No one doubts the importance and need to evaluate public policies to ensure effective and efficient use of public resources that are scarce and have a high opportunity cost. Of the many methodologies available to carry out this evaluation, one of them is the economic impact analysis, which quantifies the impact of an action in terms of income, employment and income for the public coffers. They are not only reports of interest to evaluate public actions, but also private ones, such as the organization of events or to quantify the impact of business activity.
But for these reports to be useful and fulfill their objective, they must be rigorous from the methodological point of view and the correct use of the information. Unfortunately, they do not always comply with these two principles in view of the malpractice that is sometimes used and that I expose below.
1. From the point of view of well-being, what is relevant to evaluate an action is to quantify, in addition to employment, the income (salaries, benefits, rents) that it generates, and not the turnover (or sales). It is tempting to use sales and not income for the simple reason that the impact is much greater.
2. In many reports that quantify the jobs created, it is not taken into account that they are full-time.
3. The economic impact of a euro spent is different depending on the branch of activity, since each one has a different multiplier effect. That is why it is important to have information as disaggregated as possible on the sectoral destination of spending. There are reports that do “wonders” from a few aggregate data.
4. When measuring the economic impact in a specific geographical area, what is relevant is the expense that is supplied by companies in that area, since spending outside that area does not create income or employment in the economy considered.
5. It is necessary to eliminate the expense that would have been made in the same way in the absence of the event analyzed.
6. The media impact (in the news) of an event has nothing to do with its economic impact and, therefore, both should not be added together.
7. Although it should be common sense, when comparing or adding the impacts of monetary magnitudes from different years, it must be taken into account that inflation is involved, so the amounts must be previously converted to constant euros of the same year.
8. The rigor of a report requires detailing the assumptions and methodology used, so that anyone can evaluate it. Unfortunately, in too many cases they are true black boxes.
Please keep these principles in mind so that bad practices do not affect the credibility and reputation of economic impact reports.
