February 07, 2005

Red Wing ink

Another week of NHL lockout, another newspaper story claiming dire effects on the local economy. Today's contestant: The Detroit Free Press, which dutifully reports that a canceled hockey season would cost the city $153 million in lost economic impact, and $75 million in lost revenue.

Let's do what the Freep reporters didn't, and look at some numbers to see if the above claims - from the local chamber of commerce and a former Comerica Bank economist - make any sense. The Red Wings brought in $97 million in team revenue last season, so for the city to be losing $75 million would imply that every dollar earned by the Wings is taxed at 75%, which is patently silly. Let's assume, then, that the Freep writers don't know the difference between city tax revenue and local economic impact, and move on to the latter figure.

The typical way for an economist to estimate economic impact - i.e., the total amount of money that's spent in a region as a result of a certain activity - is to take the direct spending (the Red Wings revenues) and apply a "multiplier" to account for the fact that if I buy a ticket, that helps to employ a ticket agent, who then spends her salary on other goods, etc. Economists can give you all sorts of rationales for selecting a multiplier, but it generally comes down to "pick a number somewhere around 2."

There are all sorts of reasons to assume that sports multipliers should be much lower than for other industries, however. For example, let's look at that $97 million: $80 million of it went right back out to pay player salaries, and it's pretty unlikely that Red Wings players spent that all at local Coney stands. More likely, they spent much of it on their homes outside of Detroit, if not outside of Michigan entirely. This is what economists call "leakage," and it's vastly higher in sports than in other fields, if only because so much of team spending is focused on a handful of high-paid employees.

Sporting events involve non-team revenues, too, of course, mostly spending on concessions at the event (Red Wings owner Mike Ilitch owns the local concessions company, too, but it's not included in that $97 million figure) and at local restaurants and bars. Even there, though, one needs to take into account the substitution effect, whereby some fans are going to take their erstwhile hockey dollars and spend them elsewhere in Detroit. (Yes, there are a few elsewheres within the Detroit city limits. Have you forgotten the Coney stands so soon?)

In short, a few minutes' thought indicates that it's extraordinarily unlikely that the impact of the hockey lockout is anywhere near what's been reported in the Free Press. But then, nobody's paying our nation's newspaper journalists to think.

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