Article source: http://www.policyreview.org/mar97/keating.html
Policy Review
March-April 1997, Number 82
Spring is upon us, and the thoughts of all right-thinking Americans turn to baseball. The crack of the bat and the sight of neatly mowed grass on a sunny day stir us in much the same way as they did our parents and grandparents, and hopefully will do for our children.
Yet a shadow-the shadow of big government-looms over the great pastime. While the actual sport of baseball is an excellent metaphor for the free market (illustrating how individuals and teams work together and compete against one another), at the professional level nearly all the teams play in government-owned or government-subsidized ballparks. Boston's Fenway Park and Chicago's Wrigley Field are not only rare gems from the perspective of baseball's traditions, but also from the perspective of sound economics-both were privately built and are privately owned.
In baseball, as is the case with all professional sports today, socialism and corporate welfare have run amok. Taxpayer subsidies for multimillionaire owners and players anger even the most ardent baseball fans, not to mention millions of other taxpayers who care little about the national pastime. The only individuals undeterred by this unsavory arrangement are politicians and team owners.
Indeed, state and local officials across the nation are frantically spending billions of dollars on new facilities for baseball, football, basketball, and hockey teams. Team owners pit city against city, and state against state, in the scramble for new sports venues with revenue-generating seat licenses and luxury suites.
Seattle Officials here simply ignored the voters' opposition to paying for a new stadium for the Mariners. In September 1995, King County taxpayers voted against a hike in the sales tax to pay for a new ballpark as well as repairs to the Seattle Kingdome, present home of the city's baseball and football franchises.
But just weeks later, the Mariners entered the American League playoffs for the first time and triumphed over the New York Yankees. This exciting performance stirred state and local officials to reject the vote of the people. In October of that year, the state legislature and the King County Council approved a $320-million plan for a new stadium. The Mariners offered to pitch in $45 million, while state taxpayers were on the hook for $105 million and county taxpayers for $170 million. Then-governor Mike Lowry, and then-county executive (and current governor) Gary Locke-both Democrats-led the charge.
A year later, however, the estimated price tag jumped to $363.5 million, plus a parking garage costing $20.5 million. One member of the Public Facilities District board, which oversees the project, cavalierly noted that the project budget could be increased because the taxes designated to pay for the ballpark were generating more revenues than expected. Another board member claimed, "This isn't an overrun. This is just part of the design process."
The team later grew irritated with project delays, and put the team up for sale. Proving that welfare for baseball was bipartisan, U.S. Senator Slade Gorton, a Republican, stepped in to help. The Mariners will stay in Seattle, having been promised a new ballpark by 1999 and more revenues than originally negotiated. Taxpayers got stuck with an additional bill of $50 million for the costs of extra borrowing, police details, clean-up, and litigation. The estimated price tag for the ballpark now totals $380 million, plus $26 million for the garage.
Milwaukee In Wisconsin, not even a prominent conservative leader and leading welfare reformer could resist the siren song of corporate welfare for baseball. Republican governor Tommy Thompson lobbied hard for a boost in the sales tax to pay for a new stadium for the Milwaukee Brewers. Previously, in the spring of 1995, Wisconsin voters overwhelmingly rejected (by 64 percent to 36 percent) a sports lottery for a new ballpark. Nonetheless, in October the state legislature passed a plan to build a $250-million stadium, in part with $160 million in direct public funds. The Brewers were to pick up the remaining $90 million, but $50 million of this was to come from a subsidized loan from the Wisconsin Housing and Economic Development Authority. By mid-1996, cost estimates rose to $313 million before the ground was even broken on the new ballpark. To restore the price tag to the original estimate, the builders then cut costs and pushed the opening date back from 1999 to 2000.
Doubts persisted throughout this process that Bud Selig, the Brewers' owner and the acting commissioner of baseball, would be able to raise his team's portion of the financing, even with a 20-year, $40-million deal with Miller Brewing Co. to name the stadium "Miller Park." Eventually, loans were secured from the Bradley Foundation, the city of Milwaukee, and the business community.
Incidentally, the new stadium may be the least popular venture ever undertaken by Thompson, and the sales tax hike cost Republicans control of the state senate. After voting against the tax twice, Senator George Petak changed his mind and cast the deciding vote in favor of the ballpark package. Angry citizens subsequently mounted a petition drive to recall Petak; when he lost re-election, the GOP lost its majority in the senate.
