On Wednesday, Dr. Roy Cordato, former senior economist at the John Locke Foundation, wrote a research brief questioning the reliability of many economic impact studies. Dr. Cordato writes:
Economic impact studies are common. They usually are invoked by government or special interest groups to demonstrate how a particular spending or tax incentive policy will affect variables such as employment and economic growth in a particular geographic area… For the most part, these studies are done by consultants rather than credentialed economists. These consultants are experts at manipulating the commercial models used to generate the impact numbers.
Dr. Cordato explains that, because these studies are often commissioned by special interest groups who stand to gain from the proposed projects, they are, by design, only capable of one result – positive. Because of this, the question for the consultants when writing the study is not whether or not the study will show a benefit to the economy, but how much benefit it will show. Cordato explains studies can do this because:
they ignore what economists call opportunity costs: the idea that all resources are scarce and therefore have alternative uses. The value of these alternative uses, in terms of GDP and job gains, have to be considered before one can reach any conclusion about whether the program will, on net, be beneficial. Instead of making these necessary calculations, the authors of these studies have what they believe is a way to legitimize ignoring them. They either explicitly or implicitly invoke what I refer to as the “manna from heaven” argument.
Cordato explains the manna from heaven argument:
It goes something like this: if the money that funds the program or initially stimulates a pattern of spending that comes from outside the geographical area for which the economic impact is being assessed, opportunity costs can be ignored. In fact, they can be assumed not to exist.
Cordato says that this argument does not absolve these studies of examining opportunity cost:
while the money being spent on the project may come from “somewhere else,” i.e., be manna from heaven, the actual resources – the workers, the land, and the capital – are not. The spending, wherever it comes from, actually represents an added claim on limited resources, including workers, that are likely employed by someone else. When a job is “created” by government, which necessitates new spending, a worker is being bid away from other businesses and potential investments in the area.
All-in-all, Cordato writes:
The idea commonly adopted by those who produce economic impact studies, namely that so long as money for a government spending project comes from “somewhere else” there will be no negative consequences for jobs or economic growth that have to be considered, indicates a distinct lack of basic economic knowledge. And it is not just a minor error. In making this error, the analysts are essentially rendering their conclusions useless.