Economic Impact Analysis: Principles and Applications

1. Foundations of Applied Economic Development Research August 18-20, 2015 Arlington, VA Day 3

2. Instructors Terry Clower Northern Virginia Chair, Professor of Public Policy, and Deputy Director of the Center for Regional Analysis, George Mason University Tom Tveidt Research EconomistSYNEVA Economics

3. Agenda Day 3 Start 8:30 • Principles of Economic & Fiscal Impact Analysis Break 10:30-10:45 • Learning Lab – Presentation Adjourn Noon

4. Principles of Economic and Fiscal Impact Analysis

5. Teaching Goals • Introduce students to the logic and metrics of impact analysis • Input-output method • Recognize important elements in a report

6. What is Economic Impact Analysis? • Estimating how spending associated with a particular event, project, or industry flows through a regional economy.

7. What Economic Impact AnalysisIS NOT • It is not the same as fiscal impact analysis. • We will get to that shortly • It is not usually a risk-adjusted analysis. • It is not cost-benefit analysis.

8. Why do we need impact analyses? • Allocate resources among competing projects • Assess the potential for an investment policy • Retaining an existing industry • Attracting a new industry • Putting “hard numbers” on political strategies to test their veracity

9. Steps in Performing aResearch Project • Identifying stakeholders • Deciding on scope of the analysis • Geographic • Type of analysis • Timing • Understanding costs and identifying resources

10. Input-Output Models • Developed by Wassily Leontief (awarded Nobel Prize in Economics in 1970s ) • Part of National Income and Product Accounts • Extend ideas of the economic base model by disaggregating production into a set of sectors • Produces multipliers by sector • Can be extended to explore issues of income distribution, tax policy, development strategies etc.

11. Production Function Production Function for a Spiral-bound notebook

12. Input-Output Models Input-Output Models add Households • both suppliers of labor inputs to regional industries and purchasers of regional outputs • earnings include: • wages & salaries • proprietors’ income • directors’ fees • employer contributions for healthcare insurance less • personal contributions for social insurance • household column based on PCE

13. Intermediate Inputs & Imports • Intermediate inputs = consumption of goods and services purchased from other industries. • Imports = consumption of goods brought in from outside the region

14. Value-Added Components • Value added = gross output (sales or other receipts and other operating income, plus inventory change) minus intermediate inputs. • Includes compensation of employees, profits, dividends, can include indirect business tax and nontax liability.

15. Final Use Components • Includes personal consumption expenditures, gross private fixed investment, change in business inventories, exports of goods and services, imports of goods and services.

16. Input-Output Table

17. Input-Output Table

18. Input-Output Table 18

19. Input-Output Table 19

20. Input-Output Table 20

21. How are multipliers calculated? • National source = national data • RIMS II, U.S. Bureau of Economic Analysis • Based on location quotients • Assumes Regional production meets local needs first, and the leftovers are exported

22. Steps in estimating multipliers(based on National I-O Accounts) • Prepare adjusted national industry-by-industry direct requirements table • Prepare regional industry-by-industry direct requirements table • prepare industry-by-industry total requirements table • derive multipliers

23. Input-Output Models • Relatively Simple (compared to direct measurement) – but problematic because… • Does not account for variance in regional consumption characteristics • Neglects “cross-hauling” • Adjust for regional purchases

24. Input-Output Models • Direct effects: • The direct activity(s) of the project in question • Usually defined the direct effects in terms of output or employment. • Most important step in conducting the analysis!! • Indirect effects: • Capture the impacts on firms that (directly and indirectly) supply the activity defined in the direct effect(s). (Type I multiplier) • Induced effects: • Captures impacts of spending by households receiving income based on direct and indirect effects (Type II multiplier)

25. Impacts on… • Output – measure of transactions • Employment – headcount • Labor income – wages, salaries, some benefits • Value added – GRP equivalent • Proprietor’s income • Property income • Taxes on production and imports less subsidies • Gross operating surplus

26. Input-Output Models Input-Output Assumptions: • Constant returns to scale • Linear and homogenous production functions • Perfectly elastic factor supplies • Constant technology • Note: Some commercial models adjust for these.

