In a column for The Kansas City Star, I challenged the rosy claims of the alleged economic windfall from hosting the World Cup. Every group I contacted indicated they got the number from someone else. When I finally found the organization that generated the number, it did not respond.

That seems to be the standard procedure.

The Kansas City Business Journal tried to dig into how Kansas City’s tourism bureau concluded that 650,000 visitors would descend on the region. Thomas Friestad wrote: “Visit KC declined to share its specific methodology for estimating visitors, saying it is proprietary information.”

Blaise Mesa, writing for The Beacon, examined the economic impact claims being made by proponents of a new Chiefs stadium in Kansas. He ran into the same wall, writing, “The Beacon contacted the firm that calculated economic development data on the stadium, but they didn’t reply to requests for comment.”

It should be a red flag for even the most diehard supporters of these deals that those who promote the claims refuse to answer basic questions.

The post Extraordinary Economic Claims Require Extraordinary Evidence—Sports Edition appeared first on Show-Me Institute.

David Martin over at The Pitch has a great piece about how the positive economic impacts of a Chiefs training camp in St. Joseph have failed to materialize. Residents were promised millions of dollars of revenue in return for taxpayer subsidies. Build it, they were told, and they will come.

They didn’t come. The expected money has not poured into St. Joseph, in part because the calculations used to make the promise to St. Joseph residents were flawed. Martin writes:

The convention bureau arrived at the $6.3 million economic-impact estimate by multiplying 40,000 (the number of fans who attended training camp, according to Missouri Western) by $158. The dollar figure was the average amount of money that surveyed visitors said they’d spent.

That, anyway, is how the convention bureau understood the math. But H2R [Market Research] officials, when asked about the visitor profile, told The Pitch that the average spending was per party, not per person.

The St. Joseph case is not isolated. Calculating economic impact for projects and events is fraught with errors and often with glaring flaws in the premise. Two years ago we wrote that the promised economic impact of hosting the Republican convention in Kansas City was likely overstated. In short, the number crunchers often base their estimates on the assumption that without the event in question, there would be no economic activity at all—that if we didn’t host the Republican Convention, the hotels and restaurants would be left empty. It’s not just projections for events that rely on such flawed reasoning; from stadiums to film tax credits, economic impact studies often miss the mark.

Sometimes the truth can only be known in retrospect, when we look back and compare promises to results, as Martin did in his piece. But by then the public’s money has already been invested and possibly lost. With this in mind, the public and policymakers alike should be more skeptical of economic impact claims.

The post Economic Impact Fallacies appeared first on Show-Me Institute.

Prior to releasing the 2013 report, the City sent me a 2010 HVS slideshow presentation on yet another proposed convention hotel deal, A copy of that document is available below. HVS considered the convention business that Kansas City bid on but lost from 2006 through 2009 (page 2). Based on the lost conventions it considered "winnable," HVS claimed that Kansas City would have gotten an additional 15 citywide conventions and just over 98,000 room nights if we had built a convention center hotel back then (page 3). 

According to VisitKC, Kansas City's convention and visitor's bureau, the city hosted 19 citywide conventions in 2014, 15 in 2013, 21 in 2012, 17 in 2011, and 20 in 2010. Is it reasonable that a city that hosts between 15 and 20 citywide conventions annually will jump to hosting 35 per year solely by building a new hotel? That's roughly a 100% increase. Furthermore, is it reasonable to conclude that the convention hotel will have a 68% occupancy rate without negatively impacting the existing hotels?

Convention hotel consultants have been notoriously wrong about the Kansas City market. No wonder the developer doesn't want to share the data. Let's hope that the current City Council demands a complete accounting before moving forward with taxpayer funds.

HVS Presentation – Economic Impacts – Kansas City 5-18-10.ppt

The post More Hotel Documents Predict a Doubling of Conventions! appeared first on Show-Me Institute.

