Brazil's challenge: Keynes and the 38,000 hotel rooms

Posted by Gabriele Marcotti

Maracana Stadium rain construction BrazilGettyImagesThe Maracana stadium has been part of a widespread overhaul of Brazil's infrastructure

On Monday, Brazil’s deputy sports minister and Georgetown alumnus Luis Fernandes stood before the media and explained something that many might have missed.

Seventy-six percent of the money spent (he would say "invested") on the 2014 World Cup were funds that would have been spent anyway. That's $10.1 billion of the total $13.3 billion spent. Under something called the "development matrix," this money would have gone to improving airports, building roads, train lines and subways.

So if you follow this logic, you could make the case that the World Cup in Brazil is costing "only" $2.2 billion, which is almost entirely the price of the stadiums. A lot of money, to be sure, but the World Cup does generate some income. FIFA alone will buy more than "38,000 room nights" in Brazilian hotels for the "FIFA family" at a total cost of $14.3 million, according to general secretary Jerome Valcke.

(Quick thought: That works out to an average of $375 per room, per night. That’s a hell of a lot of money for the "FIFA family" -- basically FIFA employees, executives and hangers-on -- and you'd think that maybe they could have negotiated a slightly better deal for themselves, given that they're buying in bulk.)

I couldn't help but ask Fernandes: "So if that $10.1 billion was money you were going to spend anyway, why is it included in the cost of the World Cup?"

Wouldn't it be more clever to leave it out? After all, you don't include the cost of other stuff you'd spend money on anyway, like lighting the streets or staffing the hospitals or, indeed, paying your salary?

He told me that the difference was that the money would be spent (sorry, invested) in one go. Rather than building that highway at some point in the future -- when you have spare cash lying around -- the World Cup gives you a reason to spend (sorry, invest) it straight away. He added also that it was "counter-cyclical" and therefore in keeping with Keynesian philosophy. Basically the idea is that the government should spend more on public works when the economy slows down -- to inject cash into the system -- and cut back when it's booming in order to halt inflation. It's the same logic that led the U.S. government to come up with the stimulus package a few years back.

The thing is, though, there's always an opportunity cost. Every dollar you spend on a stadium or a highway is a dollar you don't spend on something else, like health care or education. Or, just to be fair and balanced, the military or private jets for government officials.

All of the above bring some level of benefit.

A stadium helps you host the World Cup and attract tourists who spend money, and that money circulates and gets taxed.

A highway allows goods and service to move more quickly and efficiently, which makes goods and services cheaper, which improves sales, which raise tax revenue.

Health care keeps you healthy and stops you from dying (at least for a while), which is good.

Education gives you the tools to be more competitive in the workplace and more knowledgeable as a citizen and voter.

The military keeps you safe.

The private jets for government officials, well ... it gets them from Point A to Point B quicker, allowing them to spend more time working for the folks who elected them (which, if they're competent, is a good thing).

Yasuyoshi Chiba/AFP/Getty ImagesSome of the Brazilian government's economic policies have led to protests during the Confed Cup

The problem, of course, is that you can't spend on everything. You need to choose how much to allocate to each category to get the maximum benefit for the maximum amount of people. That, simply put, is the trick to good governance. And, yes, it's actually a very tricky and difficult thing to do.

You would think that if there was a good case to be made to, say, renovate the airport in Fortaleza or the road leading from Recife to the Arena Pernambuco or to finally finish the Rio subway, they could make it without needing a World Cup to justify it.

Yet, evidently, they can't. Or they have their reasons for not doing so.

The impression is that the World Cup and the Olympics are basically an excuse for governments to spend enormous amounts of money; some of it on useful stuff, some of it less useful, some of it totally pointless and useless.

But, in the Keynesian tradition, simply spending the money and getting it circulating is better than doing nothing.

Remember, this is the guy who -- only half-jokingly -- argued that the government should pay somebody to dig a hole, somebody else to bury money in it and someone else to dig it up.

If you do that, you get the benefit of a short-term surge regardless. It's in the long term where the roads diverge. If you spent it wisely, then everybody will be better off and it will effectively pay for itself. If you spent it foolishly, then the government will be stuck with huge amounts of debt it needs to pay interest on, and everyone will be worse off. But by that point, you’ll probably be out of office, so who cares?

Time will tell whether the Brazilian government -- and the economists advising it, like Fernandes -- made the right choices in how to spend their citizens' money. But in the short term anyway, they're bound to get a boost.

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