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Economic Impact Studies - Instruments for Political Shenanigans

Economic Impact Studies - Instruments for Political Shenanigans

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Published by Guilherme Cruz
Most economic impact studies are commissioned to legitimize a political position rather than to search for economic truth. Often, this results in the use of mischievous procedures that produce large numbers that study sponsors seek to support a predetermined position. Examples are selected primarily from the reports of ostensibly expert consultants that illustrate 10 of these mischievous procedures: including local
Most economic impact studies are commissioned to legitimize a political position rather than to search for economic truth. Often, this results in the use of mischievous procedures that produce large numbers that study sponsors seek to support a predetermined position. Examples are selected primarily from the reports of ostensibly expert consultants that illustrate 10 of these mischievous procedures: including local

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Published by: Guilherme Cruz on Oct 05, 2011
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Economic Impact Studies:Instruments forPolitical Shenanigans?
L. C
attributed to tourists. It is the return thatresidents receivethat is important,rather than only that proportion of the totalreturn that filters back to the council.Economic impact analyses have an obvious politicalmission. They invariably are commissioned by tourismentities and usually are driven by a desire to demonstratetheir sponsors’positive contribution to the economic pros-perity of the jurisdiction that subsidizes their programs orprojects. The intent of a study is to position tourism in theminds of elected officials and taxpayers as being a key ele-ment in the community’s economy. The effectiveness of this strategy is illustrated in the case study reported inAppendix A.Another approach that used economic impact data toreposition a tourism investment is shown in Table 1. The citywas considering termination of one of its festivals becauseits net cost to the city was $230,000. However,when thisinvestment is reconceptualized as residentsmoney ratherthan the city’s money,the key measure is revenue accruingto residents,not the city. This embraces expenditures by vis-itors both inside the festival gates and elsewhere in the com-munity. When this income is aggregated,it suggestsresidents’return on investment is 28%.There is a sound conceptual rationale for economic-impact studies,and they have a legitimate political role ininforming both elected officials and taxpayers of the eco-nomic contributions of tourism to community residents’prosperity. However,this legitimacy is predicated on thestudies’being undertaken with integrity. Because the moti-vation undergirding them usually is to prove the legitimacyof the sponsor’s economic case,the temptation to engage inmischievous practices is substantial. In some cases,the prac-tices are the result of ignorance and are inadvertent,but toooften they are deliberate and enacted with intent to misleadand distort. The array of mischievous practices used thatbreach the requirement for integrity has been discussed else-where (Crompton 1995). The intent in this article is to illus-trate a variety of forms in which deliberate malfeasancepractices are manifested and to suggest the political motivesand consequences of those procedural abuses.
 John L. Crompton holds the rank of distinguished professor inthe Department of Recreation,Park,and Tourism Sciences at Texas A&M University.
 Journal of Travel Research,
Vol. 45,August 2006,67-82DOI:10.1177/0047287506288870© 2006 Sage Publications
 Most economic impact studies are commissioned tolegitimize a political position rather than to search for economictruth. Often,this results in the use of mischievous proceduresthat produce large numbers that study sponsors seek to sup- port a predetermined position. Examples are selected pri-marily from the reports of ostensibly expert consultants that illustrate 10 of these mischievous procedures:includinglocal residents; inappropriate aggregation; inclusion of time-switchers and casuals; abuse of multipliers; ignoringcosts borne by the local community; ignoring opportunitycosts; ignoring displacement costs; expanding the project scope; exaggerating visitation numbers; and inclusion of consumer surplus. The political payoff of these shenanigansis discussed.
