Real Impact

We have heard the words "economic impact" a lot lately in the news. "Bob's Public Relations Firm" has an $X economic impact in Nevada, says the newspaper.  But what does that mean?

"Economic impact" generally refers to the gross economic activity in a particular area.  Usually, the economics applied to determine the impact are as fuzzy as the implications – as it turns out, the "economic impact" is less important and less impressive once you understand what these people are really talking about.

Down in Phoenix, the city government tried to justify a $97.4 million subsidy to a high-end, mixed-use developer to build CityNorth, a six-million-square-foot mall with condos and office space, by claiming the development would generate millions upon millions of dollars per year for the city.

Gross impact studies make some faulty assumptions. First, they assume that the transactions that occur because of the development would not have occurred otherwise.

For example, "Bob's PR Firm" spends $90 million a year on advertising "Mobtown" to tourists and about 30 million tourists visit "Mobtown" each year. The economic impact study would assume that if "Bob's PR Firm" had not spent $90 million on advertising for his city, then the tourists who stayed in hotels would have spent their money elsewhere. This of course requires the economist to assume that it was the $90 million that motivated all 30 million visitors to come and that no one else would have done any advertising had "Bob" not been around. Both are highly unlikely assumptions.

This is equivalent to someone suggesting that if the $90 million had not been spent on advertising by "Bob" to attract tourists, the money would instead have vanished into thin air. Calculating economic impact by comparing the effects of spending $90 million on advertising to the effects of $90 million disappearing into nothingness is hardly fair.

Furthermore, impact studies also tend to use gross retail numbers to come up with their economic figures.  For example, if tourists come in and buy $20 million in T-shirts with a catchy phrase imprinted on the front, you might be tempted to suggest that tourism generated a $20 million impact from T-shirt sales. But if the shirts were manufactured in the Philippines and imported to your city from a company based in Florida, the real economic impact is the net profit on those T-shirts.

Impact studies make the error of assuming that all goods sold in the location were also produced in that same location.  This, too, is highly unlikely.

In the economic impact study of the CityNorth mall in Phoenix, David Wells – an economist at Arizona State University – found that the economic impact was overinflated by as much as 75 percent because of these and other errors.

It's more than likely that a more than a few economic impact studies in Nevada make the same faulty assumptions.

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