In Figure 1-5 (page 7) of the report, available below, we learn that at the time of the report, the number of hotel room nights sold owing to the convention center (accommodated demand) was 157,159. On the next page, Figure 1-6 shows the expected annual growth rate for convention-related hotel room business regardless of whether we build a hotel. It ranged from 4% in 2013 to 2% a year in 2018 and beyond. Those assumptions are themselves questionable, as this same report indicates (Figure 1-1) that annual growth rates in 2011 and 2012 were 0.3% and 2%, respectively.

Laying that aside, lets look at how much new business a new convention hotel will bring. In Figure 1-7 (page 9), we see two things: base demand and induced demand. Base demand is the current demand discussed above plus the projected annual increases. This is the growth without a new convention hotel. Induced demand is the projected increase in business due to a new convention hotel. The report does not detail how induced demand is calculated.

In 2021, the base demand is 199,105, roughly 42,000 more than we're getting today. The induced demand is 108,000 room nights. These are both questionable assumptions. Add them together and you get 150,000. The consultants were telling us that if we built a 1,000 room convention hotel we'd almost double our hotel business–from 157,159 room nights in 2013 to 307,105 in 2021. Is that reasonable? Even in the short term, the consultants estimated that by 2017, we'd see an increase of 113,000 room nights over 2013. That is a 72% increase in room nights just because we built a hotel.

Does anyone believe these claims? Are the annual growth rates reasonable? Is the induced demand rate reasonable? On what was it based? Was the previous City Council aware of these reports and projections? Has anyone checked to see if the 2013 and 2014 annual convention growth projections were met? No hotel project should be seriously contemplated until these basic questions are answered.

The post Convention Hotel Documents Claim it Will Double Hotel Business appeared first on Show-Me Institute.

Several decades ago, earning a college degree—almost any college degree—was all it took to get a job. Now, many college students must strategically choose the right major in order to break into the field with the greatest growth potential. Experts say that majors in STEM (science, technology, engineering, and math), health care, and agriculture offer the surest path to rewarding careers. But how good are these “expert” predictions? Should state governments direct tax dollars toward these winning degrees?

For years, states have incentivized the pursuit of certain majors through grants and scholarships. Gov. Nixon signed a bill in April, for example, which will grant 80 $5,000 scholarships to agriculture majors who agree to work in the agricultural industry in Missouri after graduation.

“The overwhelming argument now for education—at all levels and from government—is that it’s a preparation to make you a better factor of production,” Hillsdale College President Larry Arnn told the Wall Street Journal recently.

It’s certainly true that students are no longer attending college to learn for the sake of learning, but before we continue our practice of picking winning and losing majors, there are a few things we should consider.

First, 80 percent of college students switch majors at least once. Though a student may pursue a degree through the assistance of a grant or scholarship, there is no guarantee the student will remain in that major, complete the degree, or pursue a job within that field of study. In many cases, students must repay loans for coursework they never use in their actual career.

Even if scholarship programs hold students accountable through loan repayment agreements, employment trends change. According to Will College Pay Off? author Peter Cappelli, “The odds of predicting correctly are zero to none.” By the time students graduate and enter the job market, a prediction might not pan out, or new “hot” jobs will replace old “hot” jobs. Cappelli cites the increase in the demand for petroleum engineers due to fracking. Ten years ago, the word “fracking” bore little significance to the public. Now petroleum engineering graduates have the highest projected median starting salary for the class of 2015.

Just as it’s not always clear which fields are expected to experience job growth, it’s also unclear if any of our attempts to attract specific students to certain fields have paid off. For example, Missouri offers the Minority Teaching Scholarship to students who agree to teach within a Missouri school for five years after graduation.

While attracting minority students to the teaching profession is a concern in schools everywhere, there are a lot of unknowns. How many students remain in the profession beyond five years? How many students decide to pursue a different career and become burdened with student debt? Do these students teach in high-need schools? Do these students become effective teachers?

We don’t actually know, because we aren’t tracking these investments. At this point, the state is about as good at predicting the future of the economy as an 18-year-old is good at picking a major.

