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.