Chapter 11: Economic Impact Analysis “Beware the Big Number” William Bellinger, Chapter 1 of this book

The Meaning of Economic Impact  “An economic impact analysis attempts to measure or estimate the change in economic activity in a specified region caused by a specific… policy, program, project, activity, or other economic event” Wikipedia, “Economic impact analysis”

Steps in an Economic Impact Analysis  Calculate the net increase in local direct spending caused by a project, event, or institution.  Determine the marginal propensity to consume locally and the local spending multiplier using an economic model.  Use the multiplier and/or input-output model to determine the cumulative size of the induced, indirect, and total spending figures for the project.  Use available models and data to estimate total employment effects, which also include direct and multiplier effects.  In many cases, effects on local and state government tax revenue and the use of related public services such as schools can also be estimated.

Keynesian Income Flow 

Concept: The Marginal Propensity to Consume Locally  The marginal propensity to consume locally is the ratio of added local spending divided by added local income.  As a formula, the marginal propensity to consume locally (MPC L ) = ∆C L /∆Y, where ∆C L is the change in local consumption, and ∆Y is the change in local income.

The Keynesian Multiplier  Keynesian multiplier equation:  (11-5) ∆Y/∆C = 1/ (1-m).  Y = gross income, C=consumption, m = the marginal propensity to consume  One can substitute investment or government saving for consumption. All can be analyzed using the Keynesian spending multiplier.

Your Turn 11-1: Impact Estimates for the Carlisle Barracks, PA 2004  A. Use the direct spending and total output figures to calculate the multipliers for spending and employment for the Carlisle area and for Cumberland County. There are 4 multipliers in total.  B. Using the formula ∆Y/∆C = 1/(1-m) and the spending multiplier values from step (A), solve for m to find the marginal propensity to consume locally.

The Economic Base Model  Total employment (L) is divided into basic or export employment (E) and non-basic or local service employment (N). The non-basic sector’s employment is related to the area’s total employment by a linear function, as in equation (11-7).  (11-6) L= E + N (see above for the meaning of the symbols)  (11-7) N = a + b L where a is a constant and b = ∆N/∆L.

The Export Base Model The export base equation relates local employment L to export employment E.  (11-9) L = (E + a)/(1-b) where a is a constant and b is the MPC L.  Your Turn 11-2: A community with 10,000 jobs in the export sector and values of 2,000 for a and ½ for b will have how many total employees? Use equation (11-9) to find the answer.  Your turn 11-3: If a town has 20,000 total employees and a basic/non-basic multiplier of 2.5, how many employees work in the export sector?

The Location Quotient  The Location Quotient = local PC production / local PC consumption  Estimates come from the following formulas:

A Location Quotient Example  Your Turn 11-4: Techville employs 400 of its 1,000 workers in the PC industry. Assume that for the nation 5 percent (.05) work in the PC industry. Find Techville’s location quotient (employment) for the PC industry.

Input-Output Models  A sample input-output table.  The rows are inputs and the columns are outputs.  The effects of a $1,000 increase in steel exports

More Representative Input-Output Multipliers industry coal miningconstructionapparelchemicalsretail tradehealth services Farming Mining construction durables non-durables transportation wholesale retail finance services households Total

Example: ArtPrize, Grand Rapids MI 2013 CategoryDirect Spending (millions) Output Multiplier Impact on Income (millions) Attendees$ $20.33 Operating Expenses $1.2 (range) $1.86 Total$12.7xx$22.19

Example: The New York Sports and Convention Center  New York Sports and Convention Center was proposed for west side of Manhattan.  A New York Jets football stadium and a convention center were the main components.  This project had an estimated cost of roughly 2.8 billion dollars.

Results from an Impact Study  The stadium would host 17 stadium events each year, including 8 Jets football games and 9 large concerts or college sports events.  The study also assumed that there would be 20 multi-day expositions at the convention facility, of which 14 would be new to the city.  Overall, added direct spending was estimated to be $314 million per year, of which $206 was new visitor spending.  The total economic impact of the facility was estimated to be $519 million per year.  Government revenue and employment effects were also estimated and found to be positive.  Based on these results and the cost estimate of $2.8 billion, the facility would offer a rate of return of over 18 percent.

Problems with the N.Y. Impact Study  The direct spending was calculated for New York City only, but its multiplier was for the New York metropolitan area.  There was also no consideration of ancillary spending in New York from the current New Jersey facility.  Thirdly, neither alternative locations for the stadium nor alternative plans for developing the Manhattan site were considered. Other uses for the site were found to be more valuable.

Conclusion  Economic impact studies are based on macroeconomic and regional concepts such as the Keynesian multiplier, the export base model, and regional input-output models.  Economic impact studies are not entirely consistent with the goals or methods of efficiency-based benefit cost analysis, or with the society-wide considerations required under utilitarian ethics.  The explicitly political role of most economic impact studies also raises concerns and questions that one should consider when reading about any economic impact number. Was the study funded by an advocacy group? Does the project being analyzed require a large public expenditure? What other alternative uses of the land or funding could be considered? Is the large economic impact number significant relative to an area’s economy?