The University of New Haven Department of Economics

Special studies series no. 1601

Macroeconomic uncertainty and the Olympics Henry Adegunle

May, 2016

Department Special Studies Series are preliminary materials circulated to stimulate discussion and critical comment. The analyses and conclusions set forth are those of the authors and do not necessarily reflect the views of other members of the Department, the College of Business, the University of New Haven or its Board of Governors. Upon request, single copies of the paper will be provided. References in publications to Department Special Studies Series should be cleared with the Individual author to protect the tentative character of these papers. MACROECONOMIC UNCERTAINTY AND THE OLYMPICS

Henry Adegunle* Department of Economics University of New Haven

Abstract The economic effects of the Olympics are a hotly debated topic especially leading up to the bidding and to the event itself. In fact, much has been written about the economic effects of the Olympics – ranging from the impact of the games on national output, investment, consumption, government spending, inflation, exchange rates, and unemployment, to list but a few. I assess the impact of the Olympics on macroeconomic policy uncertainty of the nation or region hosting the Olympics, a proposition advanced by Bruckner & Pappa (2011).

DRAFT April, 2015

* Email: [email protected]

“Americans are apt to be unduly interested in discovering what average opinion believes average opinion to be.” Keynes (1937)

Introduction

The Olympic Games originally started as a series of competitions between representatives from cities in Ancient Greece. The events were mainly athletic, but also included combat and chariot racing. In this early era the Olympics were of fundamental religious importance to the Greeks. The events were held in parallel with rituals to honor Zeus and Pelops, mythical kings of Olympia- the location of the original Olympic ‘stadium’. (Edds, 2012)

The Olympics were held every four years and this period, known as the Olympiad, was used by the ancient Greeks as a way of time measurement. Winning an event at the Olympic Games was of great value and recognition to the individual athlete. The winners of the individual games were idolized by the Greeks on a national level. The winners were also immortalized through the writing of poems and construction of statues. Many winners are documented in ancient Greek myths and legends, their stories still being told to this day.

The Greeks also are important for the contribution to sports. We compete in "gymnasiums" and "stadiums" today--names that both

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come from Greek. There are lots of other echoes of the Greeks in our sports tradition of today. Some of our track and field events (e.g., the javelin and the discus) come out of Greek tradition. Events like the Marathon and the Decathlon have Greek names, though they weren't specific Greek events. Perhaps the best example of Greek influence on our sports tradition: the Olympic Games. (Greek Achievements, 2009) Political symbolism In Olympics The Munich massacre was an attack during the 1972 Summer Olympics in Munich, West Germany, on eleven Israeli Olympic team members, who were taken hostage and eventually killed, along with a German police officer, by the Palestinian group Black September. (Wikipedia, 2015)

The 1979 Soviet invasion of Afghanistan spurred Jimmy Carter to issue an ultimatum on January 20, 1980 that the United States would boycott the Moscow Olympics if Soviet troops did not withdraw from Afghanistan within one month. (Smothers, 1996).

The Soviet Union led the Warsaw Pact and other Communist and Socialist countries on a boycott of the 1984 Summer Olympics, in retaliation for the U.S.-led boycott of the 1980 Summer Olympics in Moscow over the Soviet Union's invasion of Afghanistan in 1979. (olympic.org, 1984). .

When the 2004 Summer Olympics returned to Athens for the first time in more than a century, nearly 11,000 athletes from a record 201 countries competed. In a gesture that joined both ancient and modern

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Olympic traditions, the shot put competition that year was held at the site of the classical Games in Olympia.

The Olympic Games truly took off as an international sporting event after 1924, when the VIII Games were held in Paris. Some 3,000 athletes (with more than 100 women among them) from 44 nations competed that year. Paris was the first time the Games featured a closing ceremony.

There are seemingly vast economic benefits for different industries and sectors derived from hosting an event of such magnitude as the Olympics, from increasing tourism rates to job creation to investment. Yet, by their very nature however, the Olympic Games engender considerable opposition and criticism. Critics contend that they divert funds from more socially-worthy projects, that they foster corruption and cronyism.

There is considerable interest in documenting both cost and benefits to establish the net effect of hosting the Games (Owen, 2005). Official economic impact studies attempt to measure the costs and benefits of hosting the Games (Rose & Spiegel, 2011). However, setting aside the often obscure and complicated modeling, published official studies often fail to adjust for the self-interest of those conducting the studies and which may lead to self-serving characterization of costs and benefits casting doubt on the exercise itself. Tellingly, the economic benefits of hosting the Games are dubious for most

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academics who have conducted independent research on the issue. It fact, it has only been recently, using trade models, has it been possible to show that hosting the Olympics has a positive impact on national exports which is statistically robust, permanent, and large.

