Debunking junk economics

Just recently, the CWB released a study it had commissioned at the farmer's expense to look at its own economic impacts. PriceWaterhouseCoopers, the international consultancy, performed the analysis. Not surprisingly, it found that the CWB had major impacts, generating $1.6 billion in economic activity and "creating" over 14000 jobs. This seemed ludicrous. Then I looked at the study. I saw that they took the value of "premiums" earned by the CWB straight out of other CWB commissioned studies by Andy Schmitz, Richard Gray, and the like and treated these mythological premiums as having a direct, tangible impact on the Canadian economy. Sounds fishy. But the study also treated all CWB expenditures as having economic impacts. I always thought that farmers funded those expenditures, not the CWB. Those expenditures would exist with or without the board in place, so attributing them to the CWB seemed incredibly arbitrary.

To assure you that this idea isn't totally crazy, I refer you to Tyler Cowen, professor of economics at George Mason University and author of the popular econ weblog Marginal Revolution. This was posted under the heading, "Don't Trust Economic Impact Studies." It refers to impact of the arts but it applies to studying the economic impact of any organization and it is crucial to any critical look at the study released by the CWB. (Emphasis is mine.)

We should be skeptical of “economic impact” studies that show the importance of the arts to a community. A study of this kind might show that an arts festival or new arts arena brings millions of dollars in economic value. But these studies typically treat arts expenditures as creating value out of nothing. Implicitly it is assumed that if the money had not been spent on the arts, no other economic or social values would have been produced. Again, the relevant comparison is whether an arts arena leads to more value than some alternative. When we look at economic impact studies for one industry at a time, they all appear to show high benefits. But this means that the net benefits of any single project are low, zero, or perhaps even negative on average. By investing in one good idea we are always forsaking another good idea. In essence these studies list gross benefits rather than net benefits.

Indeed, the relevant comparison in the case of the CWB would be the impact of marketing expenditures in a competitive market. It is a comparison that can't be made.

It is the height of arrogance to think that the gross benefits of Western Canadian wheat and barley marketing are the result of the existence of the CWB. The only conclusion you can take away from the CWB's Impact Study is this: the CWB has such a lack of respect for farmers that it believes that they couldn't generate a single dollar of economic activity in its absence.