Economic impact statements: long on promise for projects that are short on delivery

Yogi Berra would say “Deja vu all over again” to the Inquirer articles on the overstated benefits of the convention center expansion. The Inquirer published similar articles after the stadiums were funded with city taxes that would have been better spent on tax reform or the schools. Yet, the Inquirer has never questioned the economic impact of a project before it was a done deal.

Over the past 30 years I have done economic policy analyses and I have examined economic impact statements written in support of projects. I have yet to read one that does not overstate the benefits. After all, these documents are written to sell projects.

The economic impact statement for the shipyard had no meaningful statement of benefits and we are now in the position where the shipyard stymies expansion of the airport; a true economic engine for the region. The economic impact statement by the Army Corps of Engineers for deepening the channel in the Delaware presumed that reducing the amount of crude oil that had to be offloaded from tankers would generate enough cost savings to pay for the deeper channel. I was part of the study team at the company that transported the offloaded crude. We found that the same number of trips would be required and that claims of savings are bogus. Separately, the Government Accountability Office concluded that this project would return only $.42 per dollar spent and has cited it as an example of government waste. Stadiums just divert recreation dollars from other recreational activities and don’t add jobs, as we have found with the last round of stadium construction.

The stadiums illustrate another point about the standard economic impact studies: they never point out the lost opportunity of using the site for something else. Warehouse jobs were lost to make room for the stadiums. We are now risking the jobs at the food distribution center because the stadium locations would have been the best sites for a new facility and there are no other good locations in South Philly.

So, should we believe the casinos claims before the casinos are built?

I have looked at the casinos’ claims. They are long on promise but will be short on delivery.

First, SugarHouse claims its average wage will be $40,000. Yet, Foxwoods says its average wage will be half that of SugarHouse. Since a casino is a casino and they both use the same technologies, I suspect Foxwoods is right.

Now let’s examine the claims that casinos will add jobs to the city. Managing a regional economy is like filling a bathtub with the drain open. To grow, you have to pour water (dollars) in faster than the water (dollars) drains out. That is, economic growth comes from getting new dollars from elsewhere to be spent in the region to pay for what the region buys from elsewhere, which the now-closed factories did admirably.

Do casinos open to faucet and fill the tub or do they open the drain and empty the tub? This depends on where the casino revenues come from and how much of that revenue is spent locally. Casinos spend $.27 of every revenue dollar locally, according to Foxwoods. For the city to gain jobs, at least 73% of the casino revenues have to be new dollars coming from outsiders, not dollars diverted from other recreational activity. Anything less than 73% means the bath tub empties and the city loses jobs.

These casinos are designed to serve convenience gamblers. Since convenience gamblers go to the closest casinos and the city is bracketed on the north and south by slots parlors, the main customers of the city slots are city residents. The tourists they draw will be tourists who are coming to Philadelphia anyway, which means more losses for local businesses. If you look at the decline in slots revenue in Atlantic City in comparison to the revenues generated by the operating slots parlors in PA, at best a third of the revenue in the PA slots is diverted from Atlantic City.

Starting with Foxwoods’ own economic impact statement, my analysis shows that casinos will take out more money than they will bring into the local economy. This will cost the city 3900 jobs. The casinos add 1500 jobs and the neighborhoods lose 5400 jobs. Those selling casinos tout the jobs added but never mention the jobs that disappear.

The recent Penn Praxis study shows the potential of the waterfront to create a better city that draws in new residents and economic activity. Since the gamblers in Chester are undeterred by playing the slots next to a prison, why waste the valuable waterfront on slots parlors that would do just as well on the Automall? The lost opportunities for quality waterfront development from siting the casinos on the river make them an even bigger negative beyond what my analysis shows.

What about the promised wage-tax cut?

Governments that share their revenues with other governments have a long history of turning off the tap when their revenues fall short. We can expect the state legislature to cut expenditures from general revenues for schools as soon as state tax revenues slow down. The legislators will point to gambling revenues to justify their cuts. This has happened in other states with casinos.

Revenues in casinos are high for the first couple of years and then fall as the gambling addicts, who can represent up to half of casino revenues, tap out and go bankrupt. Consequently, expectations of the long run revenue are almost assuredly optimistic.

Little by little, the gambling revenues will be diverted for pet projects. Already, a slice is going to “economic development.” The overvalued convention center, about which the Inquirer has expressed so much angst, gets a large chunk of these funds. Taxes will have to be raised, just like the DRPA bridge tolls will be raised to cover DRPA’s “economic development” expenditures.

Furthermore, the city will have to cover the social costs of pathological gambling. PICA says, “Even on the low end of the estimated cost per pathological gambler, […] the costs would be close to $200 million.” Add to that the extra costs of policing and the city budget breaks.

How long can we remain fools?

If city officials and the Inquirer continue to leave unchallenged the economic impact statements of interested parties, then Abraham Lincoln was right when he said, “you can fool some of the people all of the time.”

Frederic Murphy
Fox School of Business and Management, Temple University