Governmental institutions like to exaggerate their benefits since that helps ward off questions about their efficacy. State universities are a good example. Taxpayers might wonder why we spend so much on them, given that lots of college grads seem to have learned little of use from their college years.
Recently, one of the University of North Carolina campuses (Asheville), put out a study purporting to be an “economic impact statement” of the university. As with all such studies (we find the same thing with studies about convention centers, sports stadiums, and so on), the researchers came to the conclusion that the school has a huge impact on the local economy. So there, you nit-pickers!
Not so fast, argues economist Roy Cordato in this essay for the Martin Center. This study, Cordato observes, commits the old mistake of omitting the opportunity costs from consideration.
The error is that the study — as is often the case with IMPLAN-based studies — ignores opportunity costs; that is, it ignores the fact that the resources being consumed by the economic activities of the university, like all resources, are scarce. This means that the study does not assess the alternative uses of the resources — land, labor, and capital — when it analyzes the university’s economic impact. This is the most fundamental error found in economic analysis and is often made by people who have no serious training in the discipline. Because of this, the study does not even provide enough information to determine whether UNCA’s impact on economic activity is positive or negative.
For example, UNC-A is building a new dorm and the study looks at all those costs as adding to the Asheville area economy. But if the resources for that dorm were used for other buildings in the area, they would also generate spending and add to the economy.
In spending $33.8 million to construct this residence hall, UNCA will use a host of contractors — construction, electrical, etc., who in turn will use labor with many different skill-sets and capital of all kinds. But unless one assumes that these contractors would have no other work and that there will not be other uses for the labor and capital that they employ, what the university, in fact, will be doing is bidding these resources away from other projects in the local economy. The $33.8 million dollars is actually a claim on scarce resources that have alternative uses.
Because college enrollments are apt to decline in the future, this new building may turn out to be a waste of resources. But the approach taken by the people who churn out these economic-impact studies can’t shed any light on the value of the spending, just that it happens.
Cordato correctly concludes, “By employing an economic impact study that only solves half of the question, the state government is making major policy decisions based on inadequate information.” This is one reason why we get so much governmental stuff — everyone focuses on the seen and ignores the unseen.