Opinion: Daily Journal

Economic impact studies: How special interests tell public interest stories

CJ graphic by Greg DeDeugd
CJ graphic by Greg DeDeugd

Question 1: When are special interest subsidies not special interest subsidies?

Answer: When the special interests hire consultants to do an economic impact study.

Question 2: How often do economic impact studies show that the special interest subsidy will be good for the economy?

Answer: Always.

Economic impact studies have become part of the standard tool kit used by nearly every special interest pleader begging state and local officials to (please, please, please) transfer wealth from workers, entrepreneurs, and taxpayers to themselves. The film industry, sports teams, the renewable energy industry, and many other corporate welfare recipients, pay consultants to tell them not only what they want to hear but, more important, what they want the public to hear; namely how great the subsidies will be for those who are being fleeced.

Sure, those film “incentives” or subsidies for a new football stadium are going to make the film industry or the NFL team owners a lot of money, but pay no attention to that man behind the curtain. What these industries really care about is that they are going to make all of you out there in the community better off. And to prove this, everyone from local politicians to the local media is told to look at those impressive numbers from the industry-paid economic impact study. Thousands of jobs will be created and hundreds of thousands or maybe even millions of dollars will be generated for the community. It’s the proverbial win-win. The beauty of an economic impact study is how it demonstrates that Peter can be robbed to pay Paul and, magically, both Paul and Peter are made better off.

So, here’s the dirty little secret about economic impact studies. They are designed so they can only give one kind of result — positive. The possibility that any subsidy or special project could generate negative results for the economy, i.e., lose jobs, reduce incomes, or shrink GDP, is ruled out by design. I have explained why this is in several other publications. But the more-lengthy arguments that I’ve made elsewhere can be boiled down to one simple point: The studies all assume none of the resources being used — labor, land, steal, electricity, etc. — would be employed in any other productive activities if the subsidized companies or industries weren’t using them.

If a 10-acre plot weren’t being used for a subsidized solar power plant it wouldn’t be used to grow soybeans or sweet potatoes. It would be just lying there idle. And if the workers used to install the solar panels weren’t hired to do that job, they would be in the unemployment lines. These are the kinds of assumptions that are implicit in constructing the studies meant to convince the public that these subsidies are really for their own good.

There are no job losses, no wage reductions, and no GDP losses to calculate and subtract from the gains. So, the question that all of these studies are asking is, How good will the special interest subsidy be for the economy? Not whether it will be good or bad.

The answer to this question comes through all of the ripple effects from the subsidy, sometimes called multiplier or secondary effects. This has to do with how the subsidies work their way through the economy once they’re handed over to the special interest. Again, all of these effects are assumed to be positive for the same reason as discussed above. None of the resources being used would be employed in any other productive activity if it weren’t for the subsidy. How large the total impact ends up being has everything to do with these rippling effects. Often, they are assumed to be 10, 15, or even 20 times the amount of the original subsidy. The bigger the ripple effect, the better off the special interest subsidies are making everyone.

The numbers the typical economic impact study generates have no meaningful economic content. They cannot intelligently inform debates over whether any particular project or subsidy would be worthwhile. As a general rule, the public and politicians should never view economic impact studies as anything more than an attempt by special interests to manipulate public opinion for their own benefit.

Dr. Roy Cordato is resident scholar at the John Locke Foundation.