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. scott says:

    I would be interested to see that the comparative economic effect is between the four big sports teams their there arena’s/stadiums being publicly funded. I understand there could be some apples/oranges comparison like how Philadelphia has a hockey and basketball team in the same arena whereas Pittsburgh only has a hockey team. What makes this interesting to me is that generally baseball plays a longer schedule and has stadiums in more urban environments compared to football who plays a short schedule and stadium is located at the fringe of the metropolis (usually). I would think factors like these play into the economic output of building the stadium.

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  2. Bob Lewis says:

    While I agree that public subsidy is not right and that the stadiums do not pay for the public subsidies, what is not mentioned is that city councils almost are required to approve the public spending because another city will. Or they worry that another city will. This is unfortunate, but the same holds true for most or all other economic development incentives. The “multiplier effect” jobs and dollars won’t be as great as projected, but what if the team or corporation leaves town? Well, the negative multiplier effects also won’t be as large as worried, but civic pride, kowtowing to the corporate poobahs who want such entertainment, and competition with sister cities virtually forces city councils to accept the economic benefit arguments, not because the economic arguments are right, but because they are cover for other reasons which have less compelling political support.

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  3. cackalacka says:

    15 years ago, I had a similar discussion at a wedding with a conservative economics professor from NCSU, who argued in favor of having my town shell out $125 million as part of a quarter-billion facility for his school’s basketball program.

    12 years later, I read an op-ed this gentleman contributed to in my town’s paper arguing against public dollars for an infrastructure project (one that would directly benefit the entire community, not just his fellow boosters.)

    I learned a lot about conservative economics from observing his arguments.

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    • Ari P says:

      Along the same lines, my observation as a resident of Sacramento County is that almost all of the people who go to games regularly 1) underestimate the extent to which taxpayers are subsidising their recreation and 2) are absolutely convinced that even those who never attend a game are receiving a huge benefit from being in a “major league town.” Somehow, none of the people I talk to who don’t go to the games seem to feel that they are receiving this huge benefit.

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      • Henry from Sac says:

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  4. assumo says:

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  5. Brent says:

    Perhaps it was a throwaway comment, but I’m really struck by the author’s use of the word “monopoly” here. Above, I declined to grant the absurd comment that teams 90 or 366 miles away were in any way a substitute, and I preferred, instead, the notion that the NBA has no power to block other major sports from setting up shop in Sacramento.

    However, I started to think about effective monopoly power. The NBA has an effective monopoly in Sacramento because they are the only major sport and there are barriers to entry (other NBA teams it can block, and it is very costly to relocate a MLB, NHL or NFL franchise). It occurred to me that the NBA is actually in a lot of markets where they hold this effective monopoly of the major sports league markets. So I looked. 7 of the 30 teams (23%) are located in cities that have no NFL, MLB or NHL franchise within 80 miles. Those cities are: Memphis, Oklahoma City, Orlando, Portland, Sacramento, San Antonio, and Salt Lake City.

    For comparison: None of the MLB teams play in a city where there isn’t another major sport. Only two of the NFL Franchises do (Green Bay and Jacksonville). While seven of the NHL franchises do, most of those are in Canada where baseball, football and basketball are far less marketable than hockey.

    If it weren’t for the fact that many of those clubs have been in residence in such cities for quite a while, I might consider it part of a strategy. But it does seem that nearly a quarter of the NBA clubs hold unique positions within the cities they play, and may be able to use that to gain concessions.

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    • James says:

      “I declined to grant the absurd comment that teams 90 or 366 miles away were in any way a substitute…”

      Why is this absurd? I live well over a hundred miles from the nearest professional sports team (which is probably the Sacramento team being discussed), yet I see bumper stickers and other paraphernalia proclaiming fans’ allegiance to teams located hundreds, if not thousands, of miles distant.

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      • Henry from Sac says:

        It’s absurd because it ignores that being a sports fan is an emotional investment. You grow up rooting for your home team, you don’t just move on the next nearest sports team if they leave. How many Seattle Sonics fans are now Portland Trailblazer fans? None. They’re either still depressed or scheming up ways to get a team back to Seattle. If you see paraphernalia from teams across the state or country, it’s probably because they were raised there.

