FORECASTS & TRENDS E-LETTER
by Spencer Wright
July 30, 2024

The Economics of the Olympics

IN THIS ISSUE:

1. The Costs of Hosting

2. The Benefits of Hosting

3. A Bad Investment Often Repeated

The Costs of Hosting

The costs of hosting an Olympics are, in a word, extreme. To begin with, cities enter a bidding process with the International Olympic Committee (IOC). The bidding process alone can run into the billions. And of course, success is not guaranteed. Following a lengthy evaluation process, the IOC selects the host city generally six to eight years out from its games host date.

Once a selection is made, the winning city embarks upon a truly huge series of projects to accommodate the games. The first set of major expenses involves general infrastructure to house the tens of thousands of tourists and athletes that descend upon the chosen city. The IOC requires that the host city for the Summer Games has a minimum of 40,000 hotel rooms available for spectators and an Olympic Village capable of housing 15,000 athletes and officials. In addition, the city needs to have both internal and external transportation facilities that can get tourists to the city itself and then to the individual sports venues within the region. This creation of specific venues for the games costs billions and takes years to complete, often with extreme disruptions to the logistics and economy of the host city in the intermediate term.

Consider the following chart.

Source: Journal of Economic Perspectives—Volume 30, Number 2—Spring 2016

Look at the costs of some of these games. Notice that the games held in the US have a low cost in comparison to the others. This is likely a result of the extensive and already in place infrastructure in the US. Also, look at the last column that shows the percentage of cost overruns. While the Olympics may run on time, it generally runs far over budget.

The Benefits of Hosting

In the short term the host city engages in a construction and development period that can be a boost to employment for a time. Of course it is also quite expensive. There are numerous licensing and media opportunities through the IOC that can offset costs to an extent. The broadcast rights and sponsorships alone are worth several billion dollars.

The games can showcase the host city, increasing tourism. However, in recent notable cases this has not happened.

“…the UK Office for National Statistics (2015) reported that the number of international visitors to the country fell to 6,174,000 visitors in July and August 2012, the months of the Olympics, from 6,568,000 the year before, and some popular shows in London’s theater district shut down during the Games. Similarly, Beijing reported a 30 percent drop in international visitors and a 39 percent drop in hotel occupancy during the month of the 2008 Games compared to the previous year. Utah ski resorts noted a 9.9 percent fall in skier days in the 2001–02 season during which the Salt Lake City Winter Games occurred, compared to the previous year along with a drop in taxable sales collections at these locations (Zimbalist 2015; Baade, Baumann, and Matheson 2010). Taxable sales and skier visits rebounded the following season, after the departure of the Olympic fans and athletes.”

(Source: Going for the Gold, The Economics of the Olympics)

The long-term benefits of hosting the games center on infrastructure improvements and showcasing the host city and country in the best possible light. Think of it as an advertising campaign for the country.  This can, in theory, promote foreign investment in the host country as well as bolster international trade. Does this happen? From an infrastructure perspective, rarely. The IOC promotes the reusability of sporting venues but it is rarely the case. Here is a picture from the Rio games.

Not to pick on Rio, but there is no end to the abandoned Olympic venue pictures you can find online. The following quote provides other examples:

“…cities may be faced with heavy long-term expenses for the maintenance of ‘white elephants.’ Many of the venues from the Athens Games in 2004 have fallen into disrepair. Beijing’s iconic ‘Bird’s Nest’ Stadium has rarely been used since 2008 and has been partially converted into apartments, while the swimming facility next door dubbed the ‘Water Cube’ was repurposed as an indoor water park at a cost exceeding $50 million (Farrar 2010).”

(Source: Going for the Gold, The Economics of the Olympics)

Hardly a net benefit for the incredible cost of hosting an Olympic games. There have been net financial successes. The games held in Los Angeles, Salt Lake City and Barcelona were profitable, a feat that has rarely been equaled. Salt Lake City and Barcelona benefitted dramatically from increased tourism that did not occur in other cities. Why? They were not as well-known as other similar destinations such as Madrid or Aspen. London, for example, was already the most popular tourist destination in the world in 2012. How did Los Angeles remain profitable? They built nearly no new infrastructure for the games, relying instead on existing venues with modest modifications. They were also the only city to submit a bid for the 1984 games, so the hosting rights were cheap by modern standards where billions are routinely spent.

In fact, it was Los Angeles’ success that created the modern Olympics.

“When Los Angeles had shown the possibility of profits from the Games, it led multiple cities to enter the bidding process, each hoping to cash in on the potential Olympic windfall. However, this crop of new entrants meant that bargaining power shifted back to the International Olympic Committee. No longer could cities design bids based solely on expected revenues and the expenses necessary to stage the event. Instead, applicant cities needed to consider how to beat competing bids from other potential hosts.”

(Source: Going for the Gold, The Economics of the Olympics)

A Bad Investment Often Repeated

Hosting the games is a bad investment that is often repeated. Why? It isn’t just about the money. The decision to host the games can result from the ego of political leadership. More directly, hosting the Olympics reflects political and economic prowess. To make a global statement, some countries are willing to send vast sums that no benefit of the games could possibly repay.

The IOC is currently working to make the games more affordable and “sustainable” by retooling the bidding process and mandating the use of existing infrastructure where possible.

Hosting the Olympics is no longer a ticket to economic progress and a spotlight on the world stage. It has become a financial albatross to all but the wealthiest nations, and to them it is a mirror held up to reflect their own greatness to the world.  

Thanks for reading,

 

Forecasts & Trends is published by Halbert Wealth Management, Inc., a Registered Investment Adviser under the Investment Advisers Act of 1940. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of the named author and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific advice. Readers are urged to check with their financial counselors before making any decisions. This does not constitute an offer of sale of any securities. Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have their own money in markets or programs mentioned herein. Past results are not necessarily indicative of future results. All investments have a risk of loss. Be sure to read all offering materials and disclosures before making a decision to invest. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.