Rejecting Conventional Wisdom: Estimating the Economic Impact of National Political Conventions

Transcription

1 Rejectng Conventonal Wsdom: Estmatng the Economc Impact of Natonal Poltcal Conventons By Robert A. Baade, Robert Baumann, and Vctor A. Matheson Aprl 2008 COLLEGE OF THE HOLY CROSS, DEPARTMENT OF ECONOMICS FACULTY RESEARCH SERIES, PAPER NO Department of Economcs College of the Holy Cross Box 45A Worcester, Massachusetts (508) (phone) (508) (fax)

2 Rejectng Conventonal Wsdom: Estmatng the Economc Impact of Natonal Poltcal Conventons By Robert A. Baade Robert Baumann Lake Forest College College of the Holy Cross and Vctor A. Matheson College of the Holy Cross Aprl 2008 Abstract Ths paper provdes an emprcal examnaton of the economc mpact of the Democratc and Republcan Natonal Conventons on local economes. Our analyss from of the 50 largest metropoltan areas n the country, ncludng all ctes that have hosted one of the natonal conventons durng ths tme perod, fnds that the presence of the Republcan or the Democratc Natonal Conventon has no dscernable mpact on employment, personal ncome, or personal ncome per capta n the ctes where the events were held confrmng the results of other ex post analyses of mega-events. JEL Classfcaton Codes: O18, R53 Keywords: conventons, mpact analyss, mega-event Robert A. Baade, Department of Economcs and Busness, Lake Forest College, Lake Forest, IL 60045, (phone), (fax), baade@lfc.edu Robert Baumann, Department of Economcs, Box 192A, College of the Holy Cross, Worcester, MA , (phone), (fax), rbaumann@holycross.edu Vctor A. Matheson, Department of Economcs, Box 157A, College of the Holy Cross, Worcester, MA , (phone), (fax), vmatheso@holycross.edu

3 1. Introducton Conventon toursm s bg busness n the Unted States. Accordng to the Conventon Industry Councl, n 2004 the meetngs, conventons, exhbtons, and ncentve travel ndustry generated over $122.3 bllon n drect spendng and 1.7 mllon jobs. These fgures are more than the pharmaceutcal and medcne manufacturng ndustry and only slghtly less than the nursng and resdental care facltes ndustry. (CIC, 2005) In hopes of ganng of pece of ths lucratve busness, ctes compete vgorously to host meetngs and conventons, and bllons of dollars of taxpayer money has been drected towards the constructon of ever larger and more elaborate conventon centers n ctes all across the country. Perhaps the most sought-after jewels of the conventon ndustry natonwde are the quadrennal Natonal Democratc and Republcan Conventons at whch each party s presdental canddate s nomnated. Cty and party offcals suggest that these events generate sgnfcant economc wndfalls for host ctes and also serve to focus natonal and even nternatonal attenton on the host cty. For example, cty offcals of New York Cty and Boston clamed net economc mpacts of $255 mllon and $156 mllon, respectvely, for the 2004 Republcan and Democratc Natonal Conventons. These economc mpact numbers fgured promnently n press releases promotng the 2008 Republcan Conventon n St. Paul/Mnneapols. Economsts, however, tend to be more skeptcal of the large economc mpact numbers touted by event organzers. Our examnaton of 18 natonal poltcal conventons from suggests that the promoters rosy economc projectons are overstated, and these events have a neglgble mpact on local economes. 3

4 Background Economc mpact analyses are dvded nto two man categores: ex ante studes and ex post studes. Ex ante studes predct the economc effect of an event by estmatng the number of vstors to the event as well as ther average expendtures. A multpler s typcally also appled to these drect economc mpact fgures resultng n a total mpact number that s often at least twce as large as the drect economc mpact. As noted prevously, ex ante studes of natonal poltcal conventons routnely ascrbe large benefts to these major events. Crtcs of ex ante economc analyss, however, pont out that these studes often suffer from three major shortcomngs that lead to an overestmaton of the total net mpact of these events. Frst, ex ante reports often fal to account for the substtuton effect whch occurs when local resdents spend ther money on conventon-related actvtes rather than on other goods and servces n the local economy. As the Democratc and Republcan natonal conventons prmarly draw delegates from across the country rather than from local areas, the substtuton effect n these cases s lkely to be relatvely small compared wth, for example, a county or state poltcal conventon. The second concern n ex ante studes s the crowdng out effect. The large crowds and congeston assocated wth mega-events lke the natonal conventons may deter people not assocated wth the conventon from engagng n economc actvtes n the host cty. Whle hotels, bars and restaurants, may do well durng the conventon, other retalers and servce provders may not beneft from the event and potentally could lose sales. Ths ssue s of partcular concern durng a natonal poltcal conventon whch necesstates a hgh degree of securty and also may generate large crowds of protesters both of whch wll serve to dssuade casual shoppers and dners and result n major dsruptons for local resdents. Durng the week of 4

