The false promise of economic impact statements.
The false promise of economic impact statements
It’s a staple of the news cycle: A new study documents the multimillion-dollar impact of a given company, industry or institution on the local economy, prompting policymakers to call for further investment because of its “economic impact.”
These studies are impressive. But what exactly do they mean? Nearly all economic impact studies are what I call “hagiometry: purchased flattery with numbers.” Let me explain.
Hagiography, according to the Oxford English Dictionary, refers to “a very admiring book about someone or a description that represents the person as perfect or as much better than they really are.”
The wealthy and successful will often commission a biography that puts their life in the best light, trumpeting their accomplishments and minimizing or overlooking their flaws. Hagiography isn’t limited to books. Marie de’ Medici — the mother of France’s King Louis XIII — commissioned Peter Paul Rubens to paint 24 canvases depicting her life, each featuring hints of divine intervention on her behalf.
Portrait painting may have fallen on hard times, but hagiometry, in the form of economic impact studies that flatter their clients, have become increasingly popular. Locally, you can find economic impact studies of Oregon Health & Science University, Intel, the University of Oregon sports programs, the travel industry, the beer and wine industries, and even the Public Employee Retirement System. Each, unsurprisingly, was commissioned by the organization or industry that was its subject.
Economic impact studies are actually political documents: They are used to make a very public case that we ought to defer to the industry’s wishes or generously support them from the public purse. But these studies are typically a poor guide to public policy.
Why? First, economic impact is an elastic term. What we really care about in the public realm are direct jobs: income levels and net tax revenues. But economic impact studies tend to count every dollar, however remotely connected, as an “impact.” For example, tourism “impacts” include the money Oregonians spend on gas for trips 50 miles and longer.
Impact studies also make sweeping claims about total spending that are based on questionable assumptions. Most studies assume, for example, that if money weren’t spent in a particular industry, that it wouldn’t be spent in the state at all. The numbers can be large but meaningless: An economic impact study of left-handed people would undoubtedly show that they account for $1.7 trillion in economic output, but that hardly means we ought to have special policies that defer to their interests.
Second, double-counting is rampant. It’s quite common for different industries to count the same dollar of spending as “their” impact: For example, an Intel engineer’s job, salary and taxes get counted as Intel’s economic impact; when he travels to his second home in Central Oregon, that same income gets counted as part of the impact of the travel industry; when he buys a beer, that gets counted again as an impact of the brewing industry; when he gets a checkup at OHSU, that’s an impact there, too. And so on.
Third, what these studies count as “impacts,” others might regard as “costs.” The more money we collectively spend on health care, for example, the greater its “economic impact.” But you and I might be much better off, individually and collectively, if health care were cheaper and more efficient, and if we spent less money on it. Economic impact is not the same as well-being. Always ask who gains and who loses. Economic impact studies are notorious for not talking about the distribution of costs and benefits.
Fourth, think about alternatives. Every expenditure has an economic impact. Economic impact studies are almost invariably myopic — they look at only one firm or industry. But many industries and firms and projects drive our economy, and if one were less robust, others would likely be more robust. Portlanders spend less money on transportation than people in other cities, so the economic impact of transport is smaller than elsewhere. But they can then spend that money on other things — like beer — which means the economic impact of other industries is correspondingly larger.
Fifth, discount multipliers. Much of the ego inflation in economic impact studies comes from touting the multiplier effect of an industry’s expenditures. But all expenditures have a multiplier effect, and the differences in multipliers between industries are often very small.
Finally, be aware that multipliers work in reverse, too. If the public sector subsidizes an industry with taxes, those taxes take money out of consumers’ pockets that would otherwise be spent, and that produces a negative multiplier.
Fawning biographies seldom provide answers to important questions. Confronted with an economic impact statement, everyone should probe the details, focus on direct jobs and wages and discount multipliers. And just because something is big doesn’t mean we should provide more public support or resources.
To be meaningful, economic studies need to address alternatives and choices.What return could we get economically if we spent money on some other logical priority, like childhood education (which, too, would have a multiplier effect)? And we should insist such studies tell the public about the returns from incremental investment. Some industries, though large, may be mature or declining, or may offer few opportunities for growth.
If Donald Trump commissioned the story of his life, you’d probably take any claims it made with a large dose of skepticism. The same rule should apply to economic impact studies.
- Joe Cortright is an economist for Impresa, a Portland consulting firm. He conducts “cluster studies” of different industries, counting jobs and wages — but not multipliers or impacts.