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Notes from Regional Strategic, Ltd.

Category Archives: Economic Impact Analysis

Terminating Federal Funding Flows – An Iowa Example

Posted on April 8, 2025 - 3:06 pm by

Increasingly, we live in a world where the federal funding we have integrated into our local economies cannot be relied upon. At the same time, there are no guarantees that the lost funds will be returned to the economy in other forms if they are removed. There is substantial talk of deficit reduction and of selective tax cuts, but there is no sign that funds held at the federal level will be broadly distributed to the local economies which will bear the loss.

This is a simple analysis of what the Iowa economy would look like if four major flows of federal funding were cut off:

  • Agricultural Subsidies
  • Social Security
  • Medicare
  • Medicaid (the federal share only)

No assumptions are made of any alternative flows that would replace these losses. This is simply a look at general expectations assuming these funding flows simply disappear.

Data for this exercise were collected for 2023. This is the last year for which the full range of data could be obtained. All data except the level of agricultural subsidies was sourced from the United States Bureau of Economic Analysis (BEA). Agricultural subsidy totals were obtained from the Environmental Working Group, because the BEA has recently stopped publishing detailed agricultural industry statistics at the local level.

The effects of removing each of the four funding flows were analyzed using an impact model built with Iowa economic coefficients obtained from the BEA Regional Input-output Modeling System (RIMS II). Each of the four major funding sources was run separately, sums were taken, and a comparison was made to Iowa totals for actual 2023 gross domestic product and employment. The table below shows the results. Dollar values are in billions.

What all falls out is a loss in federal funding of almost $30 billion. As these losses percolate through the Iowa economy, they will result in

  • Lost economic transactions totaling $42 billion
  • Lost economic value added (GDP) totaling $24 billion
  • Lost business income, interest payments, rents, and direct production taxes of $10 billion
  • Lost labor income (payrolls) of nearly $14 billion
  • Over 268,000 jobs lost

At the end of the day, Iowa can expect to see its GDP drop by almost 12 percent and its employment totals to drop by 12.5 percent if these funding flows are terminated without replacement. Iowa is not unique among states with respect to the expected impacts if major federal funding streams dry up.

Additionally, we can use payrolls as a proxy for production and income to roughly estimate Iowa tax losses resulting from this. Iowa collects approximately 8.75 cents in general revenue for every dollar in statewide payroll. At this rate, the loss of payrolls resulting from losing federal flows of funds would result in a reduction of state general tax revenue by over $1.2 billion. This would further cut expenditures throughout the state and magnify the losses listed above.

Regardless of the pros and cons of government interventions in the economy, the economy has been built up over decades on the incentive systems driven by those interventions. It would behoove us all to be a patient and cautious in making changes.

SF 615: An Impact Model Based Policy Analysis

Posted on March 29, 2025 - 8:52 pm by

The Iowa Legislature is currently working on a bill (SF 615) to impose work requirements on able bodied adult recipients of Medicaid. The bill passed the senate on Tuesday, March 27. It was passed with amendments by the house on Wednesday, March 28, and sent back to the senate. It will likely be passed and signed into law during the week of March 31, 2025.

On the face of it, it is kind of hard to figure out what this means. The governor apparently put forth the bill, but neither the governor’s office nor the departments of health & human services, public health, revenue, or management & budget provided any information to the Legislative Service Bureau on costs, savings, or fiscal implications of the bill.

Either they don’t know, don’t care to know, or don’t want anyone else to know the implications of SF 615. One can easily find estimates on the internet that 75 percent of Iowa adults on Medicaid already work, but it is hard to determine the potential exemption status of the other 25 percent.

