No. 21 Economic Impact Studies: Inaccurate, Misleading, And Unnecessary
"It's not what we don't know that hurts. It's what we know that just ain't true." Mark Twain's turn-of-the-century insight is remarkably appropriate today to an analysis of the techniques and tools employed by government officials in their policy-making roles. In this realm, the hurt can be measured in millions of tax dollars misspent on projects that in their planning stages appeared beneficial. Much of the potential for real harm stems from what has become a common element in the evaluation of public works projects and economic development strategies: the Economic Impact Study.
The principal economic theory embraced by the impact study is the "multiplier effect" of government spending on the private sector. The theory is soupported by a simple observation: When an individual purchases goods or a business pays salaries, the recipients of these funds will in turn spend the money. This additional spending tends to increase income and employment, which in turn generates still more spending, and so on. While it is no doubt true that this process takes place, the common belief that the results of this process can be accurately measured and manipulated by government is mistaken-- and genuinely dangerous.
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