parks, churches, neighborhoods, local theater, etc. I think that it might be true that a sport team is something that can unite an entire city (as example, the Spurs mania that erupts from time to time in my hometown) but on a day to day basis I appreciate and enjoy so many other things. Would my town be less of a city to be proud of if the Spurs left? I think not.

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      • Ian says:

        I just think sports are one of the easier things to choose as representing your city. People don’t cheer on the San Antonio local playhouse besting the Dallas playhouse quite as vocally I bet.

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      • Charles says:

        San Antonio is a great example of the intangible benefit of having a (high performing) franchise. The San Antonio metropolitan area isn’t particularly large or especially noteworthy. If the Spurs hadn’t had such success over the past decade or so, how much would the average american know about San Antonio? They’d probably know it was in Texas, and maybe they’d remember the Alamo (pun intended) but that’s about it.

        Because of the exposure that the Spurs have had from their high profile basketball games I know about your Riverwalk, the Tower of Americas, and I would love to see the Bexar county courthouse in person, and that’s all just from the pre and post commercial bumper footage during the various finals and playoff games. The Spurs give San Antonio, which would otherwise probably be overlooked by most Americans, some measure of national recognition for several weeks out of the year and a chance to showcase itself that it wouldn’t otherwise have.

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      • Victor Matheson says:

        Charles makes a good point here that sports could potentially serve as valuable advertising. So one thing that guys like me and Rob Baade try to check is whether tourism rises after a city like San Antonio (or more recently Indianapolis and the Super Bowl) gets its moment in the national spotlight.

        And when we look for these things, we can’t seem to find any increase. More people may know about the Riverwalk and the Alamo after a few NBA championships, but that doesn’t seem to translate into more tourists in the years after.

        To sum up, a general rule might be that sports may make a city happy or famous, but they are unlikely to make a city rich. If a team is justifying a subsidy based on a direct economic return, it is not likely that the argument holds water. If a team is justifying a subsidy for reasons of fame, civic pride, or happiness, I wouldn’t necessarily dispute that, but I would wonder how big a dollar value should be placecd on those things.

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    • John says:

      What’s at question is not whether you should be permitted to spend your money on things which you hold to be irrational. At question is whether boosters should be able to lie about the existence of rational reasons to justify MY money being wasted on YOUR frivolous irrationality.

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  5. Mitch says:

    If the Kings aren’t popular and profitable enough to thrive in Sacramento, it doesn’t make a whole lot of sense for them to stay there. On the other hand, I think having a sports team is important for Sacramento’s public image and legitimizes it to some extent for young professionals like myself. I might not be interested in the Kings at all, but because the franchise is there, Sacramento is somewhat familiar to me and I would consider taking a job there.

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  6. Mike B says:

    If professional sports leagues are going to enjoy monopoly status then they should be subject to appropriate regulation, the same as utilities. First among these would be getting federal regulatory approval to move a team. Only if the team could show that it lacked sufficient community support would it be allowed to move. Another good regulation is to require the leagues to provide the local municipality the right of first refusal when a team comes up for sale. After the “mistake” of the municipally owned Green Bay Packers produced a team that would act in the interest of the fans instead of the owners, most professional leagues ban municipal and public (stock) ownership of their franchises. That should not be allowed to stand and public ownership should be encouraged so that sports teams represent the interests of the community. Buying an NBA team might cost more than a new arena, but it will be the last new arena that city will ever have to buy.

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  7. Christina says:

    As a resident of Sacramento, the Kings are a sour subject. The org’s that want the Kings to stay, either have a business in the area recently developed near the existing Arena, or are remaining Kings fans. I might have been willing to put my money towards a new team a decade ago when the team was 1 game away from the championship. Since that season though, I’ve lost interest in a team that trades away all of its best talent. There are other factors that create a bad taste too. A)In the not to distant past, an entire new roads system was built around the former Arco Arena which went a long way to easing up congestion in the area… the new Arena they wish to build right in the heart of the worst sections of freeway in the city in a part of town that is adapted from the early gold rush days which is barely able to handle the flow of traffic on a regular day. B) The Maloof’s never payed off their original debt (though the NBA would have made them do so before a big move) for buying the Kings in the first place. C) You used to see a lot of dedication and devotion from the community when it came to their team. While they still have supporters, there is very little team spirit left in the overall community. Being forced to pay for things we don’t enjoy or see value in – sucks D) Cities in surrounding counties are being approached by Mayor Johnson to help pay for the city of Sacramento’s choices. Great way to make friends with neighbors eh?

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    • Jon says:

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      • James says:

        You’ve missed the point entirely. What matters here is that there is only a small fraction of the population of Sacramento (or of any city which hosts a pro sports team) who are fans. Many of us simply aren’t interested. So why should our tax money be spent on facilities for a team we don’t want or care about, when that spending creates little or no economic benefit?

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      • Henry from Sac says:

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  8. Fernando says:

    You keep equating funding an arena as giving money to the NBA. Arenas host 41 games per year without playoffs, and the owners are contributing for their use. Arenas are more often hosting other events that non-basketball fans enjoy that would not be there without it. Arenas enrich a community by improving neighborhoods through redevelopment and adding entertainment options. Libraries, parks, and museums don’t profit the city yet few advocate that cities not help fund them.

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    • Brian says:

      The costs might be justified if Sacramento did not have an arena to begin with, but if the city already has an arena, the marginal benefits of building a new one are not worth the costs.

      If the Kings had to pay for the arena 100% from their own pockets they would never consider upgrading their existing one. The threats of moving to a new city are only credible if their destination already has a suitable arena or a new one would be publicly funded.

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    • Enter your name... says:

      This doesn’t make sense. With library funding, we’re buying literacy and information. With parks, we’re buying health. With a sports arena, we’re buying, I don’t know, an opportunity for a small number of people to buy overpriced beer and a socially sanctioned time to yell? I think shat we’re really buying is the mayor’s re-election.

      Also, it’s not like Sacramento has an actual shortage of space for these other, non-basketball events. We hear this all the time in my very arts-focused region. “There aren’t enough performance venues!” the musicians whine. “We have so few bookings that we’re about to go bankrupt!” the many venues counter. (What the musicians mean is “There aren’t many FREE performance venues, and there aren’t enough people willing to PAY me to attend my show”.)

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      • Ian says:

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