World Cup economics and skepticism

Journalists are supposed to be skeptical. Actually, all of us should be skeptical but not cynical. Big difference. A cynic dismisses ideas and arguments as a reflex. A skeptic checks them out.

So when the USA bids to host the World Cup, a bit of skepticism is healthy. It’s just due diligence. People have a right to ask how much the whole thing is going to cost.

University of Maryland-Baltimore County professor Dennis Coates wants to encourage people to ask these questions. He has produced a study claiming that the economic impact of a World Cup is either negligible or negative. Check the full PDF report or his op-eds. He is similarly skeptical of other sports development such as Baltimore ballpark Camden Yards.

Soccer fans may be naturally defensive upon hearing such things. We’re all prepared to spend some money on tickets if the World Cup doesn’t require a passport, long flight and awkward housing searches. So we should admit up front that we’re hardly disinterested parties. (Frankly, though, the BigSoccer discussion has been fairly reasonable.)

That said, from a purely logical perspective, I found myself with a lot of questions after reading the study. I asked Dr. Coates, and he was kind enough to respond.

I have a few comments in response, so what you’ll see here is my question in bold, his response in italic and my comments in plain text. It’s fair to say I find his argument unsatisfactory, but I shouldn’t have the last word — Dr. Coates is invited to leave comments here. And so are you.

On we go …

1. You restate several times in the paper that the Bid Committee’s economic figuring should be questioned because its members stand to gain from the World Cup. It’s necessary, of course, to point out the available numbers are not independent. But why belabor it? Is it unusual for any sort of enterprise to state its economic case? (As a philosophy major — many years ago, of course — I’m admittedly queasy with any attack on motive in a logical discussion.)

I don’t agree that the point is belabored, but that is a matter of opinion.  I do think it is imperative that people understand that the claims of gains for the general populace are smoke and mirrors used to buttress what I believe is really just straightforward lobbying for a form of corporate welfare.

Fair enough, though I’d state again that it’s not unusual. They’re making a case for what they want to do, just like a job applicant would make a case for being hired. That’s not evil. And prospective host cities, who have the full economic report, are welcome to do their own analysis.

1A. In your listing of the Bid Committee Board of Directors are several people who would not benefit economically (Bill Clinton, Henry Kissinger, Spike Lee, Brad Pitt) and some people who, by your analysis, could incur costs to their constituents if the Bid Committee is successful (Michael Bloomberg, Arnold Schwarzenegger). What’s their motivation?

Some of them are soccer fans.  Some of them have bought the malarky about increased income benefits to the local economy at no cost.  Some of them both.

OK — so at least we’ve established that it’s not always financial gain that motivates the bidders.

2. On page 4, you say the economic gains do not benefit “average Americans.” Why would the U.S. Soccer Federation, which runs programs for millions of soccer players, not represent “average Americans”? And wouldn’t the stadium workers, security personnel and street-sweepers who would earn a payday through each game be “average Americans”?

The US Soccer Federation represents the interests of the US Soccer Federation.  If the idea is to run soccer programs, then ask the American people for money to run soccer programs.  In fact, argue that hosting the World Cup is a fund-raiser for such programs and outline the costs of fund-raising that way.  But don’t argue that the World Cup is a cost free economic stimulus plan.

The goal of real economic analysis is to find the best use of resources.  If using resources to host the World Cup generates $10 of benefit to the average person but using those same resources in an alternative way generates $40 of benefit to the average person, then by spending on the World Cup the average person is worse off by $30.

Of course, if the US Soccer Federation and FIFA capture all or part of that $30, they will rightly claim the event was profitable.  Now suppose that 300 million people each lose $30 this way.  The aggregate loss to Americans is about $9 billion but few people will really feel that loss.  On the other hand, if FIFA and the Bid Committee capture even 10% of that loss they will have had a $900 million pay day.

It is important to remember that the workers you mention could also get a payday being employed in the activity that generates $30 of benefit in my example.  Moreover, the money for those paydays comes from somewhere. If government pays it, then the rest of society is taxed extra to give out those paydays.  The net gain to the society is therefore precisely zero.  Every dollar paid to an event worker by government is a dollar of taxes collected from the rest of the population.

