The Paris Olympics Won’t Add Billions to France’s Economy
Let’s take a look at some of these unseen effects of hosting mega-events and debunk the myth of Olympic-sized economic impacts.
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As the world gears up for the Paris 2024 Olympics, the International Olympic Committee (IOC) and local politicians are eagerly awaiting to see what economic impact the Games will bring to the City of Love. They have touted these benefits for the past year and a half and even recently released a commissioned study that found the Games should generate between EUR 6.7 and 11.1 billion in net economic benefits for the host city.
Officials claim we have already seen surges in job creation and infrastructure improvements and this weekend will bring a wave of tourists. The Olympics certainly sound like a recipe for economic success, with an economy supercharged by Olympic excitement, ready to reap the rewards of hosting one of the world’s biggest sporting events.
However, this glowing narrative misses the mark. Organizers have glossed over some of the less glamorous economic realities. To understand the true impact of hosting the Olympics, we must look beyond the surface. We need to consider the unseen effects—such as substitution effects, crowding out effects, and leakage—that often chip away at the supposed benefits. These aren’t just theoretical concepts. We’ve seen them in previous Olympic Games, and some of these effects have already started to emerge in Paris. So, let’s take a look at these unseen effects and debunk the myth of Olympic-sized economic impacts for host cities.
The Seen vs. The Unseen
The concept of “the seen versus the unseen” was popularized by the 19th-century economist Frédéric Bastiat. He pointed out that while the immediate, visible effects of an action might appear beneficial, the unseen consequences often tell a different story. Bastiat illustrated this idea with the parable of the broken window, demonstrating that destruction and the money spent on recovery are not truly a net benefit to society.
When it comes to the Olympics, the “seen” effects appear obvious: bustling construction sites, an influx of tourists, and a festive atmosphere. But the unseen effects reveal a less optimistic reality. Consider the Parisians who leave the city to avoid the chaos and take their Euros with them instead of spending them around town. These “unseen” actions distort the economic impact narrative and are often left out of the economic impact studies. Understanding both the seen and the unseen is important if we want to grasp the real economic impact of the Olympics or any other mega-event.
Shifting Spending Patterns
Let’s start our analysis of “the unseen” by examining the substitution effect, a key economic concept often overlooked in the hype surrounding the Olympics. The substitution effect occurs when spending shifts from one area to another without generating new economic activity.
Without the Olympics in town, a trip to Paris might involve spending money on various attractions, from the Louvre Museum to the Palace of Versailles as well as cafes and restaurants throughout the city. However, with the Olympics in town, tourists might focus all their money on Olympic events, accommodations, and dining near the venues.
On the surface, this seems like a win for the Olympic sites in Paris. These areas see a spike in tourism and spending, which appears to be a positive economic impact. However, this is “the seen” effect that Bastiat warned us about. The unseen consequence is that other businesses in Paris lose out on that tourist’s spending. The money that would have been spent throughout the city is now concentrated around the Olympic venues.
This shift doesn’t increase overall spending; it just reallocates it within the city. So, while the areas around the Olympic sites might appear to benefit, other parts of Paris could see a decline in economic activity. This reallocation can distort the true economic impact, making the benefits seem larger than they are.
The Tourism Crowd
One of the most widely proclaimed benefits of hosting the Olympics is the anticipated surge in tourism. Supporters expect millions of visitors to flock to the host city, spending money and boosting the local economy. While we’ll likely see a lot of international tourists when we tune in, the crowding out effect suggests this influx is not as beneficial as it seems.
The crowding-out effect occurs when local residents and regular tourists avoid the host city during the Games to escape the congestion and high prices. Delta’s CEO recently announced that the Paris Olympics will result in a $100 million loss in revenue because travelers are heading to other destinations. Air France is expecting an even bigger hit.
The intense media scrutiny during the Olympics may even deter future tourists. If things go wrong—whether it’s logistical challenges, security concerns, or overwhelming crowds—this negative attention can have a lasting impact on the city’s reputation as a tourist destination.
Regardless of the number of international visitors seen on television during the Games, it’s important to remember that the Olympics rarely lead to a sustained increase in visitors. Paris is already one of the most visited cities in the world, attracting millions of tourists each year. The spike in tourism is short-lived, and there is often no meaningful effect on the host city’s global profile.
Where Does the Money Really Go?