New York As in many other endeavors, New York City leads the nation in taxpayer-funded projects. Not one, but two new subsidized fields of dreams are in the works for the Big Apple.
Of course, New York City was once the greatest baseball town in America. Yankee Stadium and the Polo Grounds-the former home of the Giants-stood like opposing fortresses on either side of the Harlem River, while the Dodgers played in the intimate confines of Brooklyn's Ebbets Field.
New York's baseball glory faded somewhat after the Dodgers and Giants fled to the West Coast in the late 1950s, and the city became far better known as America's big-government town. In 1964, New York City opened Shea Stadium to house the Mets expansion team, and acquired Yankee Stadium in 1971, remodeling it a few years later. New York's ballparks were socialized, effectively adding its teams to the city's burgeoning welfare rolls.
Now both the Yankees and Mets seek new, taxpayer-funded stadiums. Republican Rudy Giuliani has acquiesced, lest he become known as the mayor who lost the Yankees to New Jersey, where Yankees owner George Steinbrenner threatens to flee if he does not get a new ballpark. Meanwhile, the Mets are committed to building a new stadium next to Shea, with some assistance from the city.
Latest estimates place the total bill to the city well in excess of $1.1 billion-about $100 million toward the Mets' $450-million ballpark and more than $1 billion for a new Yankee Stadium. Few expect Steinbrenner's Yankees to pitch in on the funding. "The house that Ruth built" will likely be replaced with baseball's version of public housing built by taxpayers.
San Francisco One might expect a similar rush to subsidize in liberal San Francisco. San Franciscans have exhibited a streak of common-sense conservatism, however, when it comes to stadium socialism. In recent years, voters have voted down four referenda for new, taxpayer-financed ballparks to house the Giants.
After going 0 for 4, the Giants came to the plate with a proposal for a ballpark initially billed as privately funded. And, in fact, the $262-million Pacific Bell Park will be built and owned by the team. The notion of a new "old-style" ballpark built without taxpayer dollars-with home runs splashing into the San Francisco Bay just beyond the right field wall-would be sure to excite the free-market baseball fan.
Unfortunately, government is still involved to some extent. The land upon which this green cathedral will rise will be leased rather than bought from the city. In addition, the city will contribute $15 million in tax revenues to pay for related infrastructure improvements, and another $4.1 million to buy 3 acres from the state. Still, the financing structure for the Giants new ballpark-with more than 90 percent of the funding coming from the private sector-is quite a feat in today's subsidy-happy stadium environment. Indeed, the private sector has not been so dominant in financing a ballpark since Dodger Stadium opened in 1962.
Show Us the Numbers Politicians usually appeal to voters' civic pride to make the case for subsidies. Yet they are willing to use any tactic to attract and keep a big-league sports franchise, including disingenuous and discredited arguments about the economic benefits of taxpayer-funded stadium construction. Proponents peddle reports, based on the old Keynesian multiplier, showing that new sports facilities built with tax dollars spur massive economic benefits. That is, the money spent by the builders of the facility and by the spectators attending each game is multiplied by some estimated number to calculate the total amount of economic activity supposedly generated by such venues.
This analysis, however, ignores a key economics concept-the substitution effect. Consumers have a limited amount of dollars to spend on entertainment, which will be spent one way or another. If they do not spend money on a baseball game, they spend it playing golf, going to a museum, watching a movie, attending a concert, et cetera. Hence, baseball games don't leverage economic activity any more than any other pastime.
The stadium boosters ignore the tax issue as well. The forced transfer of resources from the private sector to government bureaucrats creates numerous problems. Edwin S. Mills, a researcher at Northwestern University's Kellogg Graduate School of Management, argues that the negative multiplier effect of taxing citizens largely offsets any positive multiplier. "Everybody who pays a dollar in taxes to support the facility must reduce his or her spending," he says. "The diminished spending goes round and round, just like the aforementioned positive multiplier effect." Mills noted that the studies supporting stadium plans "never mention" this countereffect, assuming that "the cost of capital is free."
Second, government is far less efficient than the private sector, which will tend to distribute resources to their most productive uses. Resources controlled by the government, by contrast, are often allocated according to political considerations. Government officials also lack the incentive, knowledge, and experience to control costs or to pick winners and losers in the marketplace.
If new stadiums and arenas have economic value-and I believe they do-the market will see that they are built. Indeed, prior to the 1960s, privately built and owned facilities were the rule. In 1950, just one major-league baseball park was government-owned. Today, only seven ballparks are privately owned, and even some of those received government subsidies.