5 the 2004 Republcan Natonal Conventon n New York Cty, for example, attendance at Broadway shows fell more than 20 percent compared wth the same week a year earler despte the presence of tens of thousands of vstng conventoneers and journalsts. Many economsts are also skeptcal of the multplers used n ex ante studes to generate ndrect economc benefts. Often the multplers used are absurdly hgh, but even more careful estmates of multplers may be vewed wth suspcon. Multplers are calculated usng complex nput-output tables for specfc ndustres grounded n nter-ndustry relatonshps wthn regons based upon an economc area s normal producton patterns. Durng mega-events, however, the economy wthn may be anythng but normal, and therefore, these same nter-ndustry relatonshps may not hold. Snce there s no reason to beleve the usual economc multplers apply durng major events, any economc analyses based upon these multplers may, therefore, be hghly naccurate (Matheson, 2004). In partcular, natonal conventons may result n large wndfalls to natonal restaurant and hotel chans and provde employment opportuntes for hosptalty workers and journalsts from across the country but may not result n sgnfcant wage gans for local employees. In ths stuaton, the economc gan from the event does not accrue to the host cty but rather benefts the bottom lne back at corporate headquarters. It s local taxpayers, however, who are often asked to foot the fll for conventon center expansons and who suffer from the dsruptons assocated wth the event. Fnally, conventon promoters often suggest that promnent events such as the Republcan and Democratc Natonal Conventons gve ctes mmeasurable benefts n terms of natonal and nternatonal exposure by beng placed n an ntense meda spotlght. Whle ths contenton may be true, t must be realzed that the attenton a cty receves may not portray the cty n a postve 5

6 lght. In the realm of sportng events, the Summer Olympc Games n 1972 n Munch and n 1996 n Atlanta were marred by terrorst ncdents, and Salt Lake Cty s reputaton suffered after the brbery scandal surroundng ts bd for the 2002 Wnter Olympcs. Host ctes for poltcal conventons are smlarly not mmune from bad publcty. For example, the chaos and protests surroundng the 1968 Democratc Conventon n Chcago s stll noteworthy even 40 years later. It s hard to magne that the cty of Chcago benefted from ts ll-fated moment n the sun. Due to the dffcultes assocated wth ex ante estmaton, numerous scholars estmate the effects of mega-events on local economes by ex post estmaton whch examnes the actual economc performance of local areas that host large events. Whle few ex post studes of conventons are found n the exstng lterature, many authors have examned of major sportng events such as the Olympcs (Baade and Matheson, 2002; Jasmand and Maenng, 2007) or World Cup (Baade and Matheson, 2004; Hagn and Maenng, 2007a; 2007b), the Super Bowl (Porter, 1999; Baade and Matheson, 2006; Coates, 2006), All-Star Games (Baade and Matheson, 2001; Coates, 2006), and post season play n general (Coates and Humphreys, 2002; Coates and Depken, 2006; Baade, Baumann, and Matheson, 2008). The overwhelmng majorty of ex ante studes of mega-sportng events fnd lttle to no sgnfcant postve economc mpact from hostng these events. If the Republcan and Democratc Natonal Conventons are truly the Super Bowl of the conventon busness, then based on the evdence of the actual economc mpact of the Super Bowl, ctes hostng natonal poltcal conventons have every reason to be concerned about the real magntude of the economc wndfall they can expect. The paper by Coates and Depken (2006) s of partcular nterest to our study. The authors use taxable sales data from ndvdual ctes n Texas to measure the economc gans from hostng a varety of sportng events ncludng the Super Bowl and the World Seres. Houston also 6

