Olympics Host City Economic Impact

The hope for a positive economic impact is, of course, one of the rationales cities use for bidding to host the Olympics in the first place. When planned and managed well, host cities can reap long-term rewards due to increased tourism and revitalized local businesses, and from an increase in new cultural offerings such as concerts, plays and exhibits that use the former Olympic venues. Economic Impact Studies (EIS) are often used as supporting evidence of the economic gain an Olympics will produce, as I discuss in The Olympic Games Effect. However, EISs are considered suspect by many leading economists, partly because they usually rely on the multiplier effect (ME). In the case of the Olympics, MEs project that the sports event will generate additional spending above and beyond regular economic activity and that the income generated from this spending will be re-spent within the same economic region in subsequent periods. The multiplier is always greater than 1, meaning that a $1 in income generated will lead to value creation well above that initial dollar (1.5, 2.0 or even 3.0 times the initial additional income created). Logically, the implication is that the sports event’s economic contribution to the local community will be positive, substantial, leading to a permanent, increased level of economic performance. But the ME's implication of sustained economic contribution is problematic for many economists because of the unpredictable interaction among complex variables, such as labor market changes (permanent or temporary?) and the unpredictable flow of money (does it go out of the region, thereby not building upon activity within the primary Olympic geography?), among other factors. One of the by-products are inflated rental rates, as I discussed in my February 3 post. The same is true for hotel rates, which brings us to the basic laws of supply and demand. When demand exceeds supply, as is anticipated with respect to hotel rooms during the London Olympics, then prices rise. The question then becomes what is a reasonable price increase? As I mentioned in my February 3 post, some landlords are raising rents 3-4 times above normal rates during the summer, and hotels are expected to increase rates as well. A February 10 article in BBCNews points out that hotel rate increases are averaging 315%, according to the Shadow Minister for London and the Olympics, and a plea has gone out from a disability charity to keep hotel rates reasonable. The economic promise of the Olympics poses a dilemma for London, and other host cities, regarding how they ensure that the economic gains the Olympics are supposed to create don't also end up unreasonably gouging visitors (particularly those with special needs, such as disabled Olympians) and even locals. Inflated prices run the risk of narrowing participation to only those with significant means, undermining the Olympics' reputation as a celebration of sport and international cooperation that brings together people of all backgrounds. This problem is not unique to London, and the challenge for host cities is how to appeal to as many people as possible while also ensuring the economic vitality that their bid promised.