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Nacre

The Economic Argument in Favor of the Olympics

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Since the only project I have to do this weekend is re-flooring my den and there's no actual sports discussion here, I've decided to put forward the economic argument in favor of hosting the Olympic Games.

This will be a very long post, so apologies in advance for boring you.

Macroeconomics

Before we get into the Olympics themselves, I want to explain a little bit about macroeconomics and how money functions.

Monetary Velocity

The Monetarist policy of the Western World has focused on inflation rate and monetary supply rather than the circulation of money. The result is that the velocity of money, or the rate at which money circulates through the economy, is now worse in the Western World than at any time since the Great Depression.

https://fred.stlouisfed.org/series/M2V

Western countries have massive supplies of capital, but it is just sitting around doing nothing as everyone hoards money. Millennials don't trust the stock market and won't invest, banks don't trust homeowners and small businesses to pay back loans, the ultra wealthy prefer to literally buy more money in the form of buying government debt (from accounts in tax havens, of course) rather than invest it, idiots buy bitcoin to hoard their cash, et al. The result is economic stagnation as the great wheel of commerce grinds along at a rate slowed by the lack of monetary circulation to push it along.

 It's no coincidence, in my opinion at least, that we are seeing populist political parties emerge in the West because the last time this kind of monetary stagnation happened (during the Great Depression) it gave rise to Fascism.

Wage Stagnation

Hand in hand with decreased velocity of money itself, the Western World has seen a stagnation (or outright decrease) of wages. Since I used American data last time I will use Japanese data this time to show that this isn't a problem unique to the USA.

https://resources.realestate.co.jp/wp-content/uploads/2017/07/Japan-average-annual-salary-2008-to-2016-2-of-2-1024x636.png

Hoarding Money

Humans are not rational. We are also selfish, and make decisions on a personal basis rather than what works for the greater good. And these two unfortunate facts are behind the West's economic problems.

People see money as a commodity. Gold coins are a commodity: gold. Pure money on the other hand is not a commodity. It has no value in and of itself. Money is a medium of exchange for goods and services, not a commodity.

When people face difficult economic times the immediate visceral response is to hoard. And if otherwise sane people see their neighbors hoarding they will tend to do it as well. (Do a web search for "consensus reality.")

But what people do not understand is that hoarding money is the cause of the recession. The cause of our economic slowdown is all of those stupid people panicking and hoarding their money instead of spending it. The profits of businesses, the wages of employees, the interest collected by banks and the taxes collected by government are all dependent upon money circulating through the economy. When everyone unintentionally conspires to stop money from flowing through the economy, we go through an economic slowdown.

Government Austerity

Consumers, businesses and banks, having adopted policies of retrenchment for themselves, also demand austerity from government. But this is merely compounding an error. Citizens demanding that governments reign in spending to the minimum are doing themselves a disservice.

Spending public money on the Olympics (or other mega projects) can actually be a very good idea. Refusing to provide public funding for projects like the Olympics is not really going to lead to prosperity.

The Economics of the Olympics

Both the defenders and the supporters of the Olympics tend to push it as a get rich quick scheme. And if you see the Olympics from that perspective then the economics of the games do not make much sense.

  • While the Olympics requires a massive short term workforce, this translates into full time jobs for very few local people. The vast majority of Olympic workers are unpaid volunteers, imported foreign specialist workers, and very short term workers who end up having to find another job after the "five ring circus" has packed up and moved on.
  • The promise of a massive influx of tourists is a siren's song due to the displacement effect. Rio gained tourists in 2016, but between Atlanta 1996 and London 2012 every summer games host city actually lost tourists on the year of their games. (In fairness for London 2012 the Olympic tourists ended up buying more in shops than the average tourists, so the city still did alright that year.)
  • The security costs are a money-eating black hole that grows bigger with each Olympiad.
  • The Olympics require the construction of palatial sporting venues that are fundamentally unsuitable to the long term sporting needs of the host city. This is in large part due to the demands of the sporting federations. For example Rio already had an existing high level tennis complex before 2016: Jockey Club Brasileiro for the Rio Open. Yet they had to include a very expensive temporary tennis complex in their bid to win over the International Tennis Federation.

If you look at the Olympics from a short-term view, they are an absolutely awful proposition economically. The benefits from the Olympics are shown in the long term.