7 hosted the 1992 Republcan Natonal Conventon, and Coates and Depken nclude a control varable for ths event. They fnd that the poltcal conventon reduced taxable sales by $19 mllon and reduced sales tax revenues by approxmately $1.4 mllon. The Model Two types of data have been used most frequently n the exstng ex post studes for professonal sports. Coates and Humphreys (1999; 2002; 2003), Baade and Matheson (2001; 2004; 2006), Hagn and Maenng (2007b), and Jasmand and Maenng (2007) use annual data on employment, personal ncome, or personal ncome per capta over a wde number of ctes and years to estmate the economc mpact of sportng events. Clearly annual data s not deal when examnng events wth a relatvely small duraton such as a poltcal conventon. To ths end, other studes such as Porter (1999), Baade and Matheson (2001), Coates (2006), Coates and Depken (2006), and Baade, Baumann, and Matheson (2008) have used taxable sales data that are avalable at a monthly or quarterly bass. Taxable sales data, however, cannot be used n natonwde panels of poltcal conventons because of cross-state dfferences n data avalablty and taxaton laws. Ths leaves two optons: examnng any poltcal conventons that have taken place n a sngle state usng hgh frequency data or examnng a large panel of conventons usng annual data. Ths paper uses the panel approach to look at multple conventons over the perod As noted by Baade, Baumann, and Matheson (2008), there are several approaches to estmate the mpact of an event on a cty. Mlls and McDonald (1992) provde an extensve summary of these models, whch seek to dentfy changes n economc actvty through changes n key economc varables n the short-run or the dentfcaton of long-term developments that 7

8 enhance the capacty for growth. Our task s not to replcate explanatons of metropoltan economc growth, but to use past work to help dentfy any effects of poltcal conventons on economc ndcators. To ths end we have selected explanatory varables from exstng models to predct economc actvty n the absence of the conventon. Estmatng the economc mpact of a conventon nvolves accountng for normal actvty and determnng whether the presence of an event of such natonal promnence ncreases economc actvty. Thus, ths approach depends on our ablty to dentfy varables that account for the varaton n growth n economc actvty n host ctes. Our model estmates the changes n the growth rates of real personal ncome, employment, and real per capta ncome attrbutable to poltcal conventons n host ctes between 1969 and We use a sample of 50 metropoltan standardzed areas (MSAs) that have at least one mllon resdents n Ths sample ncludes the 14 MSAs that hosted a poltcal conventon (see Table 1) and a control group of MSAs that have not hosted a poltcal conventon. Most of the host ctes are relatvely large compared to the rest of the sample. The smallest MSA s Kansas Cty, whch had a populaton of just under two mllon n For ths reason, we use growth rates to compare ctes of dfferent szes and also present estmatons. Table 2 presents the summary statstcs of real personal ncome, employment, real per capta ncome, and populaton. The followng s our baselne model for the estmatons: Y t = β β 1 POPt + β 2OTHERt + β 3CON t + γ t + α ε t (1) There are three dfferent dependent varables ( Y t ): the growth rates of real personal ncome, employment, and real per capta ncome n year t and MSA. POP t s the log populaton of cty n tme t. Ths varable s removed from the real per capta ncome model 8

9 snce the dependent varable s already scaled by the populaton sze. OTHER t s a vector of dummy varables that represents other mportant economc events specfc to an area that would not be captured n the natonal economc busness cycle or overall cty growth rate. Examples of such devatons nclude the tech boom n Slcon Valley durng 1999 and 2000, the ol boom and bust cycles n the 70s and 80s n ol-producng ctes, and Hurrcane Katrna n New Orleans durng For example, New Orleans n 2005 produces the mnmum of each dependent varable n Table 2. The specfc varables, ctes, and years ncluded n OTHER t s avalable from the authors upon request. CON t equals one f the MSA hosted a poltcal conventon that year and zero otherwse. Fnally, to account for the panel nature of our data, we nclude controls for each year ( γ ) and MSA ( α ). Ideally, ths specfcaton allows MSAs to have dfferent t ntercepts and also purges natonal trends. In other versons of ths model, we also ncluded controls for cty-specfc trends as well, but ths addton added lttle explanatory power and dd not mpact our man results. We use several tests to ensure the dependent varables do not exhbt a unt root. Frst, we perform Dckey-Fuller and Phllps-Perron tests for each cty and each dependent varable. For all three dependent varables, 48 of the 50 ctes pass both tests at fve percent. Of the other two ctes, one passes both tests at ten percent (Washngton, D.C.), and one fals both tests (New Orleans). We also perform unt root tests on the entre panel usng tests from Levn, Ln, and Chu (2002) and Im, Pesaran, and Shn (2003), whch allow for panel-specfc attrbutes such as dfferng tme trends and autoregressve paths. Both tests reject the exstence of a unt root n all three dependent varables. Gven the tme-seres nature of the data, the error term n equaton (1) s lkely to be autocorrelated. Whle ordnary least squares regressons wll produce consstent estmates, the 9