Another important factor that dilutes the economic benefits of the Olympics is known as leakage. This occurs when a significant portion of the money spent in the host city during the Games flows out of the local economy and into the pockets of international companies and contractors.
Simply put, not all the money spent in the city stays in the city. Major hotel chains like Hilton and Marriott, and global restaurant brands like McDonald’s and KFC, capture a large share of tourism spending. The profits from these expenditures don’t stay within the local economy but are sent back to the companies’ home countries.
So, while it may look like the Olympics are bringing in a lot of money, much of it leaks out of the host city, reducing the overall economic impact. Understanding leakage helps us see that the economic benefits of hosting the Olympics are often less significant than they appear.
The Illusion of Long-term Benefits
Proponents of hosting the Olympics often highlight the long-term benefits, particularly the investments in infrastructure that come with the Games. But why do politicians need to host the Olympics to improve their city? Many of these investments—new roads, improved public transportation, upgraded facilities—could have happened on their own, without the Olympic-sized price tag. And, quite frankly, they probably would have been cheaper. The Olympics are notorious for cost overruns, turning what might have been a reasonable investment into a financial headache.
At least Paris had some advantages over other potential host cities in that many of the necessary stadiums and facilities were already in place. This made Paris an attractive option since it reduced the need for new, expensive constructions. But even with these advantages, the city is still expected to spend 115% more than it had estimated. But how significant are these supposed benefits in the grand scheme of things?
Paris is a massive metro area, generating roughly one-third of France’s GDP. In 2022, that amounted to around 782 billion euros. If we take the optimistic view and assume the Olympics bring in an extra 11 billion euros (which, based on our earlier discussions, is highly unlikely), that would only represent about 1.4% of Paris’s economy. It’s a drop in the bucket for such a large economic powerhouse.
Moreover, the focus on long-term benefits often glosses over the fact that the infrastructure investments tied to the Olympics might not always serve the best interests of the city or its residents. Instead of targeted, thoughtful investments that address specific local needs, Olympic-related projects are often rushed and prioritized to meet the demands of the event, not the people who live there.
Final Thoughts: Civic Pride vs. Economic Reality
Hosting the Games can indeed create a sense of unity and pride among residents. There’s something special about seeing your city on the world stage, hosting athletes and visitors from across the globe. It’s like throwing a huge party where everyone gets to share in the excitement.
However, this emotional benefit rarely justifies the large financial costs of hosting the Games. Economists use contingent valuation methods to measure how much people are willing to pay for things like civic pride. Unfortunately, the perceived benefits are often far outweighed by the costs. For example, a study of the 2012 London Olympics estimated a civic pride benefit of around £2 billion, while the total cost of the Games was nearly £9 billion.
The truth is, while the IOC and local politicians often present a glowing picture of the economic benefits of hosting the Olympics, the reality is far more nuanced. When you consider the unseen costs of hosting the Olympics, the financial burden often far outweighs the short-term gains. As the Paris 2024 Olympics unfold, let’s appreciate them for the excitement and pride they bring, rather than the supposed economic windfall.
If you’re watching the Olympics, leave a comment and let me know which sport you are most looking forward to seeing. If you have a friend who believes that the Olympics are a good investment, be sure to share this newsletter with them. Now let the (incredibly expensive and not all that economically beneficial) games begin!
The International Olympic Committee is a not-for-profit, nongovernmental body that generates 91% of its income from selling broadcast rights (61%) and sponsorships (30%) [Associated Press]
Paris will join London as one of only two cities to host the Summer Olympics three times [Guiness World Records]
The tourism board of Paris expects around 11.5 million tourists to visit the city during the Olympics [Forbes]
The Director of the Paris Tourist Office reported that air arrivals in Paris during the first three weeks of July were down by 15% compared to the same period in 2023 [Le Monde]
Air France-KLM forecast a revenue hit of as much as 180 million euros ($195.5 million) in June through August because of the Olympic Games [CNBC]
Great post, and maybe the area in which economic thinking helps society the best. When we had the World Elite bike race in Richmond, The organizers talked up the crowds so much that all the locals cleared out and Richmond was a ghost town all week, until the weekend when the crowds finally came.
I am reading this article a year and a half later, and now I wonder if the LA Olympics will turn a profit since they already have most of the infrastructure in place to host a large event. Also, they are outsourcing some sports, like softball, to other cities to ease financial burden.
It will be interesting to see what happens.