Input equals output
There is a well-known and simple way to calculate the economic effect of hosting an event called input-output modelling. This approach generally creates the largest sums and often does it essentially by valuing broken windows at replacement cost.
The Auditor-General of the state of Victoria has politely described using input-output modelling as “not appropriate for assessing the economic impact of major events”.
Adding in indirect benefits (like encouraging people to do sport) and multiplier effects (accounting for money spent being re-spent by other people) is another sure-fire way to engineer a higher number.
A more-sophisticated approach to modelling the value of events is the use of computable general equilibrium (CGE) modelling.
This tries to capture only the additional value of an event to the economy. It basically runs a computer model of the economy twice – once with the event in it and once without.
A good example of such a CGE model is one operated by economic consultancy Ernst & Young to measure the economic upside of the Australian Formula One Grand Prix.
That exercise found the gross state product of Victoria would rise by around $A35 million if the Grand Prix was held but private consumption by Victorians would fall by $A16 million.
In an economy worth many hundreds of billions of dollars a year the effects are essentially indistinguishable from zero and smaller than the subsidy traditionally provided by the taxpayer to host the race.
While CGE modelling has its advantages, it still suffers from the temptations which bedevil any model – a skilled user of the model may obtain mot any result they desire by tweaking the assumptions.
Going once, going twice
At the Olympic Games hosting costs are out of control, according to Andrew Zimbalist, economist at Smith College in Massachusetts author of a book on the economics of the Olympics.
“The costs of hosting, properly accounted, can be expected to top $US15 billion for the Summer Games, while generating revenues in the $US3 billion to $US5 billion range for the host city” Zimbalist argues in the Milken Review 2018.
That combined with a rising awareness benefits are illusory is having a deleterious effect, he writes.
“The number of applicants fell from 12 in 1997 for the 2004 Summer Games to five in 2013 for the 2020 Summer Games, and from nine in 1995 for the 2002 Winter Games to three in 2011 for the 2018 Winter Games,” Zimbalist says.
For the 2024 Games, five cities expressed interest but three pulled out. Budapest only did so after a popular revolt over the cost and perceived opportunities for corruption.
That left the IOC with two choices for 2024 – Paris and Los Angeles. Perhaps fearing even fewer bids the next time, it chose to deny neither city the chance to host and allocated the 2028 games to LA in an unprecedented break with practice.