To its credit, the Legislative Service Bureau did provide some important estimates to underpin the analysis presented here:

  • The bill will generate Medicaid savings of $3.1 million to the State of Iowa in the first year
  • The bill will generate savings of $17.5 million in the second and subsequent years
  • The funding percentage split between federal and state is 88.4 percent federal and 11.6 percent state

This means that when the state saves $3.1 million in the first year, the federal government will save $23.6 million, and when Iowa saves $17.5 million the second year, the federal government will save $133.4 million. Summing these up, during the first year while the State of Iowa is saving $3.1 million it will be cutting health care expenditures in the state by $26.7 million. During the second year the state will save $17.5 million by cutting statewide health care expenditures by $150.9 million.

So far, this has all been derived directly from the estimates made by the Legislative Service Bureau.

The United States Bureau of Economic Analysis (BEA) generates estimates of expenditures for each state. Assuming the healthcare expenditures eliminated by SF 615 are spread through the system on an equivalent basis to Iowa’s overall health expenditures, they can be run through an input-output model to see how they will affect the entire Iowa economy. The model was set up using coefficients available from the BEA.

Four scenarios were set up – two each for first year and for second year reductions in health care expenditures. In the first scenario for each year, health care expenditures were cut, and no other changes were made. In the second scenario for each year, it was assumed that the State of Iowa’s estimated savings were concurrently returned to taxpayers as household income (equivalent tax cut scenarios spread proportionately to income distributions).

Scenario One: First year health care expenditure cuts without equivalent tax reductions

  • State of Iowa savings – $3.1 million
  • Health care expenditure cuts – $26.7 million
  • Statewide payroll reductions – $17.3 million
  • Statewide jobs reduction – 307 jobs
  • Reduction in statewide returns to capital (profits, interest, rents, etc.) – $10.9 million

Job losses will fall predominantly in these sectors:

  • Health care – 189
  • Finance & real estate – 28
  • Professional, management, & administrative – 23
  • Wholesale & retail trade – 21

Additionally, a very rough estimate of state general revenue fund tax loss can be made by dividing state net tax deposits (Iowa Department of Revenue) by earnings by place of work (BEA) for Iowa. That calculation results in 8.75 cents in general fund tax deposits per dollar of payroll in the state.

This estimated tax loss would be $1.5 million. It would not include losses in non-general state income, such as the lottery or liquor, and it does not include local government receipts, but it would still amount to approximately half of the state’s anticipated savings from restricting access to Medicaid.

Scenario Two: First year health expenditure cuts with equivalent general tax reductions

  • State of Iowa savings – $0 (all savings are distributed in an equivalent tax cut)
  • Health care expenditure cuts – $26.7 million
  • Statewide payroll reductions – $16.4 million
  • Statewide jobs reduction – 287 jobs
  • Reduction in statewide returns to capital (profits, interest, rents, etc.) – $10.0 million
  • Estimated general revenue tax losses – $1.4 million

Job losses will fall predominantly in these sectors:

  • Health care – 185
  • Finance & real estate – 24
  • Professional, management, & administrative – 21
  • Wholesale & retail trade – 17

Scenario Three: Second year health expenditure cuts without equivalent tax reductions

  • State of Iowa savings – $17.5 million
  • Health care expenditure cuts – $150.9 million
  • Statewide payroll reductions – $97.7 million
  • Statewide jobs reduction – 1735 jobs
  • Reduction in statewide returns to capital (profits, interest, rents, etc.) – $61.5 million
  • Estimated general revenue tax losses – $8.5 million

Job losses will fall predominantly in these sectors:

  • Health care – 1068
  • Finance & real estate – 155
  • Professional, management, & administrative – 128
  • Wholesale & retail trade – 119
  • Manufacturing – 38

Scenario Four: Second year health expenditure cuts with equivalent general tax reductions

  • State of Iowa savings – $0 (all savings are distributed in an equivalent tax cut)
  • Health care expenditure cuts – $150.9 million
  • Statewide payroll reductions – $92.9 million
  • Statewide jobs reduction – 1620 jobs
  • Reduction in statewide returns to capital (profits, interest, rents, etc.) – $56.7 million
  • Estimated general revenue tax losses – $8.1 million

Job losses will fall predominantly in these sectors:

  • Health care – 1047
  • Finance & real estate – 134
  • Professional, management, & administrative – 121
  • Wholesale & retail trade – 95
  • Manufacturing – 33

Some thoughts

Regardless of the merits of imposing work requirements where the great majority are already working (recall that the governor and affected state departments declined to provide details regarding those merits), this is not simply a state budget reduction effort. It will significantly affect payrolls, employment, profits, and tax receipts across the state.

