Most men [and women] would feel insulted if it were proposed to employ them in throwing stones over a wall, and then in throwing them back, merely that they might earn their wages. –Henry David Thoreau
Though he never uses the terms, Thoreau does a great job of showing the difference between “economic impact” and “economic value.” A job like the one described above has a positive economic impact. The worker receives wages and then spends them—in this case, probably in a pub. The bartender’s income goes up a little, so the bartender uses the extra money to buy a better cut of beef for his family’s dinner. Thus, construction expenditures (stone tossing) have spillover effects in the services sector (the pub) and the agricultural sector (the beef). The total impact of the stone throwing job is the sum of all the direct and indirect effects of the wages paid to the stone tosser.
But what is the value of the stone tossing trade? Nothing much changes, for better or worse, as a direct result of the activity. There are some indirect effects, but the value of stone tossing per se is zero.
The distinction between economic impact and economic value is important in discussions of government expenditures. All expenditures have an economic impact. Government investments in research or aircraft, for example, will have measurable direct and indirect impacts on the economy—even expenditures on poorly conducted research and airplanes that are never used. The key is that money was spent for a product or service and the recipients of those expenditures used the money that they received.
It’s important to know the economic impact of government expenditures. Designing, manufacturing, and deploying a new satellite has an economic impact that is greater than the direct costs to the federal government; the effects of that direct spending spill over into the economy as a whole in many ways. Adding 20 new jobs at a weather research facility might result in the creation of 20 additional jobs across the economy as a whole as the weather researchers spend their pay and the office manager purchases necessary supplies and support services—computers, office supplies, and custodial workers, for example.
But it’s also important to know the economic value of the goods and services produced by government expenditures—for example, the positive effects that government-funded research has when the information is used by society to stay safe when a storm is coming or to build homes and businesses that aren’t placed in harm’s way. Marine research vessels and aircraft are used to collect data that help us grow the economy and, at the same time, preserve the world as a healthy place to live.
The value problem is tricky since a single product can benefit many sectors of the economy in large and small ways. The first step in estimating the value of a weather forecast, for example, is to list all the different ways that forecast affects agriculture, transportation, energy production, tourism, and other sectors of the economy. Then, those effects have to be estimated, perhaps using different estimation methods for each of the effects.
The whole process can be complicated, but it all boils down to price X quantity. In this case, the price is the cost-reduction or value-added by each use of a government product or service. The quantity is the number of times that good or service is used.
Governments sometimes spend money for the explicit purpose of “stimulating the economy.” In this case, we’d want to know not just the direct expenditures, but also the “spillover effects” of that spending. This is the total impact of the spending, usually expressed as changes in employment, sales, or some other economic indicator.
But in most cases, we want to know how much bang the public gets for each buck of government spending. In these cases, we have to roll up our sleeves and do the hard work of figuring out who is using the product or service, how many times it’s being used, and how much that reduces costs or increases the value of final outputs.
We want to be sure we’re not just throwing stones.