Economics

The development of stadiums in most of the developed countries is precipitated by a considerable lobbying and discussions on the feasibility and the related benefits of establishing a stadium in a given locality (Baade, R. & Sanderson 77). An economic analysis is also carried out and this will be the focus in this study. This assessment stands out as the most fundamental yet it has in the past generated controversies between opponents of government funding and private enterprise. Economists Andrew Zimbalist and John Siegfried who have conducted studies on the stadiums economic impact have unanimously concluded that there are no indicators that show there is a positive economic effect that can be attributed from such stadiums (Noll & Zimbalist, 1998). Nine studies cited by these economists, all done by different consultant economists arrive at a similar conclusion that stadiums do not induce new economic growth (Siegfried & Zimbalist, 2000. p. 103). This however requires in depth analysis as will be done in this study.
The issue of funding a stadium in Canada from private or public source is always a popular topic for academic research. There are various theoretical models that can show the difference in terms of economic benefit derived from either of these two sources that we are interested in. Both macroeconomics and microeconomics theories can help ascertain as to   what strategies the government should implement. This paper will study some general macroeconomics concepts.


Aggregate Supply/Aggregate Demand Model
            Economic analysts argue that shifts in the economy are primarily caused by the shift in aggregate demand. A massive spending by the government in the building of a stadium would substantially affect aggregate demand which would produce a significant shift in the locality’s economy. Graphically, the model is illustrated as shown below:


       
  Figure I show the two variables represented in the model. On the horizontal axis is the quantity variable, which stands for real gross domestic product (Y). The value of annual national production is measured by this variable and it is adjusted for the inflation. The variable on the vertical axis represents the level of price inflation. The slopes of AD and AS curves show the relationship between them. Changing all other variables will cause the curves to shift either to the right or left. Since there are many factors that affect the aggregate demand and aggregate supply, I will only focus on factors relevant to the topic. Change in the population, government demand, investment, and expectations all have a positive relationship with AD curve. Government may decide to construct a stadium according to these factors since they will cause real gross domestic product to increase. However, taxation is a factor that makes the AD curve to shift to opposite direction. This implies it is negatively related to AD. Collecting taxes from people reduce the income they earn; it also leads a decrease in consumption ability. Even if the stadium is built; some of the people will not buy tickets to participate in the activities in the stadium. Eventually, real gross domestic product will fall. Costs of resources and labour wages are negatively correlated to aggregate supply. The construction of a stadium requires a lot of materials such as plastic, concrete and steel and also needs a large number of human resources. Real gross domestic product will decrease due to these two factors. According to this graph, any shift in aggregate demand produces an automatic shift in aggregate supply in order to maintain the quantity level. Such that if the government invested in a stadium, there would be an automatic shift in aggregate supply in the  form of earnings from both full time and part time employment which would multiply in such a manner that they would eventually exceed the government spending.

Keynesian Income-Expenditure Model
             This model is also called the Keynesian cross. It emphasizes that decreasing aggregate demand can produce substantially stable equilibrium which would produce substantial unemployment. The different elements incorporated in this model are both consumption and investment which are expressed by the equation Y=C+I+G+(X-M) and together, the elements shapes the level of output equilibrium. The model is represented graphically as shown below:

           For Keynesian Income-Expenditure Model, expenditure is the variable that needs to be analyzed first. Expenditure has four components: consumption expenditure, investment expenditure, government expenditure and net export.  To determine the relationship and influences of the variables on the right hand side of the equation and the left hand side variable Y or GDP is the essential purpose of this model. Consumption expenditure’s predictability is fairly high as a country's share of gross domestic product. Sports fans would like to attend activities in the stadium. They may also go to restaurants that are located close to the stadium or shops in the mall nearby which could stimulate consumer spending. Therefore, GDP will go up and have a positive impact on the economy. Investment is a crucial part of a stadium project decision. Investment could lead to the improvement of overall domestic production condition. Enterprises and firms might find investing in stadium is profitable and attractive. Since physical capital and inventories are needed when investing in a project, this will also help domestic consumption gain positive returns. Government expenditure should be taken into account as well. In case of China, government expenditure from 2002 to 2006 spent approximately $40 billion in infrastructure in order to transform the cityscape of Beijing because of the Olympic Games.   Even though the stadium is for 2008 Olympics, Beijing’s economic development, environment and the growth of mobile phone industry, internet, and country’s advertising were significantly influenced. (Kent, 2009). Importation of construction materials might be necessary in certain cases. According to the equation, net export is import less export. If a country imports goods more than it exports, then GDP will decrease. Therefore, before the project is carried out, the decision maker must consider this factor. A wrong decision will cause gross domestic product falls.

