How Holding the Olympics Harms Countries

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We all marveled at the glamour and prestige of the Chinese Olympics. It was the most impressive, grandiose Olympics yet. That’s exactly the impression the Chinese government wanted us to have. The Chinese people themselves were proud to show the world what their nation could fund, assemble, and display.

But besides national pride, what did those citizens get out of it? What was the true benefit to them? Nothing. The Olympic Games, for any country which holds it, is a losing proposition economically.

Even if governments don’t expect to have their Olympic expenditures recouped in additional taxes, they expect that economic spending will stimulate the economy. The popular notions regarding how Olympic spending will bring economic growth is three-fold. First, foreign visitors who come to see the Chinese games will spend money in hotels, restaurants, historical sites, shops, etc. It is expected that this will be additional income to Chinese citizens, and improve their economic state. This is not true.

This notion is similar to the old Mercantilist fallacy that if a country exports more than it imports it will be better off. This incorrect belief is based on the idea that money per-se is wealth. In reality, goods and services are wealth. If a country exports all of its goods, and obtains cash or gold in return, what is there left to buy? There are no goods remaining in the country because they’ve all been exported. What we need money for is to buy goods.

The same case applies to the Olympics: the goods and services that Chinese consumers sell to foreign Olympic visitors means a net reduction in the amount of these goods and services available in the country. The foreigners did not trade goods in return, they traded cash. One could argue that Chinese vendors will take their new cash and purchase new foreign goods. But the cost of obtaining the cash they collect from Olympic tourists consists of the expenditures made by their government to get the foreigners to come over. Without those expenditures, the additional tourist spending would not exist. The nation as whole spent money so that it could obtain foreign cash. The amount of government spending needed to generate those additional receipts from tourists was greater than the value of the receipts! It was a losing proposition.

This brings us to the second popular notion regarding the notion that Olympic spending will bring economic growth. It is the idea that spending on the infrastructure for the Olympic venue sites will constitute income to local providers of materials, construction, and capital goods. Indeed it is, but that income constitutes a loss to other citizens who paid for it with tax money (or inflation). The money taxpayers spent (yes, the Chinese pay taxes) for the Olympics goes mostly into building things that will be used rarely and often never again.

For example, as Martin Rogers of Yahoo! Sports noted, 21 of the 22 Olympic venues from the 2004 Athens Olympics now lie abandoned in various states of ruin. He states:

Gypsy camps have sprung up in the shadow of stadiums where the world’s finest athletes once battled for gold. Graffiti is scrawled over the outer walls of many sites, and it has been reported in Greece that upward of $1 billion has been spent simply to maintain these ugly wrecks.

This one-time spending constitutes a waste of a country’s resources. Even for those few buildings which will be used again, they operate at a huge loss – the total revenues they will create will never equal the total cost put into them. The billions of dollars spent for pride and prestige could have instead been used to build factories, machines, tools, trucks, etc., by individual businesses. In this case, these investments would usually earn a profit; the investments would more than pay for themselves. Additionally, these additional factories and tools would be used to generate more and more truly-needed economic goods and services, year after year.

The third popular notion regarding Olympic spending is one based on Keynesian economics. It is the notion that if a government spends money on anything, that additional spending will constitute additional income to businesses, who will then spend the money causing yet more income and more spending. All of this additional spending will bring additional wealth and additional economic growth. All that’s needed is the original additional spending . It has been argued in Keynesian government textbooks that governments, using the multiplier, could even build pyramids, or build anything, and then dump it in the ocean, and still create wealth. This theory is called the Keynesian multiplier. This theory is not only 100% incorrect, it is absurd.

There are many reasons why the multiplier theory is fallacious, but the main reason is that wealth is not generated by spending, but by saving and investing. Suppose you spent $100 at the book store. Then the bookstore owner, instead of re-investing in his business, also spent the money at the grocery store. The grocery store owner then takes the $100 out of the cash register and spends it on a new appliance. The appliance store owner spends it on movies, gasoline, or whatever. The spending goes on and on in this fashion. In this case, the money was never NOT spent. If it were NOT spent, it would be saved.

It is saving, i.e., not spending, that pays for additional capital goods and labor. Had any of the above businesses saved the $100 and invested it in their business, they could buy new machines or hire more workers. Had they saved the $100 in a bank, other businessmen could have expanded their operations or started new ones. For things company’s produce are paid for (with savings) before customers buy them. When you go to buy a car, or even a bagel, the product is already made. Savings pays for goods to be produced, consumer spending does not.

The only effect from additional spending is to raise the rate of profit of businesses. Business costs remain the same, but the corresponding sales revenues have increased from the new spending. No new wealth is created. No investments are made.

Still, since most government’s economic advisors believe in the multiplier effect, they continue to spend and spend, on any and everything, believing it will somehow bring prosperity. Japan has tried to spend its way out of economic recession for the last 18 years. The only thing the spending has created is the greatest amount of debt a country has ever had in history. But politicians don’t have to worry about profits and losses, as it’s not their money.

The Olympics are just another case of governments wasting their citizens’ taxes on unprofitable “investments.” It destroys wealth and makes people poorer - all in the name of national pride.

Kel Kelly @ September 24, 2008