Public Confidence

The Olympics make people happy and somewhat optimistic. And this can be useful in breaking people out of the cycle of retrenchment and monetary hoarding.

It's hard to find concrete data to support this as the sample size is so small. Los Angeles did comparatively very well after the 1932 games, but part of that was due to the LA oil fields and the city was already growing very rapidly in the 1920's along with the rise of Hollywood. Berlin also did well for two years after 1936, but . . . yeah. Rio has not fared well, but that's due more to a national financial crisis than the Olympics themselves.

But subjective studies have been pretty clear that the Olympics make people happier and have a more positive outlook on their city's future, and this should result in more investment and economic development.

Property Values

The single biggest advantage of the Olympics is the ability of cities to use them for redevelopment. London's Queen Elizabeth Park in East London is an excellent example of this. The Olympic Park has helped boost property values in the area, which in turn means more property tax revenue for the government. Other examples include the growth of the Parramatta district of Sydney around the Olympic Park. 

Unfortunately this can also been seen as a negative thing for the people already living in the area, just as gentrification is a mixed blessing everywhere. And anti-development people are always going to be a problem for cities in any kind of project designed to improve a city commercially.

Public Infrastructure

Pictures of unused and deteriorating sporting venues have become a stock character in the Olympic story. But the non-sporting venues are generally a good idea.

Barcelona is the ultimate example of this. For the 1992 games the city spent lots of money on transit and tourism infrastructure, and this has helped turn Barcelona into one of the biggest tourism destinations in Europe. This is the best case scenario and even in Barcelona the increase in property values is not especially popular with the people who feel priced out of the city. But the Olympics played a substantial role in the economic redevelopment of Barcelona into a tourist mecca, and in turn with making Catalonia the most economically prosperous part of Spain. 

Even Sochi, the poster child for waste on capital spending, has actually done alright after their winter games. Building a warm weather tourist destination nearly from scratch was massively expensive for Russia, but it seems to be paying off. Hotel occupancy is in the low sixties: about the same as the average hotel occupancy rate in the US. And this during a period of crippling economic sanctions against Russia. In the long run Sochi will probably become Russia's equivalent to Orlando in the United States.

Hosts typically lose money on the Olympic Village, but that is true of virtually all public housing projects. In the long run the expansion of high density housing will be worth a small loss on the initial construction of the Olympic Village. And if the host city can follow the typical American model of building a village as dormitories for a university the subsidy to education should be well worth the investment.

Conclusion

I have to get around to ripping up my carpets, so I'll wrap this up.

Los Angeles has never put forward a "good" bid. Of the nine times it has been in a bid race, it has lost every time. But it has hosted the Olympics twice before and will soon host once again by constantly putting forward bids that minimize spending on wasteful, non-recoverable costs like palatial sports venues with no obvious use after the Olympics. When the IOC has had few other options, Los Angeles has been waiting in the wings with a cost effective bid, ready to host on its own terms.

And this is what cities should do; focus on the long term benefits of hosting the Olympics and the needs of the host city rather than hoping to somehow make a lot of money on the three week festival or putting on the "best Olympics ever" with the most lavish sporting venues. The cities that do so have in fact gotten their money's worth out of hosting the Olympics.

Edited by Nacre
clarity

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That was anything but boring. Excellent analysis, which far too many people fail to do before making up their mind on an issue. They see a headline that Sochi spent $50 billion and they feel no need to read any further. The idiots in Calgary who voted no due to cost were too myopic to realize that those facilities from 1988 are still going to need government funds for upkeep so that they can continue to hold World Cup events. The displacement argument makes me laugh. When I go someplace to attend a sporting event it is with the sole intention of doing so. When I go to a Nationals game in Washington I am not taking my money from any other part of  DC, as I have no reason to go there except to see the game, Do the Games cause the locals and their money to flee for a couple of weeks. Sure, but the average visitor probably spends more than the average local in those two weeks.

Your best point is that many blame the IOC for the rising costs of the Games, but it is my belief that the IFs drive up the costs. The IOC would probably be content with the LA model for venues, but the IFs seem to want the enhanced facilities and this, as well as their insistence of wanting every possible event on the program, has stretched the summer games to a breaking point (as well as ridiculously bloating the winter games).

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