Induced Economic Effects

A lot of people ask me what I do for a living.

Well, mostly the people paying me, but they ask it a lot, so I figured I'd take a blog post to talk about something relevant to my interests.

These days I spend a lot of time studying and quantifying the economic impacts of investments in different communities based on a concept called "Induced Economic Effects".

What it boils down to, is that for every dollar invested into an economy, a certain number of cents can be expected to stay circulating in that economy.

So, for example, if you were to buy a candy bar from your local 7-11, and for some strange reason, it were to cost exactly $1.00, my job is to figure out where all one hundred pennies wind up, and how quickly they get there.

I didn't say it was a good job.

Econometric Analysis has not led to nearly the debauchery I was promised, as both the booze and the bitches have been mysteriously over-represented in the brochure.

That being said, tracking a dollar is hard work. Tracking millions of them is even harder, but because this is a blog, and you free-loading readers aren't actually paying for this, we'll stick to the example of the dollar at the 7-11.

So let's follow the money.

Assuming you live in a civilized state like New Jersey (and not some communist VAT utopia like the EU), your state has a sales tax. Sales tax can range anywhere from 0 to 25%, but in this example, we'll assume it's going to be 6% because you're not the kind of person to shop in one of those sketchy low sales tax HUD areas.

That means that six pennies have disappeared to the coffers of the state, so we need only follow ninety four more. (Actually, that's a bald faced lie that we'll return to in a bit, but for now pretend to believe it.)

Of our remaining ninety-four cents, let's assume that the retailer marked the product up 100%, as is their custom. This means that forty-seven pennies disappear out of our economy back to the manufacturer. If you're keeping track at home, we've now accounted for nearly half of the first generation of pennies in just two short hops.

And this is where things get hairy. Of the forty-seven remaining pennies, some percentage went to overhead. Traditionally in retail we anticipate approximately 30 percent of Net Revenue to be consumed by overhead. In this simplified example, we'll assume that ~30% of the net revenue from every sale covers the SG&A expenses of the store since 7-11 generally runs a pretty tight ship. that takes fourteen more pennies out of the equation to the bank, the power company, and whatever other expenses the shopkeep has. This leaves thirty-three pennies for labor.

Not bad.

Or, if you're one of my clients, "What the hell are we paying you for, any idiot could have told us that?!"

True, and the difference is, this is where an idiot leaves the discussion. Because in reality, this is where things are just starting to get interesting.

If we assume that the region or economy under analysis is the state, how much money is left in the economy?

The correct answer is: None.

"Wait... what? I know I'm bad at math, but if we start with a dollar, how'd you get to none?" I can hear you asking now, because I, like the FBI, can turn your computer microphone on at will in direct contravention of any perceived rights or liberties you may have.

It's a gift.

What's actually going on is that after the first generation of transactions, a portion of each of these expenses stays in the state. At this point, to make things easier we'll have to create a template entity and assume that all of the recipients of our pennies behave the same way. While we know this is not true, we can make the assumption that on average they'll all even out to something.

What is that? Well stayed tuned, as tomorrow's post will detail template entities and the time-decay of microeconomies, or as I like to call it, "buck rot".