More on Fiscal Policy

There are just too many stories to ignore, so once again we blog on fiscal policy. Our previous blogs were a story on the Quebec City arena, and examples of stimulus spending in the U.S.


Today we want to look at infrastructure spending in general and a baseball stadium in particular. Our first article comes from the St. Petersburg Times and looks at the benefits of the spring league to the state of Florida. (Click here for article) The article quotes a study undertaken by The Bonn Marketing Research Group that suggests the economic benefit to the State is $752.3 million annually. (Click here for study) This has prompted government spending to maintain, or increase the number of MLB teams that hold spring training in Florida. The alternate destination is Arizona. In the article, Professor Philip Porter from the University of South Florida is quoted as saying that the study is flawed – having used inappropriate methodology. We have to agree with Prof. Porter. The study looked at benefits, but not costs. This is definitely a shoddy way to do economic analysis. We look at net benefits, not gross benefits.

That brings us to our second article, taken from Bloomberg. (Click here for article) This one deals with the decision by Lee County officials to borrow $81.2 million to build a training center outside of Fort Myers, Florida for the Boston Red Sox and the Minnesota Twins. In this case, an economic analysis could be undertaken. Not all the relevant numbers are presented in the article so some research would be required. To decide whether the County has an economic case for building the stadium, we would look at the capital cost and the annual operating costs of the stadium and compare that to the benefits derived from the stadium, including lease revenues, concession and parking revenues as well as the benefits to the community. All values would have to be discounted to take account for the time value of money. This is known as net present value analysis and is similar to what a profit maximizing firm would do. The difference between public and private analysis is the inclusion of external benefits. If the article is accurate and the stadium would account for $41 million in tourist revenue, a legitimate business case might be made.

Our third article comes from the Washington Post. (Click here for article) In this article, the author argues that the U.S. government should borrow $2 trillion (that’s $2,000,000,000,000) and spend it on infrastructure including roads, railroads, runways, water systems, schools and levees. The argument is that there is so much labour and so much material available due the recession and the fact that interest rates are so low, that the costs will never be lower. Once again, the analysis is flawed. Current interest rates are, in fact low. There is no guarantee that they will stay low. Most of the demand for bonds is currently at the short end of the maturity spectrum. This usually happens when rates are expected to rise. The article does say that current government spending needs no cost-benefit analysis and is completely political. Does it not make more sense then, to initiate broad based tax cuts and let individuals decide what is cost effective? Just a thought.