Governing is hard in the modern world. Politicians and the public service face an impossible task – the demands for new goods and services grow ever more extravagant, while what already exists grows increasingly expensive to maintain and modernise. Meanwhile, the only thing that doesn’t grow is what the public are willing to contribute from their own pocket toward these goals. In fact, that really ought to shrink at the same time! It’s almost like nothing short of a perpetual money machine can bridge the gap…
Well, I have good news! Did you know about this one weird trick that can turn $1 into $1.50, create jobs, and perhaps even a ribbon cutting photo-op as well? As they say, you have to spend money to make money!
So goes the siren song of the Economic Impact Analysis, at least in how they are often used. These studies are common in both the public and private sectors to help understand the effects of a given project or event on the economy. A report that quantifies expected outcomes for jobs, income generation, tax revenue, GDP, and total economic output has many useful applications for folks who have to weigh policy options, prioritise investment decisions, or optimise the use of scarce resources.
These types of concrete, quantitative conclusions are also potent tools for those hoping to shape public discourse, and sway decision makers’ minds. Tilting the policy landscape in one’s favour can have enormous benefits, and so it is no surprise that EIAs are frequently at the foundation of advocacy campaigns and motivated advice.
Therein lies the rub. These tools are used to substantiate a variety of conclusions and recommendations, and it is easy for the discussion around them to go beyond what their technical nuance and limitations can reasonably support. Economic Impact Analyses can become a mirage in the desert, promising a stream of prosperity that will never actually materialise. How can this be? Government spending programs designed around economic impact have been used time and again to blunt downturns or spur recoveries. We’d still be wallowing in the mud were it not for centuries of growth built on the magic that the economic sum can be greater than its parts. Sometimes pushing things to an extreme is the best way of revealing their shortcomings and absurdities, so how about an example:
Digging a Hole and Filling it Back in Again: An Economic Impact Analysis
Let’s start by defining our input assumptions to estimate the total direct expenditures.
Labour
- Fivestaff hired to dig for 7-hour shifts over five days @ $25/hr – $4,375.00
Capital
- Shovels and basic PPE, $300 per employee – $1,500.00
- Excavator rental and fuel for the week – $2,200.00
Administration and Overhead
- Permit fee – $100.00
- Overhead for management and supervision (assumed @ 10% of Labour) – $437.50
- Insurance, other miscellaneous (coffee and donuts at the worksite) – $300
Total Direct Expenditure: $8,912.50
So far, our expenditure of nearly $9,000 has created 5 jobs for a week, $4,375 of gross income, and perhaps $1,650 of government revenue through income and sales taxes. However, the effects do not end there. Our capital and administrative expenses are the revenue for other businesses, supporting jobs and stimulating spending in related industry sectors. Our five workers will use their income to purchase goods and services for themselves and their families. The effects of our direct expenditures ripple outward supporting this indirect and induced economic activity, contributing to GDP and job creation throughout the national economy.
Statistics Canada studies economic linkages between industry sectors and how spending in one flows into others. They produce helpful multiplier factors that help account for the combined magnitude of all these ripples. Digging a hole and filling it back in sounds like “Other Activities of the Construction Industry”, so let’s apply the corresponding factors to our expenditure to ensure its impact is fully quantified:
- x1.000 for $8,912.50 of direct economic output
- x0.352 for $3,137.20 of indirect economic output
- x0.157 for $1,399.26 of induced economic output
In conclusion, spending a week digging a hole and filling it back in would generate an impact of $13,449 in total economic output. Sparing you the additional math, similar multipliers tell us it would also add $8,636 to Canada’s GDP, and create 3.729 jobs per $million of total output. This is factual, reliable analysis – allowing for shortcuts and imprecision appropriate for a blog post. The trouble arises after this point, depending on how the results are framed and the wider narratives that are built on it.
Statement from the Executive Director of HDAC
In these uncertain and difficult times, it is crucial that government considers all opportunities to invest in our nation’s economy and support the jobs that put food on Canadian tables. The Hole Digging Association of Canada knows the value of a hard day’s’ work, and has long known that digging millions of holes and filling them back in can be the keystone of our government’s economic plan. Now we have the numbers to prove it.
Estimates from a team of independent economists confirm that every $1 we spend digging a hole and then filling it back in again generates $1.51 in economic output. This is an enormous opportunity – HDAC’s proposed $370 billion plan to dig a hole for every person in Canada would generate nearly $560 billion in economic activity, create more than two million jobs throughout the economy, and grow our GDP by an astounding 16.5%. The pessimists and reactionaries that want us stuck in the past always ask how we can afford to undertake such a task, but this analysis shows we can’t afford not to! Prosperity awaits, and we call on our leaders to take bold action and seize it.
Absurdity again helps us here, though this is not too far removed from the more irresponsible narratives advanced on the basis of an Economic Impact Analysis. After all, the man whose work is responsible for me wanting to become an economist, John Maynard Keynes, suggested that during economic contractions, even useless activity can create a positive result. What he is actually quoted to have said is, “Let them dig holes in the ground.” A more recent iteration is the notion of “Helicopter Money”, sending cash directly to households as if dropped on them from the air, done in several countries during the Covid-19 pandemic. The logic is that aggregate demand can be a limiting factor, so whether you pay people for fruitless work, or just drop the money on their heads, they will have means to spend more on goods and services. If there is enough spending, there will be people wanting to sell, and it will kickstart the economy.
