Maybe government should subsidize the Québec Nordiques

In the past few weeks, there's been a little bit of publicity on the part of Quebec politicians trying to get the NHL to bring back the Nordiques. While deliberately avoiding making any kind of commitment, the NHL has said that a new arena in Québec City is a prerequisite for the return of the team. And so, the Province of Québec has agreed to pay about half the cost, and is asking the federal government to pay the other half.

As far as I've read, Conservative Prime Minister Stephen Harper is not committing himself either way. Back in 2000, the Liberal government announced a plan to help out money-losing Canadian NHL franchises, but was forced to back down days later after the public reacted with outrage. At the time, Harper was head of a conservative think-tank, and came out strongly opposed:

“Canadians are being forced to subsidize millionaire hockey team owners and that’s a misconduct. ... It’s a policy which hurts taxpayers and won’t help pro hockey. After all, giving the Ottawa Senators a few million tax dollars just means they might be able to sign a second string winger.”

Now, my own views tend to be strongly libertarian. I generally favor less government, lower taxes, and privatizing government functions. But, when it comes to hockey teams, I believe the case for a state subsidy is very strong, on economic grounds, stronger than for almost any other type of government spending. I think there might be a solid argument for why the government of Canada should indeed spend money on an arena for the city of Québec, if that's what it takes to bring the NHL back.

First, let me explain what my argument is not. It's not about how building the arena will create jobs. It's not about how fans will spend money on tickets and souvenirs, thus boosting the local economy.

Those arguments don't hold water. For one example of a clear argument as to why, here's an op-ed piece by two think-tankers from the (free market) Fraser Institute. (JC Bradbury has a few posts on the subject too.)

Basically, it goes something like this: the residents of Québec City have a certain amount of disposable income to spend. If they don't spend it on hockey, it doesn't mean they'll flush their cash down the toilet. They'll just spend it on other things, like movies or restaurants.

That is, suppose the Nordiques generate $75 million in economic activity. The existence of the Nordiques didn't cause that amount to materialize, like magic, in the pockets of people in Québec. So, obviously, the $75 million in spending on the team has to be balanced out by $75 million *less* spending elsewhere.

As for jobs, there's no reason to think that the new hockey jobs created will by higher in quantity or quantity than the jobs lost by restaurant or cinema workers. So, on balance, having a new arena won't create significant economic activity in dollar terms.

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So if that's not the argument, then what *is* the argument? Basically, it's that the benefits to the residents of Québec City outweigh the costs of the subsidy.

That is: suppose the various governments have to contribute $300 million to get the team back. I'm arguing that the existence of the team will raise the happiness of the fans by more than $300 million, even after taking into account all the other money the fans themselves will wind up spending on the team.

That may sound ridiculous. How can you put a number on the happiness of the fans? How can it be bigger than how much they spend on the team?

There's a concept in economics called "consumer surplus." That's defined as the difference between what you paid for a product, and the maximum you would have paid if you had to. If you're addicted to Tim Hortons coffee like I am, you'd gladly pay $3 for your first cup in the morning. But Tim's only charges $1.59. Effectively, when I buy my first coffee of the day, I've made myself $1.41 richer, just like that. I don't have an extra $1.41 in my pocket, but I'm still $1.41 better off than if Tim Hortons closed down, and I had to drink some kind of crappy coffee somewhere else, from which I derive little or no surplus.

Consumer surplus is a huge, huge part of everyone's quality of life, even though we take it for granted. We all have our personal favorite products, one way or another. Maybe you can't live without your iPhone, or your internet service, or the pad thai at your favorite restaurant. Imagine if those products no longer existed. If your iPhone disappeared, and you got back the $400 that you paid for it, wouldn't you be a lot worse off? To you, the iPhone must be worth more $400, or you wouldn't have bought it. How much more? It depends on the person. If you're an Apple fanatic, and the iPhone is something you can't live without, you might have been willing to pay up to $1,000 for it ... in which case your consumer surplus is $600. Or maybe $600 was your limit, and so you only get $100 in surplus. (Indeed, it's possible that you thought you'd like the iPhone, but you hate it, and it was only worth $300 to you -- in which case you have a *negative* surplus. But that's rare ... if you look around, most of the things around you are things that you're glad you bought and would buy again.)

Now, the fact that a product has a lot of value to a lot of consumers doesn't mean that it needs to be provided by government. If a product is in demand, someone will provide it at a profit. Apple is willing to manufacture an unlimited number of iPhones at $400, so that anyone who values it at more than that will make a consumer surplus "profit."

But with a hockey team, it's more difficult, because a hockey team has the characteristics of what economists call a "public good". Specifically, a public good has two properties: I can enjoy it without paying for it, and my enjoyment of it doesn't deprive anyone else of any of their enjoyment of it.

