Stadiums, Subsidies, and other Wishful Thinking (Part 1)

Boston’s shot at the 2024 Olympics is dead and buried, but the post-mortem analysis will go on for many years. Why did the bid fail? Is it because Boston is the city of “no”? Was a sustained effort of “people power“?

Buried beneath the mutual recrimination is an important question: have voters started becoming more skeptical of the megaproject?

The way Boston 2024 was sold in Massachusetts was an exercise in the “wishful thinking” mode of economic development. The Olympics will finally let us fix our public transit, they said. That disastrous traffic circle will disappear. The more boisterous defenders insisted that this was the opportunity to prove that Boston is a real, world class city – and now that we’ve lost to LA, we just have to watch from the sidelines as the big boys eat our lunch.

I wasn’t dead set against the Boston Olympics, but seeing it sold in this way made me very skeptical of its actual impact. It seems to me that a shrinking proportion of voters and policymakers believe it’s smart to rely on the next big project as the thing that’s going to save us. I think it is possible to say that the death of Boston 2024 is part of a trend that is bigger than the Olympics and bigger than local politics.

If I’m right about this – and given the amount of wishful thinking economic development still going on, I’m not sure I am – this would be a huge change for the better. The megaproject as silver bullet to economic woes is still rife in this country.

In a broader sense, wishful thinking economic development preys upon all our human biases for simple answers to complex problems. It’s apparent in the convention center building craze, the public financing of stadiums and sports venues, and the massive incentivization of firms with public dollars. It replicates the same playbook everywhere: shaky public benefits, underestimated costs, and the public left holding the bag on big, flashy purchases. The fight for more transparency, less corruption, and more democratic decision-making is and should be a recurring theme in economic development across the world.

This matters not just for the economy, but also for public participation in democracy.  It’s why many people see economic development – in a line that I wish so badly I had written – as “the stuff of business parks, tax perks, and a long aisle of pig-lipstick.”

In this two part series, I’m going to go through some of the more routine outrages that go on in every state and city in the country.

I hope that we can look back fifty years from now on these stories like some kind of Tammany Hall period – outrageously corrupt, but definitively in the past. Step one, in my mind, is disassociating these ridiculous schemes from legitimate economic and community development.

Exhibit A: Sports Venues

I hope this isn’t news to you: the amount of public money that goes to sports teams in the US is simply shameful.

If you’re a fan of pro sports, you probably have heard about why the public needs to help the team build a new stadium. The logic is seductive, if you’re easily seduced by stupid things:

  • To be seen as a “real city” we need a world class team.
  • The younguns love sports. Without sports, they will leave and we’ll be a brain-drained backwater / We need to have sports to attract the creative class.
  • People will come to the new stadium and spend lots of money. Spillover effects!
  • A team gives something our city to rally around. A stadium is a symbol of civic pride.
  • If we don’t buy a new stadium, they’ll move to LA/Las Vegas/Seattle/London/Abu Dhabi

Spend a few minutes catching up on your local boondoggle through Field of Schemes, a site dedicated to exposing the ridiculous narratives behind public stadium subsidies.

The fact that public spending on stadiums is a real lemon is not controversial. Whenever economists want to add a mainstream press citation to their resume, they come out with another study proving what a shakedown public financing of stadiums is. Deadspin estimated that the cost of direct subsidies to 2012 is $32 billion out of local coffers, which is very conservative in many ways (for example, not counting the cost of foregone property tax, which the arenas rarely pay, or increased municipal services, like the cops paid overtime to direct traffic). The more you dig, I guarantee the angrier you’ll get.

  • 65 of these stadiums, about a third, have already lost their professional teams and/or been demolished. These ghost stadiums cost $8.8 billion, of which$6.6 billion (75 percent) was paid for by the public. Many of these included horrible outer-city 1960s and ’70s megastadiums that were largely funded with taxpayer dollars, only to be shuttered in the ’90s and early ’00s.

If you want a stem to stern examination of how bad these deals are for their cities, I’ll recommend a killer piece by Next City on the development of a new Detroit Red Wings stadium with $284.5 million in public financing. Detroit! It would be hilarious if it weren’t so heartbreaking. Certain details of the deal, such as redirecting property taxes that would otherwise go to funding Detroit schools and selling the property to developers at well below market rate – in fact, for $1 – might make Ebenezer Scrooge blush, given Detroit’s recent bankruptcy.

