Tuesday, 28 November 2017

Tim Hazeldine on economic impact studies

Last week I wrote a post about economic impact studies, specifically the Americas' Cup economic impact study. In today's New Zealand Herald, Tim Hazeldine (University of Auckland) echoed some of the same points:
...the Ministry of Business, Innovation and Employment has commissioned a report from the same consulting company responsible for the Auckland Airport impact numbers cited above.
Using the same "multiplier analysis" that the NZIER and other independent economic consultancies have by now renounced, the report produced quite spectacular numbers for the impact of the Cup: up to $1billion injected into the NZ economy, thousands of jobs created, a return of more than seven dollars on every dollar invested in new wharf facilities.
Take the last number first. Reality check: a return on investment of over $7 per dollar invested is loosely equivalent to the "double your money in three years" promise on my hypothetical hoarding on the airport road. Believe that?
As for the value-added injection and the jobs created: to a first-order approximation, the net number of new jobs created in Auckland, with its already stretched construction and tourism industries, will be about zero. The workers needed will be bid away from other jobs, or imported as new immigrants. As a result, there will be no significant real output increases, the extra spending will be soaked up in higher prices.
Higher prices are harmful for domestic New Zealand customers and travellers but beneficial to the bottom lines of New Zealand and foreign owned businesses. It's a trade-off. My expectation is that, overall, there will be net economic benefits from holding the Cup in Auckland but that they will be quite small — below the costs to which national and local government are being asked to contribute.
In the article, Hazeldine is being a little unfair to the report. While it is true that it reports economic impact analysis based on a multiplier analysis (even though, curiously, the report notes that "we do not use multipliers that are derived from IO tables" - I guess the multipliers were derived from somewhere else?), the report also includes a cost-benefit analysis. Perhaps Hazeldine was so quick to pull the trigger on his article that he didn't read all the way through to Section 5 of the report.

As I noted last week, the cost-benefit analysis is the best of the three alternatives, and at least according to the authors, follows Treasury's Social Cost Benefit Manual (which Hazeldine advocates for, and which you can read for yourself here). The cost-benefit analysis shows benefits greater than costs under the base assumptions. However, it seems to me that, like virtually every event ever, costs will be greater than expected. In that case, costs are likely to be greater than benefits. Which isn't a good reason not to support the Americas' Cup, but is a good reason not to do so on the basis of economic impact.

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