This is not to say that investing in education isn’t worthwhile, but we should be cautious about expanding our practice of picking winning majors, especially if investing in certain degrees does not result in net gains for taxpayers and college graduates.

The post Choosing a Major, Picking a Winner appeared first on Show-Me Institute.

While we wait for hotel cost estimates and earnings projections, it is worth reflecting on previous convention hotel efforts in and around downtown. Hotel consultants have provided inflated estimates in the past.

Overland Park: Projections for their convention hotel were off by about 40 percent. A June 2010 issue of The Pitch published:

Original projections called for Overland Park’s convention hotel to earn more than $110 per available room. Actual number: $67.50.

Kansas City, MO: In 2009, when Kansas City was considering a convention hotel, the hired consultant, HVS, estimated that the average daily rate (ADR) for hotels in Kansas City in 2016 was going to be $162.72. Today it is $121.37, far short of the projection.

Kansas City, KS: The Pitch also reported on the money pit that is the Hilton Garden Inn:

The [Unified Government] hired a consultant to project how much money the hotel would make when it applied for the HUD loan in 1999. The consultant predicted that by 2005 the Hilton Garden Inn would hit $3 million from room revenues alone. Actual financial records show that the hotel has stooped below that $3 million figure. In 2006, the hotel reported only $2.2 million in room revenues. The hotel itself has always operated at a loss, and every independent audit of the hotel project since 2006 has sounded the same warning: The Hilton Garden Inn is a money loser and can’t stay afloat without subsidies from its owners.

It appears earnings projections run about 25-40 percent higher than reality. That is quite a margin of error. As we consider a downtown convention hotel, we must keep in mind that projections are rarely met.

The post KC Convention Hotel Estimates Are Notoriously Wrong appeared first on Show-Me Institute.

The economists at PNC predict that the unemployment rate in Saint Louis will continue its slow decline, falling to a little over 6 percent by year’s end (see accompanying chart). Even so, job growth in services is expected to slow as the year progresses, and manufacturing jobs are not expected to show much change over 2015. According to its regional outlook, when comparing potential job growth from the trough of the recession through 2015 across a number of Midwest metropolitan areas, PNC ranks Saint Louis well behind such cities as Indianapolis, Chicago, and Milwaukee.

The PNC report, which provided both charts shown here, also predicts that while household income will continue its post-recession recovery, improvement will be slow. As shown in the chart, PNC predicts that median household income in Saint Louis will increase from about $54,000 to approximately $56,000 between the end of 2013 and the end of 2015. This is less than a 2 percent annual rate of increase. As noted in the PNC report, “Income growth in St. Louis still lacks the job market support necessary to break out to a much stronger pace.”

The post Lackluster Outlook for Saint Louis in 2015 appeared first on Show-Me Institute.

While low fuel prices may give an unexpected boost to the economy at-large, they confound the expectations of city and state planners. Whether the source is the Mid-America Regional Council (MARC) (the Kansas City area planning agency), the Missouri Department of Transportation (MoDOT), or East-West Gateway (the Saint Louis regional planning agency), they all expected rising fuel prices to continue into the future. For example, in MoDOT’s October 2014 Financial Snapshot, they figured gas would average $3.26 in the upcoming year.

None of this is to blame these agencies for failing to predict future gas prices. The price of oil is historically volatile, and few predicted prices to fall as they have. What these government bodies should be faulted for is using what was at best an educated guess about the direction of gas prices as a standard plank in their arguments for billions of dollars of state and local investment in alternative transportation and restrictive land-use policies. For example, MoDOT used the trend in fuel prices as part of its argument that they needed the ability to fund billion-dollar passenger rail lines as well as support urban transit. MARC predicted that rising gas prices, along with other trends, would “demand for more walkable, transit-friendly development closer in.” This is part of their reasoning for recommending regional densification and urban refill.

Regional planners have consistently made the argument that citizens will increasingly use public transportation and live in denser environments, due in part to more expensive fuel. But instead of waiting for these markets to materialize and responding to steadily rising needs, residents are asked to spend billions today to meet uncertain demand down the road. What the precipitous fall in oil prices should remind us is that long-term predictions can be mistaken. While the estimates themselves may be prudent, using them to speculate with public dollars is not.

