Thumbnail: The flurry of economic impact studies here often come fast and furious, defying belief but attracting little in-depth analysis by the local media which repeat their conclusions as authoritative. Some of them have obvious errors like the one for Memphis in May, which actually doesn’t have to prove economic impact to indicate its intrinsic importance to our community.
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In early 2001, the Vancouver Grizzlies announced it was relocating and despite failure after failure to attract a National Football League team, a group of Memphis civic leaders decided to go after the pro basketball franchise.
It was anything but a slam dunk. As the clock ticked down toward the team’s deadline, it was uncertain that Memphis City Council and Shelby County Board of Commissioners would approve the deal – $250 million for improvements to The Pyramid and construction of a new arena.
In the midst of the heated debate, the Chamber of Commerce told the city and county mayors that it had the trump card for a winning vote: an economic impact report that showed the Grizzlies would have $1 billion in economic impact. The mayors were so skeptical of the conclusions that they never used the report.
While there had been a few before, the economic impact study for the Grizzlies was arguably the beginning of our community’s addiction to these reports.
Lots of Claims
Since then, there have been economic impact reports for every imaginable purpose and cause – from day care centers to the medical center to the Agricenter.
There is the $2.5 billion report for the medical device industry, University of Memphis’ $900 million, the Memphis International Airport’s $19.1 billion, Rhodes College’s $316 million, the Port of Memphis’ $9.3 billion, Southern Heritage Classic’s $21.6 million, AutoZone Liberty Bowl’s $25-30 million, and Agricenter International’s $524 million.
Memphis Tourism sets its industry’s economic impact at $3.65 billion and and an incredulous 12,400,400 visitors. That averages out to 34,000 people a day. Memphis in May’s report said it has $149 million in economic impact. Interestingly, its attendance increased 18.5% since 2016 but it claims that economic impact has grown by 69%.
An economic impact report for Memphis and Shelby County Economic Development Growth Engine (EDGE) claims that its tax freezes have produced $1.4 billion in new tax revenues since 2011 notwithstanding the yearly complaints by local government about tight budgets and sluggish revenue growth.
About 25 years ago, city and county mayors “thawed” PILOTs from 100 percent to 75 percent to free up property taxes for the operations of schools. Today, each PILOT application is accompanied by an economic impact report that dependably claims an economic benefit for every tax freeze by extolling the new taxes created by the 25 percent “thaw” although for every dollar, three more are given up. The 25 cent tax dollar is somehow reason enough to approve PILOT after PILOT and inspires the relentless cheerleading for tax freezes by the Chamber, EDGE, and City Hall.
The economic impact reports have been used to justify a number of recent controversial PILOTs – a $3.2 million subsidy to Raymond James so it can move from one zip code to another inside Memphis, $1.7 million for Renasant Bank to build a Memphis “headquarters,” $58 million in tax breaks for six apartment developers that amount to more than 20 percent of the cost of their projects and irrational retention PILOTs that mean some companies will not pay taxes for 30 years (if then).
A Direct Hit
If economic impact reports already suffer from a credibility problem, they took a direct hit when the one used to support $4.25 million in public incentives for the television series, Bluff City Law, said it would result in $1.7 billion in new visitor spending. That’s the equivalent of about half of the tourism economic impact, according to Memphis Tourism’s economic impact study. The show got mediocre reviews and lasted from September to November in 2019.
Often overlooked in the public discussion about economic impact reports is that they are projections. Some projects, like this ill-fated television program, need no economic impact study because the value is readily apparent or intangible. That said, the $1.7 billion was the logical outcome for what one person called “the arms race” in economic impact studies.
It is seen starkly with Bluff City Law, because the report tried to quantify the unquantifiable and measure the tangible when the greater value is in the intangible. For example, a few years ago, there was an economic impact study for nonprofit arts groups, and their economic impact was set at $200 million.
Unfortunately, most economic impact studies are accepted and repeated by the news media without independent analysis and staff understanding. That’s why no City Council or County Commissioner has asked if someone could track the $1.8 billion in new tax revenues even as budgets get harder and harder to balance. At the least, the news media should be doing this routinely.
In addition, when has the news media retroactively reviewed economic impact reports to determine if they live up to expectations in areas like jobs growth, property values, business income, and tourism growth?
In our community, because economic impact studies are not independently analyzed, they have become merely a “check the box” feature of political lobbying by special interest groups. They produce the report, it is presented to elected officials who do nothing to challenge any assumptions (often because they are intimidated by terms like IMPLAN, CUM, REMI, and input-output), and the alleged impact is then used to justify whatever project is being considered.
It doesn’t have to be this way.
In Charlotte, the Observer did its leg work and wrote that the conclusions in a study justifying the funding and construction of a convention center were “wildly inflated.” The newspaper wrote that the convention center did not produce the number of visitors and the amount of business predicted in the report. In fact, it found that for every dollar spent on the convention center, the city, county, and state would make as little as 35 cents.
No Measure of Economic Well-Being
And yet, things like the arts cannot be measured in purely economic terms because it’s impossible to put a dollar value on something that shapes the city and its character, inspires its ambitions, and elevates its quality of life.
But, at the end of the day, economic impact reports give politicians cover for the PILOT program’s $800 million in tax giveaways over 10 years and are catnip to the news media, which regularly report their conclusions without question and with no examination of the assumptions, the often wild multipliers that turn $1 in spending to $17 in impact, the self-reporting data that swell projections, and the absence of opportunity costs and possible diminishing returns.
Opportunity costs are this: all economic activity uses scarce resources that would otherwise be used for something else. In other words, they are about resources diverted from economic opportunities that would otherwise be pursued. Any economic impact study that does not assess opportunity costs should not be called economic analysis. In fact, the failure to do this has been called the greatest oversight by noneconomists in discussing economic impact studies.
Crucial to all this is the “multiplier effect,” which takes the original number and multiplies its journey through the economy to come up with the final economic impact. It’s how $1 in spending can suddenly become much larger in an economic impact study.
Here’s the proverbial bottom line: economic impact studies are not a measure of economic well-being or improved social welfare. In truth, most of what they measure are economic costs, not benefits. Finally, they are not cost-benefit analyses, a staple of the business community, and create the perception that correlation is causation.
What they do is measure spending flows while telling us nothing about the efficiency of the spending or its social benefits.
Today, a number of cities are discussing what constitutes real economic impact analysis. Memphis and Shelby County should be part of it.
After all, despite all the talk about momentum, 69% of the Memphis population are distressed, which puts the city as the second most distressed city in the U.S. (behind Detroit), according to Economic Innovation Group.
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