What Does Economic Impact Really Mean

Recently, several colleagues in the sports and entertainment industry have forwarded me an article from The Atlantic Magazine that calls into question the economic impact of sports venue projects. If you haven’t seen it, click here before reading on.

I think the author’s point is well taken that sports facility development projects have risks associated with them, as is the case with any large-scale real estate development project that is ultimately dependent on market factors. However, I strongly disagree with the flawed manner in which the writer approaches the concept of “economic impact”. The author’s approach reflects a common mistake that I see all too frequently in public discussion of economic impact reports.

The problem with the author’s approach is that the concept of economic impact is always relative. I often see news headlines that make statements such as, “The Economic Impact of Project X is Expected to be $2 Billion.” But without context, that is a nonsensical statement. In order to reasonably assess the economic impact of a project over a particular period of time, you need to define exactly what economy you are analyzing. For example, Jobing.com Arena in Glendale exists within any number of commonly defined economic areas, including:

  • The Westgate City Center entertainment and retail complex,
  • The City of Glendale,
  • Maricopa County,
  • The Phoenix metropolitan area (Maricopa and Pinal Counties),
  • The State of Arizona,
  • The United States of America, and
  • The North American Free Trade Area (Canada, Mexico, and the United States).

Whether or not economic impact has occurred because of Jobing.com Arena is entirely dependent on which economic area you choose to analyze. This is the point that the author overlooks in The Atlantic article, and this mistake is most clearly seen when the writer incorrectly attempts to pit two arguments against each other. First, the author quotes a Glendale representative who cites the arena as an “economic engine for Glendale”. But then the author responds by saying that economists don’t seem to agree based upon the following quote from a Holy Cross economics professor: “It’s not generating new revenue. This is local spending on a local event.” The problem is that these are not actually opposing arguments. In fact, both the Glendale representative and the economics professor are correct.

The reason for this discrepancy is that the two quotes are referencing different economies. The first quote defines the economy as the City of Glendale. Every time a resident of the City of Phoenix attends a Coyotes game in Glendale, they are spending money from their entertainment budget in the Glendale economy rather than in the City of Phoenix’s economy. If Jobing.com Arena did not exist, that person would spend their entertainment budget elsewhere, either in the City of Phoenix or another City within the greater Phoenix area. From the perspective of the City of Glendale, the money that the Phoenix resident chooses to spend in Glendale on a game night is economic impact for Glendale.

At the same time, the Holy Cross professor is also correct, because his statement is focused on the “local economy” as a whole… i.e. the greater Phoenix metropolitan area. When the City of Glendale attracts entertainment spending away from the City of Phoenix, the gain for Glendale is equal to the loss for the City of Phoenix. So from the perspective of the greater Phoenix area as a whole, the two impacts net out. The City of Glendale is seeing a positive impact, the City of Phoenix is seeing a negative impact, but the net impact on the economy of the greater Phoenix area is zero.

So in the bigger picture, what does this all mean? It means your interpretation of economic impact data can vary widely depending on your particular perspective. If you’re a Glendale resident, you can reasonably see Jobing.com Arena as a venue that attracts economic impact to your City. (That said, whether or not the City’s ROI on the project justifies their initial and ongoing investments is another discussion entirely.) If you’re a Phoenix resident, you can justifiably view the Coyotes’ move from US Airways Center in downtown Phoenix to Jobing.com Arena in Glendale as a loss of entertainment spending to the suburbs. And if you live 2 hours away in Tucson, you’re probably wondering why it even matters, since to you it’s just a spending transfer from one part of the greater Phoenix economy to another.

The next time you see a news item that discusses the economic impact of a development project (sports or otherwise), just remember that your first question should always be, “What economy are we talking about?”

Brian Connolly is the founder of Victus Advisors, an independent consulting firm specializing in market research, financial advisory and economic impact analysis for sports franchises, athletic departments and sports & entertainment venues. You can e-mail him at bconnolly@victusadvisors.com or follow him on Twitter at @BrianHConnolly.

4 thoughts on “What Does Economic Impact Really Mean

  • October 2, 2012 at 8:40 am
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    Finally – someone who understands “economic impact”. Well said Brian.

    Justin

  • October 2, 2012 at 2:09 pm
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    I understand your point, and too often the region definition is vague in EI articles. However, its widely accepted among academics that the economic region for calculating impacts is the metropolitan area, in this case Phoenix Metro. There are also solid arguments for EI to be only calculated at the state level, which I disagree with, but there is some evidence for it. This is due to the concept of leak. The tax revenue for Glendale and the wages for workers living in Glendale, is about the only new money that does not leak out of Glendale almost immediately. What purchases made during a visit to Jobing.com Arena are actually produced locally (in the City of Glendale)? How many employees and business owners live within the city limits? As you expand the economic region, you begin to decrease the amount of leak.

    Also, the original author does have a point even if you only consider Glendale as the region. The largest EI factor is hotel nights (both from an the room rate and from the length of stay increasing other spending), and someone in Phoenix is unlikely to stay overnight in Glendale.

  • October 2, 2012 at 4:10 pm
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    @Ben – Yes, there is obviously a lot more that goes into properly analyzing/measuring economic impacts, and in this post I didn’t even want to get into a discussion of the magnitude of impacts. My intent was only to highlight the fact that the academic focus on metro area is rarely in line with a local politician’s perspective. A City Council member sees their City competing with other municipalities within their metro area to maximize their slice of the pie. When they commission an economic impact analysis, they want to know the incremental jobs/income/taxes that are created in their City by a project, not the effects on the overall metro area economy.

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