While The Lost EconomyTM is a unique research program, it follows a very similar methodology to other economic studies of the past. This program will be an ongoing, consider many different markets and industries, and serve as a constant reminder of the economic costs associated with onerous regulations that block and stymie market development across the U.S.
One of the principle variables used to evaluate economic impacts will be the calculation of Gross Domestic Product (GDP), employment earnings and jobs denied due to regulatory impediments.
As commerce is reduced and investment blocked or delayed, the economic losses can be estimated, in part, by the reduction in direct purchasing of equipment and services, including reduced direct employment of and payment to workers and contractors. Because of this direct decrease in economic production, indirect economic losses also occur, leading to decreased demand for secondary suppliers and contractors, which further leads to a rippling effects that dry up hiring and payrolls due to fewer workers, as well as fewer purchases of equipment. In addition to the direct and indirect losses resulting from a decrease in output or blocked investment, the decrease in employment earnings means that workers spend less on household purchases – an economic change referred to as an induced effect. As a result, the total decrease in economic production is made up of direct, indirect and induced effects.
Said differently, for every dollar of production denied, opportunity costs cascade through various stages of production, and businesses and employees spend less, which means that the economy ends losing more than one dollar of economic output. This phenomenon is referred to as the multiplier effect. These direct, indirect and induced benefits lost can be measured in terms of their effect on GDP – the most comprehensive measure of final demand – and they can be reflected in terms of their effects on jobs and employment earnings.
But when progress is denied, the benefits foregone may include the impact from the initial investment, as well as subsequent opportunity costs of operations to provide services to consumers. These opportunity costs represent The Lost EconomyTM.
Our methodology uses state-level and industry-specific multipliers to estimate lost economic output, lost jobs and lost employment earnings. For example, in California, if one $1.00 of infrastructure investment is blocked by regulations, it may mean that $2.11 of economic output was foregone. This impact includes direct, indirect and induced effects for specific industries. This program follows the methodology used by the U.S. Department of Commerce for these regional multipliers.
However, there is potential a second impact. If a project is not constructed, there are additional opportunity costs that cascade to reduced full-time operations. For example, if wireless broadband infrastructure were blocked, then some wireless services are not delivered to consumers. If that is case, then a $1 drop in wireless communications services will represent an additional loss of $1.98 to the state economy. In order to maintain simplicity and reduce subjective judgments, all figures will be reported in their current dollar value, not reflected in present discount value.
This program broadly inventories and quantifies the value of many ongoing and proposed investments and private initiatives that are currently being impeded or delayed because of regulatory, legislative and related actions. There are a few caveats worth noting. While we measure the size of the proposed potential benefits from this inventory of projects, these are just estimates based on public information and use average industry and state-level assumptions. It is worth noting that when projects are cancelled at one state, it may mean that investments may still take place, but in another state or country. We do not attempt to adjust for this, but merely to highlight symptoms and measure the problem.
When it comes to investment, there is always an element of uncertainty, particularly with respect to the economic cycle, consumer trends and market competition. Additionally, we recognize that not all the projects could or should be approved, but the sheer size and scope of potential benefits (and losses) provide ample examples of the adverse consequences resulting from onerous regulations, and it highlights the need for streamlining approvals, licensing and permitting. Our independent research demonstrates that impediments such as regulatory barriers can substantially reduce and impair private investment and job creation.
Notwithstanding the above caveat, this research provides an instructive and statistically defensible picture of the potential for corrosive economic and employment impacts that can arise from significant project obstacles such as inefficient regulatory processes, including attendant lawsuits and threats of legal action. Moreover, we believe the data can demonstrate that these impacts are substantial.
- For a similar methodology, see Steve Pociask and Joseph Fuhr, “Progress Denied: A study on the Potential Economic Impact of Permitting Challenges Facing Proposed Energy Projects,” TeleNomic Research, March 10, 2011, http://www.projectnoproject.com/wp-content/uploads/2011/03/PNP_EconomicStudy.pdf. Here 350 energy projects, totaling a trillion dollars in GDP, were found to be held up by regulatory delays and permitting, including “green” energy projects, which made up 45% of the energy producing projects in the study.
- Distinct industry and state multipliers are available for output, earnings and employment are from the United States Bureau of Economic Analysis (BEA). These multipliers are based on 2007 national benchmarks and 2015 regional data. See, Regional Input-Output Modeling System (RIMS II), Regional Product Division, BEA, Table 3.5, Type II multipliers, 50 states, 2017.
- For an explanation of multiplier uses, see “Regional Multipliers: A User Handbook for the Regional Input-Output Modeling System (RIMSII),” Economic and Statistics Administration and Bureau of Economic Analysis, U.S. Department of Commerce, Third Edition, March 1997, in particular the case study described on page 11.
A full description of the methodology is available here.