The Olympic Games in Rio are about to open, and there is great cause for celebration. The Olympics were founded to foster harmony between nations and celebrate the achievements of individuals who devote their life to excellence in sports.
However, the Olympics offer little cause for celebration on economic grounds. In order to attract the Olympics to a given country, public officials expend large sums of money: They promise to build new infrastructure, renovate existing installations, and modernize blighted areas. In exchange, they argue that the country will get a massive influx of tourists which will stimulate economic activity and lead to widespread economic gains.
Unfortunately, nothing could be further from the truth.
There are few topics where you will find economists in agreement, but the desirability of public expenditures for the Olympics is one of them. Generally, the consensus view is that national and local governments are left with massive debt overhangs, since the projects generally exceed initial cost projections and the benefits are miniscule. The whole venture yields either net losses or net gains so small that those sums would have been better spent elsewhere.
All by itself, the process of trying to "woo" the delegates voting for the location of the games requires approximately $100 million of spending by the candidate cities. Then, the local and national governments expend large sums to build and renovate infrastructure. In many cases, cost projections were busted and the bill that taxpayers had to foot was many times the initial estimate.
On the whole, the benefits are smaller than the costs.
From 1968 to 2012, every Olympic Games (winter and summer) produced final costs above those originally estimated. The cases of Montreal (1976 Summer Olympics) and Sarajevo (1984 Winter Olympics) are especially egregious cases of costs overruns -- a ten-fold increase. And these costs do not include the burden that governments must carry for many years after the Olympics to maintain the installations. The cost is thus covered through a higher tax burden in the future.
As for the benefits, they tend to be smaller than advertised. Academics who specialize in studying the benefits of the Olympics have a telling rule of thumb: Whatever number is touted by promoters, move the decimal point one place to the left. This means that the benefits are generally one tenth as large as initially promised.
One example is that the increase in tourism is generally overestimated. Faced with the prospects of large crowds and congestion, regular tourists and business travellers delay their visits to the host country. This reduces the net gain in tourism and in some cases, it leads to a net drop in tourism, as was observed for the London, Beijing, and Salt Lake City Olympics.
Local residents also reduce their activities during their Olympics, as they leave the city or delay some consumption decisions. This was found to be case after the 2000 Summer Games in Sydney, where the Olympics led to a $2.1-billion reduction in household spending.
On the whole, the benefits are smaller than the costs. The influx of tourists and the increased economic activity has to be compared with the fiscal and economic burden of building and maintaining the new infrastructures. A recent study surveying the economic benefits of hosting an Olympiad in a given city between 1950 and 2005 makes such a comparison. It found that there are no long-lasting impacts from hosting the games. In fact, some studies find that certain cities would have been better off had they not hosted the event.
While we should celebrate those who devote their lives to the pursuit of excellence, we should take care to distinguish their efforts from the net economic effects of the Olympics. In doing so, we could be able to properly discuss the best ways to finance and organize the games.
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