10 standard errors wll be ncorrect. We use a test suggested by Wooldrdge (2002) for autocorrelaton wthn each panel, whch estmates ˆ ε t ˆ = ρε, t 1 + u t. Under the null hypothess no autocorrelaton, ρ = 0. 5, and all three dependent varables reject the null. One method to account for the autocorrelaton s to nclude an autoregressve component, whch changes our estmaton model to Y t = β 0 + β 1 Y, t 1 + β 2 POPt + β 3TECH t + β 4CFBt + γt + α + ε t. (2) Introducng a lagged dependent varable requres the Arellano and Bond (1991) estmaton technque, whch s sometmes referred to as a dfference GMM model. Ths model s descrbed n several works, ncludng Bond (2002) and Roodman (2006). Ths model begns by dfferencng equaton (1), whch purges α. Once the cty-specfc effect s removed, the model uses hgher-order lags of Yt to nstrument for ΔY, t 1. Any other ndependent varables that are beleved to be endogenous or predetermned (.e., varables ndependent to the current error but not prevous errors) can be handled n the same way. Gven T = 35, there are 34 observatons of the dfferenced dependent varable ( each cty. Gven the frst lag of the dfferenced dependent varable s endogenous ( Δ the remanng 32 hgher-order lags can be used as nstruments for Δ Y t ΔY t Y, t 1 ) for ), all of. Whle the hgher-order lags should create mssng values n practce, Holtz-Eakn, Newey, and Rosen (1988) show that each nstrument produces a useful moment condton. In other words, consder the moment ' ' condton E[ ε ] = 0, where Z contans the nstruments (.e., the hgher-order lags) and Z t Δ t t s the dfferenced error term. For the second-order lag nstrument, the moment condton s Δ ε t 10

11 y Δε 0 f t 3; for the thrd-order lag nstrument, the moment condton s, t 2 t = y Δε 0 f t 4 ; and so on., t 3 t = Consstency of ths approach requres the error terms are ndependently and dentcally dstrbuted, whch s typcally cannot be assumed n dynamc panel models. For example, t s plausble the varance of the error term (orgnal or dfferenced) may dffer across ctes. A 1 v ' v v v ' weghtng matrx W asymptotcally corrects the moment condton: W = ( Z Δε Δε Z ), N where Z v mnmzes and 1 N Δ v ε are cty-specfc (T 2) vectors. Usng ths weghtng matrx, GMM N 1 Δε Z v v W ' 1 v ' v Z Δε. To obtan the weghtng matrx, t s necessary to have consstent estmates of Δ v ε, whch 1 v v ' can be obtaned usng a dfferent weghtng matrx W 1 = ( Z HZ ), where H s a (T 2) N square matrx wth 2 on the dagonal, -1 on all of the mmedate off-dagonals, and zero elsewhere. Thus, the frst-step estmates the model usng W1 to produce the estmates whch the second step uses n the weghtng matrx W. Whle ths correcton produces the Δ ) ε t, desrable asymptotc propertes, several works (Arellano and Bond, 1991 and Blundell and Bond, 1998, to name only two) suggest the standard errors n the second step are downward based. We use the Wndmejer (2005) fnte-sample correcton to adjust the standard errors. Fnally, one concern wth the Arellano and Bond (1991) technque s over-dentfyng restrctons, especally gven the relatvely long tme perod for each cty n our data. We use a Hansen (1982) test to determne the number of over-dentfyng restrctons. 11

