Learning to Question Claims about 'Economic Impact' | Eastern North Carolina Now

    Publisher's note: The author of this post is Michael Lowrey, who is a contributor for the Carolina Journal, John Hood Publisher.

    Economic development is a game, and it's played by its own special set of rules. At its core, it involves taking public money and spending it on private companies, which is also presented as a gain for the public as a whole. That's especially true for stadiums and other facilities built for sports teams, where the public expenditure often is quite large and the number of people employed is rather small.

    Persuading the public to fund these facilities can be a hard sell, but project backers always have what they see as an ace in the hole: studies claiming to show exactly how much economic impact a new facility will generate. The numbers are invariably large - $61.8 million a year in economic impact from the NASCAR Hall of Fame or $7.2 million a year for a minor league baseball team in Fayetteville.

    There's good reason, though, to question such impact figures. The estimates suffer from false precision, project costs are ignored, and other alternative uses aren't considered.

    Economic development projections are generated from input-output models: increasing inputs (spending) with a certain industry will result in a predictable increase in outputs. The models assume indirect effects - multipliers - so that the spending at the stadium, for instance, will result in additional spending throughout the broader local economy. IMPLAN, the company that makes the most commonly used software to generate such estimates, is based in Huntersville.

    Such IMPLAN estimates are overly precise. In the Fayetteville study, a baseball team was projected to generate $7,186,000 in economic activity each year. Yes, you read that right - exactly $7,186,000 and not $7,185,000 or $7,187,000. The precision suggests certainty and frames the terms of the debate.

    Behind the $7,186,000 are a whole host of assumptions, including but not limited to how many people will attend, whether they live in the immediate area or would come from out of town to see a game, average ticket prices, parking revenue, advertising revenue, spending on concessions and novelties, and the size of local multipliers.

    In the real world, your mileage - or a facility's actual performance and the multipliers involved - may vary. Indeed, as the Fayetteville report states: "It is important to note that because events and circumstances may not occur as expected, there may be significant differences between actual results and those estimated in this analysis, and those differences may be material."

    That certainly happened in Charlotte, where the NASCAR Hall of Fame's actual attendance came in at about half of what had been projected. Good luck getting project backers to acknowledge any downside risk before a project is approved.

    IMPLAN studies are not a cost/benefit analysis. Stadiums, arenas, and the like don't arise magically overnight on what had been little-used parcels of land. They require resources to build - and those resources have alternative uses.

    If a local government raises taxes to build a new stadium, it is taking money out of residents' pockets, and much of it might have been spent locally. There are indirect (multiplier) effects here too. IMPLAN models don't take these costs into account. If they did, the net economic impact from a project would be lower and in some cases negative.

    Nor do input-output models consider whether alternative use of those dollars might have created a greater economic impact. Ultimately, that is the most critical issue - limited resources. Throwing money at second-best or third-best uses doesn't benefit society as a whole. So while building a new ballpark could be a "good" use of money that generates some level of economic activity, it's possible that some other use might generate a greater economic return.

    Economic development figures need to be taken with a big grain of salt. If the impact claimed seems unbelievably large, it probably is, in fact, unbelievable.