A ‘F’ or at least a ‘D’ on economic development literacy

I just got done listening to a podcast where a couple of Libertarians were expounding on their positions with a fairly hostile journalist interviewer.   One of the segments showed for me just how illiterate most people are about economic development.

The discussion was about the economic multiplier effect and the Libertarians were heaping scorn on the concept that sports stadiums, arts centres, etc. could have a 4:1 or even a 5:1 multiplier effect.

We’ve talked about this a lot but the point has to be made as much as it needs to be made to sink in.  If the residents of a province are shifting their spending from one local use to another – there is essentially no multiplier effect at all.  Instead of going to the movies, I will spend my money on a hockey game at the stadium.

The economic multiplier is only valid (in the context of deciding how many tax dollars to throw at it) for what Statistics Canada clearly calls ‘exogenous output shock’.    If government wants to invest in things that will just divert money from one area to another in a local economy, that may make sense but the economic multiplier argument is bogus.

Now, of course, when you are shifting local spending, there are still winners and losers (companies and communities) and there may be incremental tax revenues for government.   Certain industries generate more taxes than others.

But if we are looking to grow the economy, we must be focused on exogenous activity – external investment, more exports – productivity has a role to play.

Some people have said to me that investment is the same as exports because the new investor (say a manufacturer) will end up exporting anyway.  That’s partially true.  I am not talking about investment byWalmart – although a healthy turnover in retail building stock can be good for the economy.

But investment in Radian6, Speilo, etc. may not lead directly (initially) to increased exports but it monetizes the value of those firms and the NB investors in them have a pile of new money to invest elsewhere in the provincial economy.  I mention this because someone at BNB recently told me that the Radian6 investment wasn’t their ‘concern’.  My response?  One of the largest FDI investments in NB’s IT industry in history – not a concern of BNB?  Wrong.  BNB should be encouraging external investment in fast growing SMEs – as much as attracting outright greenfield investments.

In the end, we should rarely be using multiplier impact analysis to justify government investment in projects that don’t generate exogenous output growth.

As I said before, for the others I like the term economic footprint because it implies that if your industry or project were not in place some other would take its place (reallocation).

Economic development illiteracy (or willful ignorance) is at the heart of many bad decisions.

2 thoughts on “A ‘F’ or at least a ‘D’ on economic development literacy

  1. I’d almost argue that BNB should be doing nothing ELSE. If you take a population that KNOWS how to create a technology company from scratch and build it up, that virtually solves any economic problems you have. Right now the province seems to bank on hoping enough people will win the lottery. If instead of playing the lottery, X percent of a population created a new technology firm, there would be no more need of BNB. So perhaps that explains their outlook.

  2. Wait a sec, first, pretty sure virtually ALL Radian 6’s product was exported. Second, in this blog BNB is saying Radian 6 is ‘not their concern’. Two blogs down you state that somebody said your head is in the clouds and that ‘all we can do is help local industries’. Well, pretty sure Radian 6 was a ‘local industry’, given that it got provincial investment, and all the people involved were local.
    So one of the problems at BNB seems to be that the people who work there can’t even decide on what their mandate is. I suspect the problem for BNB is much the same as the general population-those who work there probably have very limited knowledge of technical industries.

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