The Pro Basketball Lockout Could Improve the Economy in NBA Cities

The stadium scene.
Oct. 5 2011 12:30 PM

No Basketball, No Problem

Why a lost NBA season wouldn’t be a disaster for local economies.

LeBron James arrives to the NBA labor negotiations at The Waldorf Astoria September 30, 2011 in New York City.
LeBron James arrives to the NBA labor negotiations at The Waldorf Astoria September 30, 2011 in New York City.

Photo by Michael Cohen/Getty Images.

After another fruitless round of talks between the players and owners, it looks like the start of the NBA season—if not the whole thing—will soon be wiped out. It's not only hoops fans who are anxious at the prospect of a lost season. By all accounts, cities with NBA franchises have also been cringing in terror. With the start of the season a month away, we've already seen predictions of a "devastating" impact on Charlotte, N.C., businesses, a $55 million loss to the city of Indianapolis, and certain disaster for sports bars in Portland, Ore.

This kind of reporting is a staple of sports work stoppages, and it's easy to see why. Idle turnstiles and shuttered souvenir stands are obvious indicators of lost economic activity, and an easy visual symbol of the impact of the sports world’s regular strikes and lockouts. The problem with these stories is that there’s no evidence to support any of their claims. The lost city revenues, the devastation for local businesses—none of it ever happens.

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"There is no way the NBA lockout will have any significant economic consequences," says the University of Alberta’s Brad Humphreys, an economist who has studied the effects of sports work stoppages. Humphreys' most in-depth investigation came in 2001, when he and Dennis Coates of the University of Maryland-Baltimore County set out to determine the effects of the lockout that wiped out the first half of the 1998-99 NBA season. Since economic data weren't yet available for those years, Humphreys and Coates instead focused on five previous MLB and NFL work stoppages, starting with the mass holdout over baseball's pension plan that briefly disrupted spring training in 1969 and running through the strike that wiped out the last two months of the 1994 MLB season and that year's World Series.

The economists looked at per-capita income data from metropolitan areas that were home to striking (or locked out) sports teams. They found that even when ticket sales stopped, average income in a city didn't change. At all. "Work stoppages in baseball and football have never had significant impacts on local economies," they wrote. As icing on the cake, they looked at NBA cities that had lost their teams and found the same thing: bupkis. "The departure of a franchise in any sport, particularly in basketball, has never significantly lowered real per capita personal income in a metropolitan area,” Humphreys and Coates wrote.

Still, some critics objected. Humphreys and Coates, they noted, had looked for changes in year-long income data as a result of strikes that in some cases lasted only a couple of weeks—the equivalent of trying to hear a whisper at a My Bloody Valentine show.

So, five years later, Robert Baade, Robert Baumann, and Victor Matheson tried a different tack. That trio of economists zeroed in on the state of Florida, looking at how sales tax receipts changed during every MLB, NFL, NBA, and NHL labor stoppage since 1982. Baade, a Lake Forest College professor who's spent the better part of three decades studying the impact of pro sports teams, explains that they picked Florida because it reports sales tax data on a monthly basis. "You're really looking for a needle in a haystack," he says of trying to divine economic effects on a whole city from a single sports team's absence. "But if you're looking at something like tax revenues, you're reducing the size of the haystack."

The new study delivered the same results as the earlier one: When leagues shut down, sales tax receipts keep chugging along. In Miami, the disappearance of the Heat during the 1998-99 NBA lockout showed an extremely weak 0.00987 correlation with sales tax figures; the 2004-05 lockout of the Florida Panthers has an even slighter effect, at 0.00739. And almost as often, the direction of the signs ran the opposite way: The 1994-95 NHL lockout had a negative correlation of 0.00353 with sales taxes—if anything, people in Miami appeared to be spending more as a result of the Panthers being on the shelf.

"If professional sports have a positive impact on a region’s economy, then one should expect a consistent pattern of increasing taxable sales following franchise expansions and the construction of new stadiums and a pattern of decreasing taxable sales ratios during periods of labor disruptions," the three economists reasoned. Instead, "no statistically significant effect on taxable sales is found from the sudden absence of professional sports due to strikes and lockouts."

