LeBron James Can't Save Cleveland's Economy (Sorry)

The "LeBron Effect" isn't total bullshit, but economists agree that the impact of sports on local economies is vastly overstated by politicians looking to score points.

Nov 4 2014, 1:30pm

Photo by David Richard/USA TODAY Sports

LeBron James made his long-awaited return to Cleveland last Thursday, scoring just 17 points but unleashing a cloudburst of cash over the city, with hundred-dollar bills raining down from the heavens and settling softly into citizens' pockets with a hushed "swish."

No, really. I saw it on the TV news. And if not there, I would have known it was coming thanks to the July report from Cuyahoga County's top official that stated James' return would generate an astounding $500 million a year in added economic activity—though the county official's office later clarified that they really meant to say only $268 million in total activity, $53 million a year of which would be thanks to number 23.

We've heard these kinds of numbers before. Michael Jordan single-handedly created $10 billion in economic impact. The Super Bowl is worth $600 million to its host city. A rodeo in Florida would bring in $100 million.

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The first thing to remember when these kinds of dollar figures are being thrown around is that they don't represent actual dollars, at least not the kind you (or your duly elected representatives) can go out and spend on things. "Economic activity," the measurement typically used in these kinds of stories, is just the total amount of dollars changing hands within a designated area. As Holy Cross economist Victor Matheson memorably pointed out, it's easy to picture economic activity that doesn't benefit any actual locals: "Imagine an airplane landing at an airport and everyone gets out and gives each other a million bucks, then gets back on the plane. That's $200 million in economic activity, but it's not any benefit to the local economy."

Okay, fine, so the numbers are overblown. James, whatever else he does or doesn't do for the Cavs' title chances, is surely going to sell a lot more tickets and bring a lot more people to downtown Cleveland than the LeBron-less team did the past four years. (In fact, the entire season is now sold out.) Just listen to David Gilbert (no relation to Cavs owner Dan Gilbert) of Destination Cleveland, the city's newly rebranded tourism agency, talking to CBS News about the return of the prodigal forward:

"Every game is bringing thousands of people in, spending their money, every game. When those dollars are spent it creates jobs. Every one of these new hotels, new restaurants, they all create jobs."

It's certainly easy to picture when you see sports bars in usually desolate downtown Cleveland packed with Cavs fans on game nights. It's also almost certainly wrong, and an object lesson in why reporting on economic issues by dropping into a couple of sports bars should be banned by the Geneva Convention.

No one has yet conducted an independent study trying to measure what's happened to local economies when a big-name star has arrived in, or left, town. (As one economist pointed out to me, this is likely because anyone claiming to be able to measure this impact in a city the size of Cleveland would be laughed out of any journal editor's office; if LeBron had gone to Sioux Falls instead, you might be able to filter out the signal from the noise.) But we do have studies of what's happened when entire teams have appeared in or disappeared from a metropolitan area. That should show a far bigger impact, since absolutely nobody goes downtown to see games when there are no games being played, and yet the findings are just the opposite:

  • Economists Brad Humphreys and Dennis Coates looked at five strikes and lockouts that wiped out MLB and NFL games to see if local economies suffered. Their conclusion: "The departure of a franchise in any sport, particularly in basketball, has never significantly lowered real per capita personal income in a metropolitan area."
  • Economists Robert Baade, Robert Baumann, and our airplane friend Victor Matheson scrutinized monthly sales-tax receipts in Florida, which should make it easier to see the impact of work stoppages of only a few weeks. "No statistically significant effect on taxable sales is found from the sudden absence of professional sports due to strikes and lockouts," the trio wrote.
  • Economist Geoffrey Propheter compared cities with and without NBA teams, and found that, on average, cities with pro basketball don't do any better in per-capita income than cities without it.

So what the heck is going on here? Are all those sports-bar patrons who show up on the nightly news some kind of specters whose spending doesn't register on normal instruments?

The answer, most economists believe, is in what they call the "substitution effect," which is perhaps better put in plain English: When you buy sports tickets, you have less money left in your pocket. That means that all those LeBron-related ticket buyers may well be creating jobs in and around the Cavs' arena, but at the expense of jobs wherever they would have spent their cash if they were bored at the prospect of watching the NBA.

Since this negative impact tends to be spread broadly around town, however, this leads to a kind of "dog that didn't bark" phenomenon, where news reports focus solely on all the activity around the game and not the lost activity elsewhere, though there are occasional exceptions: During the 1994 baseball strike, the Canadian Broadcasting Corporation interviewed non-sports business owners around Toronto to see how they were faring, garnering a classic response from one comedy club owner: "We really feel it would be in the best interest of entertainment in Toronto if the hockey players sat out the whole season too."

Downtown Cleveland's Terminal Tower was built by railroad moguls Oris and Mantis Van Swerigen. They surely had a greater economic impact than LeBron James. Photo via creative commons. 

But what's up, then, with that $268 million that Cuyahoga County claims the Cavs are worth to the local economy, one-fifth of it due to LeBron himself? (This doesn't mean that the other four-fifths are due to Kevin Love and Co., by the way—presumably the lion's share would take place even if the Cavs suited up a bunch of randomly generated players.) The total number seems crazy—even in LeBron years the Cavs have only had about $160 million in total yearly revenues, most of it from things like TV rights sales, which are the epitome of get-off-the-airplane spending. But it's tough to say for sure, because though Cuyahoga County Executive (and longshot candidate in today's Ohio gubernatorial election) Ed FitzGerald got tons of coverage for the announcement of his LeBron Effect report, he hasn't actually released the actual calculations to the public.

FitzGerald has hinted at a few ways in which higher Cavs attendance would help—most notably, by providing about $3.5 million a year in increased receipts from county ticket taxes, which apply to NBA games but not comedy clubs—and perhaps some added sales tax receipts, though it's not clear whether that figure is adjusted for substitution. Or if it is, how his office calculated how many Cavs fans otherwise would stay out of the city. Or even whether this was counting new money to the city (which could include spending cannibalized from elsewhere in the county) or to the county or what.

Either way, though, we're now talking about any benefits of James' return being something on the order of a few million dollars a year, not half a billion—and while we'll probably never know for sure, at least not until someone solves the Sioux Falls problem, that's likely a reasonable estimate. All of which brings to mind one more Victor Matheson quote worth remembering:

"As a rule of thumb, an economist like me would say this: Take whatever the supporters are telling you, move the decimal point one place to the left, and that's a pretty good estimate."

Print that out and stick it to your monitor. Kevin Durant's free agency is just two years away.