Do the Olympics cost too much for host cities?

@CNNMoney July 30, 2012: 11:43 AM ET
Olympics is a very risky bet for cities

London has already exceeded its initial Olympics budget by a wide margin.

NEW YORK (CNNMoney) -- Hosting the Olympic Games is a lot like throwing the world's largest -- and most expensive -- party.

The costs are legion. Massive new infrastructure projects must be planned, funded and constructed. Security forces are mobilized, with costs ranging into the billions of dollars. Thousands of hotel rooms must be built to house athletes and tourists.

And most of it happens on the taxpayer dime.

Politicians have long justified the outsized expenses levied on cities and citizens by arguing that ticket sales, construction jobs and increased tourism outweigh the costs.

Elected officials often seek to bolster their argument by commissioning forward-looking economic studies that predict huge economic benefits for the host city and country.

But most independent economists say the real cost of the Olympics is more complicated to determine -- and certainly not as rosy as politicians portray.

"There is very little evidence to suggest hosting the Olympics provides much of an economic benefit," said Victor Matheson, a professor of economics at College of the Holy Cross.

The two most recent Summer Games had drastically different outcomes. The Olympics in Beijing in 2008 were widely considered a success, mainly because it helped the nation show the world how much it had emerged as an economic power.

"Beijing did it as an advertisement. They got tremendous value, because they didn't care about the cost. It was like buying a ton of television ads," said Mark Rosentraub, a professor of sports management at the University of Michigan.

But Athens in 2004 was a disaster. Experts say that Greece built too many hotel rooms and fell victim to the hopes that the Olympics would lead to longer-term gains thanks to tourism.

(Related: Olympians face financial hardship)

Matheson said that forecasts produced to justify the Olympics often underestimate potential spending overruns, and rely on models that don't accurately capture unintended costs.

"I would say these folks are really good at adding and multiplying, but not very good at subtracting," Matheson said.

Stefan Szymanski, another professor of sports management at the University of Michigan, said that politicians feel pressured to link the Olympics to economic gains because taxpayers bear the cost of putting on the games.

"The government wants to say that not only are we going to have a good time with this event, but it's also going to make us rich," Szymanski said. "And that's just not true."

Perhaps the best example of the long-term costs associated with putting on the Olympics is Montreal, host city of the 1976 Summer Games.

Prior to the games, the Canadian city's mayor, Jean Drapeau, followed the course of most elected leaders who court the games, saying that "the Olympics can no more lose money than a man can have a baby."

He was wrong. Mismanagement and gross cost overruns left the city's citizens with a $1.5 billion debt that took three decades to erase. The final payment on the debt was made in 2006.

By that time, the local citizenry had turned the name of the city's unused Olympic stadium-turned baseball park, the Big O, into a homonym: the Big O-W-E.

(Related: Olympics only take Visa ... for a price)

Montreal's experience went a long way toward scaring off potential host cities for 1984, and only one municipality -- Los Angeles -- made a bid for those Olympic Games.

Because of low demand, Matheson said, Los Angeles was able to dictate terms to the International Olympic Committee. It pursued a new model that relied heavily on private financing.

The city was also able to use existing stadiums as sports venues, erasing one of the largest costs associated with hosting the Olympics. The result? Profit.

Rosentraub said there are two ways to turn the games into a financial success.

The first is to adopt the Los Angeles model, and rely on existing facilities to host events. The second is to use the Olympics as an impetus to build long-term infrastructure projects that would be needed with or without the games.

It is probably too early to say whether London will be a financial success.

(Related: Life in the Olympic cauldron)

Because the city is already a popular tourist destination, Rosentraub said London shouldn't expect much of an economic boost from tourism.

"Some cities really buy this tourism argument," Rosentraub said. "But we have studies up the wazoo showing that it will never happen."

And costs are already mounting. The British government has raised its initial $4 billion cost estimate to nearly $15 billion. Some estimates project an even higher cost.

But London is also accomplishing some major infrastructure goals, including projects designed to give the long-suffering East End neighborhood a facelift.

The final verdict? "London probably won't lose too much," Rosentraub said.

Szymanski, meanwhile, expressed dismay that politicians continue to tout the Olympics as an economic boost, and not just a great sporting event.

"I think the Olympics is and should be a great sporting event, but it is not and should not be considered a major economic event," Szymanski said.

"It's a lot like having a party," he added. "It's a good time but it doesn't make you rich." To top of page

Overnight Avg Rate Latest Change Last Week
30 yr fixed3.80%3.88%
15 yr fixed3.20%3.23%
5/1 ARM3.84%3.88%
30 yr refi3.82%3.93%
15 yr refi3.20%3.23%
Rate data provided
View rates in your area
Find personalized rates:
Economic Calendar
Latest ReportNext Update
Home pricesAug 28
Consumer confidenceAug 28
GDPAug 29
Manufacturing (ISM)Sept 4
JobsSept 7
Inflation (CPI)Sept 14
Retail sales Sept 14
  • -->

    Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.