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Decoding Economic Impact Analyses in the News

June 21, 2018 by Tim French

Newsprint, unlike your average algebra quiz, leaves little room for showing your work. But that doesn’t mean that you have to give partial credit to every large sum that’s inked across page A1. Fortunately, there are a few easy tricks you can rely on to suss whether those impressive economic numbers are fact or fake news.

Common misconceptions

First, the calculation process that builds an impact analysis only responds to the numbers and assumptions supplied by the researcher. If the researcher isn’t aware of a mitigating factor associated to a project, then it won’t affect the results as it should. Perhaps the most common sin of omission is opportunity costs. The term gets a lot of play in the residential realty sphere where the decision to sell or buy is weighed against any other alternative to decide how best to manage a property for maximum profit. Similarly, in economics opportunity costs are the accounting of all possible uses for an investment of some kind within a given geography (whether that’s deciding how best to allocate tax credits or develop public property). A story about the massive economic benefit that a project will bring to a town or city which omits alternative proposals should raise eyebrows.

20170316_CO-SD_WhitePaperCover_ImpactFactCheckingMany state, county, and city offices rely on a staff economist or economic modeling software to gauge the costs and benefits of tax incentive programs and the economic contributions of industries within their climes. If a study seems spurious to you, ask your local government offices about the study. Download "5 Questions to Ask When Fact-Checking an Economic Impact Analysis" to learn more.

Second, there’s the matter of the feasibility study. Just because the potential for a significantly beneficial economic impact exists, does not mean that all the other requisite factors which would contribute to making that economic effect happen are in place. This is one that project managers often learn the hard way after a project fails in spite of a very optimistic economic impact analysis.

Last but not least, impact analyses are fundamentally macroeconomic and not microeconomic. Simply put, an economic impact analysis can describe linkages between industries within an economy on a big-picture scale but not prescribe individual business practices, inform price-setting decisions, or describe how the quality of life for workers or residents in an area will benefit from an economic change. But what studies of this type do provide is enough information (coupled with other avenues of research) to make a very educated best guess about how an economic shock will ripple through an economy.

Questions to ask

Reducing the results of a multi-page impact analysis down to part of even a long-form article by the best of reporters is no easy feat. In the best cases, a story should provide some context for an analysis’ total economic impact effects. But in worst cases, a story may fleetingly mention a single number before moving on to other points. Here are just a few things to look for the next time your favored news source reports on an economic impact.

Economic impact of what?

Economic impact analyses describe activities that can be expressed in dollar amounts. These activities can be quite varied in scope—from the total GDP of a nation to the per capita local tax revenue in a specific industry in a single county. So when you hear someone describe an activity as having “an economic impact of $450 billion” without any further detail, the number is ultimately meaningless. Look for an impact’s dollar amount to be followed by concrete economic measures like GDP, value added, employee compensation, or taxes.

For which industry primarily?

As you can imagine, an increase in sales in the automobile industry is going to have a greater impact on the stamped sheet metal manufacturing industry than it will on apple farming because cars share a strong backward linkage to sheet metal compared to apples. It follows, then, that whatever an economic impact analysis examines, the results will be more meaningful for some industries (and individual businesses, employees, and households by extension) than for others. So when an impact analysis promises to bring that “$450 billion in economic activity” to an area as a result of setting a plan in motion, it’s essential to find out in which industry or sector the capital investment is being made or the operations will be centered. If the host region to that economic change contains industries which support the primarily affected industry, then it’s likely that the economic impact will ripple through the local economy. If, however, there are no significant linkages between the local economy and the primarily affected industry, then much of the inputs needed to maintain the operations of that industry will be imported from elsewhere and the economic impact may leak out of the local economy.

Compare impacts to inputs and area-wide totals

If an impact seems too good to be true, then it’s worth measuring against something real. Though many new activities in a region will increase the local GDP, the economic impact will rarely double or triple the GDP (unless that area is severely underpopulated and devoid of many industries). One of the best checks against over-inflated estimates is to find an after-the-fact report on what measurable impacts occurred as a result of a completed similar activity in the same or an identical economy.

Generally, the closer the impacted industry is to the end of a supply chain, the smaller the economic impacts will be. If, for instance, the impacted industry is a form of retail, office work, or in the services sectors (where most of the initial investment would be expended on employee compensation relative to anything else) then the continued ripple of impacts through the economy would primarily filter through household expenditures and little else. By contrast, an industry which produces hard products or commodities that rely on an extensive supply chain will tend to have greater economic output due to the value added on intermediate expenditures between the industry’s suppliers.

If the impact of something triples employment in an area, that should raise suspicions.

Are any assumptions included?

Finally, look for some reference to assumptions which shaped the reporting, a link to the actual economic impact analysis, or information on who commissioned and executed the study. Naturally, the economic data available to describe how an economy will behave is inherently limited (just like any man-made data source). Analysts compensate for blind spots in the data with assumptions (whether stated or unstated). Knowing who was responsible for the study will help add color to your understanding of what those assumptions might be. Consider the source.

For example, the most common (and safe) assumption is that the economy will remain static throughout the duration of the activity they’re modeling. This is essentially another way to say that the analyst is presuming that there won’t be a disaster or some other event which might fundamentally change the way that a specific economy functions. You’ll be hard pressed to find an economist willing to predict very far into the future.

Other assumptions include, but are certainly not limited to:

  • What’s the specific region being impacted?
  • Who is included in employment counts?
  • What’s the time frame?

The Takeaway

Even though analysis results may vary from analyst to analyst due to varied assumptions or known inputs, consulting multiple sources and grappling with the underlying methodologies can illuminate much of how an economy functions and might behave as a result of new activities in a region. You can think of it as a sort of cone of uncertainty which shows the general shape of the benefits which certain industries and their employees might enjoy as a result of economic change. To sum it all up, as with any other detail included in an article or broadcast, consider who benefits, who’s talking, whether statements are plausible or verifiable, and get as many perspectives on the issue as you can.

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Topics: Data, Economics, Methodology


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