These effects are magnified by the fact that the federal government multiplies Iowa’s investment. For every dollar the state puts into these benefits the federal government contributes $7.62. That means that for every dollar the state saves with SF 615, the state forgoes $8.62 in economic activity that generates payrolls, employment, profits, and tax revenue. The state savings of $17.5 million per year will cost the state’s economy almost $151 million in expenditures (economic activity) per year.

The magnitude of these losses, particularly in the health care industry, will force providers to abandon billions of dollars worth of investments in facilities and infrastructure. These abandonments will not magically reappear if SF 615 is subsequently modified or repealed.

It should also be noted that, as expenditures fall, payrolls are cut, profits disappear, and jobs are axed it will be harder for Medicaid recipients to find the required jobs. This will remove more of them from Medicaid. This will save the state more money. For every dollar saved in this manner, another $8.62 in health care expenditures will be removed from the economy and the cycle of disruption to the state’s economy will continue to expand.

These are a costs that deserve more analysis than the governor or the statehouse has given.

Attempting to Offset Program Cuts with Equivalent Reductions in Taxes

Posted on March 20, 2025 - 1:03 pm by

I have recently posted three analyses of the Iowa economic impacts of breaking Social Security, Medicare, and Medicaid (Privatizing Social Security, Social Security – a Local (Iowa) Perspective, and Breaking Medicare and Medicaid – An Economic Perspective from Iowa).

None of these dealt directly with the typical small-government argument that an offsetting reduction in taxes will eliminate the adverse effects of eliminating programs.

This argument is not actually true in most cases. The reason is that markets are not neutral. They are created within the context of government intervention, and government intervention is required for efficient markets to function over time. Government defines and enforces property rights. Government oversees the accessibility and stability of the money supply. Government regulates financial transactions. Government influences marginal propensities to spend resources on and between categories of goods and services through taxation, investment, and program regulations and expenditures.

For better or for worse (I am not arguing one way or another), these influences shape markets, private investments, employment, and income. Making substantial changes to the way government influences the shape of markets and the economy will generally cause significant disruptions in the system. Those disruptions generally do not even out among all participants.

This analysis looks at the effects of eliminating federal Medicare and Medicaid benefits in Iowa and replacing them with equivalent increases in household income through tax reductions (see, in particular, Breaking Medicare and Medicaid – An Economic Perspective from Iowa). To develop this perspective, I

  • Set up a model of the Iowa economy
  • Removed $14.3 billion from the specific industry groups Medicare and Medicaid funding flow into
  • Added $14.3 billion to general household income

By both removing and adding $14.3 billion from/to the Iowa economy, the net initial impact on available resources is zero. The difference between where resources are removed and where resources are added, however, still results in devastating impacts upon the Iowa economy.

The change in how this $14.3 billion is allocated in the existing economic structure will result in a statewide payroll reduction of $5.6 billion reflected in the loss of over 70,000 jobs. Not all industries would lose jobs however:

  • Finance and real estate would see an increase of over 2,000 jobs
  • Wholesale and retail trade would see an increase of over 7,000 jobs
  • Education and the arts would see an increase of over 3,000 jobs
  • Accommodation and food service would see an increase in almost 2,000 jobs

On the other side of the coin

  • Health care would lose over 80,000 jobs
  • Professional services, management, and administration would lose over 7,000 jobs

These consequences would occur because markets are not neutral. They have been shaped for over 200 years by government interventions is property rights, taxation, expenditure, and regulation. An immediate and substantial change to the rules of the game can be expected to break down large segments of the economy that those rules have helped build up.