Still, the lack of tangible benefits derived from the games is no shortcoming to some. The appeal of such an event is its ability to cover individual participants – and their countries in honor.

In fact, whether the organization of the modern Olympic Games is a matter of honor or a matter of money has been a recurring debate for many years with no clear answer. Indeed, the debate may well be as old as the Olympics itself.

According to Herodotus, in ancient Greek times when the Olympics were on, Xerxes and Mardonius asked a group of Greek deserters what prize the Olympic winners should get. The answer was “and olive-wreath.” Tigranes, one of Xerxes generals, uttered: “Good heavens! Mardonious, what manner of men are these against whom you have brought us to fight – men who contend with one another, not for money but for honour!1 (Bruckner & Pappa, For an Olive Wreath? Olympic Games and Anticipation Effects in Macroeconomics, 2011)

In this paper, I intend to examine the hypothesis that hosting the Games raises positive expectations of future national output and related variables. In effect, if the Olympics is considered a positive experience it will result in an environment of reduced policy

1 Cited in Bruckner and Pappa (Bruckner & Pappa, 2011)

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uncertainty. The obverse, should also be true, a negative experience should enhance macroeconomic policy uncertainty. I rely on Baker, Bloom, and Davis uncertainty index to capture policy uncertainty (Baker, Bloom, & Davis, 2012). The uncertainty index is available for various geographic regions including the United States, China and Europe.

Review of the Literature

Arthur Andersen, a global consulting firm, conducted a study the year before the Sydney Olympic Games, which is often cited in later Olympic literature as a reliable source that presents the difficulty of distinguishing an Olympic effect.

The study claims a $6.5 billion dollar extra economic activity in Australia, with $5.1 billion in New South Wales alone.

These days the summer Games might generate $5-to-6 billion in total revenue (nearly half of which goes to the International Olympic Committee). In contrast, the costs of the games rose to an estimated $16 billion in Athens, $40 billion in Beijing, and reportedly nearly $20 billion in London. Only some of this investment is tied up in infrastructure projects that may be useful going forward. (ZIMBALIST, 2012)

The high costs are bound to make hosting the Olympics a bad deal in the short-run. Promoters, however, claim that there is a strong benefit that accrues over time connected to the advertising effect of hosting

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the games. The idea is that the hundreds of hours of television exposure to hundreds of millions of viewers around the globe will generate increased tourism and business for the city.

The Arthur Andersen study also describes some of the economic trends that the company discovered about the Atlanta and Barcelona Games. In Atlanta, the study claims there is a tight labor market, so the city could not maximize potential gains for employment, and furthermore, the Olympics were unable to overpower Georgia’s already struggling economy at the time. Knowing that Georgia’s economy was already under pressure at the time of the Olympics may override any potential Olympic effect. However, in Barcelona, the study notes that the Olympics and economic activity need to host may have stimulated the economy, which before the Olympics was in an economic downturn. (Edds, 2012) Another possibility for economic stimulation is Spain entering the EU, which likely had a large, positive economic impact. Because the models in this study compare autonomous communities within Spain, the EU effect is held constant, and a significant change in construction, tourism, financial services or manufacturing industry in Catalonia compared to Madrid AC might be attributable to the Olympics. Similarly, the province of Barcelona’s (a subset of Catalonia) employment rate went from 23.6% to 11.7% from 1986 to1992. (Edds, 2012)

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By holding countrywide effects constant it may be possible that significant employment change exists for the construction, tourism and financial services industries. As the study shows, each Olympics Game takes place under different circumstances and larger economic shifts and activities may cover or amplify any potential Olympic effect. While Arthur Andersen’s study is helpful in providing a framework with which to gauge results, it does not detail a model to create and interpret results, which is why I will examine current post- Olympic studies.

It's a lovely idea, but there is little evidence that it pans out. Whether or not the city receives a positive PR boost from the TV exposure itself is uncertain. Should the Games be plagued by disorganization (e.g., the current security snafu in London), the pervasive pollution of Beijing, the violence of Munich, Mexico City or Atlanta, or the corruption scandals of Salt Lake City and Nagano, then the PR effect might be negative. Further, many of the host cities are already well- known as tourist destinations around the world and the notion that hosting the Olympics will put them on the map is about as implausible as Mitt Romney calling for national health care.

Bruckner and Papi examine how per capita GDP, consumption, investment, government expenditures, the price level, and the exchange rate are related to an Olympic Games indicator variable – both for countries that bid and win the Games and for countries that bid and lose the Games (Bruckner & Pappa, 2011). They speculate

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that the main impact of the Olympic Games is in raising expectations of future output – a positive anticipation effect on the aggregate economy.

