OT: Measuring economic impacts

[QuikSand]

I've been reading a bit about SARS lately... and along the way haev come across something I claim to know something about. I've seen several places speak about the "economic impacts" of the SARS outbreak, specifically discussing Toronto. In my mind, this raises a very interesting issue that goes to the heart of economic analysis... maybe you'll find it interesting, too.


Some folks have argued that there has been a siginficant economic loss in Toronto because of SARS. People aren't traveling to Tonroto, and because they aren't there to spend money and so forth, the local economy there has suffered. Tough to argue against that.

I have also seen some attempt to "globalize" this kind of measurement. In some manner, basically tallying up all the local losses (like those experienced in Tornonto) and coming up with a total. So, sum up the impact felt in Vietnam, Hong Kong, China, Canada, etc - and you have a "total impact."

Doesn't this miss something?


Let's say that lots of people who would have gone to Toronto for conventions, tourism, or whatever have decided not to go. They didn't spend their money in Tonroto - fine. Does that money disappear from the world?

Of course not. Some of it gets spent as convention and tourism dollars in other places - Montreal, New York, wherever. And some of it just dissolves into the economy in much more subtle ways to calculate - people pay off their credit card debt, people fill up the car with gas, people go buy a footstool, whatever.

So, if all we look at are the opaces that lose - we are ignoring the places that win. In the simplest terms, if everybody's Toronto business just moves over to Montreal - it's a zero sum game for the overall economy, isn't it? Toronto loses, but the rest of us win to some degree, and it washes out.


The macroeconomic notion that economic transactions are the measure of success isn't a wholly flawed one, but it does lead us to some weird conclusions. We talk about tax policy in terms of creating jobs... that cutting taxes will create greater incentives for businesses to hire people, and will cause taxpayers to go out and spend their newly untaxed wealth.

Certainly this is true to some degree. But it belies the fact that when the government collects our money and spends it - that creates jobs too. Contractors are people too. Government buildings get maintained and cleaned by human beings, just like private sector buildings do. Spend money on a program of any sort - tha money comes back to the economy in salary, benefits, grant awards, or whatever.

Which ends up back at an economic trusim that sounds so simple, it defies understanding:

The overall measure of an economy is equal to:
the amount of money in the economy
multiplied by
the "velocity" at which that money changes hands.


Jebus... that makes it sound like the only thing that we need to do is all go out and start spending money like madmen! Spend it (and spur the economy by benefitting the sellers) or save it (and benefit the institutions in which you have invested, allowing them the capital to make better and healthier economic decisions) - either way, we all win!

It's as if the only people who hold us back are those who keep their cash under the mattress.


Measuring economic impact - trying to translate things into numbers of jobs, dollars of effect, and the like - it's a damned slippery business.

[JonInMiddleGA]

Good job on the SARS thing, the rest is more complex than I think I can handle right now (I'm supposed to be making my contribution to the economy instead of sitting here posting)

[Fritz]

An interesting post Quik. I wish I could articulate a follow on post. perhaps later today...

[oykib]

That's a good post, Kick

I have noticed a phenomenon like this in Japan. Here, people have been uptight about the economy for years.

I know a some bar and restaurant owners here. All of them have really suffered. Basically, people are so uptight about disposable income that they won't spend money on entertainment. Some of these guys have seen 50% or more drops in revenue at different times of the year.

But I've asked a number of people about how much money they make in comparison to previous years. They all say that they make about the same amount of money as they have in previous years.

The overall numbers have the Japanese economy being stagnant or only having a modest decline (less than 1%) per year over the last five years or so.

I think that the lack of sophistication of the populace about economic issues coupled with the sensationalism of the press really causes more harm than actual declines.

[JonInMiddleGA]

oykib --

If I'm reading your post correctly, it sounds like the big picture economy is tolerable, it's just that the money is being distributed differently (i.e. entertainment suffers but the money is still spent elsewhere). Am I reading that correctly.

[albionmoonlight]

Kick--

I have thought about the "zero sum" aspect of global macroeconomics of which you speak. I have a personal definition of economic growth and I hope that you or others on the board can poke some holes into it to help me refine it.

I define economic growth as the measure of the rate at which the world's net resources are made more valuable. There exists a pile of raw silicon. It has little value. It is transformed into a pile of Pentium 4 chips, and value is created.

