A Bicycle Built for Tourism

According to the Springfield News-Leader, officials are touting the economic benefits of September’s "Tour of Missouri" bicycle race:

Out of a budget of $2.8 million that includes participation by sponsors and host communities, it’s estimated state spending will come to $1 million for the race.

That money is tourism investment, and it’s unfair to claim it is being diverted from areas such as child health care, Bennett said.

I don’t doubt this race was planned with good intentions, but I don’t think the race-as-investment strategy has solid economic grounding. The race will undoubtedly bring money into Missouri, but the concentrated gains probably won’t be worth the diffuse cost to taxpayers.

In one sense, state sponsorship of a bike race is akin to government spending on a sports team or stadium (albeit on a much, much smaller scale). But these sorts of ventures constitute, almost universally, a net loss for the sponsoring municipalities. There’s a lot more at stake (and far more sunk costs) in financing a stadium than in a race, but there’s an applicable principle at work here:

Households face budget constraints; they must meet their unlimited wants with a limited amount of income. The arrival of a professional sports team in a city provides households with a new entertainment option. Households that choose to attend games will spend less on other things, perhaps going out to dinner, bowling, or the movies. If the impact of each dollar spent on these forgone alternatives has a larger effect on the local economy than the impact of each dollar spent on professional sporting events, the local economy will contract and income will be lower. Why would the impact of each dollar spent going to a professional basketball game be smaller than the impact of each dollar spent on bowling?

This is one of the most important insights economic theory has to offer: Redistribution doesn’t increase wealth, it reduces wealth. A dollar taken in taxes and spent by the government is a dollar that can’t be used in the market by its original owner — and the very act of redistribution carries with it transaction costs and administrative overhead that turns an otherwise zero-sum expropriation into a dead-weight economic loss.

In another sense, government funding of a bike race to promote tourism is like using eminent domain to promote economic growth. Eminent domain as a tool for economic development is one of the most common rationalizations that local governments use to justify their takings. As economists with the St. Louis Fed and Wash U. explained earlier this year, though:

Suppose a local government takes $10,000 from Peter and gives it to Paul, who plans to open a business. Paul then uses the $10,000 to open his business, which creates tax revenue and jobs. From a social welfare point of view, Peter loses $10,000 and the savings or consumption benefits of his $10,000, Paul gains $10,000 to open a business, and jobs are created. By taking the $10,000 from Peter and giving it to Paul, the local government is essentially saying that Paul can create greater societal wealth with Peter’s $10,000 than Peter can. The same would be true if local governments paid Peter for his house and then gave the property to Paul for development purposes.

Of course, it is impossible for local governments to know if greater wealth would have been created by allowing Peter to keep his $10,000 rather than giving it to Paul. Economic theory tells us that in the absence of incomplete information or externalities, free markets will result in the most efficient allocation of resources and greater economic growth. By replicating the above scenario across thousands or millions of individuals, the likely result is that the costs and benefits will average out to be the same, thus creating a zero-sum gain. Thus, the same level of economic development would have likely occurred if Peter kept his original $10,000.

So, if the state takes $1 million from taxpayers and invests it in a bike race, it’s effectively operating on the assumption that money coming in from outside the state will be more plentiful as a result of the race than it would be as a result of the thousands of individual transactions, investments, and savings that would aggregate from that $1 million being left in the hands of taxpayers. But there’s no way to make that assumption with any economic grounding. We can’t observe transactions that don’t happen because the money to fund them was taken away.

The St. Louis Fed article also points out that this sort of expropriation is generally worse than a zero-sum transfer:

In the face of a policy decision like eminent domain, individuals and interest groups on both sides of the issue will expend resources (e.g., campaign contributions, the cost of one’s time in campaigning for an issue, etc.) to ensure that the policy decision will favor their respective position. This rent-seeking by opposing groups results in a net economic loss because both groups will expend resources to ensure a particular outcome, but only one outcome will occur. In the above example, even if the transfer of $10,000 from Peter to Paul created a zero-sum gain, the resources Peter and Paul expended to influence the policy outcome will result in a total economic loss for society rather than a zero-sum gain. Most likely, the policy outcome will be that desired by the interest group that has expended the greatest resources.

This sort of resource-intensive competition also exists in the world of state-financed tourism promotion. If taxpayer dollars are used to attract tourists to one state, other states will likely feel pressure to follow suit — so they can grab their own share of the tourism market. This spending amounts to the same kind of rent-seeking that we see among developers lobbying for tax breaks, eminent domain takings, or other forms of special government treatment. Tourism becomes inflated by artificial investment in marketing that benefits one state at the expense of another — and at the expense of each state’s taxpayers. The more states that participate in tax-financed tourism, the greater the overall economic loss.

Aptly enough, the St. Louis Fed article also posits a solution to the miasma of tax-financed economic development:

What can governments do to promote economic development that yields positive economic growth? Rather than use eminent domain or other tools to target individual economic development projects, local governments should ask the fundamental question as to why the desired level of economic growth is not occurring in the local area without significant economic development incentives. For example, are taxes too high, thus creating a disincentive for business to locate to the local area? Do current regulations stifle business creation and expansion? All of the targeted economic development in the world will not compensate for a poor business environment. From a regional perspective, local governments should focus on creating a business environment conducive to risk-taking, entry and expansion rather than attempting targeted economic development through eminent domain or other means.

If the state creates a climate in which markets and entrepreneurs can flourish through low taxes and less red tape, people won’t need to be persuaded to visit by a tax-financed tourism effort. Events like the bike race will grow organically from entrepreneurial investment because they make economic sense to market players. Cultural value — the kind that accumulates over time, instilling a sense of regional identity and prompting people to come back for more — is difficult to anticipate, plan, or centrally manage. It’s called spontaneous order for good reason.

Coincidentally, the Fed’s prescription for economic growth can also be found in our own op-ed arguing against HB 327:

The best way for Missouri to ensure future economic prosperity is to provide businesses with a climate favorable to developing those ideas, whatever they may be. State officials should step back from the belief that they can fix weak economic growth through central planning. Creating another layer of bureaucracy, no matter how well-intentioned, will only obstruct those developments and, like kudzu to southeast horticulture, choke off Missouri’s economic growth.

In economic terms, this is as true for tourism as it is for industrial policy.