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    • RJ says:

      I just want to dispute the comment about other sports being less marketable then hockey in Canada. Specifically, the CFL, while not as large as the NFL in pure numbers and revenue, is no less a major league to Canadians. And every Canadian city with an NHL team also has a CFL team. In fact, Toronto might be the city with the most sports teams of any city in all of North America, having a national league hockey, football, baseball, basketball, and soccer team, not counting the professional lacross and AHL hockey teams. I wonder what kind of effect this has on the market for the teams…

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  6. Joe Dokes says:

    The government frequently subsidizes various industries with the idea that these subsidies will further either the economic development of the community or some other public benefit. For example, a subsidy for alternative fuel vehicles is supposed to encourage the development of electric or hybrid vehicle and contribute to the reduction of our dependance on foreign oil and reduce green house gas emission.

    The public financing of sports stadiums is antithetical to the promotion of a public good. The current arena the Kings uses is less than 25-years-old. It has luxury boxes. It has modern amenities. The question is why do the Kings need a new arena?

    The answer is simply the continuation of society supporting through welfare payments the top 1% or even the top 1/10%. The new arena will have even more luxury boxes that the vast majority of fans will never step foot in. The new arena will probably have fewer seats, thus excluding ever more average tax paying citizens of Sacramento.

    Simply put, the citizens of Sacramento will foot the bill to enrich people who scarcely need it.

    Unfortunately few cities have the fortitude to tell franchise sports to take a hike. Pride, greed, and stupidity cause civic leaders to make horrible financial decisions. Unfortunately, this scenario appears to be a prisoners dilema, if all municipalities would hang together and tell the major sports franchises to self finance, society as a whole would be better off.

    Unfortunately, few municipality are willing or able to say no. It is truly sad.

    Regards,

    Joe Dokes

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    • Ian says:

      I totally agree. I never understood the “we can’t be profitable/competitive without a new arena” argument. It’s not like the current one is falling over. And you’re right that the cities should get together and refuse to pay, but there’s always going to be one that won’t. Sacramento doesn’t want to pay for the arena, but they don’t want to lose the team either. If Anaheim wasn’t out there saying they’d pay for them to come then this wouldn’t be a debate.

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    • Henry from Sac says:

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  7. Jan says:

    I live in downtown Sacramento. I’d love to have another entertainment and sports complex witin walking distance of my house, but not at the expense of essential city infrastructure and community services: The city’s budget has been cut so much in recent years that many offices and departments are barely functioning. And they need to make another $25 million in cuts. We’ve cancelled all citywide youth sports programs, closed all public pools, closed or stopped maintaining parks and community centers. We’ve closed fire stations and cut police staff. No one’s home will burn down, street crime and gang violence will not increase because we don’t build the Kings a new arena. But people’s homes may burn, people may be injured or killed because we’ve cut public safety.

    This is really wealthy downtown special interests versus the neighborhoods. And 7 members of our city council have demonstrated by their votes that they just don’t care about the neighborhoods and the people who live there. But hey, they can always cheer for the Sacramento Welfare Kings.

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    • Henry from Sac says:

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  8. CJ says:

    So Buffalo, NY is more prestigious than Austin, TX because they have two professional sports teams (NFL’s Bills and NHL’s Sabres) and Austin’s residents have to cheer for Dallas’s or Houston’s teams? The idea that professional sports teams increases a city’s stature is overrated. I don’t think anyone makes a decision on whether to move to or from a city because of a professional sports team. Another example: My ex-girlfriend’s hometown of Norfolk, VA didn’t need a pro sports team to attract 1.6 million people to their metro area. Most would consider the Hampton Roads metro area to be a more attractive place to live than, say, Buffalo.

    Sacramento is making a big mistake wasting $250 million to build a stadium for a team that has had a nomadic history. The Kings have moved numerous times in their history (Kings once played in Rochester, Cincinnati, Kansas City, and Omaha). Isn’t Sacramento broke? Where are they going to get the money from? It’s kinda irresponsible to build a cow palace for rich casino owners while your city is considered by some to be the Ground Zero of the sub-prime mortgage crisis.

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    • Ian says:

      If you don’t think the presence of professional sports in a city factor for anyone considering moving there then you’re dead wrong. I’m not saying it’s a factor for EVERYone, but it definitely is for some.

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      • Joe Dokes says:

        Ian,

        You’ve got to kidding me, really. Personally I’d rather live in the L.A. area without a pro football team, which translates into no network blackouts and the local network affiliates broadcasts the best game, not simply the home game.

