Is That A Big Number?
The Truth Behind Economic Impact Studies: Well, the half-truth
Shiny Object Syndrome is endemic in Nova Scotia’s political class. Shiny object syndrome (SOS) is a pop-cultural, psychological concept where bureaucrats and politicians focus on a new and fashionable idea, regardless of how valuable or helpful it may ultimately be. While at the moment it seems to be something worth focusing attention on, it is ultimately a distraction, either a work distraction or something that is done intentionally to distract citizens. People who face a fear of missing out are especially susceptible, as the distraction of shiny objects in themselves clouds judgment and focus. ***cough*** Convention Centre, Sports Stadium, Commonwealth Games, Paul McCartny Concert ***cough***
Economic Impact Studies (EIS) are a seductive tool used by politicians, developers, and businesses alike to justify the worth of their Shiny Object projects. They promise wealth, jobs, and growth—all neatly packaged into large, eye-popping figures. But to understand these studies, we need to look at their origins, mechanics, and how they’re often misused.
Here’s five magic words that will make YOU the equal of the greatest mathematicians, economists, and scientists of all time. They will enable you to get to the bottom of any problem or mystery. They will allow you to know the worth of any expert or politician, and they’ll arm you to make short work of fools, fakers, hucksters, and hard sellers.
All you have to do is ask with genuine curiosity, “Is That A Big Number?”
Numbers without context, comparison, and calculation are just noise at best, at worst they are tools of trickery and deceit. There is no bottom line. Numbers are part of a process that takes us on a long journey toward the truth.
Here’s a short list of great, fun, books that delve into critical thinking about numbers and how they can be manipulated:
1. How to Lie with Statistics by Darrell Huff – A classic that shows how data can be misleading.
2. The Data Detective by Tim Harford – Provides insights into how to question and interpret data.
3. Factfulness by Hans Rosling – Teaches how to interpret the world’s data accurately and avoid sensationalism.
4. Naked Statistics - Stripping the Dread From Data by Charles Wheelan – Simplifies statistical concepts and how they’re used in everyday life.
5. A Mathematician Reads the Newspaper by John Allen Paulos – Offers a critical take on numbers in the media. A follow-up on his 2001 treatise on the state of math class in the middle class - Innumeracy - Mathematical Illiteracy and Its Consequences.
Economic Impact - The Origins: A Tool for Good
Economic Impact Studies weren’t always wielded like PR sledgehammers. They were developed during the 1930s and 1940s, primarily in the U.S., as a means to guide government decision-making. Early models, such as the famous *input-output* model developed by Nobel Prize-winning economist Wassily Leontief, were intended to measure the ripple effects of an investment or project on the wider economy.
Leontief’s innovation was groundbreaking. It allowed economists to quantify how changes in one sector could affect others. For example, if a factory opens in your town, it's not just about the factory jobs themselves. There’s also the local diner benefiting from workers eating there, the construction crew building new homes for them, and the grocery stores selling more food. This ripple effect is what’s called a "multiplier."
In theory, these models are incredibly useful. They provide a snapshot of how a project will impact a region economically, both directly and indirectly. The problem? Today, these tools are often more weapon than wisdom, offering projections that are as optimistic as they are vague.
How They Work: Crunching Numbers or Just Inflating Them?
At their core, Economic Impact Studies rely on input-output analysis, which considers both direct and indirect benefits of an investment. Here’s a simplified breakdown:
1. Direct Effects: Jobs, sales, and income created directly by the project. If a new stadium is built, construction workers are hired, and materials are purchased.
2. Indirect Effects: Ripple effects that come from the direct investment. For example, the steel plant that sells materials for the stadium hires more workers.
3. Induced Effects: When people in the community—newly employed due to direct or indirect effects—spend their wages, which fuels further economic activity.
In theory, this makes sense. If you inject money into the local economy, it bounces around and lifts multiple sectors. But as you move from direct to induced effects, the results can become increasingly speculative and more prone to manipulation.
The Catch: Abusing the Tool
Here’s where it gets tricky: economic impact studies can easily be manipulated. With the right assumptions, multipliers, and selective inclusion of benefits, you can make any project look like an economic win—even if it's not.
Often, these studies are commissioned by parties with a vested interest in the project, which opens the door to cherry-picking data. Let’s say a developer wants to build a high-end shopping mall. An economic impact study may tout the thousands of jobs it will create, yet fail to mention the small businesses that will be pushed out by national chains moving in. It might estimate how much more tax revenue the city will collect without comparing it to the increased costs in infrastructure and services the mall demands.
