When the Texas Rangers decided to build a $1 Billion new stadium, they asked taxpayers to subsidize it with $500 million in tax revenue. Before the vote, local leaders cited an economic impact study completed on the project, stating that if the measure failed, it could cost the city 2.5 million visitors each year and $77 million worth of annual economic impact (Texas Tribune).
What does this $77 million actually mean? What is economic impact? And how did this the study produce its numbers? At Intelligent Analytics and Modeling, we frequently conduct impact studies for non-profits, cities and businesses, and wanted to share some insight into this very common, but misunderstood practice.
What is an Economic Impact Study?
Economic impact studies are analyses of economic events designed to give policy makers, industry professionals, and everyday consumers a fuller understanding of the economic effects of a policy or program.
The basic process is to measure the effect that a company, institution or non-profits’ operations and its visitors have on the local economy, in terms of increased economic activity. To estimate the overall economic impact, economists use computational software that uses an input-output (“I-O”) methodology to estimate the effects of the proposed program or policy on the region. For a good understanding of I-O Methodology, check out the University of Wisconsin’s Center for Cooperatives explanation.
What software do Economists use to develop an Economic Impact Study?
The majority of economic impact studies use the IMPLAN software package (other softwares include REMI and RIMS-II). IMPLAN uses data from the Bureau of Economic Analysis, US Bureau of Labor Statistics and US Census Bureau (IMPLAN - Data) to create matrices that serve as the foundation of the Inter-Industry flows.
The end-user inputs figures from an organization’s Profit and Loss Statement, and through its inter-industry analysis IMPLAN provides a forecast for the increase in economic activity or economic impact.
Economic Activity vs. Economic Impact
An economic study should clearly distinguish between the two concepts, Economic Activity and Economic Impact. Economic Activity is the total economic activity created by all of the stadium’s operations. This economic activity includes operational expenses attributable to both non-local visitors and local visitors. Economic Impact, in turn, only apportions the operations that are attributable to non-local visitors and combines that with non-local visitors’ spending on all other tourist activities (lodging, restaurants, retail shopping, etc) during their visit.
What output does IMPLAN provide?
IMPLAN provides a breakdown of the increase in economic activity/impact that results in terms of Direct Effects, Indirect Effects and Induced Effects, a breakdown which can be seen in the table below (with randomly generated figures):
In the example of the Texas Rangers, the direct effects are the direct economic effects caused by the stadium’s operations in terms of payroll to stadium staff and other operational expenses. Indirect effects are understood as the economic activity that occurs due to purchases made by the stadium from its suppliers.
For example, when the stadium purchases snacks for its concessions stands, these purchases become revenues for suppliers, and are quantified as indirect effects. When stadium employees, in turn, spend their wages in the local economy, the overall economic impact is again increased, which is known as induced effects.
IMPLAN provides its forecasts in terms of the particular region being analyzed (generally the county where the project or institution exists). The employment figures indicate how much regional employment is created through the impact of the stadium’s operations. Labor Income is a measure of the combination of employee compensation (total payroll) and proprietor income generated in the region as a result of stadium operations. Value added indicates the regional value added impact of the stadium’s operations, as measured by the difference between total sales and the cost of its intermediate inputs in the region. Finally the total output represents the value of region wide revenues / sales created by the stadium’s operations on the regional economy. In addition to these figures, IMPLAN also provides a breakdown of the state and local taxes forecasted by the stadium’s creation.
What output does IMPLAN not provide?
While an IMPLAN forecast provides a great baseline for the economic impact of an institution, it does not provide an entirely comprehensive understanding. For instance nowhere in the IMPLAN model does it consider viable alternatives to determine the best allocation of resources. However, whenever resources are allocated to a certain project or endeavor, those same resources are deprived from another. In economics, we call this the opportunity cost. For example, the government could have chosen to spend the subsidy money it gave to the stadium on transportation infrastructure, education or healthcare. To better understand the economic impact figure, it is necessary to contextualize it. For instance, economist Michael Leeds showed that professional baseball teams have approximately the same economic impact as midsize department stores.” (Economic Research - St. Louis Federal Reserve).
At Intelligent Analytics and Modeling, we use IMPLAN as our baseline economic impact assessment. We then complement the traditional economic impact report with an exhaustive view of the institution, to determine its effect on the regional economy in terms of long-term effects of human capital development, community building, and brand equity.
Read more about our comprehensive approach, and use of social media analytics to conduct economic impact assessments. E-mail us today for a free consultation for your next economic or impact assessment.