In urban development circles, it is commonly understood that big developers cook up completely bogus economic impact studies to justify eminent domain abuse. It turns out that there is one go-to consulting outfit that rent-seekers hire for precisely this purpose. Matt Rognile explains:
If you follow the news, you’re familiar with “IMPLAN”, albeit indirectly. It’s the software package underlying the studies that pro sports teams, among others clamoring for public favors, use to claim that each new stadium will generate several gazillion dollars for the local economy—supposedly justifying a massive public outlay. Here’s a study using IMPLAN to justify a new Sacramento Kings stadium; here’s another that looks at the proposed Santa Clara stadium for the 49ers and another that attempts to justify a new stadium for the A’s. There are studies looking at the impact of the Mavericks’ American Airlines Center, the Packers’ Lambeau Field, and Oriole Park. And, of course, there are countless others: whenever someone wants to make preposterous claims about the benefits of his pet project, he’ll inevitably turn to IMPLAN or a similar package.
There’s an obvious element of pseudoscience to these studies. They use “input-output” models that painstakingly track the path of spending through the economy—a worthy goal, though perhaps an overambitious one. But they fail entirely to model the supply side of the economy, effectively assuming that there is unlimited capacity, and that each additional dollar of “spending” (magically generated by the new stadium) will become an additional dollar of economic activity—even more, in fact, after you account for the multiplier.
Rather depressingly, the Perry campaign has used IMPLAN to gauge the impact of its tax proposal. Rognile suggests this has lead to a highly misleading analysis:
When we’re looking at a stadium, at least we’re confining ourselves to a particular region: consumers flocking to a stadium can’t boost the productive capacity of the US economy as a whole, but they might encourage labor and capital to relocate around the stadium, delivering economic expansion to the region in question. But this doesn’t apply to the US as a whole: we only have so much labor and capital. Granted, if the model looked at the supply side of Perry’s plan, it might demonstrate how improved incentives lead to an expansion in labor and capital supply, thus increasing potential economic output. That is, however, what the model explicitly does not do: it ignores supply considerations completely, instead assuming that supply constraints are irrelevant and that the income from tax cuts will forever ripple throughout the economy and prompt a demand-led expansion that would put the Clinton era to shame.
I never thought I’d see the day when I had to lecture a Republican presidential candidate on the importance of supply-side analysis, or the dangers of overexuberant demand-side logic. Apparently that day has come!
The truth, of course, is that neither Rick Perry nor his staff have any idea of the analysis behind their numbers. Instead, they hired a consulting firm that specializes in using IMPLAN to create exaggerated estimates for the effect of particular industries (“Meat! Responsible for 5 trillion jobs!”) in order to please its lobbyist clients. The firm evidently knows nothing about tax analysis; it has no credentialed public finance economists on its staff and no experience in analyzing tax policy. When asked to conduct a study, it turned to the only game it knew: IMPLAN, which just happens to be a absurd way to analyze national fiscal policy. [Emphasis added]
Given the nature of the IMPLAN model, one wonders how it would gauge the impact of an enormous increase in transfers, e.g., a $50,000 welfare check to all U.S. residents, funded via deficit spending.
Thanks to Matt Rognile for explaining a complicated issue in clear and precise language.
P.S. Gabriel Rossman points us to a paper by John Siegfried and Andrew Zimbalist on “The Economics of Sports Facilities and Their Communities“:
Few fields of empirical economic research offer virtual unanimity of findings. Yet, independent work on the economic impact of stadiums and arenas has uniformly found that there is no statistically significant positive correlation between sports facility construction and economic development (Baade and Dye, 1990;Baim, 1992; Rosentraub, 1994; Baade, 1996; Noll and Zimbalist, 1997; Waldon,1997; Coates and Humphreys, 1999).
These results stand in distinct contrast to the promotional studies that are typically done by consulting firms under the hire of teams or local chambers of commerce supporting facility development. Typically, such promotional studies project future impact and almost inevitably adopt unrealistic assumptions regarding local valueadded, new spending, and associated multipliers. They often use a regional inputoutput model that depends on outdated technical coefficients which are treated as invariant to shifts in supply and demand (Center for Economic and Management Research, 1991; Deloitte & Touche, 1994, 1996; KPMG, 1996; Economic Research Associates, 1996; KPMG, 1998; C.H. Johnson Consulting, 1999).
Had President Obama used this approach to push one of his possibilities, I hope and expect that conservatives would push back.