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Going for Broke: How the Olympics Affect Local Economies

Since the establishment of the International Olympic Committee (IOC) in 1894, the Olympic Games have been a world stage for people of all countries to show off athletic prowess through competition.  In that time, 41 different cities have hosted the games with some like Los Angeles hosting multiple. Leaders in these cities justify the expense of hosting the Olympics by telling the public that there is a short-run positive economic impact from hosting the games. Inaccurate information, total cost, negative externalities, fraud, and humbug ex ante estimates refute that statement. The Olympics bring the world together to celebrate athletic achievement, but in the end it is the citizens of the host country/city that bear the cost of the games.

The most common way to measure the impact of hosting the Olympics is a highly aggregated model designed to create a “multiplier,” known as an input-output model. This has to be a highly aggregated model because hosting an Olympics affects many industries, not just a single one. The “multiplier” is the increase in total output from the input of a single dollar into a certain industry.  In many reports given to the IOC, projected multipliers for the host cities have ranged from 1.7 to 3.5, meaning, for every $100 spent in that city there is a projected increase in output of between $170 and $350. In this case though, the methodology is very flawed. In order for input-output to be credible, all input and output has to take place in a single economy. Any additional output (materials) necessary due to increased input (sales) must be produced within the host city’s economy, not imported from another city, state, or country.  Macroeconomic models of the US economy’s multipliers have it to be around 1.3, which is relatively high because the US economy is more self-sustaining (closed) and diverse than most. When you get to a more micro-level, such as a city, multipliers become smaller because economies are less diverse and more trade is required(open). If a city comes up with a multiplier higher than the country aggregate, it’s an implication that city has a more sustainable, diverse economy than the country as a whole and is simply not credible. Past major city sports projects, like building a stadium or hosting the Olympics, have had a real multiplier around 0.7 to 1.1. So in reality, $100 spent by a consumer at the Olympics (with a 0.7 to 1.1 multiplier) will turn into $70 to $110 of additional output, rather than $170 to $350. This is an example of an inaccurate ex ante estimate that will seriously hinder the accuracy of an economic impact.

For most of these host cities the games fall during peak tourist season, meaning hotels will be in high demand anyway, not “because” of the Olympics. If the city is expecting an increase in tourism, (ceteris paribus) prices will act accordingly and increase. Let’s say Rio averages 150,000 tourists during the month of August in non-host years, and “International Chain Hotel” is usually at capacity during that time. Just because the hotel raised its prices for the Olympics does not mean they need additional output from any resource to function at its optimum level. The hotel is used to operating at that certain capacity during this time so additional materials or human resources, for the most part, are unnecessary. The multiplier in this case is only relevant per additional tourist brought “because” of the Olympics, so every additional tourist over 150,000 is going to drive the multiplier up because more materials or human resources are needed. What should scare Rio officials are the numbers showing lower than average tourism numbers for recent host cities. The past two cities to host Summer Olympics, Beijing (2008) and London (2012), actually saw an 8-12 percent decrease in tourism, and in China’s case a 12 percent increase in outbound tourism. So in essence, if there are less tourists than expected in Rio for the 2016 Olympics like London and Beijing (which seems VERY likely with Zika and other concerns), the hotel could technically have less staff than normal resulting in an even smaller multiplier.

Many also do not consider how the games are paid for. No city has the liquidity to fund a $10 billion plus project by themselves, so they have to borrow. Let’s say the games cost $15 billion (London 2012 cost ~$16 to $18 billion), and your city has to borrow $12 billion at 5 percent for 30 years. They eventually have to pay that back, plus interest, and the burden of the cost falls onto the people because the local government must now cut spending and/or raise taxes to pay off the loan. When a government cuts spending, the tax-payers lose some type of benefit that money was going to like roads, schools, and hospitals. The same is true if they were to increase taxes; there is an opportunity-cost associated with giving the government more money. In the short-run, only a few Olympic host sites have seen economic gain, most notably Los Angeles in 1984. By the time the selection was made, LA was the only bid for 1984. Other countries applied, but eventually backed out because of the political debacle in Mexico City (1968), terrorist attacks in Munich (1972), the financial crash that hit Montreal after hosting (1976), and the boycott of the Moscow games by 65 countries (1980). Because of these incidents LA gained all the leverage and convinced the IOC to guarantee no financial loss to the city of LA. This ruling by the IOC, and the success of the games (mostly due to a record TV deal), exponentially increased the demand to host. A deal like this has yet to be struck again because the demand to host has been so high, and cities are willing to spend a lot more on the bidding process.

Bird's Nest, Beijing 2008

Bird’s Nest, Beijing 2008

The biggest issue after hosting are “White Elephants” which are large, luxurious buildings or arenas that are colossally underused. The most famous White Elephant is the Bird’s Nest in Beijing. It cost a reported $460 million to build and seats 90,000. Today it is pretty much unused and costs the Chinese $10 million a year to maintain. While the Bird’s Nest is the most famous, the worst case of White Elephants happened in Athens after the 2004 Games. By 2008, 21 out of the 22 buildings constructed were underused, shut down, or unrepairable, costing Greece $784 million from 2004-2008 to “maintain” these buildings. Many countries use the games to see a jump in tourism for years to come. Sydney had expected a 25 percent increase in tourism the year they hosted and to accommodate for all the new tourists, Sydney had increased its number of hotel rooms by 30 percent. When the games eventually came, they only saw an 8 percent increase in tourism in 2000, then massive decreases through 2003 leading to ten of the city’s biggest hotels closing their doors by 2004.

While hosting the Olympics and being the epicenter of the world for a month may seem ideal for a city, numbers and studies say otherwise. People look forward to the Olympics every two years for many reasons, and even more so if you are the host city, but being a taxpayer in a host city is something to be feared. The costs that fall onto the taxpayer far outweigh the satisfaction, or utility, received from hosting.

 

Zimbalist, Andrew S. Circus Maximus: The Economic Gamble behind Hosting the Olympics and the World Cup. N.p.: n.p., n.d. Print.

Zimbalist, Andrew. “The Illusory Economic Gains from Hosting the Olympics & World Cup.” World Economics, vol. 16, NTC Publications Ltd, Henley-on-Thames, 2015..

Flyvbjerg, Brent, Alexander Budzier, and Allison Stewart. “The Oxford Olympics Study 2016: Cost and Cost Overrun at the Games.” University of Oxford: Saïd Business School (2016): 1-28. Web. 15 July 2016.

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