I am involved in an increasing number of economic impact studies and I am clear with clients that there is a huge difference between projects that increase economic activity and those that just recycle it. An economist once joked that if you ran an economic impact assessment for every industry in a province (direct and the ‘spin’ effect – indirect and induced) combined they would equal double or triple the size of the economy. In other words, when it comes to economic impact, the sum of the parts is far greater than the whole.
I had this feeling when I read the new economic impact analysis of Dalhousie University. These are meant to show – mostly to government- how valuable an industry or institution is to the economy. This makes sense to me but I think they need to be far more clear with the reader about the magnitude of the impact.
I really prefer the Conference Board’s term ‘economic footprint’ when it comes to industries that base their economic activity primarily on the local market. Foot print is a better term because it doesn’t imply that if Dalhousie went away, all the economic activity would be lost which is exactly what these assessments are meant to do. Dalhousie University, according to the research, accounts for 10,000 direct, indirect and induced jobs, a billion in GDP and $243 million in taxes. The implication is this is what is at risk if Dalhousie left (total impact).
The reality is that something like 80% of the spending is from Nova Scotia sources -government, tuitions, corporations, etc. and that money – if not going to Dalhousie would be going elsewhere (say, to Acadia or STFX). So the net loss – economically – from losing Dalhousie would be what is brought into the economy each year in tuition, research grants, etc. from outside the province and even at that you could argue that some of that money would still flow to other institutions.
The real economic value from Dalhousie is hard to quantify and has to do with research, innovation, skills, – the heft it brings to the Nova Scotia economy from its brainpower. It would be harder to argue that government diverting what it spends on Dalhousie to other targets would have nearly the same effect.
This is a vital distinction and one I hope everyone gets. It is not just semantics.
A few years ago the convenience store association in Canada did a study and found that their members created xx thousand jobs, yy GDP and zz taxes for government. What an impact. They also didn’t mention this was more of a ‘footprint’ analysis rather than an ‘impact’ analysis because if they went away all of the spending on convenience stories would still remain in the economy – it would just go elsewhere.
Contrast this will the big shipbuilding project proposed for Halifax. This would be all new money coming into Nova Scotia. New technology. Strengthened supply chains. Tens of millions in new, real tax revenue for government (as compared to recirculation). Thousands of new jobs.
If people don’t get this, they need to re-read and study harder.
Governments end up spending enormous amounts of taxpayer dollars and effort recirculating economic activity because they don’t get this simple point.
Don’t get me wrong. In Dalhousie’s case – government spending is likely worth every penny. But to suggest – or even infer there is $243 million in tax revenue to government each year that would not exist without Dalhousie is just not true.
The economists will scold me and say this is implied in the analysis but they know full well that governments don’t think that deeply about it.
Again, the Conference Board approach is the most honest because of footprint analysis implies the ‘share of economic activity’ taken up by an industry not it’s ‘impact’.
Thank you for writing this. It’s such a simple point, but one that’s so frequently missed by advocates, policy makers and media.
I think the point is well-taken and worth making not only in this context but in other contexts as well.
For example, when I sponsor projects in Kiva, I select projects that have a greater economic footprint – projects that are based on creation and building, rather than just sales. So I am much more likely to sponsor a person who makes baskets for export rather than a person who sells baskets locally.
And also for example, my assessment of enterprises such as convenience stores is that they have a net negative footprint on the economy. If they did not exist, the same (or better) products would be purchased elsewhere, and for a lower cost. That doesn’t mean they shouldn’t exist – but it does mean that I’m not very supportive of, say, programs that drive students and youth into employment at convenience stores.
But it’s also worth pointing out that not all retain activity has a negative or zero footprint. Retail in product lines not previously available in a region, or creating competition where none existed in a region, have generally positive impacts, as they reduce costs to consumers, increase wages, and result in more money retained locally rather than shipped out of the province as retail chain profits.
All of that said, though (and I rather suspect you know this), we cannot focus on footprint along (or more accurately, footprint as a snapshot). I am not totally supportive of the shipbuilding projects, for example, because they tend to be one-shot enterprises. Look what happened in Saint John after the Halifax-class frigates were completed. It is much better to have sustainable high-footprint economic activity than episodic activity, and the money invested specializing in frigates would have been better spent in shipbuilding for more reliable markets.
Ahh, the illusion of truth is all around us. We can question everything, and get nothing done; or accept half truths and get less than optimal results. We suffer the constraints of bounded rationality – and thus we too often succumb to rhetorical influence.
Thanks David, I always appreciate your clear-headed perspective and explanations.