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The bidding process for the 2022 Olympics was a disaster for the International Olympic Committee.
Democratic nations are no longer buying the argument that hosting the games is a wise investment. Every potential 2022 host city with a democratic government eventually pulled out of the bidding, many over economic concerns, leaving Beijing and Almaty, Kazakhstan, as the IOC's only two options.
Academics have been saying for years that hosting the Olympics doesn't make economic sense. The costs are typically larger than expected, the infrastructure needed for a big sporting event isn't the same as the infrastructure needed for daily life, and the economic benefits are typically overstated.
The latter point was addressed by Holy Cross professor Victor Matheson in a 2004 paper called "Economic Multipliers and Mega-Event Analysis."
The paper examines a major problem with pre-event economic-impact studies, which Matheson says have a tendency to overestimate how much a one-time attraction like the Olympics will contribute to the local economy.
IOC Oslo pulled out of the 2022 Olympic bidding process in early October.
Olympic organizers consistently cite such studies as a justification for the astronomical costs of building and staging the games.
Matheson argues these studies are inaccurate, and he presents a hypothetical example about hotels that demonstrates why.
Before we get to his example, here's his explanation for why these studies overestimate how much money the Olympics will bring in:
In estimating economic impacts from mega-events, analysts frequently use multipliers derived from input-output tables based on the normal state of the economy even though the presence of a large temporary tourist attraction such as a World’s Fair, the Olympics, or the World Cup indicates a departure from this normal state. Mega-events are characterized by high utilization rates and increased prices for tourism related industries. While labor may benefit to some extent through increases in hours worked or higher tips, the main recipient of this windfall is likely to be business owners.
Basically, there's a difference between the way money ordinarily flows through the economy and the way money flows through the economy during the Olympics. Local workers don't benefit from the Olympics as much as business owners do. Because the industries that typically capitalize off the Olympics are dominated by national or multinational corporations, much of the new money coming in during the games will not stay in the host city, Matheson says.
Matheson uses the hotel industry ("an industry that accounts for up to half of all visitor spending during mega-events") as an example.
@HarryCNN The hotels built for the Sochi Olympics weren't ready in time, and probably helped the economy less than you think. The Hotel Example
He starts with a hypothetical:
A hotel sells 75 rooms per night at $150 per room and employs 75 workers at $100 per night.
The city collects a 10% tax.
Workers spend 50% of their wages locally, with a 2x multiplier for "subsequent rounds of spending."
If we assume the owner of the hotel is outside the city, the economic multiplier on a normal night at this hotel is 1.7 (meaning every dollar spent has a total economic benefit of $1.70 once it flows through the economy).
Matheson then presents three different scenarios that mimic what this hotel would do during the Olympics:
1. Hotel increases the number of rooms it sells by 25% and the number of nightly workers by 25%.
2. Hotel increases the number of rooms it sells by 25%, leaving the number of workers the same.
3. Hotel doubles the price of its rooms, leaving the number of rooms sold and workers the same.
In each of those scenarios, much of the additional revenue generated because of the special circumstances of the Olympics flows to the owners. As a result, the economic multiplier for the local economy is different (and smaller) than the "normal night."
Whereas every dollar spent on a normal night has a total economic benefit of $1.70, scenario No. 2 has a benefit of $1.50, and scenario No. 3 has a benefit of $1.39.
When assessing how much money the Olympics are going to make for a city, Matheson argues, economic-impact studies get it wrong because they use normal economic circumstances to assess what will be a non-normal economic event.
Here's the full table (check out Matheson's full chart here):
Data via Matheson
In another paper, Matheson points out some of the most egregious real-world examples of these economic-impact studies overestimating the effect of one-time sporting events. Some of them are pretty incredible:
The Sports Management Research Institute estimated the direct economic benefits of the U.S. Open Tennis tournament in Flushing Meadows, New York at $420 million for the tri-state area, more than any other sports or entertainment event in any city in the United States. This sum represents 3% of the total annual direct economic impact of tourism for New York. It is simply impossible to believe that 1 in 30 tourists to New York City in any given year are visiting the city solely to attend the U.S. Open.
The projected $6 billion impact of the World Cup proposed for South Africa in 2006 suggested that soccer games and their ancillary activities would have represented over 4 percent of the entire gross domestic product of the country in that year.
Along the same lines, a study by the Dentsu Institute for Human Studies estimated a $24.8 billion impact from the 2002 World Cup for Japan and an $8.9 billion impact for South Korea. As a percentage of total national income, these figures represent 0.6 and 2.2 percent of the total Japanese and South Korean economies, respectively.
The pervasiveness of economic-impact studies that overestimate the benefits of hosting the Olympics isn't the only reason cities are turning their backs on the games. But it certainly doesn't help that host cities have no credible estimate for how much money the Olympics would generate.
"Cities routinely offer to spend large sums of money in order to attract these events in large part based upon these exaggerated claims of an economic bonanza," Matheson writes, "but a skeptical public should beware of economists bearing reports showing great benefits from mega-events."
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