Three of these four paragraphs assume that some other activity could provide the same economic benefit more efficiently. I’m sure every American city would love to know what that activity is.

The argument reminds me of the MLS players’ lawsuit, in which the court took a dim view of the players’ argument that a Division I soccer league would have come into existence if MLS hadn’t done it.

3. Are there no intangible but real economic benefits to hosting an event like this, particularly at a time in which the United States’ image overseas is less than ideal?

There are intangible but real economic benefits.  The question is whether those benefits are greater than the costs of acquiring them.  My hope is that real investigation into that question occurs as a consequence of my report.

It might. But we should be careful not to let this report stand as the entire investigation. I don’t think Dr. Coates wants that, but I wonder if the media will give this such a careful read or follow up.

4. Is it inconsistent to argue on one hand that the World Cup won’t actually bring in $5 billion, then argue that $5 billion really isn’t that much money? And if the Cup were to lose $5 billion, for which I’ve seen no evidence, wouldn’t that also be negligible, particularly given the intangible benefits (basically, global marketing for your country) mentioned in Question 3?

It isn’t inconsistent at all to say the number is wrong but that even if it were correct that there are questions about whether it would cost more than that amount to put on the event.  Be sure you don’t confuse FIFA and organizing committee profits with gains or losses to the general population.  The event can make FIFA lots of money, and it surely will since FIFA gets all the revenues and pays very little of the costs, while still losing money for the American public.

Again, we don’t know what the true costs are.  We know from numerous studies by independent researchers that the World Cup and other large events don’t produce the huge gains the event supporters advertise in their press releases.  If we knew what the real costs were we could begin to compare those to estimates of the real benefits.  So far, that has not been done, but it seems to me the burden of proof should fall on those people asking for our support for their project.  And that proof should be independently verifiable and publicly available.

We’re going to get to these independent studies.

5. You cite studies that claim little to no net gain in tourism in a few cases. But given simple principles of supply and demand (and what we’ve heard from South Africa), wouldn’t hotels be more expensive during the World Cup? Wouldn’t the increase in demand create more revenue for hotels? Also, if there’s no net gain in tourism, then why would locals be displaced during the World Cup and not at other times of the year? (If they’re renting out their houses, as we know people do during the Olympics, wouldn’t that be more revenue flowing into the economy?)

The evidence is that hotels are more expensive.  This fact has been documented for Super Bowls and Olympics and was widely known by sports economists long before the South Africa World Cup.  But hotels aren’t generally any fuller.  So owners of hotels get some extra revenue, perhaps a great deal.  Are you suggesting that the US host the World Cup to give more money to the Hiltons?

The evidence is that there are few extra tourists because of the World Cup.  That doesn’t mean the distribution of tourists over the year stays the same.  Maennig found for Germany 2006 that there was an increase in tourism during June and July, during the event, but that tourism to Germany during April, May, and August was lower than usual.  The total tourism for 2006 was roughly the same as would have been predicted for the year even without the World Cup.

If I rent my house to someone during the Olympics, I surely will collect some revenue.  Of course, I still have to live somewhere, and I may even have to pay rent for a room in a hotel out of town or for a cottage in the mountains or at the beach.  Doing so takes some or all of that rental revenue I got from letting my house to an Olympic visitor and passes it on to someone outside my community.  Maennig’s results for Germany indicated that there was substantial out bound tourism by Germans during the World Cup.

As with the “average Americans” argument above, the comment here on giving money to “the Hiltons” reads like distasteful class warfare to me. Even people with a healthy skepticism toward “trickle-down” economic theory would have to concede that some of the money will go to people other than Paris’ parents.

As for the house — if it costs me more to leave the house than it does for me to stay, I’ll probably stay. And if I break even, well, the money that I earned from the rental subsidized a nice little vacation for me. That doesn’t mean the money disappeared — no moreso than if all the stadium workers take their paychecks from a World Cup game and buy new iPods.

6. Some parts of your study seem to raise straw-man arguments. Does any mega-event bid claim to have an ongoing effect on employment?

