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Economic Impact Studies

07.12.2010

Steve Thompson at The Dallas Morning News wrote an article on Sunday called Economists skirmish in Dallas wet/dry debate that featured a quote from me about economic impact studies. It’s important to understand the difference between an economic impact study, usually conducted for economic development purposes, and a cost-benefit study, which should be employed for policy analysis.

Traditional economic impact analysis–the direct, indirect, and induced benefits you usually see quoted–is only one side of the story. Economic impact analysis is a useful tool for modeling the changes in a regional economy resulting from a large scale project, or “shock” as economists would say. Think base closure or Samsung’s recent expansion in Austin. However, economic impact analysis does not yield enough information for responsible policy analysis because it does not explicitly address the cost side of the equation. Five hundred new jobs, for example, will likely attract new residents to a city, which increases demand for housing, infrastructure, schools, etc. The key question is whether or not the benefits exceed the costs for a municipality, resulting in a net gain in revenue. There’s no such thing as a free lunch.

In Dallas’s case, it’s unlikely that a citywide expansion of alcohol sales would produce no new costs for the municipality. Now, the question is whether or not you believe the suggested benefits would outweigh the costs. It’s a debate worth having. But economic impact analysis can only get you part of the way there. Focusing on estimated direct and “spinoff” benefits while ignoring costs is faulty methodology and irresponsible decision making.

For additional reading, check out Analyzing the Benefits and Costs of Economic Development Projects by Jonathan Morgan at the UNC School of Government.