There is a forest. It has some (low) value as a producer of wild game. It is transformed into houses and chairs and other lumber products and (high) value is created.

I have a strong environmental bent. One of the things about which I worry is that as politicians on both sides of the aisle argue over who can make the economy grow faster, they are really arguing over who can create a system that pulls (non-renewable) resources out of the ground faster than the other guy.

I am a realist and I understand that no one will get elected promising to slow down the economy. The natural question I have is--Is it possible to have a functioning economy that continues to grow and improve the global quality of life without transforming natural resources at a rate faster than they can be replenished?

[Fritz]

Originally posted by QuikSand

Certainly this is true to some degree. But it belies the fact that when the government collects our money and spends it - that creates jobs too. Contractors are people too. Government buildings get maintained and cleaned by human beings, just like private sector buildings do. Spend money on a program of any sort - tha money comes back to the economy in salary, benefits, grant awards, or whatever.

I think one might argue that the transaction cost in terms of velocity is very high when it comes to the govt. In other words, govt. slows down the process.

[Craptacular]

Each of you is more than welcome to send money my way if you want to stimulate the economy.

[JPhillips]

Quicksand: One problem with your SARS analysis is your assumption that the money will be spent in a relatively short amount of time. This isn't necessarily true. If I own a business and decide not to make a sales trip to Toronto, I may or may not spend that money on something else. I also may or may not spend the money on something that provides the same economic benefit. For example, my sales trip to Toronto will presumably help many as I will spend money on hotels, food, transportation, office supplies, ect. This money in turn will benefit the suppliers of these companies all in a relatively short amount of time. If on the other hand I buy a Mickey Mantle signed baseball, that money will not benefit as many people in the short run. Eventually it will spread around, but in the short run there will be an economic hit, both in Toronto and the world economy overall.

The other problem with this analysis is that wealth is not a finite commodity. There is no law that states wealth can't be created or destroyed but just changed in form. The value of a product is based almost entirely on the demand for it. If demand for tourism in Asia drops, the economy will likely take a hit because there is no gaurantee that a corresponding rise for demand in something else will happen. Look at tech stocks. On paper these companies were worth billions more five years ago than they are today. Afetr the stock bubble burst their value fell dramatically without a rise in value of other stocks. The wealth just disappeared. Because wealth isn't concrete, a dollar not spent here will not necessarily be offset by a dollar spent there.

All this being said, economics is a damn slippery business. I don't think there is anyone who could really explain the global economy. There's just too damn many unknowns still.

[KWhit]

Originally posted by Fritz
I think one might argue that the transaction cost in terms of velocity is very high when it comes to the govt. In other words, govt. slows down the process.

I don't know, Fritz. I take a different view on that.

Having worked in the public sector before, I have witnessed the fact that the gov't will spend every dime that is budgeted. If 10million is in the budget for a certain dept, the director will make sure it is all spent - whether it is needed or not. They don't want to leave any money "on the table". The main reason they do this is that the amount of money needed in 2003 will effect the $$ they get in 2004. If they didn't spend everything they were allotted 2003, you can bet they will see a decrease for 2004.

So, for instance, if you send 10mil to the gov't, it will ALL go into the economy. If you give that 10mil to consumers, most will go to the economy, but some will go "under the mattress".

Someone correct me if I'm way off base here.

[JonInMiddleGA]

KWhit - If you get corrected, it won't be by me, because I thought about the same thing you mentioned.

[Fritz]

Originally posted by KWhit
I don't know, Fritz. I take a different view on that.

Having worked in the public sector before, I have witnessed the fact that the gov't will spend every dime that is budgeted.

Someone correct me if I'm way off base here.

Oh, you are certainly correct. But how frequently those dollars can be spent may change.

For instance, let's say you save $100 from Jan 2002 to pay your 2002 taxes in April 2003. Then the govt gets hold of that $100 and does not obligate it until Sept 2003, and does not actualy spend it until Dec. 2003. That $100 takes 2 years to make one transaction.

The same $100 in 1/2002 could be spent on a lawn care guy, who spends it in 2/2002 on at a hardware store, who spends it on accounting services in 3/2002, etc. That $100 may move through 24 transaction in the same 2 year time frame.

Some would claim that the sluggishness of the govt. retards economic activity.

I am not saying that I buy into what I have posted, or even that it is a mainstream concept. Mostly I am regurgitating someting a economist friend told me.