All in all, the Red Wings case is thoroughly modern: sold as a public service and a boon necessary for a struggling city; financed out of complex, redirected money rather than a giant novelty check cut from public coffers; done for private gain and in the name of public impact; and thoroughly invisible to a public that loves their team but has trouble sorting out the details. It’s looting carried out in broad daylight.

Local media play a huge role in explaining these issues to the public, who rarely have time to sort out where the money comes from and how this financing scheme affects them. This is exactly the sort of coverage hurt by the decline in local press outlets.

Unfortunately, while the deals are local, the system is national. Team owners have much more leverage over cities than the days when no public financing went to stadiums. There’s just more cities that want a team than there are teams. The leverage to fleece taxpayers only declines if a huge number of cities suddenly refuse to play ball.

If you want to see this problem at its logical endpoint: I wrote recently about the local scramble to shell out 9 figures for the minor league Red Sox affiliate, the PawSox (formerly/currently of Pawtucket, RI). Thankfully, most local decision makers seem at least somewhat skeptical of the PawSox pitch – but never underestimate people’s ability to sell themselves the Brooklyn Bridge.

The next time a new stadium comes up in your area, especially if you’re a sports fan, you owe it to your community to ask who pays, how, and why. Be honest.

Exhibit B: The Edifice Complex

Stadiums are unfortunately just a part of a broader suite of poor decision making and inflated claims. The “Edifice Complex” refers the desire to build grand buildings at public expense for either personal aggrandizement, or more to the point in this context, the one key needed to move the economy forward.

Let’s look at one fascinating example of this trend in action: convention centers. There may even be a convention center nearby you that is screaming for public investment. This totally ignores the changing market for conventions and the weak claims that they make.

In 2012, CityLab wrote an article examining the convention center building boom:

Over the last 20 years, convention space in the United States has increased by 50 percent; since 2005, 44 new convention spaces have been planned or constructed in this country alone. That boom hasn’t come cheap. In the last ten years, spending on convention centers has doubled to $2.4 billion annually, much of it from public coffers.

…But there’s a problem with this building bonanza, and it’s a doozy: There aren’t really enough conventions to go around. The actual number of conventions hosted in the U.S. has fallen over the last decade. Attendance at the 200 largest conventions peaked at about 5 million in the mid-1990s and has fallen steadily since then.

Like stadiums, you will hear the same tired talking points trotted out for *every* publicly funded convention center, regardless of context. The vague idea that they create “cachet” for the host community – unfalsifiable, like any good slippery claim – is ubiquitous, for example.

Convention centers are only one type of white elephant in the Edifice Complex. Other possibilities include casinos, luxury hotels, or ridiculous highway expansions. The common theme is that costs will be underestimated, benefits overestimated, and common human biases like the sunk cost fallacy or appeals to regional pride will be exploited.

Often the Silver Bullet is a cash handout dressed up like an infrastructure project. I don’t really need to pile on Detroit any more (they already have a basket full of image problems and its issues aren’t out of line with what happens in other cities) but Governing recently reported on a story that shows how far the madness can go, and the city happens to be Detroit. Detroit’s port for cruise ships cost taxpayers $22 million and has achieved considerably less than that in economic output. In fact, it has received just one cruise ship in 2015, and when that ship returned the passengers were not allowed to disembark because Customs said the facilities were not able to process cruise vessels or passengers.

Detroit only serves to prove the simple fact that being out of money is not a limit to these type of schemes; it is sometimes, in fact, a prerequisite. To quote the Governing article:

Elective politics rarely attracts small egos, so it’s only natural for officials to want to do big things. But good government is rarely sexy. Sometimes it requires resisting the siren song of projects that rely on patently unrealistic economic assumptions. That’s particularly true when those who can least afford it — such as the taxpayers of a suffering region — are picking up the tab.

These dynamics aren’t unique to Detroit: here’s some similar stories from Miami, Seattle, and DC. I’ll have more on how desperation creates ideal conditions for looting of public coffers next time.

