Weekly John Locke Foundation research division newsletter focusing on environmental issues.
This newsletter highlights relevant analysis done by the JLF and other think tanks as well as items in the news.
1. Another "not an economic impact study" by another "not an economist." This time it’s the nuclear industry.
Making the news this week are the results of a new "economic impact" study funded by a trade association representing the nuclear industry. The study purports to show that the nuclear industry in North and South Carolina generates $25 billion dollars annually in economic activity for the two states and is creating 29,000 jobs. Not surprisingly, the study was funded by an industry group called the "Carolinas Nuclear Cluster." Also not surprisingly, the study was not done by an economist or even someone whose credentials are in a related field. The lead researcher has a Ph.D in industrial engineering and is a professor in the department of industrial engineering at Clemson University. So, again not surprisingly, there is very little actual economics in this study, and what economics there is is flawed. As an aside, it should be noted that Clemson is a Ph.D. granting institution in economics and has a first class economics department. All of this real economic expertise was bypassed in favor of using industrial engineers at Clemson to do the study. Hmmm! Could it be that a real economic analysis done by qualified economists may not have given the results that the Carolinas Nuclear Cluster was looking for?
The study is done using a proprietary statistical package called IMPLAN. IMPLAN is widely used by consultants who are hired by industry groups to demonstrate the "benefits" of an industry’s economic activities in a particular geographic area. Studies using this package are quite common, and they all suffer from the same flaw — they don’t actually measure economic impact. The attractiveness of IMPLAN is that users do not need to know anything about economics. They only need to know how to manipulate and make use of IMPLAN. Hence, it is almost always the case that when IMPLAN is used the results that are reported say little about what an economist would describe as the real economic impact.
A calculation of the true economic impact on an economy of any investment activity has to consider both benefits of that activity and costs. The benefits arise from the productive output generated by the investment, and the costs arise from the use of resources that are employed in producing that output. The only kinds of studies that can measure actual economic impact are those that invoke cost-benefit analysis, where the value of the productive output generated by the investments is balanced against the opportunity costs, i.e., the alternative uses of the resources that are taken out of the economy to generate it.
This industry study, and the IMPLAN statistical package that it invokes, does none of this. First of all, there is no attempt to ask the most basic, freshman econ class question: how else might the resources — land, labor, steel, energy, lumber, technology, etc. — that are going into the nuclear industry have been used? Indeed, if one simply reads through the study, it would be easy to conclude that all the resources used by the industry would have been sitting idle had it not been for these nuclear industry investments. In other words, the study seems to assume zero or close to zero opportunity cost.
For example, an obvious fact is that, if Duke Power or another electric utility company didn’t use their resources to build a nuclear power plant, they probably would have used them to build another kind of electricity generating plant — maybe a natural gas plant. So an important question to ask in considering the actual economic impact of nuclear power is what the economic effects would have been if a gas fired plant had been built instead of the existing nuclear plant whose economic effects are being considered. Might electricity users be better off today, would they possibly be paying lower rates, if the electricity being generated was coming from a different source? I’m not suggesting that they would be, but this is the kind of information that would have to be analyzed in order to assess the real economic impact of the nuclear power plant.
What this study does is turn costs and benefits on their heads. People should be aware that this is true of all IMPLAN based studies. What they do is consider the expenditures made by the industry under examination, in this case the nuclear industry, and then attempt to follow how those expenditures generate more expenditures in other industries and businesses in the region. From the perspective of economics, all of these expenditures are a measure of the resources being used to produce the industry’s output. An economist would ask how else these resources might have been used. What these studies refer to as "direct" and "indirect" effects are actually measurements of costs that need to be weighed against the benefits that they generate. They do this while at the same time saying nothing about the actual benefit, which is the value of the output being produced by the industry.
As an addendum, let’s take a look at the kinds of absurdities that the IMPLAN methodology leads to. As reported in the Charlotte Observer, the nuclear industry study counts the expenditures and employment generated at a plant devoted to the disposal of nuclear waste as part of the positive economic impact of the study. Clearly nuclear waste is a cost, not a benefit, of generating nuclear power. (Hint: they call it waste for a reason.) The implication of this study, then, is that the more nuclear waste that is generated, the better off we are. Yes, nuclear waste is good for the economy according to IMPLAN. Friedric Bastiat, call your glazer. (For those of you who do IMPLAN studies, Bastiat was an economist.)
Click here for the Environment Updated archive.
