Guess what? The Number might be pretending! Two common mistakes in economic impact analysis.

Here’s the second in the series from developer-cum -regional-analysis-whiz Peter Mallow on correctly and realistically using economic impact methods — and avoiding getting fooled by The Number that they generate.

In this essay, Peter is taking on two basic flaws in how economic impacts get prepared and used.  Between sloppy assumptions and amoral results, they often don’t give us the answers that we might think they do.

Amoral?  Yes. amoral.  Read on, and all shall be revealed… and if you have comments, questions… or violent protests… let me know below.

dgr

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Economic impact analysis is a powerful method for ascertaining the potential jobs and dollars a new project or program will bring to your community.  The Number from the economic impact analysis is also used frequently to generate support when existing local institutions ask for public money.

And that’s a problem, because often The Number is pretending jobs or dollars are being added to the economy when they actually aren’t.

In this article, I’m going to call places that typically use an economic impact statement to ask for money Favored Community Institutions.  For reference, the Favored Community Institution could be pretty much anything: an arts organization, zoo, major employer, education institution, professional sports team, or a major tourist attraction.

cartoon of happy zoo
Awww. Isn’t that a cute Favored Community Institution?

It is important to note that the methodology of economic impact analysis is designed for new projects or programs.  When used by Favored Community Institutions, we need to factor a couple of very important considerations into the interpretation and explanation of The Number.

First, economic impact analysis is amoral. That’s a-moral (not immoral). You know that the Favored Community Institution holds a cherished spot in the history of the community, and most people have positive attachments to that institution.  The Number reinforces the strength of the attachment – “Not only is it fun to visit, but look, it puts money into our economy, too!”

You have to keep in mind, however, that an economic impact analysis does not tell us if the Favored Community Institution is better than any other institution in the community.  Economic impact analysis cannot answer the question that you have to answer: Is this an appropriately beneficial use of limited public money?

An example may help explain this distinction.

Let’s imagine that the Favored Community Institution is not a happy place like a zoo or a tourist destination.  Instead, the Favored Community Institution is a grenade factory. It employs a few hundred people who build and ship grenades all of over the world. The Favored Community Grenade Factory has been in town as long as anyone remembers, and its leadership serves the community on various boards and occasionally elected office.

The Favored Community Grenade Factory wants to retool due to high demand for their grenades.  The expansion will create new jobs and bring new dollars to the community from the increased production.  They even have an economic impact analysis showing a large Number of new dollars that will be brought into the community. But they can’t do it without a public subsidy for new roads and rail connections.

world war 2 grenade factory, Australia
Not such a happy Favored Community Institution. From www.publicworks.qld.gov.au

Here’s the tough question: can we conclude that this is an appropriately beneficial use of limited public money, even though its existence is predicated on people dying?  What about the brand-new, farmer’s market on the other side of town?  An infusion of public dollars will allow them to, employ more people, expand their parking, buy more from local farmers, and make people healthier

We want to think that all economic impacts are good economic impacts, but we know in real life that not everything is good for us (like grenades versus farmer’s markets). Unfortunately, economic impact analysis doesn’t help us make value judgments or compare the non-monetary impacts of different institutions.

Second, if a Favored Community Institution is already part of the community, then only new dollars or jobs are being estimated in the economic impact analysis.

The standard economic impact analysis method is based on the assumption that new money will be coming into the community.  The new money creates a “shock” that reverberates within the community.  The “shock” created by the new money is the multiplier effect – the promise that the new money will generate additional jobs and money circulation beyond the initial investment.  As a result, what that multiplier effect gives you is the amount of new (revenue, jobs, etc.) that will result from that investment.

But the Favored Community Institution is generating at least some of those impacts today, before the proposed investment.  Most economic impact analyses don’t separate those out.  They calculate the impact based on the total value of what’s there today and what’s proposed.  That basic overlooked assumption violates the fundamentals of economic impact analysis. When existing jobs and spending are included in the analysis, The Number will be grossly overstated because the community has already absorbed those jobs and spending.

Think back to our Favored Community Institution for a moment (the happy one, not the grenade factory).  Let’s say that it currently employs 100 people. It is looking to expand and is requesting $5 million in publicly-funded improvements.  This expansion will generate 50 new jobs.  The Number that they gave you in their economic impact analysis said that over 200 service and support jobs would be generated by the proposed expansion.

This is a gross overstatement of The Number. If they were introducing 250 new jobs into the community, then they might generate 200 to 300 new service and support jobs.  But according to any kind of reasonable estimate, 50 new jobs might support 75 to 100 service and support jobs.

So, does the Favored Community Institution deserve those additional public funds?  Well, it’s complicated … and the answer has to include factors outside of the economic impact analysis.  But don’t be misguided by The Number – at the end of the day, The Number only says what it says, and is only as good as the thought that went into it.

 

 

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