Regardless of philosophies regarding the long-term merits of one government-influenced market regime over another (and make no mistake, changes in government intervention only change the shape of government influence on the market – they do not eliminate that influence), it is important for the health of the economy that substantial changes be made slowly.

Furthermore, it is almost certain that the negative economic effects outlined above are understated. It will be worse than the results of the model shown above. It will be worse across all categories. Worse for the modeled winners as well as for the modeled losers. The reason is simple. The increases in household income (reductions in taxes) will not accrue to the same people who suffer losses of benefits.

In the model, the tax reductions were treated as increases to general personal income across Iowa. This assumes that tax reductions were proportional to incomes across the economy. That means that the people that lost Medicare and Medicaid benefits would be net losers in the transaction and everyone else would receive an unearned windfall.

A large proportion of this unearned windfall would go to high-income households with lower propensities to consume. This will result in a significant portion of the offsetting increases in income being removed from the economy as savings or financial investments. This would result in significantly lower offsetting economic activity than the model assumes. That, in turn, means the model results presented above are unrealistically optimistic.

In reality, however, this unearned windfall, these tax reductions, would not be spread proportionately across incomes within the economy. The current tax system and current proposed tax reforms heavily favor upper income households over lower income households (taxation policies are a major avenue through which government shapes the economy – see Why We Can’t Make Nice Things….). As a result, a predominant share (rather than the proportional share discussed in the previous two paragraphs) of offsetting personal income will accrue to upper income households. This will magnify the effect of lower marginal propensities to consume discussed in the paragraphs immediately above and further reduce the effect of offsetting income on benefit losses depicted in the model. For this reason, again, the economy-wide results modeled above are unrealistically over optimistic.

Regardless of the philosophical merits of any one form of government intervention over any other in shaping the economy, significant changes in these forms of intervention should not be made abruptly or haphazardly. The analysis above is clear that eliminating Medicare and Medicaid benefits in Iowa and replacing them with equivalent increases in household income through tax reductions will have a large negative impact on the Iowa economy. Markets are not neutral. They are shaped by the government. As a result, government has a responsibility to be responsible in changing the rules.

Data Disappearance and You

Posted on March 6, 2025 - 4:48 pm by

On February 6, 2025, I posted a note on the closure of the United States Agency for International Development (USAID). Regional Strategic, Ltd. turned down a contract to analyze the economic impact of that closure on an area of the Upper Midwest, because, in concert with the closure, the administration foreclosed access to data documenting USAID’s purchases and expenditures. The government actively denied the public the ability to evaluate government actions.

That denied my company the ability to conduct meaningful analysis for an industry group that needed to make immediate plans. That, in turn, foreclosed the generation of business incomes (and the residual personal incomes) on both sides of the potential transaction.

The note indicated that this was not the only case of data access restrictions occurring under the new administration in Washington, D.C. At that point, two weeks into the administration, data on healthcare, weather, and climate change that undercut the administration’s political positions had already been removed from public access. The note detailed some of the commercial problems these data restrictions would cause.

Yesterday, the administration moved again to restrict and/or alter major data streams available from the federal government. This time it was the Department of Commerce (USDOC). The USDOC is one of the major sources of data in the federal government. Data agencies within the USDOC include

  • The Census Bureau (Census) – which collects data on population, demographics, housing, employment, income, commercial activity, and international trade. These data streams are used to allocate congressional and state legislative seats, benchmark the National Income and Product Accounts (NIPA), manage and evaluate congressionally mandated programs, and determine the need for and effects of tariffs and trade restrictions.
  • The Bureau of Economic Analysis (BEA) – which is the national accountant. The BEA consolidates and analyzes data from the Census, the Bureau of Labor Statistics, the Department of Agriculture, and the Treasury to provide the consistent production, employment, income, and consumption data to generate the NIPA, which, in turn, is the source of national income and gross domestic product statistics.
  • The International Trade Administration (ITA) – which collects data on our international trade and the trade positions of our trading partners.

