LeBron And The $500M Lie: How Sports Economic-Impact Studies Trick You

Not long after LeBron James announced his return to the Cleveland Cavaliers, the business pages lit up with breathless announcements about what LeBron would mean for the local economy:

The greatest player on the planet could be an economic catalyst for the Rust Belt city. More fans will flock to Quicken Loans Arena to see James play, more staff will be needed at the arena to handle those larger crowds, more money will be spent during games at local bars and restaurants, and all of that will get pumped back into the region. The result, says LeRoy Brooks, a professor of finance at the Boler School of Business at John Carroll University in suburban Cleveland, could be nearly $500 million added to the local economy. Call it the LeBron Effect.

While it's a great time to be a sports fan in Cleveland, and while there is no doubt that LeBron will make many Clevelanders happy, he is simply unlikely to make much money for any of them not named Dan Gilbert. The LeBron Effect is wildly exaggerated, and in ways that are worth examining in detail. The industry is plagued by economic-impact estimates that bear little resemblance to economic reality and that are so thoroughly a product of the sports-hype machine that they might as well have been fired out of a T-shirt cannon. The problems in the LeBron study are the same ones that crop up again and again whenever a league or a team trying to justify subsidies for a new stadium or a big event points to the positive impact on the local economy.

The first problem economic impact estimates run into is the overwhelming tendency to make overly rosy projections. In the case of LeBron James, in order to get to $500 million, it is assumed that the revitalized Cavs will make it to the NBA finals and reap the rewards of an additional 16 high-profile home games—a projection that supposes not only a Cavs championship, but a team like Atlanta or Milwaukee taking them seven games in the first round and at least six games in all other rounds. Similarly, the impact numbers are boosted by inflated ticket prices based on ticket-resale data from sites like Stub Hub. But resale data don't constitute a random sample of ticket prices and only represent a small fraction of tickets purchased. Just because one guy scalps a courtside seat for $3,000 doesn't mean that the typical ticket buyer is paying prices like this.

A second problem is the common failure to simply look at the past when predicting the future. With a metropolitan area population of 2.1 million, a $500 million impact on the area would mean that every single man, woman, and child in the region will be indulging in an average of $240 in Cavaliers-related spending every year for the rest of James's career. Possible, but unlikely.

More specifically, in 2009-10, LeBron's last year in Cleveland, the Cavs sold 20,562 tickets per game at an average price of $55.95 for a total regular-season gate sales of $47.2 million. Last season, attendance was down to 17,329 and ticket prices were only $43.31 for a total gate of $30.6 million. LeBron's return will certainly bring team gate revenues back to at least $50 million and likely quite a bit higher, but James is not responsible for all of Cleveland's gate revenue, and an increase in $20 million still leaves $480 million of the economic impact yet to be explained.

In fact, the Cavs' entire team revenue including all sources was only an estimated $159 million in James's last year with the team and $145 million last year. Even the Knicks, the highest earners in the league, generated only $287 million last year. And James's Miami Heat generated only $188 million in revenue last year. Unless LeBron James can somehow generate two and a half times as much revenue in Cleveland as he did in Miami, we will have to look for other places to find that $500 million.

Of course, these are really just small issues. The biggest problem with the $500 million figure is that it falls prey to one of the most serious fallacies in economic impact analysis: the failure to account for the substitution effect. Any money spent by local residents at Cavs games is money not spent elsewhere in the local economy. The extra 150,000 fans who will be going to watch LeBron next year are 150,000 people who at least on game nights aren't going out to nightclubs, restaurants, and theaters. The higher ticket prices mean less disposable income for fans to spend on Indians or Browns games, or movie tickets, or bowling, or free-style skydiving, or whatever it is Clevelanders were doing while LeBron was in South Beach. Similarly, every kid in Cleveland will be getting a LeBron jersey for Christmas or Hanukkah this winter, but this doesn't mean they will be getting more presents; it just means they're getting different presents. The jersey manufacturers' gains are matched by the losses for the makers of ugly sweaters. Sure, people may be willing to dig a little deeper into their wallets for a chance to see the King, but unless LeBron can somehow make everyone's paychecks bigger, there is a real upper limit on what Clevelanders can afford to spend on entertainment.

Bars and restaurants near the arena should benefit, but total attendance will only be up about 20 percent next year. And even if people are willing to pay a lot more to see the Cavs if James is playing, they aren't likely to be willing to pay a lot more to eat before the game, especially after shelling out big bucks for tickets. And again, these downtown restaurant visits are often coming at the expense of restaurants and other attractions in the suburbs.

So what about hotels? Well, don't count on lots of out-of-town visitors coming in to watch LeBron—tickets will be awfully hard to get. Obviously there will be some effect, but even LeBron can't make Cleveland a prime tourist destination in February.

This is not to say that LeBron's return won't have any tangible economic effect. The net impact on the economy could easily be in the tens of millions of dollars of new money entering into the greater Cleveland economy. And as an added bonus, thanks to James's deep roots in the community, a decent portion of his own salary is likely to stick in the local economy, as opposed to the paychecks of other NBA stars, which are earned in one city but spent in Miami Beach or Beverly Hills or the champagne room of Treasures in Houston. Still, tens of millions is a far cry for $500 million.

Now in the case of LeBron James, the economic exaggerations are largely harmless since the citizens of Cleveland are not being asked to kick in public money to bring the King back to the city. All too often, however, economic-impact studies are used in an attempt to wheedle otherwise reluctant taxpayers into paying for new stadiums and arenas. Since the vast majority of academic work finds that public expenditures on professional sports teams, stadiums, and events represents a poor use of taxpayer money, it is important to call out these economic fabrications. Would any sports fan expecting 30 points per night from a newly signed free agent be satisfied with a player who produced three points instead? So why accept economic impact studies that are off by at least a factor of 10? Sports fans, not to mention local taxpayers, deserve better.

Victor Matheson is a Professor in the Department of Economics and Accounting at The College of the Holy Cross.