The Decision Strategist

A substantial part of my day job involves trying to estimate the ‘economic impact’ of a company, policy, university, park, forest, visitor, or really anything else that someone wants to champion for some reason (almost always to get more state or federal money).

The method is pretty simple on the surface. How much money does said company, policy, etc… (lets call them actors for brevities sake) bring in to the region you are examining? You don’t want to consider money that is already within the region, because that money is already there, and if it wasn’t going to said actor, it would be going to some other actor in the region.

Often times this is a company looking for tax breaks or other incentives. ABC Auto wants to be able to tell the state economic development department that they will hire 1000 workers, who will provide, through derivative economic activity, an additional 900 jobs.

There are generally two accepted ways in which these additional jobs can be generated. First, they are generated because ABC Auto buys parts from XYZ Metals, and so provides some of the money used by XYZ Metals to pay their employees. XYZ Metals in turn has to buy from Local Smelters, etc… These are called ‘indirect’ impacts.

Then there is the income of all those workers, buying clothes, gas, cars, food, houses, etc… which again provides the economic activity necessary to keep all those retail workers employed. These are your ‘induced’ impacts.

The problem is that the size of your economic impact is extremely dependent on the size and location of your geography. Say for example that Big Mall has a location in the next city. They are considering moving the location to your city, and say they will hire 500 employees!

Sounds great right?

It might be, if you’re measuring the economic impact on the new city. But if you are looking at the old city it’s not such good news. And if you are looking at the state, there won’t be any real change at all.

And here is the problem, because no geographic region is economically isolated. So your ‘outside money’ is only outside because of definition. This can get us in to real trouble. Every economic impact study I have ever seen has worked hard to capture any federal dollars that will flow into the region because of a given actor (say the economic impact of a university). But not one study has accounted for the fact that a whole lot of money flows out of the state to the federal government first.

Indeed, without the flowing of money out of the state, there would be no flowing of money in to the state (unless, like our current government, you just borrow as much as you want).

So really, your benefit from federal dollars is only positive if you get more money than you pay, and then it comes at the expense of some state that gets less than they pay.

But an even bigger problem is a misconception about how economic growth occurs. It doesn’t happen because ABC Auto buys metal from XYZ Metals who buys ore from USA Smelters. Those are economic transactions, and are the transmission lines along which economic growth occurs, but they aren’t the source of the growth itself. But this is implicitly what is happening in economic impact analysis.

Economic growth is a factor of a lot of things, reducing primarily to how productive your workforce is, which depends on your capital investment (e.g. computers and the internets), education, etc…

It’s also a function of use of resources, which may be things like minerals and timber, or things like military power to coerce other countries to implement favorable economic policies.

On a global level though, economic growth can only be due to increases in efficiency, whether it’s in terms of labor or resource extraction or manufacturing process.

The point of this long ramble being that economic impact studies are by their very nature prone to NYMBYism at best, and foster explicit fighting between regions at their worst. Companies playing states against each other to get the best tax break is possible because the economic impact is done for each state separately. Geography is the Achilles Heel of economic impact analysis.

There is a bunch of software available for impact analysis:

• Implan: Some good information in their documents section.
• Remi: Very expensive, more complicated (without necessarily being better).
• Redyn: The gentlemen who put this together are thorough and extremely smart.
• RIMS II: Quick and dirty, BEA model.

I think there is a place for an open source free downloadable and web-based impact model…I should really make that happen.

-zot.

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Disclosure: I hold a small position in an ING bond fund (IDBOX). I’m also not a professional investor. Please don’t take my word for anything you do with your money.

I started looking at investment about six months ago when I realized I would soon achieve my goal of eliminating credit card debt. It is a bewildering world, and back in August I wrote a 2 part series about investing in a recessionary economy (and part II). This post is in a similar theme. Here’s a few basic rules I follow when deciding how to invest:

1. Don’t Buy After a Rally

First off, I never buy an asset (stocks, mutual funds, real estate) when the price has increased. There is no hard and fast rule on how much it has to have increased for me to avoid it, but basically if it’s being hyped by the media or talked about by people, I stay away.

You might miss some really strong growths in specific stocks by not buying in a rally, but it’s also possible that you’ll buy in near the top and only see the value decline substantially. It’s too much of a game for me. I haven’t bought in to tech stocks like Google and Apple for the same reason.

2. Don’t Sell After a Slump

In the same vein, don’t sell when the price drops. A lot of people see a stock’s value going down and sell hoping to avoid losses, but in effect they are locking in price decline that has already happened. Here again it seems like it’s just as likely that you will sell when the value reaches the bottom and so won’t benefit from following gains.

The Current Economic Climate

These rules can be hard to follow though. As fears of inflation (the fed cuts rates again, though read Global Economic Trends for an argument of why inflation is not related to federal interest rates as much as production capacity) mount and the dollar loses it’s value, a lot of people are shifting to gold and silver or foreign markets with their investments. But where do those of us stuck in dollar based investments turn?