Sounds like pretty dry stuff, but this data underpins nearly every

  • Piece of market research
  • Investment decision
  • Community economic development plan
  • Interest rate
  • Bond issue
  • Congressional revenue and expenditure enactment

made in the United States.

On a personal level, this data underpins a complex integrated financial system that supports your auto loans, mortgages, and credit card transactions – all of which will get significantly more expensive as the quality and consistency of these data streams deteriorates.

The accuracy and consistency of these data streams is critical to business decisions, government action, and personal income.

On Sunday, March 2, 2025, Howard Lutnick, Secretary of Commerce, announced his intention to strip government activities from gross domestic product data. On Tuesday, March 4, 2025, he announced the disbanding of two important advisory boards:

  • The Federal Economic Statistics Advisory Committee
  • The Bureau of Economic Analysis Advisory Committee

These committees are made up primarily of professional and academic statisticians that advise the USDOC on proper data handling and increasing the quality and precision of the data and estimates the government produces and disseminates. To be effective, however, committee members need to be made aware of changes being made and how those changes are being accomplished.

Over the past five days, the federal government has, in quick succession,

  • Announced its intentions to make one of the most radical changes to federal data systems in modern memory
  • Dismissed the very experts it would need in order to accurately and successfully accomplish these changes.  

While much of the general public is not aware of these data streams on a daily basis, interrupting them is a major affair that will directly and significantly affect their livelihoods if not done correctly. It will be infinitely more disastrous if these disruptions are done politically.

This is a big deal that should command more attention than it is getting.

Post script

The list below is of posts I have made over the past 15 months that would not have been possible or accurate without the consistency of the data streams put at risk over the past five days. These are just short musings I have put up as examples of what can be done.

They do not include the extensive market reports I have generated for Midwest businesses and industry groups, economic impact studies I have done for the likes of John Deere, Des Moines University, the Iowa Off-Highway Vehicle Association, the National Balloon Classic, and others, or the policy analyses I have done for agricultural commodity groups. None of these efforts would have been possible without consistent quality data streams on the economy.

Beyond this, most people don’t spend their lives with there noses in the data. Most who do perform internal statistical analysis and do not work with the economic and social environments that underpin economic and policy analyses. Removing or corrupting the data streams discussed above will eliminate the jobs of hundreds of thousands of folks like me that connect the data to markets, the economy, development initiatives, and social and recreational initiatives.

Here are the posts:

USAID and the Business Implications of Data Disappearance

Posted on February 6, 2025 - 6:19 pm by

Yesterday, Regional Strategic, Ltd. was asked to evaluate the effect shutting down the United States Agency for International Development (USAID) would have on demand for agricultural commodities in a specific area of the Midwest. We had to decline the project. After looking at available data, we found that, in shutting down the USAID website, the administration had denied citizens and the business community the ability to evaluate what had been lost and plan for the alternatives that remained.

The question is not trivial. It appears that USAID acquired approximately $1.8 billion in U.S. food products to support its activities in 2022. Every $100 million spent on food production and processing in the upper Midwest generates approximately

  • $100 to $120 million in value-added economic activity within the Midwest
  • $55 to $70 million in labor income
  • $30 to $65 million in corporate profits and tax revenue
  • 1,000 jobs

Any of these estimates could be increased 18 times to accommodate the $1.8 billion demand loss from eliminating USAID. All of these totals would go up if the impact was evaluated across the entire United States.