There’s another element that I have to leave out of the Edifice Complex for this series: the ridiculous way we overbuild highways in this country. If you’re interested in the topic you’ve got to check out the excellent Aaron Renn on the Illiana Expressway and I-64 in Louisville. They suffer from the same optimistic projections, blindness to reality, and dependence on government support. In ten years, when traffic is just as standstill or tolls aren’t getting their projected return but the local area has been entirely covered by overpasses, the folks in charge are already on to the next project, with no time to talk about yesterday’s news.

How Did We Get Here?

Almost everything I’ve talked about in this post is a direct result of manipulation about what the term “economic benefits” means. The typical project is justified on the basis of nebulous “economic effects” which have little to do with how good an investment a project is. For example, even if Detroit could prove it had directly caused $44 million in private spending on cruise ships through the purchase of a new port, this does not mean that the port was necessarily a good investment. They have not doubled their initial investment of $22 million, although it’s often framed that way. Two questions at the very least have to be asked and measured to determine the quality of the investment: how much actual tax revenue did the project generate, and would the spending have happened without the subsidy?  This should ideally take the form of rigorous accounting, but even basic addition is lacking from most public projects. Benefit calculation usually takes the form of a wink and a promise from the developers themselves.

It’s depressing, but these facts are something people have to understand. The 21st century demands scientific and computer literacy. I propose that people need to become more economically literate as well. More outrage to come in part two.

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The (Zoning) Battle of Seattle

If ever there was a time for outsiders to pay attention to local Seattle politics, this is it. It’s a city council election year and the candidates have a better chance than ever before to discuss Seattle’s already declining affordability.

Seattle’s mayor, Ed Murray, recently announced that he was backing off key elements of the Housing Affordability and Livability Agenda (HALA) recommendations that the city had requested. Specifically, there was a loud outburst on the part of homeowners to HALA’s proposal that much of Seattle’s land be “upzoned” – that is, the city would change zoning regulations to allow the construction of multifamily homes (mostly duplexes, triplexes and condos) in areas that currently only allow single family homes.

Seen in the context of all the HALA recommendations, upzoning is a sensible idea that could make possible the radical changes that Seattle needs to maintain its diversity and livability for all. During the raucous few weeks of the plan’s rollout, however, most politicians seem to be content to demonize their enemies (if I never hear the word “fauxgressive” again, it’ll be too soon) rather than discuss real change.

Seattle has the opportunity to build broad based support on the terms of the plan, but the deck is somewhat stacked against sensible changes. The housing issue is boring and can be data heavy. Supporters also apparently shot themselves in the foot with some political missteps.

Viewing this battle from afar gives me a little space to examine the quality of argument on each side. If HALA supporters can somehow resurrect the zoning changes, do they stand a good chance of making an impact on the city’s affordability?

Supply and demand in Seattle

smallzonemapSeattle is a land constrained city with enormous and growing appeal. Like other similarly situated areas (San Francisco, New York, Boston, etc) the price of housing has skyrocketed in recent years. In addition, a vast amount of its land is covered by Single Family Zoning (SFZ) allowing only detached homes placed within a given lot footprint. Up to 65% of the land area is covered by the light yellow shades representing SFZ in the map above.

It’s not a big stretch to see how limiting the size and structure of homes to the least efficient mode translates into higher housing costs. If developers can’t build up or across, they have to make independent, freestanding structures on each plot. Zoning codes also dictate a certain lot size, which makes for an even more inefficient use of land. These factors reduce the supply of housing, increasing the price.

A good background piece from Daniel Kay Hertz (not about Seattle) in Washington Post points out why this is:

…[Z]oning laws restrict the total amount of housing that can exist in any given area, which means that wherever well-to-do people decide to move, they will bid up the price of housing until it’s out of range of everyone else. Imagine, for example, if there were a law that only 1,000 cars could be sold per year in all of New York. Those 1,000 cars would go to whoever could pay the most money for them, and chances are you and everyone you know would be out of luck.

Incidentally, Hertz also references the racial and economic exclusion that is inextricably linked to zoning in this country. HALA did something similar which may have backfired, as a relatively benign mention of this fact in the HALA recommendations caused some pearl-clutching and outrage, largely from the population that benefits from the status quo.