The post Fuel Prices Falling, Along With Planners’ Expectations appeared first on Show-Me Institute.

The Kansas City Aviation Department originally used 2006 baseline estimates to justify new terminal specifications. Back then, they predicted 2.8 percent growth in enplanements (the number of people boarding the airplane) from 2006 onward. But they were wrong, and eventually had to revise the projected growth down to 1.9 percent. The growth of passengers in the last decade has fallen even further, to 0.01 percent. This slide in growth started before the financial crisis. Even including the booming 1990s, total growth averaged a meager 1.9 percent from 1991 to 2012.

MCI’s passenger traffic peaked at 6 million in 2000, when the airport still handled 1 million transfers per year. This subsequent decline in passengers is the result of airline consolidation and transfer centralization in large hubs. It is affecting all airports, not just Kansas City’s. The airlines’ strategy has meant that fewer airlines operate out of MCI than any time in the last two decades. This trend is unlikely to reverse, making a repeat of the growth rate in the 1990s an unlikely scenario.

According to the planning documents for the new terminal, the Aviation Department claims that takeoffs and landings will increase at 1 percent per year. In reality, the number of aircraft operating out of MCI fell and then stayed flat in the last decade, with little evidence of any future increase, much less at a rate greater than 1 percent. As airlines focus on filling every flight to capacity, they require fewer flights per passenger. If we assume that passenger growth remains low or flat, total flights will grow even slower.

The post KCI’s Overly Optimistic Estimates – Part 1 appeared first on Show-Me Institute.

This is exactly why I listen to the Freakonomics podcast, which highlights the ways that economics can provide insight to seemingly inexplicable situations. Recently, Freakonomics discussed efforts in Romania to fine witches if their predictions fail to come true. The jail-time punishment being proposed for multiple false predictions could result in six months to up to three years in jail.

I suppose that if you acted on a false prediction, you would want to punish the person who led you astray. But think of all of the people and organizations who make predictions that affect the way our economy runs. We don’t penalize, say, politicians, economic development officials, or coalition groups when the promises they make fail to materialize.

As Steven Dubner, host of the Freakonomics podcast put it, “I don’t care if you’re anti-witch or pro-witch or witch-agnostic. Why should witches be the only people held accountable for bad predictions?”

In Missouri, it isn’t very hard to find evidence of bad economic development predictions. The recent Mamtek scandal is one. The 2006 prediction that the Ballpark Village development in downtown Saint Louis would result in more than $700 million in economic impact looks unlikely, to put it kindly. And, for a recent example, we have the ever-changing job estimates associated with a proposal to dedicate $300 million in state tax credits to construct warehouses and facilities.

Consider also a state audit report that found, among many other problems, that Missouri’s Low Income Housing Tax Credit is much more costly than initially predicted. How about the overly rosy economic growth assumptions used to sell Tax Increment Financing (TIF) projects? An East-West Gateway Council of Government study found that “broad measures of regional economic outcomes strongly suggest that massive tax expenditures to promote development have not resulted in real growth” (emphasis mine).

Of course, I’m not advocating that we throw politicians and economic development officials in jail for making the wrong promises. But I would suggest, for the health of Missouri’s economy, that we start holding these people responsible for their predictions.

As Freakonomics co-host Steve Levitt points out in the podcast, people have every incentive to make absurd predictions:

So, most predictions we remember are ones which were fabulously, wildly, unexpected and then came true. Now, the person who makes that prediction has a strong incentive to remind everyone that they made that crazy prediction which came true. …But if you’re wrong, there’s no person on the other side of the transaction who draws any real benefit from embarrassing you by bringing up the bad prediction over and over.