Basically they all do by implication.  They rarely are clear that all these jobs will be for a few days out of the year.  It sounds far less impressive to say 100,000 jobs in which people are employed for a day than it does to say 100,000 jobs.

I’d restate: Does anyone really think jobs pegged to a major event will outlive the event?

Here’s where it gets interesting.

7. Baade and Matheson used analysis of personal income in World Cup host cities to define how much the World Cup “lost.” But if the World Cup has a negligible impact on the economy at large (0.07% of GDP, by your earlier number), how can the World Cup be the sole factor in lost personal income?

The Baade and Matheson methodology was to predict the income in host cities using standard statistical techniques and to compare that to the actual income in those communities in the year of the World Cup.  Surely other things happened, but there is no reason to believe that the same unaccounted for events in LA, for example, happened in Washington and Boston.  Those unknown influences are have no impact once they are averaged across all the cities.  The one obvious thing that was common to the cities in the Baade and Matheson analysis was hosting the World Cup.

This is the heart of the study, claiming that billions were lost rather than gained. And it’s the part I find most problematic.

LA, Washington and Boston have plenty of other things in common. They’re American cities whose economy is intrinsically tied to the American economy, which was in recovery mode in 1994. (Not fast enough to save the Democrats in Congress.)

But honestly — the revenue from the World Cup is negligible, but the Cup is solely responsible for billions of dollars of lost personal income?

That’s not enough evidence. We need to see where the money went. It didn’t go to white-elephant venues (a problem with the Olympics), and security costs couldn’t have accounted for all of it.  Why would a city’s economy be so ruined by simply hosting a couple of soccer games, getting a couple more days of use from existing infrastructure?

8. “The Bid Committee goal is for the citizens of the US to pay for a vast marketing campaign to enhance the profitability of many committee members’ investments in the soccer business.” How are the citizens of the US, other than the Bid Committee itself, paying for this marketing campaign?

If the income of Americans is lower as a consequence of the US hosting the World Cup, then the citizens paid for the event indirectly.

Which, again, is a point for which the evidence is questionable.

9. Page 19-20: Why would cities be forced to pay money to host soccer teams for training? What prevents the cities from saying no?

You would have to ask that question of the cities that felt they must pay.  I suspect it is all the intangible benefits they believe they are getting.  It would be helpful to all cities to first get a good handle on what those intangible benefits might  be worth to them before they agree to host some team.

If you haven’t read the study, here’s the argument: A few cities paid considerable sums for the honor of having, say, Brazil’s national team training there.

On a city-by-city basis, it’s valid to ask whether your locality should be spending that money. But this isn’t a necessary consequence. If no city offers to pay Brazil to use its fields, Brazil can’t extort that money somehow. Brazil will just have to rent a field like anyone else.

10. Is it fair to call on the experiences of London, which must construct many new venues, with the costs that will be incurred by holding a World Cup in existing venues, many of them already built with the idea of hosting world-class soccer games?

The London Olympic organizers have expressed regrets about taking on the task of hosting the Olympics.  They made the decision to seek to host the games despite the fact that lots of economists told them they should be wary of the costs of doing so and that the benefits would likely be smaller than they were being told. I think it is fair to use that experience as a cautionary tale.  But note that I also call upon the experience of Germany in 2006 and the US in 1994, and report on evidence that those events were not the source of great economic gains in income and employment.

The US has already built the stadiums in which the games would be played, and the same was true in 1994.  The fact that independent analysis suggests the US economy suffered in terms of lost income as a consequence of hosting th1994 World Cup even when no stadiums had to be built should raise concerns about hosting another event in similar circumstances.  Moreover, the facts that the stadiums are built, and the transportation infrastructure is in place, and that each potential host city has world class medical facilities all means that the US is an especially attractive location for the event.  In those circumstances, I think the American people should get more out of hosting the World Cup than vague promises of economic impact and intangible benefits whose value is unknown.

We’re back to assuming that the analysis of lost income is true.

Congratulations for reading this far. Any comments?