It may seem counterintuitive—how can the shuttering of a major business not affect the local economy? But economists have an explanation, or rather two.

The first is a well-established phenomenon called the substitution effect. When people choose to spend money on one entertainment activity, that's also a decision not to spend that money elsewhere. Every basketball ticket you buy is a movie ticket not purchased, or a fancy dinner not eaten. If the NBA season doesn't start on time, Charlotte and Indianapolis and Portland will find something else to spend money on: college basketball, movies, restaurants.

In that sense, sports expenditures should be looked at less as new economic activity than as spending that’s cannibalized from elsewhere in the local economy. During the 1994 baseball strike, the Canadian Broadcasting Corporation surveyed Toronto businesses on how the sudden disappearance of the then-World Series champion Blue Jays was affecting local businesses. It found that some of them were doing just fine, indeed, with video stores reporting a particular boom in rentals. As one Toronto comedy club owner quipped, "We really think it'd be in the best interest of the entertainment community in Toronto if the hockey players sat out the whole season, too."

In fact, there are some indications that losing games to a labor dispute could be good for a local economy. Humphreys and Coates found that per-capita income actually increased during sports work stoppages, albeit by a fraction of a percentage point: 0.38 percent for baseball strikes and 0.17 percent for football.

Though Humphreys cautions that the effect was below the threshold of statistical significance, he and Baade say the phenomenon of leakage could explain why local economies might benefit when sports leagues shut down. The magic of consumer spending is that it begets even more consumer spending: Buy a can of tuna from your local grocery store, and the store owner uses a share of the cash to pay his workers, who in turn spend it on more groceries, and so on. The cycle continues until somebody sinks the money into a bank account or spends it on something in another state or country, at which point it "leaks" out of the local economy.

At a sporting event, however, the cycle is cut short. That's because a disproportionate share of sports revenues goes to a handful of people—the team owner and the players typically soak up the majority of every dollar spent at a game. When a local grocery store owner goes out to dinner, he ends up putting money in the pockets of busboys who'll later visit his store to buy vegetables and milk. When LeBron James cashes one of his paychecks, by contrast, it's unlikely that he spends it all at the local Walgreens. Rather, your outlay on Heat season tickets will end up doing as much to boost the Bahamas as it does the economy in South Florida.

If you believe the leakage theory, then a lengthy NBA lockout could actually improve local economies. "People are still going to spend their money," says Baade, "but they're going to spend probably more of it on locally owned and operated entertainment activities." Baade does note that a handful of studies seem to show minor-league teams giving a small boost to local economic activity. If your city is small enough and has few other attractions, perhaps would-be visitors will steer clear unless there's a game on. That could indicate that smaller NBA cities like Oklahoma City or Sacramento would still be at risk from a lockout.

Yet those single-team cities actually have an advantage over their big-market brethren. In New York, a spurned Knicks fan might instead take in a Rangers game, giving his entertainment dollars to the same corporate owner and to a new set of players who spend their salaries out of town. In Sacramento, they're more likely to, say, go bowling. That means less leakage, countering any negative effects from out-of-towners who remain out of town.

The biggest impact is likely to be felt in cities whose new arenas are being paid off with dedicated arena-district taxes, as those municipalities could face short-term problems in paying off their bonds. (Sacramento, which is considering building a new arena for the Kings in part with ticket taxes and other game-related revenues, might want to take notice.) But ultimately, that's little more than a bookkeeping problem: If cities' general funds are flush with sales taxes collected from non-NBA spending, that should more than make up for any shortfall.

Despite this mostly sanguine news, a few businesses do still need to worry. "There is no doubt in my mind you can find a bar or a restaurant right next to the [Verizon Center] in D.C. where they're going to lose some business," says Humphreys.

If you run a nonsports bar across town, however, you should stock up on liquor. While a lockout may be bad for businesses in the shadows of NBA arenas, it could be boom times for anyone offering fans something else to do on cold winter nights. And if that doesn't cheer up despondent fans, consider this: Whatever's on Netflix has to be more entertaining than the Timberwolves.

Neil deMause is co-author of the book Field of Schemesand runs the stadium-news site fieldofschemes.com.

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