Chicago recently lost its much-publicized (and politicized) bid for the 2016 Summer Olympics. The International Olympic Committee (IOC) announced the destination Oct. 2, selecting Rio de Janeiro over Madrid, Tokyo, and Illinois’ Windy City. Days prior to the final vote, President Barack Obama, first lady Michelle Obama, and media icon Oprah Winfrey all attempted to use their clout in Copenhagen to influence IOC voters as Chicago made its final pitch.
While many were disappointed that Chicago didn’t win its bid—the biggest disappointment came from the fact that Chicago was eliminated in the first round of voting—from an economic standpoint, it could be argued that Chicago is actually better off not hosting the Olympics.
Past Summer Olympic Games on American soil, such as Los Angeles (1984) and Atlanta (1996), have been financially successful, but there’s no guarantee that the city of Chicago would have received a monetary boost. Building the necessary infrastructure to host the various sporting events has proven extremely costly for some host cities, with a long list of them having suffered long-term economic difficulties due to spending that, in some instances, surpassed initial budgets by 10 times.
In order to gain more insight into how Chicago’s economic future could have been affected by hosting the 2016 Olympics, Fitness Information Technology (FIT) contacted Dr. Brad Humphreys. An associate editor of FIT’s International Journal of Sport Finance and one of the leading experts in Olympic budgets and stadium finance, Humphreys previously was an associate professor at the University of Illinois at Urbana-Champaign in the Department of Recreation, Sport and Tourism and is now chair in the Economics of Gaming at the University of Alberta.
Q: Having worked in the state of Illinois, you probably have a good feel for how Chicago would have done as a host city for the 2016 Summer Olympics. How do you think Chicago would have performed?
Humphreys: I’m sure they would have done an excellent job hosting the Games. Chicago is a great city, and it would have been a fantastic location. I think most hosts do a great job—the big issue is how much does it cost.
Q: Speaking of cost, from strictly an economic point of view, do you believe Chicago is actually better off not having won its bid for the Olympics?
Humphreys: Absolutely. There is little evidence that hosting the Games provides tangible economic benefits to the host community. All public spending for hosting the Games has an opportunity cost—Chicago now has billions to spend on other badly needed public projects. In addition, hosting the Games imposes a lot of intangible costs on residents, in the form of inconvenience (increased traffic during the games, all the disruption associated with construction projects, etc.) and residents of Chicago now escape those costs. A lot of residents of Atlanta left town during the Games in 1996.
Q: Why is it that so many host cities have grossly exceeded their budgets for the Games, and what are some of the long-term ramifications some cities have experienced?
Humphreys: The cynical answer is that cities deliberately understate the costs in their bid because support would be lower if they revealed the actual cost. The less cynical answer is that construction costs, which make up the bulk of the costs of hosting the Games, are inherently difficult to estimate because of raw material prices and unknown environmental remediation costs at sites. In any event, the facility and security costs are enormous, and typically must be financed over long periods—they were still paying off debt from the 1976 Montreal Games until a few years ago.
Another important long-term negative effect is that cities are stuck with venues that are much too large to be used for anything other than the Games after they are over. The Bird’s Nest stadium in Beijing is basically unused and Athens and Sidney have torn down Olympic facilities because of the high cost of maintaining unused buildings.
Q: What will Rio’s next steps be in an attempt to ensure that the 2016 Summer Olympics won’t be a financial drain on its economy?
Humphreys: Pray? The first estimate for total facility costs I have seen is $1.1 billion. Rio will also need a lot of infrastructure investment—more than the other potential hosts—and they have a significant crime problem. I recently read a paper on the funding of sport in Brazil, and they are unable to finance their current sports system. Hosting the Games will place a huge strain on the Brazilian economy. They are also hosting the 2014 World Cup. Some have claimed that there will be “scale economies” to be realized, but I disagree. The World Cup needs soccer venues; the Olympic Games need a completely different set of venues. But Brazil is the 8th largest economy in the world, with GDP of almost $2 trillion in ppp-adjusted terms, so they have the ability to pay for the games.
Q: If there was one city that should serve as an example of how to successfully host the Olympics from an economic perspective, what is that city and what specifically did it do to succeed where so many other host cities have failed?
Humphreys: Los Angeles (1984). Very little was spent on new venue and infrastructure construction, and the Games ran a modest surplus (using a relatively narrow cost definition). Of course it is difficult to replicate the LA model, because other host cities don’t have the existing sports infrastructure that LA had in the 1980s.