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11 Responses to World Cup economics and skepticism

  1. anon says:

    Thanks for the thorough reporting, Beau. You’ve raised the bar for discussing this topic.

  2. Beau Dure says:

    An excellent comment at BigSoccer points out that LA had a big earthquake in 1994. That might affect the economy just a bit.

    Other good points in his analysis as well:

    http://www.bigsoccer.com/forum/showpost.php?p=21834915&postcount=53

  3. Neal Thurman says:

    Excellent article. Did you and Dr. Coates discuss the intangible benefit of happiness at all as he discussed his analysis of the potential benefit of a US WC bid? There’s a great section in Soccernomics related to happiness rather than economic gain as the primary reported benefit of holding a major sporting event like the Olympics or World Cup. The section goes on to talk about the fact that over a certain income level there are diminishing marginal returns in terms of “citizen satisfaction” with additional income but that their satisfaction can be increased in other ways and that things like hosting a Super Bowl or attracting a major sports team (or hosting a major world event like an Olympics or WC) qualify. Without reading the entire report, is Dr. Coates saying that there’s NO good reason for bidding to host a WC? Or just that there ISN’T the claimed economic benefit?

  4. Beau Dure says:

    He’s purely focused on the economics. I didn’t get the sense that he’s opposed to the whole idea of playing the games.

  5. ERic says:

    Thanks for this, Beau. I really appreciate it when people discuss things rationally.

  6. Dennis Coates says:

    Beau, I thought I would check in to see how the comments went and possibly contribute to the discussion some.

    I believe that cities should do due diligence in examining the costs and benefits of hosting the World Cup. I don’t believe many will because they will take it on faith that the Bid Committee report that projects large benefits applies to them or they will turn to local boosters to produce the same biased reporting the Bid Committee purchased. In fact, if you read my report you will find an instance where a San Diego city council person objected to agreeing to be host without having the details of the deal and was told by the city attorney’s office the details would be worked out later.

    It is surely not the case that I or any critic of the bid wanted to suggest that the only reason anyone would support the bid is financial gain. But being able to point to some committee members, whose participation is largely by lobbying and attaching their names to the bid, is not evidence that the affair is some sort of exercise in altruism.

    You suggest that cities don’t have better ideas for producing economic gains than by hosting the World Cup. Actually they have dozens if not hundreds of ideas that could do so. Let’s say repairing an aging transportation infrastructure, upgrading the sewer systems, putting more police and firemen to work, reducing class sizes in the public schools, updating school facilities from buildings constructed in the 1940s and 1950s, having the money in schools for music and arts programs or sports and recreation programs, fully funding retirement plans for state and local employees. Or even the common cure-all of cutting taxes.

    Distasteful class warfare? Please. It was a throw away smart remark. Nonetheless, you are 100% wrong is saying some of the money will trickle down to the hotel employees. Here’s why. If the hotel is no fuller than if there was no event, and the evidence is it would not be, then no more staff is employed. Those workers don’t get a bonus just because the World Cup is in town. They get what ever their agreed wage is for their agreed hours of work. So all the gains from the higher room rates go to the owners of the hotel. Not all to the Hilton family, but to owners of stock in the myriad hotel chains. It is nice for them, but it is not obvious why the average person should pay for that.

    I enjoy soccer. I am not opposed to hosting the World Cup. I am opposed to making the decision without getting the facts. The Bid Committee is nothing more than a political lobbying organization that has marshaled famous people and highly suspect “facts” to convince the American people and FIFA to give them a big prize. The American people need to decide if giving the Bid Committee that prize is worth it.

    The comment that the earthquake in LA in 1994 might be the source of reduced income is an interesting one. Of course, that does not explain why income in New York was lower in 1994 or why income was lower in Detroit, Newark, Orlando and Washington. San Francisco and San Jose are also reported to have had lower income in the Baade and Matheson study of the 1994 World Cup.