27. Input-Output Models(Other Considerations) • Study area definition • Gross vs. Net Impacts • Accounting for leakages/spending realignment • Timing • Adjusting for prices • Defining the direct effect • Margins

28. The Functional Economic Area Residential Location of Labor Force Travel Corridors Impact Site Consumer Locations Location of Support Services Location of Supporting Industries

29. Input-Output Models Defining the Direct Effect • Most important step • New firm coming to town • Industry already exists in the area: use established multipliers • Industry not in area: may have to build estimates based on firm expenditure patterns • Bill of goods approach • Costly, time consuming, fraught with error, probably can’t get detailed data

30. Timing of the Study • a-priori • Projected spending • Realistic? • After the event • Actual spending • Appropriate timing depends on purpose • Comparatively few after the fact studies

31. Projects • Building a -- whatever • Bridges • Roads • Reservoirs • Buildings • Others?

32. Impacts by Endurance • Temporary impacts of construction activities • Construction may last several months or several years (for some roads, never ending) • Once construction stops, impacts cease • Recurring Impacts • Operations • Maintenance / repair • Net or gross? Opportunity costs?

33. Construction Budget Data • Do you have access to detailed data? • Common way: Spending $150 million on building a new highway • Less common: Detailed budgets

34. Land & ROW acquisition Engineering & design Environmental studies Archeological studies Mitigation Contracting Bonding Public relations Concrete Aggregates Steel/iron rods Contractors Fuel Labor Attorneys Insurance Examples of HighwayConstruction Budget Items

35. Landscaping Engineering testing Environmental cleanup Traffic monitoring Labor Maintenance repair Concrete Aggregates Steel/iron rods Contractors Fuel Utilities Examples of HighwayOperating Budget Items

36. What do you count? • Impacts of a highway include the new distribution center that locates nearby? • Impacts of a new reservoir include the new powerplant that uses the water supply? • Impact of the Golden Gate Bridge include increased tourism?

37. Special Events • Spending by: • Organizer/host • Participant • Visitors • Media • Sponsors

38. Industries • New firm coming to town • Industry already exists in the area: use established multipliers • Industry not in area: may have to build estimates based on firm expenditure patterns • Bill of goods approach • Costly, time consuming, fraught with error, probably can’t get detailed data

39. Industries • You can estimate impacts using two types of inputs: • Sales (adjusted), output • Employment • Employment is often the most readily available.

40. Common User Errors in Conducting Impact Analyses • All benefits and no negative consequences • Displacement issues (What were residents doing before there was a baseball stadium?) • Overstating the net new growth • Timing of Impacts • Investment Today, Impacts Tomorrow

41. Tax Impacts vs Fiscal Impacts • Direct tax revenues from source • Infrastructure • Sales and use taxes • Events • Sales, hotel occupancy, special assessments and permit fees • Industries • Property taxes, sales and use taxes, permit and license fees, income taxes, etc. • Indirect tax revenues • Sales and use taxes based on transactions, values of surrounding properties • Some share of property taxes (may be best to leave out and be conservative)

42. Tax Impacts vs Fiscal Impacts • Induced tax revenues • Use total earnings • Personal consumption estimates from Survey of Current Business, taxable, % in region • Apply tax rate • Do same for property taxes. • Some commercial models offer estimates of state and local indirect taxes

43. Fiscal Impacts Analysis • Adds in government costs: • Protective services • Fire – inspections • Police – security, traffic control, respond to calls • Debt service • Other services

44. Un-Measurable Impacts • Impacts that are real and have quantity, but are very difficult to assess. • Value of media exposure • Long term impact on tourism, business attraction (nothing draws a crowd like a lot of people) • Is an event an amenity that enhances the value of nearby properties?

45. Intangible Impacts • Impacts that are real, but are not practically observable or measurable. • Civic pride • Place bonding • Community cohesiveness • Other?

46. Getting Professional Modeling Help: The Options Available • RIMS II – U.S. Bureau of Economic Analysis • EMSI– Economic Modeling Specialists, Inc. • Implan – MIG, Inc. • REMI – Regional Economic Models, Inc. (REMI) • Policy Insight • Transight • EDG – Economic Development Group TREDIS

47. Module Conclusions • Economic & fiscal impact analysis are valuable tools – when properly done. • State clearly or understand the parameters and limitations. • Best analysis does not always result in the biggest number. • If conducting or commissioning an impact study, manage stakeholder expectations.

48. Team Presentations • 10 minute max • Sell your community

49. Wrap-Up