Economics, Not Sentiment, Should Guide The Hockey Arena Debate

December 05, 2012, 3:21 PM

Back during the election, when major media outlets wanted some perspective on the presidential race they turned to professional talking heads like Dick Morris for predictions. They should have, as history proved, skipped the chattering class and talked to guys like Nate Silver and Sam Wang about what the polling data was suggesting.

It’s a lesson that hopefully (maybe?) political journalists will take to heart moving forward. It’s also a lesson that should extend to other issues and beats—data trumps flashy names.

Unfortunately, the status quo is a tough thing to kill.

Consider the way we’ve reacted to the news of the Ilitches’ kind of, sort of proposal to build a new hockey arena/”innovative district” if the Downtown Development Authority has the ability to subsidize the project.

Among the first questions to ask is whether or not this sort of development would justify—in economic activity, in jobs created, in improving downtown’s quality of life, etc.—the public investment.

To answer that, there exists a massive body of economic research worth referencing. Or you can just ask Matt Cullen what he thinks. Predictably, Detroit Free Press business columnist Tom Walsh elected to do the latter, ending his column Wednesday thusly:

Freep: Given Detroit's dire financial condition and erratic city services, there will certainly be a vocal group questioning the targeting of city resources at more downtown development.

Still, [Matt] Cullen said, "there are reasons that communities across the country put resources into projects like this. They don't do it out of altruism, but because it benefits the community economically."

Mr. Cullen is certainly entitled to his opinion and there is a case to be made that, if the rough vision Team Ilitch outlined yesterday is fleshed out and fully built, it will be good for downtown. However, the assertion that subsidizing downtown arenas and stadia “benefits the community economically” is utter rot.

I can say it’s utter rot because that is the overwhelming conclusion of serious economic scholars who have studied the matter. Whatever Cullen’s merits as a businessmen—that is, someone who can increase his employer’s profits—he isn’t an authoritative source on the economics of sports venues. 

You know who is? Dr. Andrew Zimbalist, Robert A. Woods professor of economics at Smith College. In fact, he’s arguably the best known and among the most respected economists studying the value of public investment in sporting venues and their ancillary developments.

Dr. Zimbalist, like virtually every other serious scholar who has reviewed the data, came to the conclusion that the economic benefit to the community is an illusion. Take a gander at what he told the Freakanomics blog a couple years ago.

Freakanomics: All of the independent, scholarly research on the issue of whether sports teams and facilities have a positive economic impact has come to the same conclusion: One should not anticipate that a team or a facility by itself will either increase employment or raise per capita income in a metropolitan area.

Generally, the reason for this is threefold. First, most of the spending at a stadium or arena is from residents of the metro area; as such, it is simply redirected expenditure within the local economy, e.g., from the bowling alley or restaurant to the ballpark. Second, much of the income generated by the team leaks out of the local economy, as owners and players save a substantial portion of their earnings in the world’s money markets or spend their income outside the host city. Third, in the typical case, the city and/or state contributes roughly two-thirds of the financing for the facility’s construction and takes on obligations for additional expenditures over time.

Boy howdy that’s a long way from the Cullen/Walsh unequivocal “benefits the community economically” line. The reality is the economic benefits have never been great for these projects so the burden is to prove this one, because of the secondary development or the unique nature of downtown Detroit, will be the exception to the rule. Certainly if this happens without public subsidy, it will be an unequivocal good.

And, yes, the argument could be made that a new hockey arena isn’t expected to benefit the whole of metro Detroit, but rather the fledgling downtown revitalization. So perhaps using city resources for such a project makes sense, especially if the DDA can get a better deal than the two-thirds public cost average, because strengthening downtown is ultimately so important to the city’s and the region’s future.

However, one must also consider Dr. Zimbalist’s point about income flowing out of the host city. Detroit has a limited pool of economic development dollars to spend on downtown development. Is this sort of major venue project the highest and best use of those dollars?

One might argue that taxpayers will get more bang for their buck betting on the independent entrepreneurs like the bar owners thriving behind Fox Town—even on non-game nights—because the profits are more likely to stay local. Or redirecting economic development funds to basic city services like police and lighting so downtown and other retail districts are more attractive for businesses and their customers. Hey, it’s a strategy that’s seemed to work for Midtown and the University Cultural Center Association.

Probably your opinion on that question has a lot to do with whether you prefer Robert Moses' or Jane Jacobs' vision for urban revitalization.

Ultimately, though, that’s almost beside the point right now. The Ilitch proposal is little more than a rough outline of a vision for something that may or may not happen. Frankly, it’s premature to say with any certainty if this project does or does not merit public subsidy.

What is critical is this is a complicated public policy question that should be thoughtfully considered with facts and reason.

Picking up the phone to get a quote from the likes of Matt Cullen, instead of Googling the publicly available economic research does the issue and the city a disservice. Unfortunately, this is likely the sort of coverage we will likely see as this thing moves forward.

Mike Ilitch's hockey arena vision may indeed turn out to be boon for downtown, but critical thinking rather than rote boosterism is required to determine that. Detroit can’t afford to throw good money after fine feeling and bad economics—regardless of what the DAC swells may think.

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