Sunday, June 10, 2012

Economic impact of St. Louis sewer improvements

An article in today's Post-Dispatch addresses the economic impact of the several billions the area must spend over the next few years to upgrade its sewer system.  I was quoted saying that the economic effect is negligible because it's simply taking money from consumers, who then decrease their consumption of other things.

Jack Strauss of St. Louis University says that the economic impact will be substantial.  It appears that he did an economic impact study finding an increase of 17,000 jobs.  I am reflexively wary of the words "economic impact study".  Such studies tend to overstate impacts because they fail to take account of all of the substitutions within the economy.  I couldn't find the study itself, but there is a description of it on page 20 of this document.  From what I can tell from the description, there is no reason for me to feel any differently about its methodology.  The input-output models that are used in impact studies are widely used, but are little-respected among many economists.  They're regionalized versions of Keynesian models of the national economy, which have not been generally accepted since Robert Lucas's eponymous critiqueHere's a nice assessment of input-output models versus the cost-benefit approach that I prefer.

Remember, this project involves no money from outside the region, and probably involves substantial amonts of money leaving the region to purchase materials, pay contractors, and hire workers.  The net benefits from an infrastructure project are the benefits from what is produced minus what it costs to build it.  A bridge, for example, decreases costs of transportation for everyone, thereby creating benefits.  The sewer project will do little to improve the region economically, but the region will have to pay billions of dollars for it.

The benefits of the sewer project are environmental, and a great deal of the benefits are for people downstream from us on the Mississippi.  We are being forced to undertake the project because our sewer system violates Federal law.  On the other hand, there is some slack in the local construction industry, which is why I think the economic effect of the project will be negligible rather than negative.  But, if and when the economy picks up, this slack will be needed in the rest of the economy to produce useful things.