What Beaufort County needs is a sound Economic Development Plan based on solid business principles | Eastern North Carolina Now

    This article originally appeared in the Beaufort Observer.

    Beaufort taxpayers have received very little Return on Investment from the more than $7 million that has been spent since the EDC was formed

    Educators have long known that if you can sell the public on something as being "good for the children," they'll agree to almost anything you want to do. In recent years the same has come to be true with "jobs." If something is said to create or retain jobs, it'll most likely to fly with a politician.

    The problem is that what may look like its good for 'chrillrin' is not always what they need and what may appear to create jobs may not actually do so at all. The trick is to know what works, when, where and how.

    Here's an example. A study in Massachusetts (wouldn't you know it) says that bike lanes create more jobs than roads do. You don't have to be a rocket scientist to suspect that is hocus pocus. Here's how it went: "A new study says:
For each $1 million, the cycling projects in this study create a total of 11.4 jobs within the state where the project is located. Pedestrian-only projects create an average of about 10 jobs per $1 million and multi-use trails create nearly as many, at 9.6 jobs per $1 million. Infrastructure that combines road construction with pedestrian and bicycle facilities creates slightly fewer jobs for the same amount of spending, and road-only projects create the least, with a total of 7.8 jobs per $1 million. On average, the 58 projects we studied create about 9 jobs per $1 million within their own states. If we add the spill-over employment that is created in other states through the supply chain, the employment impact rises by an average of 3 additional jobs per $1 million.
Note that they don't define "jobs," just as the EDC does not have a standard for how to count jobs.

    Here's another example. The North Carolina Arts Council has a similar new study on its website entitled "Economic Contribution of the Creative Industry in North Carolina." It was prepared by the Policy, Research and Strategic Planning Division of the N.C. Department of Commerce. From that study the N. C. Arts Council concludes:
The Creative Industry creates and sustains nearly 300,000 jobs in North Carolina, or 5.54 percent of total state employment. The market value of goods and services produced and sustained by our Creative Industry is more than $41.4 billion, or 5.86 percent of the state's total production. And from other data they say that the nearly $7 million in state funds they distribute "leverage additional funds from foundations, businesses and local governments, generating almost $17 in matching funds for every $1 invested."
Sounds impressive, does it not? But if you believe either of these "studies" we have a bridge in Brooklyn that we'll make you a real good deal on that you can use to create several bike lanes and make zillions of dollars from the extrapolated economic activity they will result in and you can put up a couple of art shops at the end of the bridge and make another gazillion from them because "research shows" that 20% of the people who cross the bridge will buy more than XXX millions of dollars of goods and services while they are in New York and...well, you get the picture. Just don't waste a lot of time building a business plan on these data to try to get a bank to loan you money for either the bridge or the art shops.

    Beaufort County's Economic Development Commission and its symbiotic twin, the Committee of 100, often tout their perceived success by spouting similar statistics about "jobs created, retained" and the economic impact of various businesses that have at one time or another sought the favor of the EDC.

    We have previously documented how the EDC uses bogus data to count "jobs created or retained." And we have published letters written to the County Commissioners by Warren Smith that document that the reports of the EDC/Committee of 100 and the Executive Director duplicate even the bogus jobs data. There is solid data that the EDC has created jobs. Three. And they have spent over seven million dollars of the tax payer's dollars in their efforts.

    So what do all of these stories have in common? They are all based on bogus data and the flawed use and analysis of information.

    The purpose of this article is not to make exciting reading but rather to create a reference document to which we may refer in the future as these "studies" tell us about the tremendous impact some project is going to have.

    Economic impact studies are valuable tools in informing public policy decisions. They help provide information that decision-makers can use to weigh various options that might be available, such as where to spend more or less money.

    The problem, however, is that you have to know what you're doing to correctly use economic impact data and models. And even more importantly, those reading or hearing the data have to know how to use the information and at the same time know and understand its limitations.

    In other words, economic impact studies are neither good nor bad per se. It is how they are used that creates the problem. More specifically they become bad for public policy when they are misused, such as the ones cited above.

    In the bike path study, as well as in the arts study, you have common mistakes in the way the data and the model used to analyze the data are used. In fact, all of the economic impact studies we have seen coming out of the N. C. Department of Commerce (DOC) are flawed in the same way.

    DOC uses an economic forecasting model called IMPLAN. If you want to read a technical explanation of IMPLAN go to Page 23 (34 of the pdf document) at this link. At page 44f (55 of the pdf) of this same link is an explanation of how the IMPLAN Input/Output Model works. Then beginning on Page 46 (57 of pdf) you can read about some of the problems in using this model. Clearly the folks at DOC and the EDC haven't read this material.

    If you wade through all that what you come down to is that, as with many other highly technical tools, you have to know what you are doing, both to generate the correct data and how to interpret the data. And then you still have to apply the most important test of all: Does it make common sense?

    If something doesn't pass the "smell test" then you need to apply more rigorous scrutiny of both the numbers and what you make of the numbers.

    For example, as you read on Page 46, the Arts Council study uses state data and does not account for local variations. Much of the DOC's jobs data does the same thing. What applies to Wake County may not apply the same to Beaufort County. It's like the old analogy of the fallacy of the "average": Put one hand in a bucket of ice water at 32 degrees and the other on a hot stove and on average you should be pretty comfortable. But reality is something different. Variation drowned the six foot man who could not swim but tried to walk across a river he was told was five feet deep (on average).