All manner of nuance is lost when leaping from the general notion of temporarily stimulating economic activity to weather economic strife, to an idea that economic impact is benefit in and of itself. The discussion that grows around EIAs often falls into this trap and oversells the benefits because they ignore several important gaps and limitations in these analyses:
- Crowding-out Effects – EIAs typically look at something in isolation, but nothing happens in a vacuum. Some activities or investments can prevent other economically productive activities from happening that otherwise would have; dedicating a large amount of our workforce to the task of digging 42 million holes would likely create shortages or labour cost increases in other parts of the economy.
- Opportunity Costs – The resources spent to create an impact in one way, removes the option to use those same resources for something else. Spending $390 billion to dig holes and fill them back in also means not spending it on something else, so what
- Comparative Benefit – An economic impact from one action may be large, but EIAs generally present this as an isolated, absolute value. That is one piece of the picture, but without a relative comparison to other options, large cannot be confused with best. It’s an extension of the opportunity cost idea; we can generate a significant economic impact by digging holes and filling them back in, but is that better than digging holes to build a productive garden, or digging one big, long hole to create a canal which permanently shortens international trade routes?
- Quality vs Quantity – Economic impact is described quantitatively, and there is typically little qualitative understanding given alongside. Digging 42 million holes and filling them back in would create a lot of jobs, but are they good jobs? Are they well paying, stable, or supportive of positive outcomes for our economy and society over the long term? Or are they a burst of precarious hard labour that leaves us saddled with chronic back pain long after the sod has grown back?
A caricature of Keynes’ thinking has taken a life of its own over time. Stimulating aggregate demand of any kind made sense in the context of the Great Depression. Outside of economic downturns where time is of the essence, Keynesian theory itself points to the importance of investments that are productive and have tangible longtime benefits for the public. Math will always math — if you take a number, and add a different number, and then multiply the sum by another number, you will end up with a Big Impressive Number. If the goal is to produce a post-hoc rationale for spending, any set of numbers can be used to show results. The question of whether anything of meaningful value is added doesn’t get asked. Digging a hole may have a short-term positive impact, but if the option exists to redirect that same investment into things like healthcare, housing, or garden-building, we’ll likely enjoy more sustainable, and enduring benefits that add up to a lot more in the end.
Where does that leave us?
Economic impact analysis is a useful tool, but wielded without a proper understanding of what they do – and don’t do – can leave us thinking we are acting strategically, when we are really just running around digging random holes in the ground. Society as a whole may end up poorer as a result, but that doesn’t mean the Hole Digging Association of Canada and its membership won’t profit handsomely at the same time. That prospect puts consultants like us in a bind.
With some exciting additions to Turner Drake’s Economic Intelligence Unit over the last couple years, we are growing even further into services to support economic development strategy and policy. We can, and do, undertake Economic Impact Analyses as part of this growing practice area. We are also a business, so our work depends on someone wanting to hire us to meet a need in the first place. EIAs are a legitimate exercise, but the reality is these studies are often commissioned for the purpose of adding weight to a predetermined argument – a context in which they are easily misused.
We have worked hard to build a reputation for offering independent, reliable, and forthright advice, built on detailed, accurate, and comprehensive research and analysis. We sell our expertise and professional judgement, not our conclusions, so here’s how we approach EIAs. First, to the HDACs of the world who really just want to buy a cudgel in the form of a Big Impressive Number on professional letterhead – we politely decline. There are others who can meet those needs, and they will probably cost you less anyway.
That still leaves plenty of situations where we are happy to help, and we know there will rarely be the time, budget, or even technical possibility to perform an analysis free of the typical shortcomings described above. However, as we have the expertise to truly understand these tools and their application, we will always identify and include discussion of such limitations, and provide guidance so our analytical results are interpreted responsibly and conclusions are not misconstrued.
The other side of this coin, is that this same expertise enables us to elevate the discussion and highlight important opportunities or advantages that may not be understood based on the headline numbers alone. For example, in one recent project that included an economic impact analysis of international post-secondary students, we separately analysed the portion of their impact which was based on funds sourced from outside Canada. This is particularly important because international students’ role as a conduit for net-new capital into the nation’s economy creates an impact that simply cannot be replicated by domestic students or provincial funding, freeing it of opportunity cost concerns and generating a larger comparative benefit. With our broader understanding, we identified and communicated these important qualitative considerations, which are not immediately apparent from the quantitative impact figures.
The Bottom Line
At the end of the day, we math the math not as an end to itself, but as a means to further substantiate our conclusions, and inform our advice. We are not in the business of calculating the Big Impressive Number as little more than a cudgel. We are in the business of deploying the resources and expertise necessary to leave clients with findings, advice, or strategies that lead to purposeful investment of scarce resources, and meaningful, enduring value. If that sounds like what you need, give us a call.
Jigme Choerab is manager of our Economic Intelligence Unit. For more information about how you can benefit from the unique expertise of our Planning & Economic Intelligence team, contact Jigme at (902) 429-1811 or .