Economic impact studies – meaningful analysis or political tool? Professional Development for Economics Teachers Day Sam Richardson Department of Economics and Finance Massey University

Professional Development for Economics Teachers Day, 16 November, Economic impacts – examples: EventEconomic impact 1999 Super BowlUS$670m (Sth Fla.) 2002 Soccer WCUS$24.8b (Japan) US$8.9b (Korea) 2003 Rugby WCA$289m (Aust.) 2000 Americas CupNZ$494.7m (NZ) NZ$396.5m (Auck.) 2003 Americas CupNZ$528.6m (NZ) NZ$449.8m (Auck.)

Professional Development for Economics Teachers Day, 16 November, Economic impact studies – what are they? Reports commissioned to assess the economic impact of an event on a local/regional/national economy Economic impact consists of: –Income –Value added –Employment (job creation)

Professional Development for Economics Teachers Day, 16 November, Economic impact studies: the principle People who attend events spend money in and around the event (direct impact) This money is circulated through the economy (i.e. one person’s spending = another person’s income) resulting in further spending, etc. (indirect and induced effects) There is a multiplier effect at work!

Professional Development for Economics Teachers Day, 16 November, What are economic impact studies used for? Often commissioned by event proponents to justify government expenditure for the event Used as proxies for cost- benefit analyses of the same events

Professional Development for Economics Teachers Day, 16 November, Steps in economic impact analysis 1.Define event and location 2.Calculate attendees (non-local) 3.Calculate non-local expenditure (in appropriate categories) 4.Apply multiplier(s) to non-local expenditures You have the economic impact!

Professional Development for Economics Teachers Day, 16 November, Define event and location Event itself is straightforward Location is critical – determines the extent of the economic impact.

Professional Development for Economics Teachers Day, 16 November, Calculate attendees (non-local) Local attendees do not stimulate the economy –This expenditure is “switched” Non-local expenditure represents an injection into local economy Need to be mindful of potential displacement/crowding out (i.e. local spending, regular tourism, etc.)

Professional Development for Economics Teachers Day, 16 November, Calculate attendees (non-local) Need to also be careful to only include those non-locals whose sole intention is to attend the event –i.e. ignore time switchers, casuals, etc.

Professional Development for Economics Teachers Day, 16 November, Calculate non-local expenditures Find out what non-locals spend money on –i.e. accommodation, retail, restaurants and bars, travel, etc. Usually done via expenditure surveys

Professional Development for Economics Teachers Day, 16 November, Apply multiplier(s) Multipliers come from input- output models of economies Increased production in one sector (as a result of an increase in demand) involves production in other sectors of the economy A multiplier is calculated for each sector of the economy that includes the flow-on effects into other sectors

Professional Development for Economics Teachers Day, 16 November, Apply multiplier(s) I-O models make a number of important assumptions: –Short-term snapshot of economy (no price changes, etc). –Flows (purchasing patterns) between sectors are fixed The end multiplier can be type I (direct and indirect) and type II (direct, indirect and induced) Include output, value-added, income and employment

Professional Development for Economics Teachers Day, 16 November, Impacts = Benefits? Economic impacts: –Measure the economic return of an event or investment to residents of the local community How do we define an economic return? Can we interpret an increase in local GDP or employment (as predicted by economic impact studies) as a benefit?

Professional Development for Economics Teachers Day, 16 November, Do the impacts materialise? Overwhelming majority of independent academic research says NO! Why not? –Substitution effect What counts as new spending? –Leakages Smaller economy, larger dependence on imports –Subsidies Where is the expenditure coming from?

Professional Development for Economics Teachers Day, 16 November, Interpreting economic impacts They are not necessarily economic benefits –A predicted boost in employment may not materialise if there is slack in the economy (i.e underemployment) –They can be benefits if those employed were previously unemployed (depends on the wages they are paid versus what they earned when unemployed).

Professional Development for Economics Teachers Day, 16 November, Interpreting economic impacts They ignore opportunity costs –If local government is involved, what is the cost to the local community (i.e. a reduction in local taxpayer spending)? They ignore intangible benefits and costs –What is the value to the local community of an event/facility? (e.g. community spirit, image enhancement, noise, congestion, etc)

Professional Development for Economics Teachers Day, 16 November, Interpreting economic impacts They are not cost-benefit analyses, no matter how well done Be mindful of who has commissioned the report –Economic impact studies are rarely neutral Usually predict large impacts (substantial increase in GDP, sizeable job creation, etc) – guess who commissioned the report?

Professional Development for Economics Teachers Day, 16 November, Why are they continuously used? Frequently observable in the public domain (news!) Claims of substantial economic impact have significant effects on political decision-making –i.e. voter referenda The flip side of the argument – if we don’t have this, then this is what we miss out on!