Clearly, local regions that are heavily invested in commodity production and processing would like to evaluate what portion of existing demand is being taken off the table:

  • Every $100 million reduction in 2022 Iowa corn purchases in Iowa would have been equivalent to idling over 75,500 acres of 200-bushel corn
  • A similar reduction for wheat in Kansas would have been equivalent to idling over 310,000 acres of 37-bushel wheat

The sudden lack of data with which to evaluate these impacts on local areas is a business issue. It is a family welfare issue. It is an employment issue. It is a public policy issue.

This is not limited to the situation involving USAID. In the first two weeks of the present administration, data access has been restricted in the areas of health care, climate, and weather forecasting where those data run counter to the administration’s political inclinations. This is bad for business, and it is dangerous.

Health data is being restricted at a time when the United States is experiencing a growing bird flu epidemic, Africa is experiencing renewed Ebola outbreaks, and drug-resistant tuberculosis is becoming more prevalent worldwide. Any one of these situations could rapidly become an international health problem. Any one of these is a personal safety issue. Each of these could rapidly become a workforce issue.

Weather and climate data are critical for construction, shipping, food production, tourism, energy distribution, and many other industries. Data on income, trade, consumption expenditures, and demographics are critical to any business doing market, workforce, or facility siting analysis. In any of these cases, businesses that rely on private vendor subscriptions are not immune, as their private vendors all depend upon public data sources as foundations for their models.

Given the rapidity of data “Disappearances” in the first two weeks of the administration, we don’t expect it to stop. There is plenty of information that contradicts the administrations political proclivities in the Bureau of Economic Analysis, the Bureau of Labor Statistics, the Census, the Energy Information Administration, the International Trade Administration, the Department of Agriculture and other agencies. We anticipate that many of these sources will disappear or become restricted in the coming months. Restriction of any one of these would have major implications for significant portions of the economy.

The situation is made more critical by online data access and delivery. Thirty years ago, data histories for all these sources were published and available in libraries across the country. That is no longer the case. Unless restrictions are anticipated and data is downloaded, catalogued, and stored, even data histories will be unavailable. The reduction in publication and distribution costs has resulted in more and better data over the intervening period, but it has also put citizens and business at risk under the current administration.

There has always been public data that made elected officials uncomfortable. The current difference is that the administration is not willing to address and live with its discomforts – opting instead to eliminate the evidence of its contradictions.

THIS IS A BUSINESS ISSUE. It is time for businesses to step up to help resolve it.

Those are my two cents. Spend them as you will.

Stick to the Voodoo You Do

Posted on January 3, 2025 - 3:56 pm by

We all get our best results if we stick to things we are good at and interested in, but every enterprise involves a lot of tasks that don’t fit into any team member’s, “Voodoo set.”

Many economic development staff, business entrepreneurs, and community advocates are vision people. They must be to keep teams of volunteers, employees, and stakeholders together, focused on the goal, and moving forward.

It takes a lot of marketing, a good bit of dreaming, and a whole bunch of optimism.

That doesn’t leave a lot of time for analysis – whether that is the quantitative analysis of hard data or the qualitative analysis of personal feedback, surveys, and community discussions.

A lot of this very important stuff gets done at the frustration level. That is a recipe for lost opportunities.

Regional Strategic, Ltd. specializes in the analysis of data and community input. We can help you build a solid foundation under your vision. We are data experts. We are stakeholder input experts.

THAT IS THE VOODOO WE DO.

Economic Impact Analysis – Some things to think about

Posted on June 18, 2024 - 6:54 pm by

Look around. Anyone can acquire the necessary data to do an economic impact analysis. It doesn’t matter at what level. We can buy RIMS-II coefficients from the U.S. Bureau of Economic Analysis. We can purchase subscriptions to utilize models from IMPLAN. We can lay out retail or services estimates on the basis of regional surplus-leakage analysis or gravity-model analysis. We can rely on rule-of-thumb multipliers from most anywhere. Some of these are valid. Some are not. We can, however, see all of them in action if we look at enough “Economic Impact” reports.

