Freakonomics Radio - 85. Olympian Economics

Episode Date: July 25, 2012

Do host cities really get the benefits their boosters promise, or are they just engaging in some fiscal gymnastics?

From APM, American Public Media, and WNYC, this is Freakonomics Radio on Marketplace. Here's the host of Marketplace, Tess Figlin. It's Freakonomics time. Every couple of weeks we're talking with Stephen Dubner, co-author of the books and the blog about the hidden side of everything. Good to talk to you again, Stephen. Hey, you too, Tess, and happy Summer Olympics to you. Happy Summer Olympics to you as well. Looking forward to it. Any favorite events for you? Oh, you know, synchronized swimming, of course. I don't, however, want to talk about gold medals. I actually want to talk

about real gold, OK? The big economic boost that a host city like London is supposed to get. OK, but Tess, I'm here to tell you that, well, you can probably guess where I'm going with this, can't you, Tess? No gold in them thar hills. Let's bring in the economists, OK, to throw a little cold water and everything. Alan Sanderson at the University of Chicago has looked at previous host cities and he measured their economic gains against what he called twin cities. OK, so nearby cities that didn't get to host the games. So we use Madrid in Spain, but didn't have the Olympics. Or we use Charlotte close to Atlanta, but didn't have the Olympics.

Or Melbourne in Australia didn't have the Olympics. And 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. But Stephen, how can that be? I mean, you have thousands upon thousands of people descending on these cities. How does that not bring in a ton of cash?

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. People like you and me, you know. 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. OK, well, what are we talking about, though? You know, is this your standard cost overruns, construction, things like that? 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. OK, 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, you know, 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. And in that letter, it said that we anticipate we're going to 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. Yes. Can we please have a study that will show exactly what we wanted to show? But, you know, again, here, tourist dollars, tourist dollars, tourist dollars, not just during the games. But doesn't that play out supposedly predictably for years later? Well, you know, keep in mind that a place like London, right, already has plenty of tourists.

So to some degree, what you're doing is you're really replacing a Trafalgar Square tourist with a synchronized swimming tourist, right? And as Alan Sanderson points out – You've got a thing with synchronized swimming, don't you, my friend? I am kind of fond of it. But Alan Sanderson points out furthermore that the idea of a local economic benefit is just much more complicated than you might think. 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. It's going back. If you're buying a sweatshirt in Boston, was the sweatshirt really made in Boston? Was it made somewhere else? Is this a hotel,

its central headquarters are in Boston or not? Now, Tess, let me play devil's advocate for one minute. It may be that all these American economists are, you know, poo-pooing the Olympics because we haven't been getting the Olympics ourselves lately. OK, so New York and Chicago were the most recent losers, U.S. losers on Olympic bids. But if you listen to Alan Sanderson, he says that's OK because there may actually be more value in losing an Olympic bid than in winning one. You want to signal something. We're a world class city. And one way in which you could do it is to bid for the Olympics. Say it costs us probably all things considered 80 to 100 million dollars to bid. But then you want to lose. Okay, Tess, so how's that for your new Olympic spirit? I have the new chant now, we're number four. We're number four. Close enough to get the recognition, but we don't

have to actually have to pay the bills. I like that. A little reverse psychology. Stephen Dubner, our Freakonomics correspondent, he puts out a podcast too, and you can get that on iTunes and hear more at Freakonomics.com. Great to talk to you and we'll talk to you again in a couple of weeks. Thanks much, Tess. Hey, podcast listeners, coming up on next week's podcast, the first of a two-part episode called Freakonomics Goes to College. Now, we all know how challenging college can be and how expensive. Don't you wish there were an easier way to get a degree? We negotiated the price for my bachelor's, master's, and doctorate with no work whatsoever. Wait, you bought a bachelor's, master's, and a doctorate all at once? Sure, triple combo,

have it backdated, you know, with transcript. So next week, fake degrees and real ones too on Freakonomics Goes to college.