Is a Stadium a Wise Use of Public Funds? Q&A with Econ Prof. Fred Smith

But who will pay for it? In Charlotte—and in any major-league town—the debate will hinge on whether public funds will help pay for the facility. SoFi Stadium, the future home of the LA Rams and Chargers, is expected to cost almost $5 billion—all financed privately. Meanwhile, the Oakland Raiders are moving to a new $2 billion home in Las Vegas that will be built with almost $750 million in money paid from a special hotel tax.

Should Charlotte help pay for a new stadium? Davidson College Economics Professor Fred Smith is an urban and sports economics expert.

Are stadiums effective engines of economic growth?

Simple answer: No. They don’t generate much net economic activity whatsoever. At best, they redirect economic activity from one part of the city, state or region to another. At worst, they utilize resources that are in high demand in other parts of the city (e.g. construction workers) to work on a project that produces little in the way of net economic benefits.

Economic growth comes from improved productivity. That can result from workers using more capital, better capital (technological change), or specialization. Economic growth isn't the same as improved well-being, though.

How do you respond to economic impact reports that show that stadiums attract visitors and generate business in the region?

Most, but not all, of those dollars would have been spent in the economy elsewhere—other restaurants, Lowe's, etc. So that's not a net gain. It might be a gain for the area, but the money is coming from elsewhere. It’s not “new” economic development.

Football is a bit different from other sports, though, because it will attract folks who are outside of the Charlotte metro area (because games are once a week, with only eight regular-season home games), and that spending is "new" to our metro area. (Of course, the tourist's hometown is likely to experience a "cost" of reduced spending in another town.).

But, viewed through a local lens, even if a stadium doesn’t improve productivity throughout the state or the region, is it a positive for Charlotte?

I’d say that growth is “good” for the neighborhood but a wash for the city or state. However, “good” in this context can be situation specific. Do I want to own a single-family home near a football stadium? Probably not. Do I want to own a condo/townhouse near a ballpark/stadium? Perhaps. Do I want to own a bar/restaurant/hotel near a ballpark? Definitely. 

It’s worth mentioning that a stadium that draws major events (Super Bowls, major bowl games, etc.) does have the ability to draw economic activity from outside of the city/state and can—on the margin—lead to spending in your city that’s coming from outside of your city/state.

How do you measure the value of a publicly funded athletic venue?

Where public financing of a stadium can make some sense is to compensate the team for what many sports economists call the “water cooler effect.” In other words, when I spend time talking about the Hornets in the break room here at the college (and spend time “enjoying myself” because I get to talk about our home team), I’m enjoying benefits from something that I don’t have to pay for. I get these benefits regardless of whether I pay to attend games or buy Hornets gear.

The key point is that you need to put a HUGE value on the watercooler effect to justify the public dollars that most communities spend on sports facilities.

For most teams, the overwhelming majority of fans will live in that city or state. However, teams like the Cowboys, Yankees, Cubs, Celtics and Lakers have national followings that lead to the “water cooler effect” extending way beyond the city/state borders. The water cooler effect for the Jacksonville Jaguars, however, is probably isolated to the Jacksonville metro area at least for now. (They just announced that they’ll be playing two of their eight home games in London for the foreseeable future. The water cooler effect may extend to the UK!).

Does a major league franchise bring value to the host city?

The notion of a city being “major league” is something that’s much more appealing to fans and owners than it is to businesspeople. Do you know where Green Bay is because of the Packers? Yeah, probably. But do most people know where Jacksonville is and what is has to offer? I guarantee you that Fred Smith, the founder of FedEx, was not concerned that there were no professional sports teams in Memphis when he chose the city for his base of operations. Similarly, the big banks in Charlotte don’t seem concerned that we don’t have MLB and NHL teams.

On the margin, maybe you decide to locate your firm in a “major league” city if everything else is equal… but it’s rare when everything else is equal.

How does Charlotte’s position on the border between South and North Carolina affect decisions to build and finance facilities?

The border is a factor because the tax burden would fall (in all likelihood) exclusively on North Carolina residents, while South Carolina residents enjoy the water cooler effect (and whatever other economic benefits might spillover to the Charlotte metro area). It’s not unique, though, because there are similar situations in Cincinnati, Washington, D.C., and New England, among others. 

Are stadiums wise investments for cities to make?

I think there are very few—perhaps zero—examples of expenditures on sports stadiums being a good deal in raw economic terms. Some are worse than others. You’d be hard-pressed to find a single example of a situation where this sort of spending provides a positive return without including the water cooler effect.

What would be a better investment of public funds?

In a perfect world, I’d say that we should invest in something that makes workers more productive. Many economists are pretty negative about transportation spending (especially on rails), but I tend to think more highly of that type of spending. Something like rail lines might be a good idea.

Another thought: Imagine investing that money in a “trust” for CMS. The annual budget for CMS is evidently in the neighborhood of $1.4 billion dollars. Suppose the hundreds of millions that might be spent on a stadium were invested and earned (on average) six to eight percent. If you were to take a five percent draw on that “endowment” and use it for teacher compensation with an eye towards retaining our best teachers or attracting new teachers, then you’d have a bonus pool of nearly $25 million a year to spend on teachers. I have to suspect that you’d be able to generate some real interest in teaching in Charlotte if CMS had these dollars to spend on teacher compensation. Would it make a massive difference? No, probably not. Could it make a small but meaningful difference? I think so.

As an alternative, I’d like to see the government spend the money on public goods—large public parks, greenways, etc.—that would make Charlotte a healthier, more environmentally friendly community in which to live and work.