Evaluating Economic Development: Some Things to Keep In Mind

by Wyoming Liberty Group Staff

As Wyoming Liberty Group policy analyst Austin Hein recently explained in an excellent white paper, corporate welfare – also known as economic development – distorts investments and other use of economic resources. One of Hein's most important contributions is to explain, using Austrian economic theory, how programs such as ENDOW actually lead to less economic activity than would have occurred without that government intervention.

Sadly, there are many examples of corporate welfare in Wyoming, one of them being the Downtown Development Authority in Cheyenne. Costing taxpayers about $2 million per year, this program has yet to demonstrate that it can generate even enough tax revenue to pay for its own budget. This omission of evidence is a glaring weakness in many economic-development programs, in Wyoming and elsewhere.

The need for stringency in evaluation of economic development is only going to grow as we move forward. Governor Mark Gordon has taken an intelligent position on this, expressing caution about rushing forward with economic development. At the same time, according to the Casper Star Tribune he also said that

Any conversation about economic development and the state's revenues can no longer take place independent of one another.

Furthermore,

Gordon told members of Endow to find ways to analyze the revenue impacts of their proposal to the state, asking whether or not that effort would cost or make the state money.

This point is crucial, and it is good to see that the governor wants numbers on the table. The problem, though, is that to date there are not that many reports out there credibly showing that economic development has made a difference for the better. For example, the Wyoming Department of Transportation has published a series of reports aspiring to show that economic development generates more tax revenue than it has cost.

To be blunt, these reports do not meet basic research standards. There are several problems, the first of which is the use of the term "economic impact". It appears often in consulting reports on economic development and is used in reference to the change in economic activity allegedly caused by economic-development spending. It is claimed, for example, that every economic-development dollar spent on commercial air service generates about $1.50 in new tax revenue. There are also general statements about increased economic activity from that same spending.

Superficially, these reports look sound and solid, and maybe they are. The problem is that none of the reports stand up to scrutiny based on elementary rules for scientific research.

There is, plainly, no way for an independent researcher to evaluate the WYDOT reports. The first rule of scientific research is, namely, that anyone should be able to replicate the study to test whether or not it actually reached the conclusions it reports.

For example, if I claim that a pound of feathers weighs more than a pound of lead, I have to report what I define as "feathers" and "lead", how I weighed them and what instruments I used. That way anyone can check whether I have made a ground-breaking discovery or am just a rather bad scientist.

The same standard applies to economic-development spending, but there is one more aspect that we have to take into account. When government reports that economic development is beneficial to the economy, they are de facto asking taxpayers to give up more of their money for more of the same. If all that is at stake with a research project is the reputation of the person weighing feathers and lead, then the consequences of bad research are limited. However, if the research is involving hundreds of thousands of people by virtue of the taxes they pay, it is even more important to hold that research to the highest of scientific standards.

Unfortunately, the aforementioned WYDOT reports to not rise to that standard, and the problem with the term "economic impact" is only the beginning of their problems. As mentioned, the term is imprecise and never properly defined in any of the reports; it can, basically, mean whatever the researchers want it to mean.

As an example, in the 2016 economic impact report WYDOT claims a total of $523 million in "total economic output" resulting from $21 million in Air Service Enhancement Program spending. This number – the most conspicuous one in their report – is not reported in either a form or method that conforms to national-accounts definitions used by the Bureau of Economic Analysis, the Census Bureau, the OECD, Eurostat, even the United Nations.

The national-accounts system is not just a method for reporting data in columns and lines in a spreadsheet. It is a system for distinguishing between different forms of economic activity. It is, plainly, the storefront of an entire methodology for economic analysis. If you do not report your data according to this system, how can anyone know if you have even used basic economic methodology in your research?

I am not saying that WYDOT has violated such methodology, but the very fact that their results are not properly reported immediately raises the question. Why did they not adhere to the first order of macroeconomics, when their goal clearly was to use macroeconomics to prove their point?

Furthermore, the WYDOT reports (as linked to earlier; the economic impact study is just one of them) do not provide their original source of raw data. Therefore, there is no way of evaluating their sources for accuracy in collection, bias in selection or consistency in how the data is reported over time.

Again, we have a problem with independent evaluation.

There is yet another aspect to this: the data sources that are listed, and the model reportedly used, are all proprietary. They are owned by consulting firms and therefore not open to independent scrutiny. Right here, the integrity of the research is put on full display. How do I as a taxpayer know whether or not the model used by the consultant is neutral?

Imagine two kids trying to show who can jump the longest. Bill claims that he jumped six feet, while Bob claims he jumps eight feet. Bill uses his homemade yardstick to measure Bob's jump and says "no, it's only five feet". When Bob demands to see Bill's yardstick he says no.

Is Bill being fair? Of course not. But this is essentially the situation we are in with the WYDOT reports, and it is a problem that calls into question the integrity of their published research.

Basically, the question at hand is: would WYDOT have paid for a consulting report if they had no way of knowing that the report would come out in their favor?

Economic development is a sprawling government activity. The ENDOW program has added a major, new dimension to it, and the use of taxpayers' money to subsidize commercial air service raises the stakes even further. As I have explained in earlier articles, the cost of commercial air service could over time put Wyoming taxpayers on the hook fort tens of millions of dollars every year.

If we are going to be asked to put up such huge amounts of money, we need to at least have a basic, independent evaluation of existing programs. We need an evaluation that rises to basic research standards and complies with centuries-old, well established scientific practices.