Fiscal Multiplier Theory
           The idea behind the multiplier effect also referred to as the spending multiplier is that when a government spends a certain amount in its internal business environment, the spending stimulates increased consumption spending which results in an improved national income that supersedes the initial amount of money spent. In this case, this multiplier effect would mean that when a government spends in building a stadium, the overall result is an increased income among the various stakeholders, which eventually will supersede the total amount spent. An illustration of the multiplier process is shown below:

The figure above shows an initial investment by the government in a new mining project worth $ 100 million. This investment produces other incomes such as in steel and car industries that are a multiple of the initial investment.
Applying this scenario in a stadium development, first, it would be important to analyze the immediate beneficiaries of the government spending. Economically, this can be stated that an initial change of the aggregate demand produces an aggregate output in the economy that is normally a multiple of the initial aggregate demand change. This argument needs an analysis using an example. Consider a situation where the government injects $500 million in building a stadium. According to the multiplier theory, the final income that will result out of this investment will be more than the investment. First, it is true that the contractors, the suppliers of the materials are likely to benefit during the period of the works and that will substantially raise their income. The income they earn will be directed to other spending areas which will also benefit especially within the locality of the construction (Rivero, 2009).

The Multiplier Effect Factor-Stadium Example
An economic policy that supports and justifies spending in constructing stadiums is based on this economic principle, the multiplier effect. This effect can be best understood by looking at the secondary economic activities that result following the infusion of new investment during the stadium construction. Economists argue that the multiplier effect is very low in the case of stadiums since they do not induce new spending per se. The multiplier effect would in fact be very low if some of the money generated during an event leaves the locality soon after the event. To illustrate this principle, assume that $ 300 million is disbursed to build a new stadium. Hypothetically, it can be assumed that 50% of this money goes right away into the economy when it is used to purchase building materials. It can also be assumed that another 25% is paid out to the contactors and the workers so that only half is spent on the local economy. The calculation can be extrapolated so that every round of spending utilizes half of the remaining amount to the economy. The multiplier effect can then be calculated as:
1/2 + ¼ +1/8 + ……. (Rivero, 2009)
Eventually, the multiplier effect will be less than 1. A multiplier effect of less than 1 means that the induced spending associated with the initial cost of investment is less than the total that was spent in the investment. If the investment in the above example was $ 300 million, the multiplier effect at the end of the day shows that the new incomes will never reach the original $ 300 million. Using this argument, the construction of stadiums becomes a big burden, more of white elephant projects that do not make economic sense and that have no ability to jumpstart the local economy. Note also that the employment created by a stadium may not have direct benefits to the local economies. For instance, most players do not live in the jurisdiction within which their stadium lies, so do the workers. Also the revenue collected by stadiums is normally shared with the visiting teams which are then spent in other jurisdictions. This scenario presents a leak in the stadiums that erodes the power of the stadiums to produce a substantial impact to the economy.

The Rational Choice Theory
It would be important to analyze the sources of taxes used to fund stadiums. One, it is apparent that the construction of new stadiums does not benefit the entire national economy but it only focuses benefits to the local economy. It has the potential to create new businesses and employment which would generate money primarily for those within its locality. The question then that should be addressed is who should be taxed for developing the stadiums. Well, it would be completely wrong to tax the whole nation if there are no accruing benefits to the whole nation. The taxes should be deducted from the local community who are most likely to benefit economically because of the new stadium (Eckstein, 1983). The rational choice theory argues that costs and benefits should effectively be considered before a choice of spending is adopted. If the cost of building a stadium does not effectively benefit the nation, then there is no rationale of burdening the nation with its taxes The same argument suffices that if there are no benefits accruing to the society or the local community out of the construction of a new stadium then it would not make sense to burden the community with the taxes. If for instance, a stadium in Manitoba draws a lot of crowds from Ottawa, it implies that the stadium reduces income spending in Ottawa since most of the people are likely to go and spend their entertainment money away in Manitoba. As such, the beneficiaries of the stadium are those in Manitoba and not those in Ottawa. This implies that the taxation burden should be laid on people who will actually benefit from the stadium. Consider a situation where the stadium in Manitoba denies spending in Ottawa yet on the other hand, the locals who are denied earnings are still required to contribute the taxes. This would be double jeopardy for them since they would have lost an income opportunity as well as the tax burden. This study generally proposes that taxes for stadiums should be from the immediate community which is likely to be the economic beneficiaries of the stadium. Again, it should be recognized that unless a stadium can attract new people to the locality, the multiplier effects will always remain the same in each expense (Rivero, 2009).