    The last point I would make is that the evidence of no effect of World Cups is not questionable no matter how many times you assert it to be so. The fact is that the ONLY people ever to produce evidence of large gains are people hired by bid committees and whose reports are never vetted by anyone with training in economics and are often not released to the public. The research that finds no effect or even reductions in income is publicly available so anyone can examine the methods. Moreover, the research in academic journals, like the Baade and Matheson study, was reviewed by others trained in economics and statistics to be sure the analysis was properly done. If there are holes in that research identified by the reviewers, the editor of the journal will reject it for publication or the authors will have to fix the problems before it gets published. Keeping their methods and data a secret is not an option. That option is only open to the lobbyists at the Bid Committee.

  7. GB says:

    I would read the book, Soccernomics, if you haven’t yet. Has a whole chapter on this subject.

  8. Beau Dure says:

    I’ve been meaning to read Soccernomics, and I just flipped it open to that chapter. After reading that, I may skip the rest of the book. The logical loopholes are big enough to swallow Pluto. Maybe even an actual planet.

    P. 239-240 (paperback edition) is based on the notion that stadium construction jobs shouldn’t count because they’re temporary. Aren’t ALL construction jobs temporary?

    P. 243 raises the same argument of inevitability we see in Dr. Coates’ work — that the World Cup must surely be taking money away from something else. Similarly, they claim many World Cup visitors would’ve gone to Germany at some point anyway. That’s quite a stretch. Personally, I would hope I would’ve found a way to China at some point in my lifetime, but I couldn’t guarantee that I would do so — and I probably wouldn’t have stayed for three weeks if not for the Olympics. (That said, I know it’s very difficult to justify the money China spent, particularly with the Birds Nest — a stadium that looked great but trapped hot air — sitting empty.)

    To Dr. Coates’ arguments — and thanks again for the reply:

    As a parent who had a kid in a 29-student first-grade class in an affluent county, I’d like to see more money going to public schools. But that’s not really the argument here. We’re talking about financial gain or loss from a staged event. If that staged event makes any money at all, then perhaps it’ll be easier to come up with the money for another first-grade teacher.

    Though the Hiltons are rich, some hotels go out of business, and people lose their jobs. If more money is spent in those hotels, the odds of those hotels closing up shop is lessened. And given the “average Americans” comment in your paper, I can’t quite retract the comment that there’s some class rhetoric at play here. Perhaps it’s subconscious, but I still see it.

    I agree completely that people should ask questions of their local officials and not accept the Bid Committee’s numbers at face value. The Cup shouldn’t get blank checks from municipalities that host games or practices. What I don’t want to see is one set of questionable numbers countered by another one.

    Unfortunately, the way the media work is that we’ll see “Bid Committee claims $5B gain” countered by “Economists Say World Cup 94 Lost $9B,” even though the latter isn’t really what Baade and Matheson conclude.

    I have plenty of respect for the peer review process. My father was a scientist, my half-brother is a scientist, and I’m a journalist frustrated by the notion that people try to deny climate change or evolution despite the mountains of peer-reviewed evidence supporting the science.

    That said, I think laymen have the right to ask questions when something doesn’t seem to make sense. Economics, with all due respect, is an imperfect social science with thousands of variables that often can’t be controlled.

    And so with Baade and Matheson’s study, the big question is this: How could an event that didn’t cost all that much to stage (no white-elephant stadiums, etc.) result in billions of “lost” income? Where did that money go? How do we make the leap from correlation to causation?

    And if we think there’s a causation in those numbers, how about the numbers in the following study (not peer-reviewed, to my knowledge), which show a slight drop in economic growth during a World Cup year followed by a significant boom the next year? Can we blame the World Cup for the loss and not credit it for the gain?
    http://www.americanprogress.org/kf/worldcuppdf.pdf

  9. Beau Dure says:

    Like Jon Stewart, Dan Loney uses biting humor to make a few good points, mostly that using World Cup hosting responsibility as a reason to get around to some nagging infrastructure problems really doesn’t sound all that horrible.

    Dan explains it in far more interesting terms:

    http://www.bigsoccer.com/forum/blog.php?b=9932

  10. njndirish says:

    God says bring the World Cup to the United States:

  11. Pingback: Time to transition to a post-FIFA world? (Or World Cup, anyway?)

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