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. raf says:

    As anyone who has looked at the plan (apparently not the author of the article, as he seems more interested in scoring ‘points’ by dredging up an old study on sports subsidies) tax money is not the issue. The parking revenues are being used to fund the City’s part of the arena, NOT GENERAL FUND MONEY. As anyone from Sacramento can tell you, nights and weekends are a ghost town in the downtown area because, unlike most business centers, it serves STATE WORKERS who go home or out of town for the weekends. They do not even currently charge for parking on the weekends in most areas of downtown. I thought it was a rather ingenious solution that was apparently lost on most people.

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  2. Charles R. Donaldson says:

    I wonder how many of you that debunk the article, would put all their lottery winnings into the Kings ownership if you were lucky to win. I for one would not. It is not really an investment. It is a paying hobby like raising race horses or show dogs. Only a few are fortunate to make a profit. If Forbes Magazine is to believed, the 10 to 12 largest metropolitan areas have profitable NBA teams. Below that level the NBA needs taxpayer money to survive. Remember this is just like buying better golf clubs so one can get a stroke or two less and win the pool when you play with your buddies. It is not about profit but ego. All this talk about the image of the city is really just ego talking.

    If the city does go ahead with the arena, the will have another problem when the biggest teams increase their salaries to attract better players. Remember it is not about profit but ego satisfaction with winning. Sacramento will then have to find more money to pay the players. Heck the Maloof family have not paid back the last loan.

    Half of the teams in the NBA run in the red in any given year. The Kings turned a profit because they have the second lowest payroll. Get a winner and the Kings will need to pay more or lose the player.

    The problem with most proponents of the arena is that they want to be a small fish in the big lake. Guess what? Small fish get eaten. It is better to be a big fish in a small pond. The River Cats are a moderate size fish in a smaller pond. That is why they do so well. The prices are reasonable. People go to have fun. I notice the young people who go there on weekends to watch the game and the opposite sex in a safe environment. That is a model for sports entertainment here in Sacramento. Frankly, I expect the NBA franchises to escape to the larger cities in Europe where there is money and population greater than many of our smaller metropolitan areas.

    I would suggest a better use for the $2oo million plus. If we want sports entertainment, devise ways to enhance the football and basketball at Sacramento State. Fill ARCO, (Why call it Power Balance when they have not paid the Kings?) for Sacramento State games and we will see name universities coming here. Stanford, Cal, Nevada games would bring fans to our hotels and restaurants. Filled arenas will translate in better players and better teams visiting our area at a fraction of the cost.

    Another thing we could do with $200 million is build factories for industry instead of letting them go to China. The Chinese have factories ready to go when an American shows up with a manufacturing idea. This would really put Sacramento on the map with jobs.

    I want to thank Baad and Matheson for pointing out The Substitution Effect, The Crowding-Out Effect and Leakages. The local press just does not question deeply enough to get this information although much of it is available thanks to the Internet. Common sense would tell one that there explanation is correct. I will leave it to the professionals to quantify it.

    If we go through with the arena, we are likely to end up like Stockton or worse. Nothing like being a world class bankrupt city. As far as the NBA is concerned, when the league cannot get welfare from local governments, the league will either retract or send teams like Sacramento to the larger European and Asian cities. The logical way would to develop revenue sharing so all the teams could be competitive but don’t expect the Knicks, Lakers, Bulls and the Celtics to depart with all that gold.

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    • Henry from Sac says:

      If I won $300 million, I certainly would not buy an NBA team for economic reasons. But if I had $1.5 billion, I’d love to own an NBA team. Sports teams are not for the hundred-millionaires. But there are reasons that billionaires like Ron Burkle (and as reported on a recent Bee article, another “unnamed” billionaire), have shown interest in buying the Kings and keeping them in Sac.:

      1) Teams do not really loose as much money as they report. They are allowed to book player contracts as “depreciation” loss as if players are cattle. Since this is not an actual expense, losses are over-stated via accounting tricks.

