Olympic Economics, The Pre-Games Show

Jul 23, 2012
Originally published on July 24, 2012 11:35 am

The 2012 Summer Olympics in London starts in four days with the carefully choreographed opening ceremony. But a related spectator sport is already well underway: Dissecting the economic impact of the games.

A show we did in February looked at how big an economic boost cities really get from hosting the Superbowl, and much of the same analysis is being applied to this year's games.

Goldman Sachs has put out a 39-page report (PDF) on the subject (plus, somewhat incongruously, athlete interviews). The bank's analysts conclude that games in Munich (1972) and Montreal (1976) lost big bucks, while Los Angeles (1984), Barcelona (1992) and Atlanta (1996) "each made a profit."

But in a footnote, the report also makes clear why it's a thorny question to even ask whether a given Olympics makes money:

"In accounting for the cost of hosting an Olympics, most countries (including the UK) have treated the cost of constructing facilities and infrastructure, together with security and other ancillary costs, as being separate from the cost of running the Games themselves. The London Games are expected to make a profit (in the sense that revenues will exceed the cost of running the Games) but this will still leave the government with a significant (£8-9bn) bill from construction, security and other costs."

Over at The Atlantic, Smith College economics professor Andrew Zimbalist looks at just why the Olympics tend to lose money, and gobs of it. He comes up with three primary reasons:

"(1) The bidding process is hijacked by private interests; (2) It creates massive over-building; (3) There's little evidence that it meaningfully increases tourism"

The private interests that skew the bidding include builders, architects and related groups, he writes.

"The committee that nominally represents the city really represents itself and bids according to its sense of the private benefit (of its members) versus the private cost, rather than the city's public benefit versus public cost. Since the private cost is diminutive and the private gain extraordinary, the local organizing committees, on behalf of the cities, are bound to overbid, wiping out any modest, potential economic gains."

Translation: Developers and those in related industries stand to gain even if the games as a whole are a money-loser for the city and region they're in. And even these bidding campaigns get costly: Zimbalist says Chicago spent $100 million in its unsuccessful attempt to get the 2016 summer games.

One good effect of the Olympics, Zimbalist says, is that cities tend to tackle long-overdue infrastructure upgrades. But cost overruns and the inefficient haste of the planning process counterbalance that. Then, of course, the city is left with a bunch of dramatic but hard-to-use structures.

Zimbalist goes on to compare these costs and inefficiencies with the economic gains brought by the Olympics, and finds the comparison badly wanting: maybe $6 billion in revenue, split with the Olympic governing body, against three or four times as much to host the games — and little evidence that tourism picks up substantially.

It doesn't have to be that way, argues David Henderson on EconLog, a blog of the libertarian Library of Economics and Liberty. He points to the 1984 Olympics and its management by Peter Ueberroth (later the commissioner of Major League Baseball) as an example.

Because Los Angeles voters gave public financing a thumbs-down (with his support, apparently), Ueberroth pretty much had to keep the budget slim, Henderson argues.

"So Ueberroth did his best not to build new expensive facilities that would be used only for a few weeks but, instead, to use old ones. ... The result? A $215 million "profit" that was donated to charity."

In the comments to Henderson's post, a reader notes that the International Olympics Committee isn't likely to approve such small-scale events these days, thanks to the kind of protracted and aggressive bidding wars it encourages when choosing host cities.

"In essence," writes commenter Jonathan Monroe, "the IOC uses the power of its brand to extract rents from host cities, which it then wastes on vanity construction projects."

At The Fiscal Times, Yuval Rosenberg takes a closer look at the London Olympics specifically, drawing on the Goldman Sachs report and other financial analysts. And a poll earlier this month by Reuters concluded that "London's 2012 Olympic Games will bring no meaningful long-term benefit to Britain's beleaguered economy, but they might give it a brief shot in the arm."

Soon after the games are over, no doubt, there'll be another flurry of attention to the subject. Stay tuned.

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