12 Table 3 presents the Arellano-Bond estmaton results of equaton (2) usng each of the three dependent varables. For brevty, we omt the estmates for the year dummes and the OTHER t controls, but these are avalable upon request. The Arellano-Bond tests for autoregressve errors produce the expected result. These tests suggest autocorrelaton exsts n the frst lag, whch s expected and justfes the ncluson of the frst dfference of each dependent varable. In addton, the same test suggests a second lag term s not necessary for any of the dependent varables. We fnd only the weakest evdence that poltcal conventons ncrease economc actvty above normal fluctuatons. All of the estmated sx coeffcents (Democratc and Republcan conventons for employment, personal ncome, and per capta ncome) are postve, but none of the poltcal conventon controls are even close to statstcally sgnfcant. Because all three dependent varables are postvely correlated, however, these results are really closer to two peces of evdence of net postve economc actvty rather than sx. Conclusons Ths paper provdes an emprcal examnaton of the economc mpact of the Democratc and Republcan Natonal Conventons on local economes. Confrmng the results of other ex post analyses of mega-events, partcularly sportng events, ths paper fnds no statstcally sgnfcant evdence that these huge conventons contrbute postvely to a host cty s economy. Our analyss from of the 50 largest metropoltan areas n the country, ncludng all ctes that have hosted one of the natonal conventons durng ths tme perod, fnds that nether the presence of the Republcan nor the Democratc Natonal Conventon has a dscernable mpact 12

13 on employment, personal ncome, or personal ncome per capta n the ctes where the events were held. Whle the conventonal wsdom regardng natonal conventons s that they brng fame and fortune to host ctes, our results suggest that any economc benefts are qute elusve. People should vew promses of economc wndfalls from hostng natonal poltcal conventons n the same way they should vew the campagn promses of the canddates at these very conventons wth skeptcsm. 13

14 REFERENCES Arellano, M. and Bond, S. (1991). Some tests of specfcaton for panel data: Monte Carlo evdence and an applcaton to employment equatons. Revew of Economc Studes 58, Baade, R., Baumann, R, and Matheson, V. (2008). Sellng the Game: Estmatng the Economc Impact of Professonal Sports through Taxable Sales. Southern Economc Journal, 74(3), Baade, R. and Matheson, V. (2001). Home Run or Wld Ptch? Assessng the Economc Impact of Major League Baseball s All-Star Game. Journal of Sports Economcs, 2(4), Baade, R. and Matheson, V. (2002). Bddng for the Olympcs: Fool s Gold?. In Transatlantc Sport: The Comparatve Economcs of North Amercan and European Sports, Carlos Pestana Barros, Muradal Ibrahmo, and Stefan Szymansk, eds. (London: Edward Elgar Publshng, 2002), Baade, R. and Matheson, V. (2004). The Quest for the Cup: Assessng the Economc Impact of the World Cup. Regonal Studes, 38(4), Baade, R. and Matheson, V. (2006). Paddng Requred: Assessng the Economc Impact of the Super Bowl. European Sports Management Quarterly, 6(4), Beck, N. and Katz, J. (1995). What to do (and not to do) wth tme-seres cross-secton data. The Amercan Poltcal Scence Revew 89 (3), Bond, S. (2002). Dynamc panel data models: a gude to mcro data methods and practce. Portuguese Economc Journal 1, Blundell, R. and Bond, S. (1998). Intal condtons and moment restrctons n dynamc panel data models. Journal of Econometrcs 87,

15 Coates, D. (2006). The Tax Benefts of Hostng the Super Bowl and the MLB All-Star Game: The Houston Experence. Internatonal Journal of Sports Fnance, 1(4), Coates, D. and Depken, C. (2006). Mega-Events: Is the Texas-Baylor game to Waco what the Super Bowl s to Houston? Internatonal Assocaton of Sports Economsts Workng Paper Seres, No Coates, D. and Humphreys, B. (1999). The Growth Effects of Sports Franchses, Stada and Arenas. Journal of Polcy Analyss and Management, 14(4), Coates, D. and Humphreys, B. (2002). The Economc Impact of Post-Season Play n Professonal Sports. Journal of Sports Economcs, 3(3), Coates, D. and Humphreys, B. (2003). The effect of professonal sports on earnngs and employment n the servces and retal sectors n US ctes. Regonal Scence and Urban Economcs, 33(2), Hagn, F. and Maenng, W. (2007a). Labour Market Effects of the 2006 Soccer World Cup n Germany. Internatonal Assocaton of Sports Economsts Workng Paper Seres, No Hagn, F. and Maenng, W. (2007b). Short-term to long-term employment effects of the Football World Cup 1974 n Germany. Internatonal Assocaton of Sports Economsts Workng Paper Seres, No Hansen, L. (1982). Large sample propertes of generalzed method of moments estmators. Econometrca 56: Holtz-Eakn D., Newey, W., and Rosen H.S. (1988). Estmatng vector autoregressons wth panel data. Econometrca 56:

16 Im, K.S., Pesaran, M.H., and Shn, Y. (2003). Testng for unt roots n heterogeneous panels. Journal of Econometrcs 115 (1), Jasmand, S. and Maenng, W. (2007). Regonal Income and Employment Effects of the 1972 Munch Olympc Summer Games. Internatonal Assocaton of Sports Economsts Workng Paper Seres, No Levn, A., Ln, C.F., and Chu, C.S.J (2002). Unt root tests n panel data: asymptotc and fnte sample propertes. Journal of Econometrcs 108 (1), Matheson, V. (2004). Economc Multplers and Mega-Event Analyss. College of the Holy Cross Workng Paper Seres, Mlls, E. and McDonald, J. eds. (1992). Sources of Metropoltan Growth, New Brunswck, N.J.: Center for Urban Polcy Research. Mondello, M. and Rshe, P. (2004). Comparatve Economc Impact Analyses: Dfferences across Ctes, Events, and Demographcs. Economc Development Quarterly, 18(4), Porter, P. (1999). Mega-Sports Events as Muncpal Investments: A Crtque of Impact Analyss. In Fzel, J., Gustafson, E. and Hadley, L. Sports Economcs: Current Research. Westport, CT: Praeger Press. Pras, S. and Wnsten, C. (1954). Trend estmators and seral correlaton. Cowles Commsson Dscusson Paper No. 383, Chcago. Roodman, D. (2006). How to do xtabond2: An ntroducton to dfference and system GMM n Stata. Workng Paper 103, Center for Global Development, Washngton. Wndmejer, F A Fnte Sample Correcton for the Varance of Lnear Two-Step GMM Estmators. Journal of Econometrcs 126(1):

17 Table 1: Poltcal Conventon Hosts Democratc Natonal Conventon Republcan Natonal Conventon 1972 Mam, Conventon Center Mam, Conventon Center 1976 Madson Square Garden, New York Cty Kemper Arena, Kansas Cty 1980 Madson Square Garden, New York Cty Joe Lous Arena, Detrot 1984 Moscone Center, San Francsco Reunon Arena, Dallas 1988 The Omn, Atlanta Superdome, New Orleans 1992 Madson Square Garden, New York Cty Astrodome, Houston 1996 Unted Center, Chcago San Dego Conventon Center 2000 Staples Center, Los Angeles Frst Unon Center, Phladelpha 2004 FleetCenter, Boston Madson Square Garden, New York Cty 17

18 Table 2: Summary statstcs Varable mean Standard mnmum maxmum devaton Percent personal ncome growth Percent employment growth Percent personal ncome per capta growth Percent populaton growth

19 Table 3: Arellano-Bond Estmaton Results (standard errors n parentheses), all ctes Dependent Varable Personal ncome growth Employment growth Personal ncome per capta growth Dependent varable t *** (0.0999) *** (0.0796) * (0.1408) Percent populaton growth (0.1213) (0.1358) Democratc Natonal Conventon (0.0027) (0.0034) (0.0024) Republcan Natonal Conventon (0.0045) (0.0078) (0.0046) Arellano-Bond test for AR(1) z = p = z = p = z = p = Arellano-Bond test for AR(2) z = p = z = p = z = p = nstruments (lags of dfferenced dep. var.) 2,3,4,5 2,3 2,3,4,5,6 Hansen test for overdentfcaton p = p = p = χ = 0.43 χ = 1.01 χ = For brevty, we omt the year dummes, cty fxed effects, and the coeffcents on the vector of OTHER t varables. Full results are avalable from the authors upon request. *** Statstcally sgnfcant at the 1% sgnfcance level. ** Statstcally sgnfcant at the 5% sgnfcance level. * Statstcally sgnfcant at the 10% sgnfcance level. 19