This post appears here courtesy of the John Locke Foundation
. The author of this post is Jon Sanders
- Policymakers trusted to advocate for their communities must ask hard questions of businessmen, special interests, and consultants promising sure-winner community benefits if you agree to spend public money on their projects
- Their economic impact studies offer glossy pages and lots of impressive numbers, but they typically skimp on actual economics
- Responsible policymakers must insist on actual cost/benefit analysis produced by highly specialized economists who truly understand how to conduct such analysis properly
You love your community. You want to see it prosper. You tell your friends, family, and people you meet in other places about it. You hope others will see in it what you do - the more, the merrier. It's a great place to be. It's home.
Suppose you've achieved so much you now have the time and ability to advocate for your community. You've been chosen by your neighbors to be a city councilman or a county commissioner. You've been given a sacred trust and a wonderful opportunity to put your ideas into action to help make your community an even better place. It's a privilege and honor.
Now suppose, in your new role, you are approached by outside businessmen and consultants with their own idea of how to make your community great. Their idea could be to start or relocate a new business, build a sports facility, build a convention center, or construct some other big project that they say will be a surefire moneymaker and great for the community.
So far, so good. But why are they coming before you and your fellow councilmen or commissioners?
If they, who are specially gifted and knowledgeable in their field, have done the investigating, run the numbers, and come to the conclusion that their project is a sure bet to succeed, what are they doing? They ought to be out recruiting investors, and it ought to be easy, since it's a clear winner.
Instead, they're coming to you to ask for money. Not your money, of course. The community's. Your friends and neighbors'. Standing for them against such blatant cronyism is also the reason you've been placed in your position of trust. You know government subsidies to private business interests violates the free-market principles you hold dear, but your fellow commissioners may not share these values.
You are there to ask questions and to be very skeptical, especially when it comes to other people's resources, and you hope that your questions will generate skepticism in your colleagues about spending other people's money. If it's such a great project, why do you need our taxpayers to pitch in? Why can't you find investors? Or why are your supposed investors waiting for a guarantee of public money first? Investors are professionals at evaluating projects like these, but we are novices - what warning signs do they see that we don't?
Knowing you might ask such things, they often come armed with consultants' economic impact studies. These are generally hefty things, a hundred glossy pages of numbers, projections, artists' conceptions of your friends and neighbors and kids smiling and enjoying the project, appeals to your well-placed affection for your community. Lots of numbers showing how the money going into the project will translate into jobs for your community, grow its economy, and turn it into a place people all over the state and even out of state want to visit. The numbers are hard to follow, but their assumptions seem good and enticing, and besides, people really need to know what a great place this is, and if they come here, they will.
The appeal comes with a warning. Support the project because you love the community, they promise. Oppose it, and you're "standing in the way of progress."
They subtly use your love of community and public trust for their advantage by making you think you'd be violating that trust by asking the very questions you should be asking. (Their highly paid consultants are professionals at what they do, too, you see.)
Their economic impact reports are the key to this magician's trick.
'The missing ingredient is economics'
As part of urging local leaders to pursue policies to promote economic growth, not "economic development"
(a byword for cronyism), the John Locke Foundation has been warning about the "economic impact"
game for years. Locke senior economist emeritus Dr. Roy Cordato wrote a major report exposing the many fallacies and tricks used by these reports. They're something an economist would recognize, but not people with specialized skills and knowledge in other walks of life. And that's the point - the businessmen, special interests, and consultants are seeking economic advantages and plying you with something that seems like sound economics to someone with only a passing familiarity with economics.
The title of Cordato's report captures it: "Economic Impact Studies: The Missing Ingredient Is Economics."
In it Cordato points out several aspects of these reports that you and your fellow elected community advocates should be keenly aware of. Read the report. Here are several highlights to look for.
'What's a policymaker to do?'
- Who definitely stands to benefit? The groups bringing the project to your attention.
- What are the biggest warning signs of these reports? They're typically based on off-the-shelf modeling software featuring input/output analysis and purchased by consulting firms hired by the groups that would definitely benefit, and they typically ignore basic principles of economics.
- What would a real economic impact analysis do? Compare directly observable economic activities reasonably expected to occur from spending on the project with economic activities that won't occur but otherwise would (i.e., the opportunity cost of real economic activities foreclosed by diverting resources to the project instead).
- Why do they use a "multiplier effect"? It is a way to claim that the project is a major moneymaker for the community, not just the groups that would definitely benefit, by using the modeling software to "show" that every dollar spent produces a much greater "return" on the community's "investment" (of taxpayer dollars) through direct, indirect, and induced spending.
- How does the multiplier effect relate to opportunity costs? The models never account for opportunity costs, so they don't bother to account for the fact that unrealized uses of those dollars also would have direct, indirect, and induced spending effects, and they don't expect you'll ask about them.
- What about the law of diminishing returns? That would be "the first principle of production theory, taught in every first-year microeconomics class," which the models also don't take into account or expect to be asked about.
- At best, what can economic impact studies tell you? They can merely "provide a measure of spending flows as they move out of some industries and areas of the economy and into others."
- At best, what can economic impact studies still not tell you? Whether your community will even benefit at all - or will suffer loss - from this change in spending flows.
Cordato gives two broad criteria for examining a project properly. The first is using cost/benefit analysis of potential profitability (which is what private ventures do before making investments) as opposed to input/output analysis of money flows. The second is "hiring highly specialized economists who truly understand the nature of this kind of analysis"
rather than relying on "off-the-shelf models, such as those typically used in economic impact studies, that allow you simply to input numbers and spit out results."
Your charge to your beloved community is served by holding such proposals to high standards and asking hard questions. Cordato acknowledged that "real cost/benefit analysis is more difficult and probably more expensive,"
but he stated that could not excuse relying on economic impact studies that ultimately tell you nothing about what ultimate value to your community would government spending on the project actually provide.
"This is one case,"
Cordato warned, "where incomplete information is worse than no information at all, particularly if it is manipulated to mislead the public."
The better option by far is to adopt policies that lead to economic growth instead. Those are backed by sound economics.