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Economic impact studies – meaningful analysis or political tool? Professional Development for Economics Teachers Day Sam Richardson Department of Economics and Finance Massey University Economic impacts – examples: Event Economic impact 1999 Super Bowl US$670m (Sth Fla.) 2002 Soccer WC US$24.8b (Japan) US$8.9b (Korea) 2003 Rugby WC A$289m (Aust.) 2000 Americas Cup NZ$494.7m (NZ) NZ$396.5m (Auck.) 2003 Americas Cup NZ$528.6m (NZ) NZ$449.8m (Auck.) Professional Development for Economics Teachers Day, 16 November, 2007 2 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, 2007 3 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, 2007 4 What are economic impact studies used for? • Often commissioned by event proponents to justify government expenditure for the event • Used as proxies for costbenefit analyses of the same events Professional Development for Economics Teachers Day, 16 November, 2007 5 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, 2007 6 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, 2007 13 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, 2007 14 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, 2007 15 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, 2007 16 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, 2007 17 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! Professional Development for Economics Teachers Day, 16 November, 2007 18