    If you read the bicycle study you probably figured out very quickly that the reason the numbers showed more "jobs" created building bike paths was the simple fact that the bike lanes were being built on roads that were built for something else.

    We see the same thing in these tourism studies DOC puts out. They'll come up with something like "the 'typical tourist'" spends $200 per day while visiting a place, so they multiply $200 times the number of tourists they count that visit a place and say that is the "economic impact" of tourism. And that makes sense to many people, until or unless they stop and think about it. Reality may very well be that not every tourist spends nearly $200 per day but one tourist may be spending the night for several days while another may just be pulling off the by-pass for a rest stop. Averaging does not get it.

    And just because some tourist spends $200 does not mean that $200 is added to the local economy. If they spend $50 at Wal-Mart that money may be electronically transferred to Bentonville, Arkansas within an hour of it being spent, while $50 spent in a local establishment might turn over several times in the same community.

    The possible scenarios are endless. The point is that most of these I/O models only guess at what the economic impact is and therefore have to be taken with a grain of salt. The truth is, if the local Arts Council sponsors a festival we don't really have very good information about how much economic impact it actually has.

    And most of these studies also miscalculate the economic impact from spending. For example, if the Arts Council sponsors an art exhibit and a customer buys a painting from an out-of-town artist it is quite possible that none of that expenditure will go into the local economy. The seller simply hauls it out of town when they leave. But if the same visitor goes across the street to Bill's Hot Dogs and spends $5.00, there is a possibility (but no certainty) that part of the five bucks will circulate in Beaufort County. But that's not for sure. It depends on how much Bill's pays in payroll as a result of that additional $5.00 sale. If the arts festival across the street did not result in an increase in Bill's payroll and his margin is 20% then only $1 should be counted toward economic impact, not $5.00. Then "food/beverage" expenditures are very different in economic impact if another visitor goes around the corner to a Fine Dining restaurant and spends $20 for a meal and leaves a $5 tip. Chances are the $5 tip may have more of an impact than the $20 meal cost, much of which was paid to a company miles away. The models used by the DOC do not adequately capture such data. They would say the latter had five times as much impact when actually the impact was less or no more than the $5 bucks spent at Bill's.

    So the next time you hear a tourism cheerleader talk about how much of an economic impact tourism has on a locality, take it with a grain or two of salt. And consider the source if you don't know how they derived their numbers. And if they tell you the numbers came from the Department of Commerce just know they are bogus, just like the EDC jobs numbers are bogus.

    If any of this makes sense to you then you should be asking yourself the obvious question: Do these special events that we hear so much about actually help the local economy? If we spend $400,000 on boat docks, half of which comes out of the local taxpayer's pockets, how long will it take for the docks to pay for themselves in additional economic impact?

    The answer may surprise you. The answer is, unless we have solid data we just don't know. But this much we do know. Any time a local group sponsors an event that brings in sellers from outside the community it is quite likely that it hurts the local economy by soaking up local money that is then quickly removed from the community when the sellers pack up and leave. That money, had it been spent by local people at local establishments which hire local people would likely have had a much greater "economic impact" than special events.

    And the same is true with the docks. Had the money in the Recreation Department budget been spent on expanding the ball games that draw many more people, than the boat docks draw; would the money not have been better spent on ball fields than on boat docks? Almost none of these studies include "opportunity costs." It is rare to see an "economic impact study" of tourism that accounts for the negative impact on the local economy. We have yet to find a DOC study that has done so. Most DOC studies do not even distinguish between "itinerate tourists" and "destination tourists," while common sense would say there's a big difference in their impact of a locality.

    Again, we are not opposed to economic impact studies. What we are opposed to is bogus data and people contending that the numbers mean something when really they don't. And if you want to take a shortcut, just don't believe anything that DOC puts out until you see the hard data. And if you will contact DOC the next time they use IMPLAN to generate numbers ask them for the formulas used in their spreadsheets. DOC will tell you they don't know what the formulas are. If they tell you what they told us it will be that they use IMPLAN software and that you will have to contact IMPLAN. And when you contact IMPLAN they will tell you "that's proprietary information and we don't release how we derive our numbers." At that point we toss the study in the circular file. We think you should do so also, and that the EDC should too.

    So think about it for a minute. Which has the greater economic impact: 50 people who dock a $200,000 boat (that likely pays no property taxes in Beaufort County) on the waterfront for a weekend or 2000 people attending a softball tournament that weekend? Which has more impact on "jobs": selling more hot dogs or the same amount of money spent at Wal-Mart? Or, which has more value to the people of Beaufort County: An industrial site south of Chocowinity cleverly disguised as a soybean field or $2 million that could have been used to avoid a tax increase for every business in the county? Or better still, which would have "created and retained more jobs" : The $6 million we've spent on the EDC or and paying for a building at the Community College to train more nurses and medical technicians? Five of our county commissioners answered each of those questions wrong. And those same five apparently have never thought to ask to see actual payroll data rather than "jobs." Duh.

    If an economic development project makes good business sense then it may very well be money well spent. But just because an "economic impact study" says that it will create jobs does not mean that it will actually do so. And even if it does create some jobs, you still have to ask whether we could get a better Return on Investment spending that money another way...or not spending it at all, but letting Bill's sell more hot dogs by paying the friendly ladies there a little more. Those ladies will most likely turn that money over again in Beaufort County, while most of the million dollars in salary we've paid the EDC director since he came here has been hauled out of Beaufort County to Craven County. Now what sense does that make?