Q & A with Roger Noll

A League of Fans Special Feature

Roger Noll

Roger Noll is professor of economics emeritus at Stanford University and a Senior Fellow at the Stanford Institute for Economic Policy Research.

Noll is a well-known sports economist. He’s been called the “Father of Sports Economics,” due in large part to his groundbreaking book, Government and the Sports Business, published in 1974. Noll was also co-editor of the book, Sports, Jobs, and Taxes: The Economic Impact of Sports Teams and Stadiums.

Throughout his career, he has consulted for players associations and pro sports owners. Noll has served as an economic expert in numerous sports-related legal cases, including several involving the NCAA.

Noll received a B.S. with honors in mathematics from the California Institute of Technology and a Ph. D. in economics from Harvard University. He is the author or co-author of twelve books and over three hundred articles and reviews. Noll was interviewed by Ken Reed, League of Fans’ Sports Policy Director.

Ken Reed: For decades, until the 1960’s at least — with one or two exceptions — professional sports franchises built their own stadiums and arenas. What caused the shift to taxpayer-financed stadiums?

Roger Noll: Well, we should start from the very beginning. This isn’t like a normal industry. For example, if there were an increase in demand for pro football, the response would normally be the creation of more pro football teams. If there’s a big demand for restaurants in New York City, then people open more restaurants. But if there’s a big demand for a pro football team in New York City, it just means there’s more money going to the same team.

Over the years, as the demand for pro sports franchises increased, there was some supply-side response. There was expansion in the pro leagues (NFL, MLB, NBA, NHL) but nowhere near enough to absorb all that demand. So, there became a scarcity of teams. And cities without teams wanted them, and cities with teams wanted to keep them. As a result, these cities got into bidding wars.

For example, right now we have a bidding war between Los Angeles, Oakland and San Diego to determine where the Chargers and Raiders are going to play in a couple years. And the reason we have that bidding war is that there are three locations and only two teams. To win that bidding war, you have to bid a bigger subsidy than your competitors.

On the other side of the coin, the teams that win these types of bidding wars end up with nice new stadiums that provide more revenue. There’s more concession revenue, there are more luxury boxes and premium seating, etc. So, these teams have a competitive advantage on the field because they have more money to spend. This leads to other teams in the league saying, “Well, I need a subsidy too in order to compete.”

And the process continues. It’s similar to an arms race. It feeds upon itself and it will continue to work for the league and its franchises as long as there are more cities that want teams than there are teams.

KR: In other industries with similar characteristics, there’s either a competitive marketplace or regulation. Is this the only industry that you’re aware of where there’s a lack of both marketplace competition and regulation?

RN: These professional sports leagues are not completely invulnerable to antitrust attack but they’re pretty close to it. These leagues are organized as cartels that limit supply by limiting the number of teams. That mechanism has been attacked via antitrust several times throughout history without much success.

The primary problem is that the kinds of activities that leagues engage in, which are the pooling of broadcast rights, control of the number of teams in the league, control of team locations, etc., would be antitrust violations in any other industry. Yet, the courts have decided that the right way to think about this is the rule of reason test and then they give enormous weight to the arguments of the leagues about things like control of competitive balance, and non-economic benefits arising from pro sports, etc. They win antitrust cases that no other industry would be able to win, and even when they don’t Congress typically passes anti-trust exemptions as they did for the AFL-NFL merger and as they did with the Sports Broadcasting Act.

It’s a very tough nut to crack. The root of the way sports are treated in American society is that the social significance of sports, the importance of sports in American daily life, is vastly in excess of its economic significance. It’s a very small industry as a fraction of GDP, but it’s a very important industry in terms of its market share in what’s going on in people’s lives.

There’s a socio-cultural impact of sports that enables the industry to do things that other industries can’t do. That’s the answer to the substance of your question. We don’t really regulate it and the reason that we don’t is that it’s hard for us as a society to think straight about the operation of the industry and to strip away the underbrush surrounding it and say, look, these are just extremely lucrative monopolies that have gone well beyond any reasonable coordination mechanism that would be necessary to have a league.

And the costs are partly borne by consumers in terms of high prices and lack of availability of games on television, etc., and also via taxpayers paying subsidies.

So, we’re left with an extremely profitable industry, measured by return on investment, which nonetheless gets subsidized. Instead of getting regulated, it gets subsidized! Which is purely a reflection of the fact that we don’t know how to think straight as a society about the economics and business side of sports.