I could shift out of dollars into gold or other commodities, but doing so would violate rule #1 given the meteoric rise in the price of gold

In fact, any shift out of US dollars now that dollars have declined heavily would be violating rule #2. Yet I have real fears that the economy is going to be in a substantially worse position in the coming year or more and I suspect that the value of the dollar is only going to decline further.

And if inflation is really occurring at much higher rates than reported, then the situation is worse because inflation is just eating whatever returns my investments are earning and then some.

So the real question is whether it’s better to stay in stocks, risking financial loss when the inevitable burst happens, stay in bonds with low earnings being eaten by inflation, or violate rules #1 and #2 by selling off dollars and buying something relatively more expensive in the hopes that a foreign asset or commodity won’t decline?

About a month ago I shifted my meager investments from a tech mutual fund (IDTOX) to a bond fund (IDBOX). This protects from a coming stock decline, but not from a further decline in the dollar. It’s sort of a middle position in which I’ll lose some value either way:

If stocks decline, the economy worsens and the value of the dollar further declines, I’ll lose value due to inflation

If the value of the dollar recovers, then I won’t be left with commodities I purchased at their peak.

Still, fear is a powerful emotion. If ING Direct Investment had a commodities fund, I’d be hard pressed not to violate my rules and shift into commodities to whether out the storm.

Of course, the value of my investments at the moment are only roughly $500, so it wouldn’t be a disaster in any situation.

I’d be interested in hearing from any readers who have investments or are facing similar decisions. You can flip the situation around to consider debt as well. If the fed is spurring inflation in an effort to stave off financial crisis, it makes no sense to pay more than the minimum on student loans that were consolidated at 3.5% interest (if you were lucky and graduated in 2002).

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Technology is really about information, and our ability to interact and store information has been making some major changes for the past several decades.

Those of us who are researchers have been blessed in the past several years with an explosion of available information for examining nearly every topic we want to look at.

But at the same time, there has been a shift away from objective analysis toward studies completed by organizations with a vested interest in the outcome.

This has resulted, as noted at Overcoming Bias, in a crisis of faith in the use of statistics. No one believes any numbers that are released because they figure that the people who did the analysis have a hidden agenda. This is the most demoralizing aspect of being an analyst.

The problem is essentially that the analysis process is still closed. We don’t trust the numbers because we don’t know the process that went into obtaining them. Until the process of analysis is opened to a public that can understand and take part in a dialog about the methods, we can continue to write analytical work off as a waste of money and resources because someone else will always have a study saying the opposite.

We need the democratization of data analysis.

And I have high hopes for the future. One of my ideas has been to create an online data warehouse and analysis website, and a few groups such as Swivel and Many Eyes are doing just that.

The services are still fledgling, but in a fairly short time I think we’ll see the ability to perform analysis via the web, and to upload and share data. Hopefully this will result in the standardization of data sets and eliminate the monkey work of downloading a text file and formating it in excel.

I cry when I think how many people have done the very same thing with the very same data.

For a time there will be a lot of confusion, attacks, and some really bad work, but ultimately a community of devoted analysts performing essentially open and peer reviewed work will develop. Because it’s been through trial by fire from all sides of the issue, it will be the most objective approach to messy data analysis that we have ever obtained.

The new analytical hotshots will be the people who have weight with communities at Swivel and Many Eyes and others and are known for doing quality work. These people will engage in very public analysis and will be extremely valuable to everyone wanting analysis that can be seen as objective.

Hopefully that means that shoddy and lazy work will slip to the sides and we can regain confidence in numbers that we see.

I guess it could go the other way. That people don’t want objective analysis and we’ll shun those whose results we can’t know ahead of time. We’ll see even more extreme partisanship.

But that way lies certain death.

-zot, pretending to be a futurist.

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Google Adsense, affiliates, and their derivatives have encouraged a whole new direction in the monetization of internet sites now, especially blogs. So much so that I sometimes wonder if the entire internet isn’t just a giant group of advertisers struggling for links.

UPDATE: Techcrunch has an interesting article discussing some of the same material.

But there’s just one problem:

People have to buy things to make advertising worthwhile.

With the world economy entering what looks like a severe credit crunch and Americans owing more than 2.4 Trillion Dollars (that’s more than $8,000 of debt per capita), not to mention a loss of wealth due to declining housing prices, many economists are expecting a consumer spending-led recession.

In other words, people won’t be buying as much from internet ads anymore.

On the other hand, advertising is a curious business. In some ways, the less people buy the more companies advertise. Still, I’m expecting the price per ad to do some substantial declining in the next couple of years, which corresponds to a loss of income for all the ad-supported blogs sites out there.

That doesn’t bode well for Adsense supported startups out there either. Though I think Paul Grahams thoughts about the direction of startups in general are pretty spot on, I think the survival rate is going to start doing some plummeting as consumer spending slows.

Survival rates of businesses always decline when we enter recessions, but this one may be particularly bad.

I’d love to see some data on types of organizations that tend to thrive during economic turmoil. I’m betting it isn’t financial institutions (at least not this time) or consumer products. We might see a rise in alternative communities though.

-zot

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