“Infinite Demand”

Advocates for the status quo in Seattle make a few different arguments for why housing is more complicated than “Economics 101”. A comment on an article about zoning and housing prices on Pedestrian Observations provides a concise summary of their position:

The more housing you build, the higher prices become. Build enough housing, and eventually nobody but rich people can live in that city. Building housing makes cities unaffordable.

Economists can’t wrap their heads around these kinds of paradoxes because they’re unable to understand that not all parts of the real world function in the idealized way described by Econ 101. In the real world, there is infinite (or effectively infinite) demand for some goods, and creating more supply creates exponentially more demand in a vicious feedback loop.

…building more housing in America’s most desirable cities doesn’t reduce housing costs, it just lets more people move to those cities who otherwise wouldn’t. Why wouldn’t you, as a resident of Keokuk Iowa where wages run $8 an hour and jobs are scarce, move to Seattle WA, where the minimum wage is $15 an hour and jobs are plentiful? Obviously you would if you could. And when Seattle builds more housing you do move. So do lots of other people. But the number of people who move is always exponentially greater than the number of housing units built.

You’ll see the words “infinite demand” pop up a lot in these conversations. It may be functionally true – there may be many more people that want to live in Seattle than is viable to produce housing for. However, it is difficult to see how, all else being equal, increasing supply would increase prices.

The claim that “the number of people who move is always exponentially greater than the number of housing units built” doesn’t seem compelling – where is the evidence that people move because of the availability of housing itself? Generally, people move because of the signal of availability they get from price. There are not millions more who would move to Seattle if there was an “available house” that cost exactly as much as houses already do. If there were, the housing costs would probably be even higher.

If I’m being charitable, perhaps these folks are arguing that a new type of person will be attracted as more multi-family housing is built in Seattle – the same people that are currently bidding up the price of single family homes are not the same as the people who will be attracted to denser living. I guess this is a reasonable assumption, but there’s not a clear outcome from this. The families that are more likely to live in duplexes and triplexes are certainly not as

This is not to say that increasing supply necessarily leads to widespread cost decreases. Many, including perhaps most forcefully Jim Russell of Burgh Diaspora, write that high demand is the prerequisite to skyrocketing prices, and supply doesn’t affect the equation much. This is a bit difficult to overcome in a desirable place like Seattle – it’s unclear whether or how we should try to convince people that places that they view as desirable are in fact undesirable.

That being said, the effect of spreading out development over the city rather than only allowing densification in the very few areas that the homeowners will allow would be to decrease the effect on any one district. A citywide (and actually a regional) approach is necessary. It’s kind of bizarre that we live this up to local jurisdictions in this country.

Displacement

Again being charitable that there’s not other influences at play, another potential concern is that upzoning would cause displacement of current residents from affordable single family homes. Bill Bradburd, who advanced out of the primary and is running for a citywide seat wrote an op-ed criticizing the HALA recommendations:

The false assumption inherent in the HALA Report is that creating more supply at the high end will trickle down to increase the supply of workforce and very low-income housing for seniors and people with disabilities.  Tearing down or renovating older, moderate-cost buildings only displaces renters and exacerbates the affordability problem.  In reality, truly affordable housing types can only be produced with subsidies.

The most compelling version of his argument is that developers only have an incentive to build for the high end of the market that makes them the most money. This is undeniably true, and is happening in the hottest housing markets in the country. Take out a neighborhood of moderately affordable renting houses to design a high rise of ultra sleek apartments for the rich, and you’ve forced out people hanging on by their fingernails to the opportunities to be close to jobs and infrastructure.

There’s a couple logical flaws in this argument, the most prominent being that the current system is not protecting low income people. If you’re renting in a neighborhood that would support price increases, your landlord already has an incentive to get you out of there. That is, in fact, what is happening all over Seattle.

The second problem is that zoning is not what’s doing the preservation that is currently going on. It protects far more rent seeking homeowners who bought at the right time than it does income limited renters who need affordable housing. To address displacement, Seattle desperately needs to take measures to preserve, build, and even take off market housing that preserves affordability. Zoning changes are not the sole solution to this challenge, but they also are not the cause.

