Five questions to ask before doing an economic analysis

Five questions to ask before doing an economic analysis

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Every so often, I get requests to do an economic impact analysis of a local tourism event, or a new business that’s recently opened in the area. The person that is asking usually knows enough about an economic analysis to know that they need one (or think they do), but not always enough to make sure that it’s done right, or that the results will be helpful. In this blog post, I’ll discuss what an economic impact analysis is, how one is conducted, and some questions your organization should ask to make sure that it is done appropriately.

There is a fair degree of confusion about what an economic impact analysis is – and what it is not. One of the best ways I’ve found to describe it is to tell a story. 

Suppose that a new minor league baseball stadium was proposed to be built in your town. There are proponents and detractors of the idea, and they both have numbers to back up their position. For sure, the minor league stadium will attract visitors, create jobs, and bring in revenue; proponents of the stadium point to all of those good things. But detractors of the stadium point to the fact that even if the stadium were not built, something else would be built in its place. The proper comparison,  then, is not the stadium versus nothing, but the stadium versus the next best alternative. Who’s right?

The answer, of course, is that they’re both right, and that it depends upon the situation. It’s important to understand the types of economic analyses that are out there, both when your organization wants to undertake one and when you’re trying to interpret one.

Here are five questions to consider:

1.  Economic contribution or economic impact analysis?

While the two phrases may sound the same, they are in fact quite different, and may lead to some very different results. An economic contribution analysis looks at gross changes to the local economy as a result of the activity being studied. In other words, an economic contribution analysis considers the revenue associated with an event, but it does not take into account any “crowding out” of other activity that might otherwise have occurred. 

For example, I’ve recently been asked how I would measure the economic impact of a large sporting event that takes place annually in southern Maine and draws people from all over the country, and some from abroad. Hotels and motels are full at that time, and anyone wishing to book a vacation in the area may be out of luck. Where do those “discouraged visitors” go? If they rebook their southern Maine vacation for another time, then those visitors are not “lost” to the region- but if they go elsewhere due to no vacancy, then that should be counted as an economic cost of the event.

While the above example shows the “crowding out” due to an activity, it is sometimes hard to distinguish new economic activity versus just “reshuffled” economic activity.

Another example: the conference I recently analysed used local caterers for its food. Is the money paid to those vendors directly attributable to the conference? Yes, but in the absence of that particular conference, would those vendors have taken other jobs? If yes, then the money paid to those vendors may be a gross contribution to the economic activity in the area, but cannot be considered a net contribution -and therefore could not be considered part of its net economic impact.

Another recent example has to do with a proposed whitewater kayaking park in southern Maine. We could estimate the number of kayakers who might come to such a park, and the amount of money they might spend in the local economy – but would those kayakers have gone to another whitewater kayaking park in its absence? In other words, how much of that economic activity is new, rather than just reshuffled?

2. At what scale should you measure your impacts? 

Most economic impact analyses can be done at the State, county, or regional level, depending on the type of event and the data that are available. For example, I was recently asked to do an economic analysis of a conference that occurred in Portland, Maine, but for which the attendees came mainly from elsewhere in Maine. In that case, it wouldn’t make sense to do  an analysis at the state level, since only a small percentage of the economic activity attributed to the conference came from outside the state. In that case, it was more appropriate to consider the county as the reference region. We then needed to determine how many of the participants came from Cumberland county versus outside the county.

This question is important to answer beforehand, because it may determine the type of data you need to collect from your conference attendees.

3. Should you consider effects on prices? 

Yet another way in which an economic impact analysis differs from an economic contribution analysis is through the former’s emphasis on resulting factor price changes. For example, it might be tempting to measure the economic contribution of a new manufacturing plant moving to town. But if the local economy is already at full employment, and the plant brings in workers from elsewhere, those workers will need a place to live. That may actually increase housing prices in the area, leading to the displacement of local workers. It is perfectly plausible to have a positive economic contribution, and yet have a negative economic impact.  

It might be easiest to see this point if you visualize a new business that happens to use a lot of water (think a craft brewery) proposing to locate in a water-scarce region. It could be that that new demand for water could raise rates for everyone. If that negative economic impact is not considered, then the proposed project would look better for the area than it may actually be.

4. Economic impact or net economic benefit?

It’s important to remember that an economic impact is not the same as a net economic benefit. The net economic benefit of an activity is the degree to which that activity enhances social well-being in an area – and that well being is not always easily measurable in monetary terms. For example, suppose a factory moved into a neighborhood. The economic impact could easily be measured in monetary terms – number of jobs created, amount of revenue generated, etc., but if the pollution from the factory negatively affected people’s health, the net benefit could actually be negative. Environmental economists have ways of accounting for externalities such as pollution and natural resource degradation.

5. Economic benefit for whom?

This is one of the trickiest questions to answer. Let’s consider the manufacturing plant mentioned earlier. Yes, it might create a number of jobs, but if there is a mismatch between the skills needed at the plant and the skills of the local labor force, those jobs might not benefit the local population. Social impact analysis, whereby the distribution of benefits and costs among different sub- groups of the population are considered, could help answer that question.

Conclusion

There are many questions to consider when either undertaking or interpreting an economic analysis. These are only a few. If your organization is considering one,  please give us a call. We’d be happy to help.

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