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.


Brett

Is there an argument to be made for a professional sports team increasing a city's stature? Right now Sacramento is home to an NBA franchise. If the Kings leave, what is Sacramento? Home to Cal-State-Sacramento? Home to the California State fair? Home to a AAA baseball team? It seems to me there may be some level of distinction from having a top-level professional team that could benefit a city.

Armando

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

Brett

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."

Eric M. Jones

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.

EL

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?

Phil

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.

Brent

Furthermore, other leagues (MLB, NFL, NHL) are not blocked by the NBA from setting up shop in Sacramento for a more valid substitute (than the absurd notion that Sacramento basketball fans would root for the Warriors (90 miles away), or the Lakers or Clippers (366 miles away).

Saying fans could be "simply rooting for one of the three other NBA franchises in the state of California" is as preposterous as saying New York Knick fans could simply root for the Nets, Sixers or Celtics (as all three of those are closer to New York than Sacramento is to Los Angeles!)

Ian

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.

Read more...

Steve S.

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

Mitch

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.

Mike B

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.

Read more...

Christina

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?

Read more...

Fernando

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.

Brian

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.

scott

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.

Bob Lewis

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.

cackalacka

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.

assumo

One thing that the author fails to note is that the arena will very likely be located downtown, as opposed to its current location 10 minutes outside of the city. The new structure will border a planned inter-modal transit facility and a 240 acre multi-use development on the former UP railyards north of downtown (http://sacramentorailyards.com/home/home.htm#). While the argument is compelling that sports franchises have little net economic effect on cities, what will be the effect of the publicity and the immense draw to the new planned development in the area? What is the value of such a cornerstone to a project, such as the railyards, that has been teetering toward and away from fruition for decades? I think that this consideration is an essential part of understanding why Sacramento has made the decision that they did. Right or wrong, it has to be factored in if you're measuring variables like "the crowding out effect". What crowds are currently at that site? Answer: None.

Read more...