Levitt’s point reminds me of the St. Louis Regional Chamber and Growth Association’s outlandish predictions. The RCGA frequently issues press releases touting incredible job and investment numbers. Sometimes, the message of one RCGA study (say, that the region needs to build millions more in warehouse space) conflicts with another RCGA press release (that the region has an abundance of cheap warehouse space). The agency clearly isn’t worried about making an unlikely prediction, either.

I also wonder about the Missouri Department of Economic Development, and the state legislature’s propensity to create tax credit programs in the hopes of attracting jobs to the state. Audit reports have shown that these tax credits are more expensive than anticipated, and that the state gets little in return. And yet, in the face of  bad earlier predictions (and even blatant overstatements), state legislators continue to fail to pass substantive tax credit reform.

A solution that Freakonomics proposes is a little unexpected, but elegant. We all are familiar with baseball players’ batting averages. Let’s apply those to people who make economic development predictions.

Consulting organizations should report their track record of success (and failure). What if every estimate of job and investment creation the RCGA publishes had to be accompanied with a percentage showing the accuracy of previous estimates the agency predicted? What if, when contemplating creating new tax credit programs, we considered whether existing programs delivered on the promises used to create them?

If we are considering whether hundreds of millions of taxpayer dollars should be allocated to a particular project, it is not enough to take proponents’ claims for fact, especially if those organizations have a track record of poor prediction. We need to know how frequently those predictions actually become reality.

We wouldn’t throw anyone in jail. We might find that some organizations are really good at making predictions. And, like Romanians burned by a bad prediction from a witch, we could stop relying on organizations and individuals that provide wildly unreliable predictions.

The post Witches, Economic Development Promises, and Baseball appeared first on Show-Me Institute.

Dr. Strauss appears as part of a KMOV report on the status of the “China Hub” proposal in the Missouri Legislature’s Special Session, calling Aerotropolis a “pie in the sky” project. That segment is below:

Meanwhile, Dr. Haslag has written an article for the Columbia Business Times expressing similar concerns on the jobs front, saying that “the models used by DED [to estimate tax credit project success and job creation] have been discredited” predominantly because they fail to incorporate the cost of the government taking money from the private sector to fund the project. Dr. Haslag also tells a brief but useful story about the problem of trying to “count” jobs. (Emphasis mine)

There is a legend about employment and government projects involving Dr. Milton Friedman. During a visit to India, an official was taking Friedman on a tour of a public works project. New machinery was being used, and the official touted the number of jobs that were created by the project. Friedman responded by saying that if you wanted to count new jobs, the project leaders should have provided the workers with spoons instead of state-of-the-art construction equipment. If it is jobs we want, there are lots of silly ways to get those jobs created. A nobler goal is to find a set of rules that promotes opportunity for all, not just gifts graciously handed to a select few.

Our skepticism of the wide array of Aerotropolis job estimates has been well-documented. Dr. Strauss’s and Dr. Haslag’s analyses of the project again confirm the questionable nature of proponents’ jobs assessments.

The post SLU and Mizzou Economists Weigh in on Aerotropolis Jobs Estimates appeared first on Show-Me Institute.

On October 27, 2006, the RCGA released a study by Bryan Bezold, the organization’s then-chief economist, telling Saint Louisans that (emphasis mine):

Phase I of the Ballpark Village project will provide an annual $273 million economic benefit to the St. Louis region when completed; in the interim, construction of the initial phase of the project will generate an economic impact of $724 million. Further, the first phase of the development will have a total employment impact of 3,040 permanent jobs, and there will be another 3,000 construction jobs throughout the course of the total development. Estimated net fiscal benefit to the City of St. Louis is $291 million, with $142 million to the St. Louis Public Schools.”

On July 28, 2008, new RCGA chief economist Ruth Sergenian found that (emphasis mine):

Upon completion of Phase 1 construction and full leasing of the space, the St. Louis region will realize an additional annual economic benefit of approximately $476 million.

Regarding jobs, the construction process of Phase 1 is estimated to employ some 2,900 area workers, and those jobs will indirectly support approximately 2,300 other jobs throughout the region. The RCGA also projects that the project when fully leased will employ more than 2,000 people on an ongoing basis.

