Economy and Government and Economic Development

ECONOMIC ANALYSIS Patrick Barkey: Multiplying economic gains isn't easy as it may sound

December 26, 2005

It's an old, but primal, oath that doctors are supposed to take before they set out into the world of medicine: "Do no harm" to the patients they serve. Perhaps a few of us in the economics profession should do the same. Because some of our ideas-or more accurately, characterizations of our ideas-may be doing more harm than good.

Of course, it's great to see ideas that come out of your own specialized area of expertise find their way into the mainstream. Let's face it, most things academics talk about never get off campus. And, much like the advertising tag line for a popular tourist destination, what gets said in academic journals usually stays in academic journals.

But when those ideas are taken out of context and acquire a life of their own, it becomes a case of being careful of what you wish for.

The idea that dollars spent in an economy can induce further spending, as those who receive the first round of spending as income spend part of their new wealth, has been around a long time. It was once routinely taught to students that government spending had a so-called multiplier effect on the overall economy, and that deficit-financed spending could increase the size of the economy by much more than the amount of the spending itself.

That's no longer the case, at least in the world of economics. Suffice it to say that a more complete accounting of this spending scenario casts doubt on the ability of governments to magically produce growth in this simple way. But the idea of multipliers has leaped out of the economic class and landed in the world of economic development, morphing into something professional economists hardly recognize.

There's nothing wrong with the notion that bringing investment and jobs into a community can ultimately grow the economy by more than the new spending itself. After all, that is the fundamental premise of economic development-namely, attracting new businesses to grow the economic pie.

But the idea that you can calculate that impact through the use of a multiplier-literally, to multiply the new spending by a number greater than one-didn't spring from any science I am aware of. The simple-sounding question of how new spending, investment and jobs ultimately affect a region's economy presents a number of surprisingly complex issues that those who make development decisions should at least know about.

One is distinguishing between the cart and the horse. Some economic developments are consequences of others, and cannot be counted as new. Do we multiply the impact of the new hotel that was just built? Or is it already included in the multiplier of the convention center we expanded last year?

Another is displacement of existing spending. Downtown development may be great, but if it takes business from other parts of the region, what is the stimulus? And, at least to some extent, any new business displaces something. For the sake of our region, we hope the reductions affect someone else. That's why attracting businesses whose markets are national-or global-has always been the primary mission of development.

Still, some displacements are inevitable. Every business uses labor, land and building space, and new business can affect prevailing wages and other costs for existing businesses even if they leave their neighbor's customer base intact. Just ask Evansville employers how things have changed since Toyota opened its doors in Princeton.

Yet the idea that you can simply look up a multiplier-yes, there are reference books with hundreds of them published-to estimate the outcome of any given development persists. And getting this genie back into the bottle won't be easy.



Barkey is an economist and director of economic and policy study at the College of Business, Ball State University. His column appears weekly. He can be reached by e-mail at pbarkey@ibj.com.
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