ROI on public investment into economic development

Geez, folks.

In just the past three days I have read three economic impact reports showing the ‘return’ on government investment as a multiple of either output/spending or GDP.  This is at best bad economics and at worst purposely misleading.

If governments puts tax dollars into an activity such as a tourism event or an effort to attract a firm to the jurisdiction, the only ‘ROI’ that matters is the incremental tax dollars from that tourism event or business expansion.

It may be accurate but it is highly  misleading to say “every $1 put in by government generated $10 in new spending”.  Even if that is true it is not the ROI.  The return on investment must be incremental tax dollars.

For every $1 tax dollar the government puts in, they get $2 in new taxes as a result of the project.  Therefore, the project has generated an ROI of $1 additional dollar for every dollar they invested.  That addition dollar can be invested in health care, education, etc.

In two of the three reports I reviewed, using a tax-based analysis, the ROI was negative.  To be blunt, for every tax dollar put in, they got less than one tax dollar out – meaning they had to reduce spending on health care, education, etc. to spend on the tourism event, business attracted, etc.

The main purpose of economic development is to help foster a strong economy that is generating enough tax revenue to fund good quality public services and public infrastructure.

If we put taxpayer money into projects that do not generate more new tax revenue that the amount put in, why make the investment?  There may be cases where ‘strategically’ you may want to subsidize something but this should be rare.

And all you consultants out there – the folks doing economic analysis – think about the potential impacts of your faulty economics.  If you convince governments they are getting “$10 for every $1 they put in” – they will be tempted to put in $2 and $3 and maybe even $5 – because they are still getting $10 back.  But they aren’t.    In that case they are getting hosed.  And you are getting paid to abet this hosing.