I employ time-series estimation and visualization techniques that allow for contemporaneous, future, and lagged effects of the Games indicator. The focus is on future effects. But I also consider the bidding and hosting of the Olympic Games as natural experiments in the sense that candidacies and actual hosting are exogenous to current macroeconomic developments.

The Index of Economic Policy Uncertainty

The EPU Index quantifies newspaper coverage of policy-related economic uncertainty. Specifically, the monthly frequency of newspaper articles that contain terms related to the economy, uncertainty, and policy. At its core, the index reflects the simple intuition that a greater number of news articles about economic policy uncertainty reflects a higher level of economic policy uncertainty facing households and businesses (Baker, Bloom, & Davis, 2012).

At present there are EPU indices for Europe, for the United States, and for Korea, - areas that have hosted the Olympics in recent times.

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European Policy Uncertainty Data 350 1.2

300 1

250 0.8 200 0.6 150 0.4 100

50 0.2

0 0

January 1, 1990 1, January 1998 1, January January 1, 1987 1, January 1988 1, January 1989 1, January 1991 1, January 1992 1, January 1993 1, January 1994 1, January 1995 1, January 1996 1, January 1997 1, January 1999 1, January 2000 1, January 2001 1, January 2002 1, January 2003 1, January 2004 1, January 2005 1, January 2006 1, January 2007 1, January 2008 1, January 2009 1, January 2010 1, January 2011 1, January 2012 1, January 2013 1, January 2014 1, January 2015 1, January

Empirical Work

Consider the model

yt = α + βXt + εt

where generally, yt the times series of interest at time t; β is a vector of coefficients; Xt a matrix of explanatory variables; and, εt the error term.

The error term can be serially correlated over time:

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εt =ρ εt-1 + et where |ρ| < 1; and et is white noise. This is known as serial correlation of type AR(1) in a linear model. Ordinary least squares applied to a serially correlated model is inefficient.

It is possible to transform the series to adjust for serial correlation. The convetional approach is known as the Cochrane–Orcutt procedure transformation, which is

yt - ρ yt-1 = α(1- ρ) + β(Xt - ρ Xt-1) + et for t=2,3,...,T,

We use the Prais-Winsten variant of the Cochrane-Orcutt estimations. It is distinct from Cochrane Orcutt in that it does not lose the first observation and leads to more efficiency as a result. It is intended to address the serial correlation of type AR(1) in a linear model.

The Prais-Winsten procedure transforms the original series as follows:

2 1/2 2 1/2 2 1/2 2 1/2 (1- ρ ) y1 = α(1- ρ ) + β((1- ρ ) )X1 + (1- ρ ) e1

for t=1, and prior to using least squares for estimating the parameters.

Results

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United States

Number of observations 322 F(2,319) 4.15 Prob>5 0.0167 R-squared 0.0309 Root MSE 17.873

Index Coefficient Semi-Robust SE t |p| > t 95% Confidence Interval

US Olympics 7.832 3.438 2.28 0.023 1.07 1.59 Index Lag(24) 0.0978 0.0582 1.68 0.094 -0.0167 0.2123 Constant 95 8.710 10.91 000 77.87 112.1469 rho 0.8388 DW (original) 0.347 DW (transformed) 2.100

Number of observations 286 F(2,319) 5.22 Prob>5 0.0059 R-squared 0.0432 Root MSE 17.805

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Index Coefficient Semi-Robust SE t |p| > t 95% Confidence Interval

US Olympics 8.29 3.403 2.44 0.015 1.599 14.99 Index Lag(60) 0.149 0.07141 2.09 0.038 0.00844 0.2895 Constant 89.8 10.759 8.35 000 68.64 110.99 rho 0.868 DW (original) 0.359 DW (transformed) 2.09

Europe

Number of observations 286 F(1,344) 12.38 Prob>5 0.000 R-squared 0.0618 Root MSE 29.102

Index Coefficient Semi-Robust SE t |p| > t 95% Confidence Interval

Euro Olympics 14.516 6.535 3.25 0.001 8.344 34.072 Index Lag(60) 0.2526 0.0630 4.01 0.00 0.1284 0.3767 Constant 94.54 10.160 9.30 0.00 74.54 114.5432

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rho 0.8002 DW (original) 0.421 DW (transformed) 2.321

Concluding Comments

Many studies have claimed that hosting the Olympic Games has no measurable economic effects, but these studies concentrate on the delayed or contemporaneous effect. Our results indicate that the anticipatory and ex ante effects of hosting the Olympic Games on economic growth are statistically significant and economically important. So why do host countries experience long-run negative economic effects, on average? This may be due in part to the fact that host countries experience a one-time increase in domestic investment. Hosts may also experience a spike in consumption of domestic assets. So I assess the impact of the Olympics on macroeconomic policy uncertainty a greater impact on overall GDP as a positive.