      2) Prestige. Sounds trite, but it’s real. If the team is loosing money, why have the Maloofs hung on so stubbornly when there are interested buyers? Why did they sell their profitable beer distributorship rather than the Kings?

      3) Franchise value increases. For example: Seattle Sonics sold for $16 million in 1983. Then for $200m in 2001. Then bought by Clay Bennett for $350m in 2006. He then moved the franchise to a small market, and it’s now valued at $393m (as of early 2012). Awesome investment!

      4) With increased profit sharing from the 2012 CBA, small market teams should increase in both value and profitability.

      As for your other statements:

      “devise ways to enhance the football and basketball at Sacramento State”

      - Really? First, I have no interest in Sac State sports. Who does? I am interested in PRO SPORTS. This is like saying let’s not build a movie theatre and just watch some college-student plays. Second, without a new arena how do you propose to raise $200m for college sports? Third, even if there was $200m lying around, are you seriously propose that we spend it on Sac State Football on Basketball instead of investing it in downtown re-development?

      “build factories for industry instead of letting them go to China.”

      - Again, how will you raise the money without a new arena? Do you realize how silly this sounds? Let’s not re-develop downtown and keep pro sports here, let’s Build-A-Factory! How do you propose to compete with China when new trade agreements are being signed every day and China continues to suppress their currency to make their goods dirt-cheap. The factory would be empty in 5 years, along with the rail yards that will continue to sit empty if we don’t finally build something on that land.

      “Substitution Effect…”

      - Does not apply to Sacramento situation. Because concerts are currently passing up the outdated and problematic ARCO Arena , residents have to go to the Bay Area for many concerts and events. Without a new arena, entertainment money won’t be spent on “other” entertainment in Sac (because there is nothing comparable) and will be spent in the Bay.

      “Crowding-Out Effect…”

      - Does not apply to Sacramento. We currently get virtually no tourism. Who will get scared off?? Downtown is pretty empty on nights and weekends right now.

      “Leakages…”

      - This argument does not make sense. The players have to live here at least part of the year, right? And what about the hundreds of others that the Kings employ and a new Arena will hire? Are those employees going home to Beverly Hills?

      “If we go through with the arena, we are likely to end up like Stockton or worse”

      - So in order to not end up like Stockton you want the Kings to leave? That’s the opposite of logic. If we lose professional sports, concerts, events, and fail to revitalize a deteriorating downtown, then we WILL end up like Stockton.

      “Nothing like being a world class bankrupt city”

      - How exactly will a new arena bankrupt the city? Do you even know how the arena is being funded? Or are you just another one of the 80 other uninformed commenters that thinks that the city is laying off teachers and firemen and handing the money to the Maloofs?

      “when the league cannot get welfare from local governments”

      - Again, how this welfare? No tax money is being used. No general fund money is being used. The city projects to MAKE money off this deal.

      “The logical way would to develop revenue sharing”

      - This is why revenue sharing was increased as part of the 2012 CBA, and I foresee it increasing further. The illogical way would be to say let’s leave small markets and have 4 teams in LA, which is what would happen if we do what you are suggesting.

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  3. Big A says:

    Now, my only view to add to this subject is that we’re talking about politics, where economics is a tool and not the main focus. Whatever reasons may be behind the actions of the individuals involved, I would have to become their close friend and after a few years I’d dare ask them exactly why they did it and actually expect to get a straight honest answer.

    But the point on which the article is written: “nba takes money from people who dont like basketball” is part of modern political systems. Pacifists pay for armies, ecologists pay for tax reduction to factories and people whose house was foreclosured paid for the banks’ big bonuses during the crisis.

    In politics, it’s a fact that 100% of the population gets the government chosen by 50% plus 1 voter. The tile of the article may sound outrageous for an economist and make perfect sense for a Sacramento Kings fan, but it’s just everyday politics since democracy was invented.

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