What Sports Economics Tells Us About COVID-19

COVID-19 will affect both aggregate demand and aggregate supply in the U.S. How much will demand fall? The disparate fields of sports economics and consumer theory can give us some clues.

Sports economists have studied the economics of locally-financed professional sports venues. The conclusions are almost unanimous. Publicly financed sports venues usually cost the government entity more than the benefits to the surrounding community.

“But,” you say, “what about all the extra spending the venue creates in the local area?”

The approximate amount of net new spending is zero. The key word is net. People will spend more at the sports arena. But they will also spend less on other entertainment. Think of a consumer having a fixed budget for fun. Spending more on season tickets to the local NBA team means spending less on other amusements.

Consumer theory supports this in quite another way. Milton Friedman developed the permanent income model of consumption. Prof. Friedman’s original statement of his model was, “permanent consumption spending is a function of permanent income.” While that may seem a non-sequitur, it contains an important truth. People respond to short-term changes in their income by adjusting their wealth. During periods of above-normal income, a household will save and/or pay off debt. If income is below normal, folks will spend out of saving and/or add to their debt. In other words, people try to maintain a given lifestyle (permanent consumption) when faced with fluctuations around their permanent income.

There will be disruptions in demand. Some markets will be hit hard: restaurants, conventions, and other businesses where people gather in large groups. And decreases in demand in those markets may not be fully offset by increases in demand in other areas. But, as economist Jodi Beggs put it on Twitter,

Jodi Beggs on aggregate demand What Sports Economics Tells Us About COVID-19

(click for larger image)

Share if you feel like it

About Tony Lima

Retired after teaching economics at California State Univ., East Bay (Hayward, CA). Ph.D., economics, Stanford. Also taught MBA finance at the California University of Management and Technology. Occasionally take on a consulting project if it's interesting. Other interests include wine and technology.