A few things to watch during the Sochi Games (Scott Beaulier)

Scott Beaulier By Scott Beaulier The Birmingham News
on February 05, 2014 at 4:00 PM, updated February 05, 2014 at 4:43 PM

The 2014 Olympics in Sochi are just about here, and while much of the media attention leading up to the Olympics has focused on terrorism, Russia's attitudes towards gays and lesbians, and corruption, there are a number of other things to watch and wonder about as the Olympics fold. Among them are at least three economics-related questions:

(1) Why are Scandinavian countries so stinky at figure skating?  

This is a question I can remember thinking about four years ago, here's an answer Tyler Cowen provided back in 2010, and here are some comments I provided on the topic.

(2) Is the West still the best when it comes to medal counts? And, will the "U-shaped" correlation between freedom and medal counts continue?

In the Olympics, population is a huge driver of high medal counts. Controlling for population, though, countries with extreme levels of freedom have fared better at the Olympics. Back in the days of the USSR, for example, command and control allowed authorities to pour tremendous amounts of money into Olympic success. And, tremendous amounts of money and pressure from authorities, sure enough, led to a high medal count. 

At the same time, though, really free countries like the US enjoyed high medal counts thanks to freedom, prosperity, and the fact athletes wanted to be in America, train in America, and perform for our country's flag. In terms of Olympic medal count alone, it's not good to be stuck in the middle when it comes to freedom. A good but somewhat dated academic piece on the topic can be found here

(3) What kind of return on investment can Russia expect on their Sochi spending, which at $51 billion (and growing) has been the most expensive Winter Olympics ever?

If you read reports like this one, the public infrastructure investments made in Sochi promise to provide long-lasting, large economic benefits to the region. The elites in favor of the Olympics say the Sochi Olympics have led to an eight-year construction boom, a revitalization of the region, and major upgrades to transportation and infrastructure. In addition to the infrastructure and revitalization benefits, there are so-called multiplier effects: hundreds of thousands of people are in Sochi for the games; they will spend money on meals and merchandise; the vendors will receive money and then go buy things too; and the virtuous cycle of spending will continue on and on.

The benefits they are selling us, however, are what proponents of every major sports investment sell to the public. They are exaggerated and reflect a confused notion of economic progress. Economists have studied the impact of the Olympic games for the host country, and the overall return on Olympic investments has been negative. 

The Olympics are expensive for the host country, and they seldom bring more benefits than costs. The host city typically experiences huge cost overruns, and in Russia's case there have been a number of corrupt contracts that have also surfaced. Moreover, the long-term "glow" from hosting the Olympics quickly fades for most cities. 

One does not need to be an economist to see some of the evidence of negative returns: Readers can simply look up pictures of the Olympic staging sites, such as these from Reuters and these from National Geographic. The memorable "Bird's Nest" from the 2008 games sits empty. Athens, Greece, which hosted the 2004 Olympics, is still burdened by their overbuilding, and many hotels built for the games are in disrepair and now sit empty.

Rather than think of the building of stadiums, villages, and hotels as a driver of future economic growth, it's far more appropriate and accurate to think of the Olympics as one very big, expensive party being put on by the host country. The ceremonies and competitions are spectacular, of course, but they are not much more than a two week party. The people will come in droves for two weeks and the events will be watched all over the world, but the positive spillovers from the Olympics are not very large. 

The Olympics, like most major sports, are a lot of fun to watch, and many of the competitive events are nail-biters for spectators. But, they are not and never should be expected to be huge money-makers and engines of economic growth. Economic growth is determined by deeper, more fundamental factors--factors like economic freedom and a country's legal environment, and it's not something that can come about through one big event or one big stadium. 

To expect growth to come if we just build a big enough stadium or have a big enough party is to problematic because it sets oneself up for disappointment and represents a naive understanding of basic economics.