Neither of those two conditions to an iPhone. I can't use one without paying for it, because Apple won't let me. And if I buy an iPhone, nobody else can use that iPhone without depriving me of it.

But, for the Nordiques ... if I become a big fan, I can do that for free. And my being a big fan doesn't hurt anyone else -- in fact, it may *help* everyone else, in that they derive more pleasure being part of a bigger fan base. Indeed, even fans of the rival Canadiens might benefit: the more Nordiques fans, the more happiness in Montreal when the Habs beat them 10-0.

Public goods are usually things that are truly "public," like city-owned parks, or lighthouses, or armies. But sports teams can qualify too, even though they're privately owned.

Now, not everything Nordiques-related is a public good. Tickets to the game, for instance, are certainly not, because the two conditions aren't met. Only those who pay get to see it live, and if you buy a ticket, that's one less ticket left for anyone else to buy. But the *existence* of the team, that's certainly a public good. Here in Ottawa, there are probably tens of thousands of residents who are big fans of the Ottawa Senators, even though they may never buy a ticket. They enjoy the team for free -- well, some of them may spend a few extra pennies for a sports channel on cable, and you could argue that sitting through commercials is a non-zero cost of watching a game on TV. But their consumer surplus is still very high.

Take me, for instance. I usually go to a few Senators games every year, but last year I went to none. I don't think I even bought anything with the Sens logo on it, and I didn't buy any of the pay-per-view games. But I had friends over a few times to watch Sens games on cable, and we had a pretty good time. Cost: $0. Benefit: substantially more than $0.

Of course, just because there's a consumer surplus from a certain activity doesn't mean that government should subsidize it. Usually, when there's demand for a product, there's the possibility of making a profit on it, and the market will make exactly enough of the product to maximize consumer surplus. Colby Cosh makes that case for pumpernickel bread -- you don't subsidize it just because bread is important to society.

That's because for pumpernickel, you don't get any benefit unless you actually pay for it. Consumers don't get a lot of happiness from just following the pumpernickel market in Québec City, or from just knowing that pumpernickel exists -- they have to actually eat the pumpernickel. They can't do that unless they pay for it. The physical reality of pumpernickel means that everyone who wants to eat it winds up paying at least what it costs to make.

But for a hockey team, that isn't true. A resident of Québec may value the existence of the Nordiques at $100 a year (not including the value of seeing games in person). In fact, a million people in the Québec area might value the Nordiques at $100 a year, for a total of $100 million in value. But the Nordiques may have no way of collecting that $100 million, and, as a result, the team might not be profitable. If there were a way to somehow get all the fans to chip in what the team is worth to them (or even half what the team is worth to them), someone might create it. But there's no such way to do that.

When this situation happens in other areas, people are quick to ask the government to step in and provide the service. The Canadian Broadcasting Corporation, for instance, received a subsidy of almost $1 billion from the federal government in 2006. The idea is the same: that Canadians get a benefit from the service that the free market cannot provide, that even Canadians who don't watch the programming somehow benefit (from CBC news exposing government scandals, say), and that it's impossible to bill each Canadian individually.

And so the issue, like that of the Nordiques, is this: does the "consumer surplus" the CBC provides really outweigh the billion dollar subsidy? As you can imagine, left-wing types tend to say "yes," and others are more likely to say "no". In fact, right-wing Canadians argue that the CBC is *harmful* and has *negative* benefits because of the left-wing slant in its news coverage.

For a hockey team, there are no such political issues ... seldom do you hear anyone say that the existence of a local sports team actually makes it a worse place At worst, people will say they don't really like hockey, but I've never heard anyone actually say that the City of Ottawa would be a better place to live if the Senators left town.

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I think the evidence for the Nordiques as a public good is very strong, and those like Colby Cosh (who, by the way, I normally agree with) are simply ignoring the huge improvement in quality of life when you have a local team to root for. I'm frustrated by how much hostility there is to subsidizing a hockey team, from the same people who are so enthusiastic about subsidizing other enterprises that aren't even public goods. For years, there was a drive to get a new Opera House for Toronto, and finally governments contributed $56 million to subsidize its construction. But ... who benefits from an Opera House? Pretty much only people who go to the opera ... and opera is an art form appreciated by very few people in the first place.

The place seats about 2,000. Assuming there's an average of one performance a night, and every performance is sold out, that's about 700,000 tickets a year. At an rate of five percent a year, the interest on $56 million is $2.8 million a year. So the governments are subsidizing patrons to the tune of $4 a performance. Assuming a ticket costs $40 (say), that's about a 10% subsidy.

The Nordiques would presumably sell out 41 games a year, at 20,000 seats each. That's 840,000 tickets -- almost exactly the same as the opera house. So even if a government subsidy benefitted only ticket buyers -- as Colby Cosh implies -- why should opera goers get $4, but Nordiques fans get nothing? Especially when opera fans are probably a lot better off financially than hockey fans (many of whom are children).

