Why Bother with Economic Impact Studies?

By August 3, 2017Blog

A few months back, Dr. Roy Cordato published a strong critique of economic impact studies. The essence of his argument—that most economic impact studies are lacking because they don’t address opportunity costs—was nuanced and insightful. And it wasn’t wrong. But does that mean economic impact studies are pointless? Not at all.

For one thing, Dr. Cordato ignores a fundamental truth defining the entire field of economics: it’s all a simplification. Yes, most impact studies fail to address the entire spectrum of possibilities, but so do most economic models in general. That is, in fact, the purpose of a model: to reduce the maddeningly complex system that is any economy into something that provides understanding and value. Dismissing impact studies because of this reality is like arguing that the Congressional Budget Office is pointless because it fails to address the effects of never-to-be drone strikes while scoring a healthcare bill.

So yes, like every other aspect of economics, impact studies have their limitations, and it should never be argued this is not the case. But they also have the potential to add great value to both public and private decision-making processes. Below are a few examples of when economic studies can be especially useful.

Ensuring Communities are Getting their Money’s Worth from Incentives Packages

Whether you agree with them or not, financial incentives have become a universal tool for economic development across the entire United States. In utilizing public funds to support private businesses, then, governments have a minimum obligation of ensuring those funds are actually delivering what they promise. Economic impact studies can do this. By capturing the totality of real-world effects created by a new business or activity, impact analyses adjudicate the question of efficacy—how many jobs were created, how much the tax base was widened, etc.—in a manner that is fair to both the businesses involved and the communities they operate in. Such understanding is essential for both accountability in current incentives programs and in refining future offerings.

Measuring the Effect of Outside Visitors

Make no mistake, conventions, festivals, and other events that bring in large crowds of outsiders can create huge inconveniences for locals; congestion, higher transportation costs, and inability to get reservations at that sweet new insect spot. But they also represent a textbook scenario in which impact studies can provide some great perspective in that opportunity costs aren’t really an issue.

Wait, how’s that? Well it can be safely assumed that the vast majority of outside visitors wouldn’t have come to town if not for the special event they’re attending. Thus, it can also be assumed that the vast majority of the money they spent would never have come into the community otherwise. Thus, economic impact studies can show how it actually benefits residents of a community to avoid downtown for one weekend out of the year.

Debunking Bad Economic Impact Studies

As much as we are huge proponents of economic impact analysis, there is no question that there are some questionable reports out there. Whether it’s promising a ludicrous number of jobs, or simply misconstruing the facts, such flawed studies have the potential to poison policy debates. To rectify these issues, a more sober and rational analysis is often required.

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