Even sticking to the Input-Output based analyses (RIMS-II or IMPLAN), simply being able to buy access to the data does not assure a good analysis. Getting a good analysis is very dependent on the modeler understanding what the models can and cannot do.

The Input-Output (I-O) Model

While the details of a working I-O model can be quite complex, conceptually, an I-O model is quite simple. An I-O model is basically a matrix of economic sectors. Sectors along one axis represent industrial inputs or suppliers to the industries on the other axis, which represent industrial users or demanders. Suppliers and demanders are connected by an interlocking set of mathematical relationships specifying how much of each input is required to make a unit of any output. When it is decided how much final output an industry will produce or how much labor an industry will employ, the model specifies how much of all necessary inputs are required and how those inputs are sourced from other industries.

It starts out looking like the large system of mileage charts (similar to those that you find in the back of a road atlas). Unlike the numbers in a mileage chart, however, each of the cells in an I-O model contains part of a system of production functions that is linked mathematically to all of the other cells in the model. The values of final goods produced or labor employed can be changed for any of the industries and these coefficients allow the modelled economy (the matrix) to be rebalanced, showing how the initial change affects all of the industries that supply inputs to or demand outputs from the industry altered.

This is the basis of the type of I-O-based impact analysis commonly used to estimate the effect of a given economic change. It is important to understand, however, some basic and very important constraints upon the model.

The Model is Static

While we can change the value of output or employment for an individual industry, the model itself is static and unchanging. The production coefficients in every cell remain unchanged. The changes we made to an individual industry simply changes the scale of overall output and employment. They do not change any of the production relationships in the model.

The Model is Linear

Fixed coefficients (production relationships) make the model linear. If we change the final output of industry “A” by $200, we will get precisely twice the impact we will get if we change the output by $100. If we change the output by $100 Trillion, we will get one trillion times the impact we got with a $100 change. Because all of the production coefficients are fixed, any individual output or employment shock can be scaled up or down.

The Model is Limitless

This means the model is limitless. No matter how big a change we submit, the fixed production coefficients will provide us with an economy scaled precisely to that change. We could take Franklin County, Iowa, for example. Franklin County has a population of just under 10,000 and a civilian labor force of about 5,500. An I-O model, however, would allow us to increase employment in an area industry by 20,000 and scale the economy to match that change. It doesn’t matter to the model that the initial change is somewhat ridiculous.

Similarly, Franklin County is heavily farmed. Nearly all the arable land within the county is cropped in corn and soybeans. There is no real excess capacity with respect to arable land, so production is pretty much fixed. The model, however, would allow us to shock the agricultural system in Franklin County by increasing the value of both corn output and soybean output by 20 times. It would dutifully scale the local economy to accommodate that change even if the change is impossible in the real world.

The static model will allow us to model ourselves into absurdity. It is important to understand the environment and economy in which we are modeling. It is important to define the area modeled such that its economy is somewhat commensurate with the change being investigated. The model knows no constraints of scale, so the modeler must be able to recognize, acknowledge, and accommodate them.

Prices in the Model Cannot Change

Constant production relationships require constant prices. If prices change, the value of production and input costs change. Because the model and all of its calculations are dollar-denominated, changing prices would violate the assumptions behind the structure of production relationships.

Prices cannot change. No matter how severely we shock the environment, the model assumes that the economy can provide limitless resources at a constant price. The model also assumes that the citizens in the modeled environment are ready and capable of purchasing limitless amounts of output at constant prices.

This is never the case in reality, but for small enough shocks it can be reasonably close. Going back to freshman economics, the I-O model is a Micro economic model. In Micro it is assumed that every participant in the economy is too small to affect the economy as a whole. As a result, prices are assumed to be fixed.

Conversely, in the context of the Macro economy, prices change as more or less resources are demanded. These changes cause people to adjust their purchases and producers to adjust their inputs in order to maximize their purchasing power.

