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Analyzing the Benefits and Costsof.EconomicDeve1opment Projects Taken together, the indirect and induced impacts can be thought of as the "ripple effect" of the initial change in economic activity. These additional impacts on a community or region can be estimated by applying a ratio called a multiplier to the direct effects of new economic activity.3 The multiplier measures the total increase in employment, income, and/or output across all economic sectors per each new job created directly or per each dollar increase in earn- ings or business sales.. The multiplier gauges how an initial change in consumption byend-users or "final demand" in one sector translates into changes in the wider economy.4 A change in one sector of the economy affects many. others. The total economic impact, then, is the sum of the direct, indirect, and induced effects. Returning to the Google example, the total employment impact is estimated to be 582, which includes the initial employment of 210 that will be directly supported by the new facility. Based on these numbers, the employment multiplier for the Google project is 2.77 (582 divided by 210). The correct way to interpret Google's employment multiplier is that for every job the facility creates directly, an additiona11.77 new jobs will be created statewide.s In other words, Google's direct employment of 210 will produce an additiona1372 indirect and induced jobs for a total employment impact of 582. While exceptions might exist, as a rule of thumb, multipliers will rarely exceed 3.0 at the state level and 2.5 at the local level. Multipliers much larger than this should be considered with caution. Multipliers vary considerably by industry sector. Some industries have larger multiplier effects than others because they buy more of their inputs locally and sell goods outside the region. Industries that export or sell goods and services to businesses and households located elsewhere bring ne~v money into the local economy. Thus, applying one standard multiplier to a project's direct effects is a rather crude way to estimate economic impacts. More precise esti- mates can be generated using advanced modeling techniques that take into account the vary- ing degrees to which different industries purchase from local suppliers and export goods and services outside the local area. Rather than simply applying one generic multiplier for all projects, input-output models esti- mate unique multipliers for individual industry sectors. Input-output models capture the trad- ing patterns and money flows among the various sectors within an economy. By quantifying the purchasing transactions between industries, input-output models demonstrate how a change in one sector might affect numerous others throughout an economy. Localized economic impact models such as RIMS II, IMPLAN, and REMI (discussed below) use mathematical equations to apply national data on inter-industry input-output linkages to states and localities. These models calibrate the input-output multipliers based on the size of the area being studied. Larger geographic areas such as states will have higher multipliers than counties or cities because their "leakage" rate is lower. Leakage occurs when some portion of new dollars is not re-spent in the local economy. Dollars will leak out at every round of spending 3. For a good discussion on multipliers, see Benjamin H. Stevens and Michael L. Lahr, "Regional Eco- nomic Multipliers: Definition, Measurement, and Application," Economic Development Quarterly, 1988, vol. 2, no. 1: 88-96. 4. Cletus C. Coughlin and Thomas B. Mandelbaum, A Consumer's Guide to Regional Economic Mul- tipliers," Federal Reserve Bank of St. Louis Review 73, no. 1 (January/February 1991): 19-32. Also available at http://research.stlouisfed.org/publications/review/91/Ol/Consumer~an_Feb1991.pdf. 5. The multiplier ratio includes the direct employment which must be subtracted out to avoid double counting. The multiplier ripple effect of Google's 210 direct jobs is 372 additional jobs: 582 minus 210 or 1.77 multiplied by 210. 18 © 2010 School of Government. The University of North Carolina at Chapel Hill