        That being said, if I were contemplating moving to a new location, a professional sports team show a lack of leadership in a city. A lack of the ability to say NO to stupidity of welfare to billionaires. Further, while a person should consider the entertainment and amenities of their new city. A sports teams is about as far down on the list as amenities that would influence anyones decisoin possible.

        Think of how ludicrous it would be to say, “Oh I won’t move to blank because they don’t have a world class sympohony.”

        Show me a single instance in which a person chose one city over another because of the sports franchise. Please.

        Regards,

        Joe Dokes

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      • Travis says:

        But is it a significant factor? Is there a set of people who would turn down a job offer in another city because the city didn’t have a pro sports team? How much does a bad NBA team really attract people to a city?

        Big name teams are definitely a strong point for some cities. SF with the 49ers and Giants. LA with the Dodgers and Lakers. NY with the Yankees, Knicks and Giants. These super successful teams may be a pretty big draw for some people, but is it really universal? How many people move to Oakland because of the A’s and Warriors?

        In fact, having a BAD sports team in your city can subject the city to ridicule. If you look for “bad sports cities” you don’t see a list of big cities with maybe one professional league team, you see cities listed that have two to three bad teams. It’s gotta cut both ways…

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      • James says:

        Even if that’s true, why would the current residents want more people to move in to the city? Especially one like Sacramento, which is already overcrowded?

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      • Ian says:

        I might choose my wording differently if I were to post that again. I’m just saying that there is a segment of the population that could be influenced by that, including myself. If you have two cities that are exactly the same except one has a pro sports team and one doesn’t then I could be swayed by that. Is it as a big a factor as weather, cost of living, proximity to family, etc? Probably not. But it is a factor. Just think about how people get their entertainment: if you had two cities you were choosing between and one didn’t have a beachplayhouse/concert venue/movie theater then that could influence your decision, right? I don’t think this is a controversial stance.

        Similarly, there are people that get influenced when choosing where to go to college by the lure of big-time sports. And I’m not even speaking about playing sports. It’s just fun to attend and be an alumnus of a school with big-time sports if you’re a sports fan.

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      • Sbard says:

        @Joe Dokes: People most certainly do take things like that into consideration. Lots of people choose to move to cities for their cultural amenities like museums, symphonies, theater scene, etc.

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      • Enter your name... says:

        Sbard, I believe you’re right: some people consider the cultural scene in choosing a place to live, just like some people consider the climate, the reputation of the public schools, or the proximity to their favorite form of entertainment. A person who really loved fishing probably would think twice before moving to a desert.

        But why do we care? How does (very slightly) encouraging some random basketball fan to move into Sacramento actually help the city? Why should Sacramento try to attract a basketball fan rather than another type of person?

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    • Henry from Sac says:

      “Sacramento is making a big mistake wasting $250 million”

      How is it wasting? It’s a gift. The city is leasing out parking (not raising taxes or using any general fund money) to fund an arena they will own. The Kings will be tenants. Downtown will be revitalized, jobs, tax revenue, etc.

      “Kings have moved numerous times in their history”

      Irrelvant. The Kings have been in Sacramento longer than any of those other cities. And they just signed a 30-year lease which keeps them here until the 2040′s.

      “Where are they going to get the money from?”

      Haha, maybe you should have researched this before you went on a rant? The bulk of the money will come from leasing out of downtown parking only made possible by the Arena deal (i.e. we’re building an arena, so let’s bid out the parking now to pay for said arena). Also private money from the owners of the Kings, and from AEG (arena builder/operator), as well as ticket surcharges. No Taxes. No general fund money. No teachers or cops are getting laid off to pay for an arena, as much as opponents would like you to believe that.

      “It’s kinda irresponsible to build a cow palace for rich casino owners”

      First, the city will own the arena. The Maloofs are just tenants. It’s not being built for anyone except the people of Sacramento. Second, wouldn’t it be more irresponsible to sit by and do nothing to improve the city, add jobs, increase property values, and generate tax revenue?

      “while your city is considered by some to be the Ground Zero of the sub-prime mortgage crisis.”

      The only reason the arena plan succeeded is because of a grass roots campaign by residents of the city to keep the team here. People want this arena built. Businesses have made pledges. Cop and fire unions have endorsed the arena plan. For the crucial city council vote, hundreds of people showed up for support. The line went out and around city hall. On the other hand, there were only a handful of anti-arena protestors. Do some homework before characterizing this city as some sort of wasteland.

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