Bradburd’s objection also ignores the work that the HALA recommendations do to tie affordable housing to for-profit development. If the proposal was to destroy zoning and let the market sort it out Bradburd’s argument would be far more viable. The problem is that it will be up to people like Bradburd, if he wins, to implement the policies that create a system with greater equity and affordability in mind. If he rejects out of hand that anything should change it’s tough to see how a better outcome could happen.

“Character/X comes first”

I put two other rhetorical tools from people who disagree with upzoning on principle in a separate category, because they tend to fail on argumentative grounds, rather than evidentiary ones.

The first I find so uncompelling that I have to try hard not to make a caricature of the position: that the addition of multi-family housing will ruin the “character” of the neighborhood. This is not always meant as a racist or classist dog whistle (although it often is) but does prey on the fear of looming disaster that change represents. Never mind that there are plenty of ways to do things like preserve architectural unity or preventing a gas station moving in downstairs without requiring extensive single family zoning. The boiled down argument usually comes to: I don’t want new people or activities in my neighborhood.

Comments on articles about HALA are filled with people saying “I bought a Craftsman in a nice neighborhood 10 years ago. Why should my needs and desires be dashed for people who want to move here?” There’s a lot wrong with that sentiment – not least that allowing denser construction is actually probably good for homeowners. But on a philosophical level, a desirable large city like Seattle does not owe each and every one of its residents the preservation of what they perceive to be the “character” of the neighborhood, especially when that involves large plot single family homes in a major urban area.

There are a number of claims (some disingenuous and some reasonable) about what Seattle needs to invest in before they upzone. Some people will claim they need better parking facilities for residential areas (this is ridiculous). A more supportable criticism is that Seattle has ineffective public transit and is a traffic disaster, and that allowing densification without better infrastructure is counterproductive. As someone currently based in a city with a very high percentage of triplex houses without effective public transit, this does hit close to home. Although the reading I’ve done about Seattle does seem to indicate that they doing a very poor job on transport issues, this is not in itself a reason to reject zoning changes.

In fact, zoning could just as easily be seen as the gateway issue. A lack of density means more people have to have a car because regular transit service isn’t cost efficient. It also ignores the other recommendations of HALA that complement this investment (for example, reducing parking requirements). Also, call me cynical, but I bet the people voting against public transit funding and against upzoning are probably not entirely distinct.

A Small but Commonsense Step Forward

Let’s finish with the obvious: zoning reform is not a silver bullet. To quote someone: there are no silver bullets, just a lot of lead ones.

I was almost ready to publish this post when I read this great piece by Pete Saunders about why Zoning Reform Can’t Fix Everything. If you’ve made it this far in my post, you should read it. Saunders makes a critical distinction that is not well understood by fundamentalists of either camp: upzoning is a useful tool in some contexts, but there are others where it could well be disastrous. Upzoning and letting the market take over in South Side Chicago, which suffers serious perception, segregation, and quality of life issues, will do nothing to change the fundamental characteristics that create “global Chicago” and “Rust Belt Chicago”, for example.

Once again, this proves how we don’t really have a “national housing market”. Renting a house in San Jose is different than buying a house in Buffalo. The problems are actually the opposite of one another, and the search for a single solution is more than useless – it’s counterproductive.

However, I don’t think it would be controversial to claim that a huge portion of Seattle, including many of the single family zoned areas, represent a high demand and constrained market that is not like the struggling areas in Rust Belt or East Coast cities. While not a panacea, I don’t see how to make things more affordable and sustainable in Seattle without the ability to live more densely. The change would create greater opportunities for careful urban planning and development rather than solving the affordability problem in one fell swoop.

The best outcome that Seattle can hope for may be that rents don’t go up as much as they would have. This is still a positive impact, if depressing – Obamacare supporters will tell you that this is pretty weak tea to build support around.

Housing mix is going to depend on the particular levers deployed by local government to carry out development: the carrots and sticks that create a housing market that works for all of Seattle. Make no mistake that the whether the decision today is to embrace change or delay, the city will be living with the consequences for decades.

Update: now Tacoma’s talking about it. Obviously the context is significantly different but you can see all the same tropes on display in this article.