economic impact studies; errors; proce-dures; abuse
The conceptual reasoning for commissioning economic-impact studies is illustrated in Figure 1. It shows thatresi-dentsandvisitors in a community give funds to the citycouncil in the form of taxes. The city council uses a propor-tion of these funds to subsidizetourism events,promotions,activities,or facilities that attract out-of-town visitors whospend moneyin the local community. This new money fromoutside the community creates incomeandjobs forresi-dents
This completes the virtuous cycle of economic devel-opment (Crompton 1995). Community residents,aided byvisitors’bed and sales taxes,are responsible for providingthe initial funds,and residents receive a return on theirinvestment in the form of new jobs and more householdincome. It is the income that accrues to residents that pro-vides the justification for a community’s bearing the coststhat are associated with tourism.The purpose of economic impact analysis is to measurethe broader economic benefits that accrue to a community.Sometimes,the cycle shown in Figure 1 is perceived to startand end with the city council. This leads to a narrow defini-tion of economic impact that includes only the taxes and rev-enues collected by local government from the tourism eventor facility. Such a narrow definition suggests the councilshould receive a satisfactory return on its investment fromlease fees,rentals,admission revenues,increased sales-taxrevenues,or whatever. However,this approach is flawedconceptually because the money invested does not belong tothe council; rather,it belongs to the city’s residents.
 Economic impact 
is defined as the net economic change inthe incomes of host residents that results from spending
The motives of a study’s sponsor invariably dictate thestudy’s outcome. The point was well illustrated in the con-tentious debate in the city of Arlington,Texas,concerningthe investment of public funds for a new football stadium forthe NFL Dallas Cowboys. Economic-impact studies werecommissioned by four different factions in this debate. Thefour consulting entities hired to do the work all had a longtrack record of doing economic-impact studies and had sub-stantial national visibility. The results are summarized below,with the sponsors and the report authors in parentheses:1.“The stadium would generate $238 million a year ineconomic impact in Arlington and $416million a yearin Tarrant County.”(City of Arlington,using 2010 as asample year; Economic Research Associates 2005,p. 2)2.A new Cowboys Stadium would bring in $346milliona year to Dallas County.”(A property-developmentcompany,cited in Dickson and Claunch 2004,p. 1)3.“The City of Irving,if a new stadium were built,wouldsee an annual economic impact of approximately $51million.(City of Irving; Turnkey Sports 2004,p. 10)4.“The best outcome Arlington can expect is that itwill lose $290.5millionas a result of the building of a new stadium for the Cowboys...The loss forArlington could be as high as $325.3million.(Thoseopposed to public funding for the stadium; Rosentrauband Swindell 2004,p. 1)The difference in estimates between Study 4 and theother three reports is substantially greater than it appearsat first glance because Study 4 used as its timeframe the
68AUGUST 2006
FINISHSTARTInflow ofRevenuesOutflow ofFunds
Forcommunityresidentswho pay taxesTo acity councilWhospend money inthe localcommunityThatattract out-of-townvisitorsCommunityresidents &visitors paytaxesWhich uses them fortourism programs,promotions, activities, orfacilitiesCreating incomeand jobs in thelocal community
$Cost to the council of staging the festival:$400,000Income to the council from admission fees, 170,000vendor concessions, etc.:Net loss to the city230,000Income accruing to city residents outside 343,000the festival gates from visitor spendingin the community:Net gain in income to community 113,000residents [($343,000
$170,000)– $400,000]:Return on investment to residents28%on their $400,000 investment:
projected 30-year life of the stadium,whereas the otherthree studies reported only an annual amount. If the annualamounts given in Studies 1,2,and 3 are extrapolated to thesame 30-year-life time frame using the same 5% and 10%discount rates to calculate net present value that wereadopted in Study 4,the projected benefits to Arlington orIrving during the 30-year period would be as shown inTable 2.It seems likely that the motives of the study sponsors atleast partially explain the results. The Arlington city councilsupported a public investment of $325 million,which washalf of the stadium’s projected cost. Supporters of the pro- ject spent $10 million on the referendum campaign,of which the Cowboys contributed $6 million,whereas the pro- ject’s opponents raised just under $45,000 (Cohen 2005).A prominent feature of the brochure advocating support forthe project,which was widely distributed to Arlington house-holds,was the supposed