The I-O model, however, cannot accommodate price changes and the resulting adjustments. This means that the model overestimates impacts for any event, shock, or change modeled. It only overestimates by a little if the shock or change is small relative to the economy (say, adding a pool hall in Des Moines, Iowa). The overestimation grows, however, as the size of the shock or change grows larger relative to the area economy (removing the entire farm and construction machinery manufacturing sector from Pella, Iowa). The larger the shock is relative to the economy the larger the I-O model overestimate of the economic impact will be.

In all cases, if the expected result of an event is stated to be a change in related prices, the modeler needs to be very circumspect in evaluating impact model results. Building an ethanol facility in Iowa, for example, is nearly always promoted as a means to raise the price of the surrounding area’s corn production. Because the surrounding area’s corn production is relatively fixed, this violates two of the basic constraints of the model. First, constant prices cannot be assumed. Second, the area cannot be assumed capable of increasing the necessary inputs to support the event within a fixed area subject to fixed production relationships.

The modeler must be able to place the event within an economy that can reasonably handle the resulting impact in a fixed-price environment. The modeler must be cognizant of where the proposed event violates the underlying constraints of the model. In all cases, these issues must be dealt with transparently in the presentation of model results.

In-area Substitutions

The model cannot distinguish between new economic activity (economic impacts) and changes in existing economic activity (substitution). The modeler must be sufficiently aware of the local economy and the event being analyzed to make these distinctions.

For example, Joe buys a factory from Bill. The factory doesn’t alter its operations or output. It just changes hands. There is no economic impact. We just substituted Joe for Bill.

On the other hand, Bob opens a new grocery store in a town of 8,000 that is already served by two existing grocery stores. An economic impact model evaluates the initial investment involved in opening the store as well as the annual impact of store operations. Within a short time, however, the existing stores begin to struggle from decreased sales, and one of them closes. In the short run, there appeared to be economic impact. In the long run, it revealed itself as a substitution.

It can get murky. If the local opera house draws sixty percent (60%) of its audience from the local area and forty percent (40%) from outside the area, is 60% of its modeled impact merely substitution, because local residents would have spent their money at some other local venue? Or is it reasonable to assume that if the local opera house did not exist, local patrons would travel to nonlocal opera houses? After all, it is reasonable to assume that nonlocal opera aficionados travel into the local area to enjoy the existing opera house.

Similarly, suppose Bill was going to close the factory in the first example. Then is Joe’ purchase and continuance equivalent to opening a factory after the previous one closed? Quite often, “Jobs saved,” is presented as a justifiable impact, even if the property transfer appears to be substitution. Similarly, if our local opera patrons would have traveled out of town, “Entertainment expenditures saved,” might be presented as a justifiable impact.

There are no hard-and-fast rules in these situations. It is the function of the modeler to define the event with respect to the origin of the effects modeled and to present modeled results in a way that make the implications of those origins clear.

A Basic Conundrum of the I-O Model and Economic Impact Analysis

The I-O model lives in somewhat uncomfortable territory. It is a Microeconomic model, so the players are assumed to have no effect on size and price relationships. The goal of economic impact analysis, however, is nearly always to show that an event will have significant effects on the overall area economy. The larger these effects, the more likely it is that we are violating the fixed-price assumption of the model and overestimating the resulting impact.

One way to mitigate this size problem is to define a larger area. Doing so reduces the relative size of the modeled event with respect to the overall area economy. Increasing the size of the modeled area also increases the size of the resulting economic impact, because more expenditures happen within the area before the shock begins to dissipate as transactions go beyond the area.

Increasing the size of the modeled area, however, also exacerbates the issue of in-area substitution. As the area expands, the chance that the modeled event simply replaces existing activity grows.

This basic conundrum is why it is imperative that the economic impact modeler thoroughly understand the modeled event, the modeled area, the modeled economy, and their interrelationships.

Good Luck!

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