This has nothing really to do with the SARS thing, and is more of a tangent to his original post.

[bbor]

I own a business in Toronto.Now my business is very much based on climate right now...warm weather brings out the big spender...cold weather)like we are having) keeps people to the indoor malls(i am in a strip)

Generally April is my busiest month....except this month...but it almost impossible for me to blame this on SARS or the weather...or the combination of both.I think my business would have been busier if there was no SARS factor...but it would not have been as busy as usual because of the weather factor.

I am fairly sure that the money i would have made in April is lost forever.....i just cannot see such an increase in my sales to recover as much as i lost to SARS/WEATHER etc,etc.

i am certain that the money i lost is money people spent elsewhere on other items....or spent on malls that are indoors instead of the strip type....or people went outside of the greater Toronto area to spend their money,since the SARS threat was generally based inside Toronto.

[QuikSand]

Originally posted by JPhillips
Quicksand: (sic) One problem with your SARS analysis is your assumption that the money will be spent in a relatively short amount of time. This isn't necessarily true. If I own a business and decide not to make a sales trip to Toronto, I may or may not spend that money on something else.

Let's see how this works. "I may or may not spend that money on something else." Fair enough. If you spend it, you provide more resources to those on the other end of those transactions. But what if you don't spend it? You leave it in the bank? Or you invest it in the stock market, perhaps? Either way - your money becomes capital for use in the overall economy - the bank lends it out to someone with a growing business, the company whose stock you purchased has more resources with whish to operate... that money gets into the economy. See my point?

I also may or may not spend the money on something that provides the same economic benefit. For example, my sales trip to Toronto will presumably help many as I will spend money on hotels, food, transportation, office supplies, ect. This money in turn will benefit the suppliers of these companies all in a relatively short amount of time. If on the other hand I buy a Mickey Mantle signed baseball, that money will not benefit as many people in the short run. Eventually it will spread around, but in the short run there will be an economic hit, both in Toronto and the world economy overall.

So, is it only about the number of people you benefit? Can't be! That would suggest that the most economically efficient way to spend your money would be to spend a penny at each of 10,000 different retailers - because you'd be benefitting the most people that way. Absurd.

The piece I agree with is this: "Eventually it will spread around."



Which then leads back to my original assertion - conceptually, the only real problem is when capital (money, or other translatable resources) is not being put to productive use. The "money under the mattress" argument.

If Fritz's assertion is correct - that governments by their nature are slow to act with their funds, and keep money sitting in non-productive postures for a long period, then that supports his conclusion, that governments are inherently unproductive places to direct resources. It's consistent (I'm not debating factual here).

[QuikSand]

For the most part, the underlying concept here is what economists call "surplus." Think of it this way:

Say you and I agree that I'll buy your copy of Net Detective for $20. In entering freely into this transaction, I must have decided that I'll get more benefit out of the software than I would out of the $20. For me, the difference between the "utility" (hapiness, satisfaction, something like that) from the $20 and the software is my surplus from the deal. Similarly, you value the $20 more than the software, you in the exchange you gain a surplus of your own. We are both better off for having reached this deal.


Conceptually - this is the underpinning link between "more transactions = better world" in measuring economies. We generally posit that when more people are entering voluntarily into agreements, they do so because they are enriching themselves by those desicions. And in turn, the capital (money) is finding its way toward those who value it most (key concept), since those are the people who are giving things to get money, rather than vice versa. When money flows toward those who value it most, we presume that's because they have productive intentions for that money... and the whole system starts over again.

This is a pretty fundamentally sound concept of how marketplaces work, and within those statements lie some of the principles most dear to the American way of life. Indeed, the most conspicuous element of what we cann American society is not our democracy, nor our freedoms - but rather our consumerism. Henry Ford may have been the most influential American who ever lived.

[QuikSand]

dola.

Sorry to run on like this... I just felt I owed the forum something of potential value today, after getting off to a lousy start.

[oykib]

Originally posted by JonInMiddleGA
oykib --

If I'm reading your post correctly, it sounds like the big picture economy is tolerable, it's just that the money is being distributed differently (i.e. entertainment suffers but the money is still spent elsewhere). Am I reading that correctly.

Basically, yes. Actually, Japanese people tend to save a ridiculous amount anyway. But the real point is that the poeple of this country are so paranoid about the state of an economy that isn't so bad that they're afraid to 'waste' money on entertainment.