Olympian Economics

Tess VIGELAND: It’s Freakonomics time. Every couple of weeks, we’re talking with Stephen Dubner, co-author of the books and blog about “the hidden side of everything.” Welcome back, Stephen.

Stephen J. DUBNER: Hey, you too, Tess. And happy summer Olympics to you.

VIGELAND: Happy summer Olympics to you, as well. Looking forward to it. Any favorite events for you?

DUBNER: Oh, synchronized swimming, of course. I don’t, however, want to talk about gold medals. I want to talk about real gold, the big economic boost that a host city like London is supposed to get. But Tess, I’m here to tell you that — well, you can probably guess where I’m going with this, can’t you Tess?

VIGELAND: No, gold in them thar hills?

DUBNER: Let’s bring in the economists, O.K., to throw a little cold water and everything. Allen Sanderson at the University of Chicago has looked at previous host cities and he measured their economic gains against what he called twin cities, so nearby cities that didn’t get to host the games.

Allen SANDERSON: So we used Madrid in Spain, that didn’t have the Olympics. Or we used Charlotte — close to Atlanta — but didn’t have the Olympics. Or Melbourne in Australia — didn’t have the Olympics. And we tried to look at tourism, construction, tax revenues, both before and after. And we could not find any significant difference between the city that had the Olympics and the city that didn’t.

VIGELAND: But Stephen, how can that be? You have thousands upon thousands of people descending on these cities. How does that not bring in a ton of cash?

DUBNER: Well, it does bring in a ton of cash. So the Olympic games between TV rights and sponsorships and so on are expected to gross more than $3 billion, which is real money to people like you and me. But the host city pays a big cut to the International Olympic Committee, and then, of course, there’s the cost of putting on the games themselves. And that is where things can get really funky.

VIGELAND: What are we talking about though? Is this your standard cost overruns, construction, things like that?

DUBNER: Yes, yes, yes. But you also have to go even further back and you have to look at the incentives of the cities when they bid for the games. So these cities, they need to send out two different signals at the same time. So to the International Olympics Committee, they want to look rich. They want to show off the amazing facilities they’re going to build. But back home they want to appear frugal, to show off that there will be plenty of money left over after they build everything. The friction lies between those two signals.

So Andrew Zimbalist, who’s a prominent sports economist at Smith, says that last year the London organizers sent around a letter looking for economists who could produce just the right kind of economic impact study.

Andrew ZIMBALIST: And in that letter, it said that we anticipate we’re going get a lot of criticism from the media and from people, saying that we’ve spent so much money on the London games that it’s not going to have an economic payoff. And we would like to hire somebody to do a study that will contest that criticism and present a rosy picture of what the economic impact will be.

VIGELAND: Yes, can we please have a study that will show exactly what we want it to show? But again here, tourist dollars, tourist dollars, tourist dollars — not just during the games, but doesn’t that play out supposedly, predictably for years later?

DUBNER: Well, keep in mind that a place like London already has plenty of tourists. So to some degree what you’re doing is replacing a Trafalgar Square tourist with a synchronized swimming tourist.

VIGELAND: You’ve got a thing with synchronized swimming, don’t you, my friend?

DUBNER: I am kind of fond of it. But Allen Sanderson points out furthermore that the idea of a local economic benefit is just much more complicated than you might think.

SANDERSON: Just because a credit card gets swiped in a particular hotel or a particular restaurant or department store doesn’t mean that the money stays there. It has a life of its own. If you’re buying a sweatshirt in Boston, was the sweatshirt really made in Boston? Or was it made somewhere else? Is this hotel’s central headquarters in Boston or not?

DUBNER: Now Tess, let me play devil’s advocate for one minute. It may be that that all these American economists are pooh-poohing the Olympics maybe because we haven’t been getting the Olympics ourselves lately. New York and Chicago were the most recent U.S. losers on Olympics bids. But if you listen to Allen Sanderson, he says that’s O.K. because there may actually be more value in losing an Olympic bid than in winning one.

SANDERSON: You want to signal something: We’re a world-class city. One way you could do it is to bid for the Olympics. Say it costs us probably, all things considered, $80 to $100 million to bid, but then you want to lose.

DUBNER: O.K. Tess, so how’s that for your new Olympic spirit? I have a new chant now. We’re No. 4! We’re No. 4! Close enough to get the recognition, but we don’t actually have to pay the bills.

VIGELAND: I like that, a little reverse psychology. Stephen Dubner, our Freakonomics correspondent. He puts out a podcast, too — you can get that on iTunes and hear more at Freakonomics.com. Great to talk to you and we’ll talk to you in a couple of weeks.

DUBNER: Thanks much, Tess.