And Ballpark Village today? It’s a softball field and a parking lot.

So, let’s recap the RCGA job scenarios with Aerotropolis/China Hub to date.

• The RCGA originally predicted that Aerotropolis would bring 37,000 jobs to Saint Louis. About that time, the Northwest Chamber predicted the project would bring 5,000 jobs to Saint Louis. Big difference.
• Later, the RCGA quietly released a revision in June that 29,000 jobs would be brought to the region.
• Now, last night per Dick Fleming, the RCGA’s latest prediction is that at least 32,000 jobs will now be brought to Saint Louis through Aerotropolis, an increase since the last assessment.

And these predictions are all based on…? (And by the way, what happened between June and now that goosed the employment numbers by 3000+ jobs?)

Can someone from the RCGA please tell us where their numbers are coming from, other than from the ether? Better yet, can it please explain why taxpayers should believe any of these predictions given its track record?

The post And the Job Guesstimates Resume: RCGA Now Says Aerotropolis Will Bring 32,000 Jobs to Saint Louis appeared first on Show-Me Institute.

The project, cast as a “self-sustaining venture,” has had trouble occupying its 511,000 square feet of retail space. City planners blame the vacancy on the downturn of the economy. Without a fully occupied site, the project is having trouble recapturing the tax dollars originally allocated to finance the project.

This is not to say that the project was a failure, but rather to point out the difficulty in predicting its success. Of the original $295 million, $212 million was used to rebuild infrastructure around the project area (which could more readily be considered a legitimate expense). Many of my friends love the Power and Light District as a weekend hangout, but rosy projections and rationalization won’t save taxpayers any money.

A perfect example of the inherent fallacy of utilizing a centralized plan is found in Nassim Nicholas Taleb’s book The Black Swan. He writes:

The inability to predict outliers implies the inability to predict the course of history, given the share of these events in the dynamics of events.

Governments who believe they have a better chance than individuals of predicting future events have the tendency to be vastly irresponsible, and the bill almost always lands at the feet of the taxpaying public.

As plans like Kansas City’s Power and Light District come together, they are sold to the public in the most favorable light with the most favorable projections. Unfortunately, those projections almost never translate in the real world. Public projects usually cost more than expected and produce less.

The fact remains that the project has been undertaken, and I believe City Manager Troy Schulte put it best:

“20-20 hindsight is always good, but I’d tell taxpayers to come down and enjoy downtown, because you’re paying for it,” he said.

The post Central Planners Get It Wrong, Again appeared first on Show-Me Institute.

The bulk of the trial, which will continue on Feb. 25, was devoted to testimony by Washington University economist Michele Boldrin, who clearly doesn’t think much of the projections and forecasts developer Paul McKee used to persuade city officials that his development was viable and worthy of more than $390 million in tax increment financing (TIF).

“I find these numbers completely unbelievable,” Boldrin said. “Pie in the sky” was another frequent characterization.

And, later, “This is something that if an MBA student came up with this as a term paper, I’d throw him out of the office.”

Boldrin’s main argument, repeated many times, was that no justification was given for any of the especially rosy growth and employment estimates. For example, the development company, NorthSide Regeneration LLC, estimates:

1. That property value growth rates will be as high as 20 percent in 2010, and 15 percent in a number of following years.
2. That more than 20,000 new, permanent jobs will be created as a result of this development.
3. That there will be buyers for 6,000 new homes, valued at an average of more than $450,000.

Dave Roland, a policy analyst at the Show-Me Institute, testified briefly that the north side area, which you can explore here, is not as blighted as NorthSide asserts. He, and Terry Artis, the owner and founder of the River City Examiner, took video of some of the areas NorthSide had noted as being especially blighted. The video, which is a publicly available court record, is linked below.

Dave Roland – A Look at Purported Cases of North Side “Blight” in St. Louis from Audrey Spalding on Vimeo.

The post WashU Economist Testifies NorthSide Forecasts “Made Out of Thin Air” appeared first on Show-Me Institute.