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Appendix

Sites of the Summer Olympic Games Sites of the Winter Olympic Games

1896 - Athens, Greece 1924 - Chamonix, France 1900 - Paris, France 1928 - St. Moritz, Switzerland 1904 - St. Louis, Missouri USA 1932 - Lake Placid, New York USA 1906 - Athens, Greece* 1936 - Garmisch-Partenkirchen, 1908 - London, England Germany 1912 - Stockholm, Sweden 1940 - Not held* 1916 - Not held** 1944 - Not held* 1920 - Antwerp, Belgium 1948 - St. Moritz, Switzerland 1924 - Paris, France 1952 - Oslo, Norway 1928 - Amsterdam, Holland 1956 - Cortina d'Ampezzo, Italy 1932 - Los Angeles, California USA 1960 - Squaw Valley, California USA 1936 - Berlin, Germany 1964 - Innsbruck, Austria 1940 - Not held*** 1968 - Grenoble, France 1944 - Not held*** 1972 - Sapporo, Japan 1948 - London, England 1976 - Innsbruck, Austria 1952 - Helsinki, Finland 1980 - Lake Placid, N.Y. 1956 - Melbourne, Australia 1984 - Sarajevo, Yugoslavia 1960 - Rome, Italy 1988 - Calgary, Alberta, Canada 1964 - Tokyo, Japan 1992 - Albertville, France 1968 - Mexico City, Mexico 1994 - Lillehammer, Norway 1972 - Munich, Germany 1998 - Nagano, Japan 1976 - Montreal, Canada 2002 - Salt Lake City, Utah USA 1980 - Moscow, Russia 2006 - Turin, Italy 1984 - Los Angeles, California USA 2010 - Vancouver, British Columbia, 1988 - Seoul, South Korea Canada 1992 - Barcelona, Spain 2014 - Sochi, Russia 1996 - Atlanta, Georgia USA 2018 - Pyeongchang, South Korea 2000 - Sydney, Australia 2004 - Athens, Greece 2008 - Beijing, China 2012 - London, England 2016 - Rio de Janeiro, Brazil 2020 - Tokyo, Japan *Games not recognized by the *Games cancelled due to World War II International Olympic Committee. **Games cancelled due to World War I. ***Games cancelled due to World War II.

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References

(1984, july 28). Retrieved from olympic.org: http://www.olympic.org/los- angeles-1984-summer-olympics

Baker, S., Bloom, N., & Davis, S. J. (2012). Measuring Economic Policy Uncertainty. Retrieved from www.policyuncertainty.com.

Bruckner, M., & Pappa, E. (2011). For an Olive Wreath? Olympic Games and Anticipation Effects in Macroeconomics. CEPR Discussion Paper 6844.

Bruckner, M., & Pappa, E. (2011, September 16). Olympic Games: Natural Experiments for Macroeconomic Anticipation Effects. VOX.

Edds, S. (2012, April 1). Retrieved from "Economic Impacts of the Olympic Games through State Comparison.": http://www.freakonomics.com/media/Economic_Impacts_of_the_ Olympic_Games.pdf

Greek Achievements. (2009, March 24). Retrieved from Greek Achievements and Greek History: http://www3.northern.edu/marmorsa/greekachievements2007.htm

Owen, J. (2005). Estimating the Cost and Benefit of Hosting the Olympic Games. The Industrial Geographer, 1, 1-18.

Rose, A., & Spiegel, M. (2011). The Olympic Effect. Economic Journal, 121, 652-677.

Smothers, R. (1996, July 19). Retrieved from Olympics Bitterness Lingering Over Carter's Boycott: http://www.nytimes.com/1996/07/19/sports/olympics-bitterness- lingering-over-carter-s-boycott.html

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Wikipedia. (2015, November 16). Retrieved from Munich Massacre Wikimedia Foundation: https://en.wikipedia.org/wiki/Munich_massacre

ZIMBALIST, A. (2012, July 23). The Atlantic. Retrieved from The Atlantic web site: http://www.theatlantic.com/business/archive/2012/07/3-reasons- why-hosting-the-olympics-is-a-losers-game/260111/

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Department of Economics Special Studies Series are materials circulated to stimulate discussion and critical comment. The analyses and conclusions set forth are those of the authors and do not necessarily reflect the views of other members of the Department, College of Business, the University of New Haven or its board of Governors. Upon request, single copies of the paper will be provided. References in publications to Department Special Student Series should be cleared with the individual author to protect the tentative character of these papers.

The series editor is Professor Esin Cakan. You may contact her via email at [email protected] or write to her at:

Department of Economics College of Business University of New Haven West Haven, CT 06516 The Department Senior Thesis Series is administered by the Editor, Esin Cakan and benefits from the commentary and direction of its board members: Professors A.E. Rodriguez and Kamal Upadhyaya.