KR: You hear the term “corporate welfare” a lot when you talk about publicly-financed stadiums. Would you describe this as reverse socialism?

RN: Yes and no. Yes, in terms of its substantive outcome. No, in the sense that the reason for it is somewhat different.

Local governments are as much the victims of the unregulated pro sports monopolies as consumers are. It makes perfectly good sense for a mayor to try and keep a pro sports team. For the mayor of San Diego or the mayor of Oakland to work hard to keep the Chargers and Raiders in their current cities is completely understandable. If they lose a team, the chance they’ll get another team anytime soon is remote. It’s also understandable that Los Angeles politicians would want an NFL team in Los Angeles, which hasn’t had an NFL team for over 20 years. So, there is a fundamental legitimacy at the local level as to why they do this.

KR: But how many times have taxpayers/fans voted against a new stadium or arena for a pro sports team only to see local politicians behind closed doors develop a way to do it anyway?

RN: There are some examples of that but there aren’t a whole lot of them.

KR: Well, the Miami Marlins situation is one of the ugliest examples of this.

RN: That’s one of the prime examples. There’s a wonderful quote to this effect. I think it was a mayor of one of the Phoenix suburbs who put it beautifully. It was something to the effect of “We never decide to subsidize a sports stadium without first giving citizens an opportunity to vote. If the citizens say yes, we build it. If the citizens say no, we build it anyway.”

But in truth, the reality is that a pro team losing a stadium or arena election usually does reduce the taxpayer subsidy and in rare cases even causes it to be zero.

KR: Do you think the Green Bay Packers-style community ownership model could work elsewhere in professional sports?

RN: Well, the NFL owners, and in fact, all professional sports owners object to that model for a couple reasons. The first is that this model is genuinely non-profit. They don’t take out any profits for the owners. Pro sports owners don’t like non-profits in their league. The second reason they don’t like it is the fact Green Bay is a publicly-traded company, meaning anybody can get the annual report and see what the team’s cash flow is. The owners don’t want that information made public.

So, to prevent the Green Bay Model, the pro leagues have adopted rules that require a single owner to control more than 50% of the team. And that guarantees that a) the team’s finances will be confidential and b) it will be profit-maximizing.

KR: Is there a potential legislative solution that could overturn the pro leagues’ ability to ban the community ownership model?

RN: Well, probably. The problem is that the leagues have a good argument when they say there are valid reasons for leagues to be able to control who owns teams. For example, it wouldn’t be a good idea for the owner of a Las Vegas casino to own a professional sports franchise, or the Mafia, or other situations that you’d like to avoid as a league.

So, thinking about how you’re going to do any kind of regulatory statute in this area causes you to have a headache. There isn’t an easy answer to separating the legitimate concerns of a league regarding the composition of its ownership from the purely monopolistic rationales for controlling the ownership. Therefore, I think we’re in something of a box statutorily. How you would actually do it, and what it would look like, and what affect it would have, I think are all questions that are fairly difficult to predict.

I agree that the concept of letting the fans own the team has a certain attraction to it. But I’m not sure you could ever convince legislators to try to be that precise in opening up ownership, because legislators would be afraid of unintended consequences and there would be an enormous lobbying effort against it.

I definitely think it’s worth trying. It’s a good idea but to be honest I don’t think it’s ever going to happen.

KR: Do you see any ways to solve this problem?

RN: Well, the fundamental problem with pro sports leagues in the United States is that literally everything they do in these leagues is centrally controlled.

My modest aim would be to separate the operation of the leagues from the operation of the teams. In other words, have leagues that aren’t owned by the teams. Have the leagues and teams be separate entities. I think if we could get that separation – like they have in European soccer – it would be better than what we have. It’s a practical way to come to grips with the problems we see.

I think Steve Ross’ and Stefan Szymanski’s idea of using antitrust — perhaps it would require a statutory amendment to one of the antitrust statutes — to force a separation between teams and leagues, in terms of ownership, is a good approach.

You make things look like NASCAR, or Indy Racing. You have the entity that organizes championship seasons in that sport separate from the teams themselves. And you allow teams to participate in multiple such organizations.

As an illustration, the typical English Premier soccer team plays in three or four leagues. Those leagues have independent schedules and independent broadcasting rights deals. The people that run the leagues and run the teams are different.

A system like that makes it much more difficult to control a sport and create a monopolistic situation.