Indirect Economic Impacts (input-output modelling)

The economic impact report is now an institutional component of every large development project in the United States. These reports claim to quantify the impact a proposed project has on the local economy – using one of three popular economic models. Each model incorporates the same principle – that all expenditures associated with the proposed project have a positive impact on the local economy, and that each dollar expensed ripples through the local economy with even greater effect. For example, the expenditures on payrolls to operate the new project eventually are spent on household expenses, some of these household expenses support additional payrolls, which multiply again with the purchase of more household items and services. These multiplying dollars add up fast and the economic models produce stunningly large economic impacts for every project they touch.

In 2007 a trio of economists published a scathing critique of economic impact reports used by universities to promote growth and development. Siegfried and his colleagues surveyed 138 economic impact reports covering 241 institutions and concluded succinctly, “If these economic impact studies were conducted at the level of accuracy most institutions require of faculty research, their claims of local economic benefits would not be so preposterous.” In their study of these economic impact reports, published in 2007 in Economics of Education Review, they found multiple repeating and compounding errors: double counting impacts, miscalculations on the geographical reach of the impacts, inexplicable differences in multiplier ratios, the absence of comparisons to counterfactuals scenarios, and unrealistic assessments of how new jobs impact current residents. Siegfried et al concluded with a series of recommendations – most of which were reflected in the Economic Impact Guidelines published in 2014 by the Association of Land Grant and Public Universities (APLU).

The guidelines published by the APLU were intended to curb “the misuse of traditional economic impact analyses” which “created a situation where any use of such models is suspect,” and help institutions regain credibility in the economic world through “careful attention to accuracy in any message that is disseminated.” The guidelines are part of a larger series of documents published by the association which comprises a comprehensive Economic Engagement Framework. The Economic Engagement Framework is effectively a marketing template to promote the value and relevance of universities to local governments, business partners and area residents.

The Economic Impact Report issued by UC Davis is not consistent with guidelines published by the APLU. The economic impact assessment for Aggie Square touts a $5 billion “impact” – the largest of any project in the City’s history. The report does not mention that the region’s annual economy is $194 billion per year, nor that the region’s economy has grown organically by nearly $5 billion each year over the past five years. The planning group that produced the report did not disclose the multipliers used to generate the touted impact – a detail that is very important in determining the accuracy of the model. The consultants were not clear in their report what portion of the economic activity was likely to be new to the economy. This led proponents to use the term “impact,” suggesting all activity was additive to the economy. The report did not clarify that spending, stated in dollars, and employment, stated in jobs, were just different measurements of the same economic activity. This led many public officials to double count the economic activity of the project, stating the project would generate $X billion in spending and X number of jobs.

Had the consultants provided context for their findings, the economic impact could have been stated as, “the Aggie Square project will add approximately three tenths of one percent to six tenths of one percent to the regional economy, depending on the pace of development.” This type of statement likely would have muted enthusiasm for the project and perhaps provided the community with more leverage in CBA negotiations.