Finally, taxes levied to pay for stadiums raise private-sector costs, diminish incentives for working, investing, and risk-taking, and slow economic growth. In a 1994 Heartland Institute study, Lake Forest College economics professor Robert Baade examined economic data for 30 cities with stadiums over a 30-year period. In 27 cities, he found no positive economic impact from new stadiums; in three cities, a negative impact. Baade concluded, "If the opportunity cost is included in cost-benefit considerations, public investments in stadiums may be more than just insignificant; they may be negative."
Only team owners and players clearly benefit from these taxpayer subsidies, because they are relieved of the costs of stadium financing. Indeed, annual debt-service costs can run into the tens of millions of dollars. Such savings boost the bottom line for owners and players. Financial World magazine has reported that revenues for teams with new stadiums leap by nearly 40 percent the year a new facility opens. The Cleveland Indians and Texas Rangers both moved into new ballparks in 1994; according to Financial World, their franchise values rose by 67 percent and 37 percent, respectively, between 1991 and 1996. Meanwhile, the average franchise value of teams in the league actually declined by 5 percent.
In 1996, each of the five baseball teams that opened new ballparks in the 1990s paid its players an average salary that exceeded the league average by 28 to 51 percent. Each of these clubs landed in the top 10 for total 1996 salary levels paid by baseball teams.
What To Do? Taxpayers in the future will not easily escape this economic hoax. Between 1987 and 2000, taxpayers will likely fork over almost 60 percent of the $12 billion or more that will be spent on new stadiums and arenas in the four major league professional sports (not counting hundreds of millions more for minor-league ballparks).
State and local elected officials and team owners are in near unanimous agreement that taxpayers should pay for new ballparks. In the states, then, only the voters can put a brake on ballpark welfare. At the very least, the public should have the opportunity to review any taxes levied for new sports facilities. Although polls show the public overwhelmingly opposes taxpayer funding for sports facilities in general, the voting on specific recent proposals has been mixed. But even projects that are approved by voters usually pass by only slim margins, and only after stadium supporters have waged huge public-relations campaigns. The opposition-usually led by groups representing taxpayers or ballpark preservationists-generally cannot afford to match these expenditures.
Ultimately, however, I believe federal action will be necessary. First, the unique antitrust exemption enjoyed by baseball should be extended to the other major sports. A sports league is in no way a monopoly. In effect, professional sports leagues function as partnerships that compete with alternatives in the entertainment industry. Leagues need to control the location of its teams in order to promote stability and loyalty. Notice that major league baseball teams do not jump from city to city as often as franchises in the other major sports. Notwithstanding the threats and bluffs of owners, no baseball team has switched cities since 1972. Even with an antitrust exemption, however, the league itself can partake in city extortion, as Seattle discovered recently when it endorsed the Mariners' threat to move away.
Second, Congress should eliminate the tax break for financing the construction of stadiums. Senator Daniel Patrick Moynihan correctly points out that the current loophole "contributes to the enrichment of persons who need no federal assistance whatsoever." He has proposed legislation to end tax-exempt financing. Specifically, Moynihan's bill would limit tax-exempt debt to $5 million or 5 percent of total stadium construction costs, whichever is less. John Gillespie, an investment banker with Bear Stearns' sports-facility group, recently estimated in Barron's that Moynihan's bill would raise stadium costs by 15 to 20 percent. Such added costs should give a few politicians pause before hoisting the burden upon the taxpayers.
Subsidized ballparks are but one symptom of an enormous problem. Absent drastic action, corporate welfare for baseball-not to mention for other sports leagues, businesses, and industries-will probably be with us forever. Therefore, we need an amendment to the Constitution prohibiting federal, state, or local government subsidies and special tax breaks for noncharitable individuals, businesses, or industries.
Such an amendment faces long odds against a host of special interests. If sports have anything to teach, however, it's that we can sometimes expect the unexpected. Many baseball fans, for instance, can still recall the improbable pennant-winning home runs by Yankee shortstop Bucky Dent against the Red Sox in 1978 and by Giant Bobby Thomson in 1951 against the Dodgers. Both blasts, by the way, were hit in ballparks built with private funds.
Raymond J. Keating, the chief economist for the Small Business Survival Foundation, has just published a new book, New York by the Numbers: State and City in Perpetual Crisis (Madison Books).
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