But, as I argued, the Nordiques benefit not just 840,000 ticketholders, but at least a million people who would become fans at some level. The proposed arena subsidy is $360 million. That's $18 million in interest per year, or $18 for each of a million fans who might benefit. For $18, you can buy an opera fan a 10 percent subsidy for five performances -- or you can bring someone entire season of hockey (on TV, admittedly, instead of in person) that otherwise wouldn't exist.

(Of course, people who benefit from the opera house will claim that there's all sorts of externalities, benefits to people like me who would never buy a ticket and don't care whether or not opera even exists. They'll talk about how it improves the culture, and makes the social fabric stronger, and exposing children to it makes them smarter. I think that's all a bunch of baloney.)

Subsidywise, hockey seems to be more than competitive with opera. Why, then, is there so much hostility?

Money, of course. Everyone hates rich people. And everyone running hockey seems to be rich. The owners are rich, the corporations who buy season tickets are rich, and, of course, the players are rich. Giving middle-class taxpayers' money to rich owners and players seems like the wrong thing to do.

But it's not, not really. We give money to rich people all the time. We pay Bill Gates to give us a copy of Microsoft Windows. In fact, we pass copyright laws to prevent making or selling copies of Windows, in order to guarantee that anyone who wants one has to make Bill Gates richer. The Government of Canada spends millions of dollars to provide Windows on almost every computer in the public service.

That is: we have laws that specifically give Microsoft a legal monopoly on Windows, so they can charge as much as they like per copy. And we pay it. The Government itself spends millions of dollars every year for licensed Microsoft software. We support these laws this because we recognize that, without the possibility of a return on investment, few people would ever make the effort to create valuable products like Windows, and we'd all be worse off.

Haven't we done the same for sports? Of course. The Stanley Cup belongs to the NHL. The WHA wasn't allowed to make a copy and call it the Stanley Cup. When it put a team in Toronto, it couldn't call them the "Maple Leafs," it had to call them the "Toros". We have decided that sports leagues should have a legal monopoly on their product, just as software companies and movie studios do.

When Colby Cosh argues against subsidies for hockey teams, he says,

"[teams] are owned by a profit-maximizing cartel which limits access and squeezes every penny it can get out of that access."

Well, yes, that's right, just like Microsoft. And it was government gave them that right to be a profit-maximizing monopoly. Because of that, the NHL found that it could best maximize its profits by limiting the number of teams. Recently, the team entered into an agreement with its players to pay them a certain percentage of revenues. That now means the players have a rational, financial reason to oppose expansion. If you put a team in small-market Quebec, it brings the average revenue per player down, and the players get less money.

It's very conceivable that a team in Québec City might not be profitable, even for the fat-cat NHL owners and players -- at least not without government help.

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So what should happen?

Well, what *shouldn't* happen is where the current situation is going -- where the government builds a new arena and hopes that convinces the NHL to give them a team. That's just bad business. If it doesn't work, it's just millions and millions of dollars thrown away.

No, what the government should do is treat this as a business deal with the NHL, the same way software is a business deal with Microsoft. The government should sit down with Gary Bettman and say, look, we want a team in Québec. What do we have to do? They should work out a deal, which may involve a new arena, or a subsidy to the owner, or a subsidy every year, or a tax break.

Then, the government should look at the costs to taxpayers, and try to estimate the benefits to taxpayers. If it works out that hockey fans across Canada will benefit from having a team in Québec more than what it costs to subsidize the team, then do it. But make it a real contract. The NHL agrees to put the team back, and the governments agree to make payments. None of this, "well, come back once you've built an arena and we'll talk."

You need to have a formal agreement, in writing.

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As I said, I'm normally not comfortable with the idea that government should subsidize activities that can't support themselves. So I'm sympathetic to arguments that it's not the government's job to buy a hockey team for its fans.

If that's your argument, then let me re-cast my argument another way, that might be more in keeping with your views:

By the *government's own standards,* and by the standards of people who normally favor government intervention in the economy, having a hockey team in Québec is much, much more important than almost all the other money government spends on culture. It's a much better deal than an opera house. It's a much better deal than the CBC's programming. It's a much better deal than TVOntario. It's a much deal bargain than the National Film Board. It's a much, much, much better deal than "Voice of Fire."

Canadians love their hockey. When you weigh the costs against the benefits to hundreds of thousands of hockey-mad residents of Québec City, a subsidy to an NHL team seems like a huge bargain.

I can't believe I'm saying this, but ... yes, we should consider using taxpayers' money to bring back the Nordiques..


UPDATE: added "maybe" to the title of the post to better reflect what I'm trying to say.