In short, the study shows one side of the story. It doesn’t include what economists call the “opportunity cost”—what could have been done with those resources instead.
Comparative Analysis: The Only Way to Use Them Properly
The truth is, Economic Impact Studies are only useful if they’re part of a rigorous Comparative Analysis. The right question isn’t, "Will this project add to the economy?" because almost every project does to some extent. The right question is, "Compared to what?"
If you’re evaluating a new convention center, for example, you should ask how the proposed $200 million investment compares to other potential uses of the funds. Could building more affordable housing generate a bigger economic boost? Would upgrading public transit result in greater long-term benefits? What if we just dumped the money in the street, or, you know, left it in the pocket of the taxpayer?
When economic impact studies fail to offer these comparisons, they’re essentially propaganda. They’re not telling you whether the project is a good idea in the grand scheme of things—they’re just telling you that it’ll bring some money in, which, again, most projects will do. The absence of a comparative framework often hides more than it reveals.
Why Should You Care?
As a citizen, you might think these studies have little impact on your day-to-day life. But they do. They’re used to justify how your taxes are spent, which businesses get government support, and whether local infrastructure gets upgraded. The consequences of poorly evaluated projects are felt by everyone.
Think of it this way: when you hear a new $300 million government-backed development is coming to Halifax, you should ask, “Is that $300 million going to make my life better, or is it just going to boost the developer's profits?" When economic impact studies are thrown around, they often don’t tell you how that money could be spent better, or whether the project will contribute to the community in a meaningful way.
We’ve seen this with industrial projects, commercial developments, and even public events. They all come with glossy impact studies claiming to bring in millions. But what they often don’t say is how those dollars could’ve done more elsewhere.
Economic impact studies are not cost/benefit analyses or a measure of well-being or social progress
The John Locke Foundation, an independent philosophical research foundation puts it plainly. Even if they are done right, i.e., in a way that is consistent with sound economics, economic impact studies are not a measure of economic well-being or improved social welfare. At best, what they do is to provide a measure of spending flows as they move out of some industries and areas of the economy and into others. They tell us nothing about the relative efficiency of those spending flows. In fact, to the extent that those spending flows would not occur in the absence of particular government subsidies, as is the case for mega-projects, they are moving resources from more efficient, and diversified resource use to bigger, more risky bets on less efficient uses. This is because, everything else equal, one would expect that purely private sector resource allocation based on entrepreneurial judgments about consumer demand would tend to be more efficient than judgments made by politicians risking other people’s money.
Using the classic convention center spending debacles as an example, if the impact analysis was done in a way that is consistent with sound economics, it could tell us that employment may increase among local construction firms or for some hotels and restaurants due to investments in those industries generated by the wealth transfer from taxpayers providing the $200+ million in subsidies. And if the study attempted to measure the unseen opportunity costs of the project, it would show hypothetical spending flows that would have occurred had the $200 million not been spent on the project but stayed in the hands of taxpayers or went to other government uses. But it can’t tell us anything about whether the uses of resources — land, labor, and capital — that result from the subsidy are more efficient in terms of generating valuable output for consumers than the resource uses that would have occurred in the absence of the subsidized project.
The economic impact study alone cannot tell us whether the resulting reallocation of resources will, on net, generate more social benefits than other alternative investments of the same amount.
So whenever you see or hear about the Economic Impact of this or that know that at best it is work half done. At worst, well, it’s just people lying with numbers.
The Takeaway: Keep Asking Questions
Economic impact studies are not inherently bad… most of the time, but they need context and comparison. Without rigorous context and comparison, they’re more mischevious than anything. They are not the kind of cost/benefit thinking that you would do intuitively and normal businesses do by necessity. Don’t be swayed by big numbers without asking questions. Next time you read about a major new development or project, consider what the report isn’t telling you: What’s the alternative? What’s the opportunity cost? And is this really the best way to spend public or private money?
Numbers without context are just noise. So when you see a big economic study, remember that it’s not about the size of the number, but the story behind it.
By giving these studies their due scrutiny, you’ll see the full picture and recognize that just because a number is big doesn’t mean it’s good. Economic impact, after all, isn’t measured in dollars alone—it’s measured in what those dollars could have done.