high economic return. The brochureproclaimed,“The new Dallas Cowboys stadium is a big winfor Arlington’s economy,”and touted that the stadium wouldgenerate “billions in economic impact”(Shah and Brown2004,p. 2). In the nearby city of Irving,which is where theexisting Cowboys stadium is located,a property-developmentcompany was interested in selling land to Irving for the sta-dium. Hence,the large economic-impact number emergingfrom Study 2 would be similarly advantageous to thatcompany.The City of Irving was in danger of losing the Cowboys,which,it was anticipated,would generate negative vibra-tions from at least some sections of the community towardelected officials. Thus,a relatively low figure would serve tominimize the negative political fallout. However,Irving stillhad aspirations to negotiate with the Cowboys and was will-ing to offer $80 million of public investment if Arlingtonvoters rejected the referendum proposition. Thus,a levelof economic impact that would justify the $80 million taxsubsidy was desirable. The $51 million figure in Study 3appears to offer a reasonable balance between those some-what dichotomous scenarios.Study 4 adopted procedures that would be supported bymost economists. There is a substantial academic literatureshowing that professional sports teams generate relatively littletourism spending (this is reviewed in Rosentraub 1997 and inHoward and Crompton 2004). By commissioning as their con-sultants respected academics who feature prominently in thatliterature,those opposed to the study could anticipate receiv-ing a low or negative economic-impact outcome.Consultants supposedly are hired to provide independentevidence,but in many cases,that evidence is manipulated orselectively presented to tell clients what they want to hear,“and what they want to hear is that their event or team orwhatever is going to generate a lot of money”(Dunnavant1989,p. 3). A consulting organization that fails to deliver theeconomic-impact numbers that its client expects is unlikelyto receive either repeat business from that client or newcommissions from others. The motive of sponsors fre-quently is to seek proof to support an established position,and clients expect to get what they pay for!Some of the consulting companies that are hired to doeconomic-impact studies are related to and share the namesof firms with respected national and international reputa-tions for their work as accountants in auditing organizations’accounts. By hiring consulting firms with nationally respectednames,sponsors also are buying the aura of respect andintegrity that accompanies the consultant’s name,anticipatingthat this will enhance the credibility and public and politicalacceptance of the results and quell any questioning of theprocedures used.How might such consultants retain and protect their rep-utations when they use inappropriate procedures to giveclients the large-dollar impact number that sponsors usuallyare seeking? Two strategies are used widely. First,extensivequalifiers are likely to be inserted into the report. Considerthe following extract from a report undertaken by a majornational consulting organization:We have not audited or verified any information pro-vided to us and as such will take no responsibility forthe accuracy of the information which was providedby third parties...Some assumptions inevitably willnot materialize and unanticipated events and circum-stances may occur; therefore actual results achievedduring the analysis period may vary from thosedescribed in the report,and the variations may be mate-rial. (PricewaterhouseCoopers and CSL International2000,p. 12)Ostensibly,this is a reasonable caveat for any consultantto include,but unfortunately,it also provides license forthoroughly unreasonable assumptions and obviously biasedanalyses to be adopted. This seems especially likely to happenwhen the information is provided to the consultants by thestudys sponsors,which,as in this case,frequently occurs. Itis difficult to reconcile such uncritical acceptance of infor-mation and assumptions with typical claims that “the scopeof services for this analysis entailed an independent evalua-tion of the economic and fiscal impactsof a project(Economic Research Associates 2005,p. 8).A second strategy for protecting consultants’reputationsoften is found in the cover letter accompanying a final report,as the following extract illustrates:It should be noted that the analysis utilizes assump-tions that were developed based on our market analysis,surveys with comparable arenas,hypothetical lease
5%10%Study 1, $238 million $3.7 billion$2.2 billionper year in Arlingtonfor 30 years$416 million per year in $6.4 billion$3.9 billionTarrant County for30 yearsStudy 2, $346 million $5.3 billion$3.3 billionper year in Dallas Countyfor 30 yearsStudy 3, $51 million per year $748 million$481 millionin Irving for 30 years

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