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Impact studies used to justify public subsidization
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Whenever President Barack Obama advocates eliminating tax breaks on corporate jets, the general aviation industry is ready to tell whoever will listen how much that would hurt the struggling economy.
According to a 2005 study commissioned by the General Aviation Manufacturers Association and the National Association of State Aviation Officials, the industry generates $150 million each year and supports 1.2 million jobs. The jobs include not only the people who build the jets, but also those who sell them, maintain them, fly them, schedule and dispatch them, and give their pilots weather forecasts.
Not to mention the attorneys who negotiate sales or leases and the accountants who calculate the tax breaks.
The aviation industry isn't the only special interest group that believes that policymakers don't appreciate its importance. For many companies, industries and organizations, economic impact studies are a cost of doing business as strapped governments look for ways to tax or rein in spending.
Economic impact studies are used to justify building new sports stadiums; to impose a severance tax on natural gas (or prevent one from being imposed); to rehabilitate an industry's image; or to win favorable tax or budget treatment.
"Economic impact studies are used to justify public subsidization of one form or another," said Craig A. Depken II, who teaches economics at the University of North Carolina-Charlotte.
The studies have proliferated in the face of the worst recession since the 1930s, spawning a cottage industry that includes national accounting firms, specialized consultants such as Tripp Umbach of Pittsburgh and moonlighting college economics professors.
Groups that commission such studies have an obvious interest in portraying their activity as being as economically significant as possible. So when you consider the findings, consider who paid for the study and what vested interests they have in the outcome, said Mike Davis, who teaches economics at Southern Methodist University's Cox School of Business.
Those who conduct the studies analyze similar data, rely on the same economic models and utilize similar software programs. Where they diverge is multipliers -- the factor by which spending or jobs in one industry generates spending or jobs in unrelated industries. Using a bigger multiplier can make an industry appear larger than it really is.
"Many studies will use multipliers above two when most academic studies suggest that multipliers should be 1.5 or lower," Mr. Depken said.
Most studies cite the number of jobs an industry or organization supports and the economic activity it generates. They often include the wages those jobs pay as well as the taxes and fees the activity generates for local, state and federal governments.
Measuring the direct impact of an industry is easier than measuring indirect impacts, such as how many jobs one industry's spending creates in other industries.
When a study estimates how many dry cleaners or grocery clerks are employed by the spending of people employed in another industry, "Obviously there is some extrapolation going on," said Edward Coulson, who teaches economics and real estate at Penn State University.
Mr. Depken said studies that calculate the impact of an event before it is held often inflate the economic impact because they rely on projections and do not take into account "leakages" and substitution spending.
One example of leakage is how much of the money spent at a convention ends up in the pockets of hotel or restaurant owners who reside outside the city where the convention is held. Another example is the money that residents of the convention city spend when they flee their hometown because of the congestion or other problems the convention causes, Mr. Depken said.
Substitution spending takes into account money that would have been spent even if an event had not come to town.
Some cities draw a certain number of tourists no matter what event is on tap. Mr. Davis cited the example of how little Miami hotels benefit from holding the Super Bowl there in midwinter.
"It's January [and February] in Miami. The hotel rooms are going to be full anyway," he said.
First Published August 21, 2011 12:00 am
