The news is a broke city plans to help pay for a new sports arena.
I was as confused as I’m sure anybody would be when I heard the city of Detroit, which filed for bankruptcy in July, planned to help pay for a new arena for the Detroit Red Wings.
Mike Ilitch, the owner of the professional hockey team, and his company Olympia Development have plans for a new arena and development district in Detroit’s downtown for a total cost of $650 million. The deal between Ilitch, the city, and the state includes debt issuance by a state fund for economic development.
Approximately $360 million of the project’s costs are to be paid with private money, and an estimated $283 million is to be paid by the city’s Downtown Development Authority with tax dollars captured in the area.
The deal is bad. A quick search in any academic journal of political economy yields numerous results on the topic of tax subsidies for sports arenas, and few are positive. Within Vol. 21 of Growth and Change, analysis by two economists, Richard F. Dye and Robert A. Baade, showed that sports arenas have little to no impact on local economies in their journal article, “The Impact of Stadium and Professional Sports on Metropolitan Area Development.”
Every couple of years, countries around the world bid to hold the Olympics under the same rationale that localities and states bid to attract sports teams or keep the ones they have happy with new facilities. The tourism will supposedly make up for the cost to taxpayers, yet the evidence for that is scant even for the momentous Olympics, where the world’s best-trained athletes compete and the host country receives worldwide attention.
“Why would anyone want to host the Olympics?” said an article in The Economist in September 2013. “The 2008 Beijing games, the priciest ever, are reckoned to have cost about $40 billion.”
The 2014 Winter Olympics in Sochi, Russia are likely to cost more. “Tourism may help to offset the expense, but a spike in arrivals is not guaranteed: Beijing saw a drop in hotel bookings during its Olympic summer.”
The state should not risk its credit worthiness on this project, and since the state issued bonds on behalf of Olympia Development, it would be the state at risk should the investment fail. Like when the state of Rhode Island was left on the hook for $75 million after it backed loans for a private enterprise in the name of economic development.
Reported in the New York Times by Matt Bai, Former Governor Don Carcieri, Republican of the Ocean State, made an expensive deal with a former baseball player. Curt Schilling, who had money to spend from his heyday on the Boston Red Sox, wanted to start a video-game company, and the state was happy to have high-technology jobs created.
The short story is Schilling’s company, 38 Studios, went bankrupt in a matter of months. While it is unlikely that the Red Wings will all of a sudden go bust in a sports town like Detroit, there is no reason for the state to take on the liability.
Rick Snyder, governor of Michigan, said the construction of the arena will create 2,900 jobs. The oft made, but mostly unfulfilled promise of job creation carries no assurances that jobs will actually be created, or that they will employ residents of the city. Even if 2,900 jobs were to be created, and the number should always be considered circumspect, that would mean with the money from the Downtown Development Authority that the city spent approximately $97,586 per job.
Also, the move by the hockey team will not be without harm. There are businesses that have built themselves around Joe Louis Arena and the people traffic it creates. Now the wisdom of that business model can be debated another time; the fact remains those businesses may close if the old arena loses its main attraction. Some may call that creative destruction, but it should not be overlooked that it is Detroit business owners who will be destroyed.
I can see how the mayor, the city council and state officials could become enamored with the idea of a flashy new arena and fall to the influence of star athletes. That is what happened in Rhode Island. Schilling, who helped win the American League Championship Series for the Boston Red Sox in 2004, used his star status and received a lot of money (while the state lost a lot).
The issue isn’t whether or not the Red Wings deserve a new arena; it is whether or not Detroit residents should share in the cost. And unless Ilitch plans to make all of the city’s 701,475 residents part owners, the answer is no.
