One of the most frequently used yet poorly understood concepts in economics is “multiplier effect.” “If you just invest $1 here,” we’re promised time and again, “you’ll get $5 (or $10, or fill in the blank dollars) in total impact once all the multiplier effects are counted.”

Every time I go to Aroostook County, at least one person tells me, “You know, every dollar spent here turns over seven times before it leaves the County.”

I have no idea what this means, but it’s such a universal article of faith that I figure someone must print it on plastic cards that are distributed at chamber of commerce and Rotary meetings.

I often say that if every claim I’ve heard about the multiplier effects of investment in Maine were true, our gross product would exceed that of Japan. Too often, these exaggerated claims simply reinforce the old saw that “figures don’t lie, but liars can figure.”

Both the extravagant claims and the unthinking dismissal of “multiplier” effects are unfortunate because they undermine serious efforts to evaluate economic policies in a broader context than the crisis du jour.

We do live in a world of complex commercial interconnections. The sales revenue of every business does, in subsequent transactions, become income to employees and revenue to suppliers.

And those employees and vendors, in yet another round of transactions, turn that income into revenue for still other businesses. And so it goes down the supply chain paths of business and consumer spending.

Quarters, nickels and pennies of that original dollar do trickle down to become income to many more people than its original recipient.

From this perspective, the economy can be seen as a pond covered with an intricate pattern of constantly changing and ever colliding ripples. We see the ripples and their interconnecting patterns long after the dropping pebbles that caused them in the first place have disappeared.

We see the evidence of economic activity all around us, but we don’t see its original cause. From this perspective, the multiplier can be understood as an effort to stop the chaos of the entire pond and explain the relationship between one pebble and the size and extent of the ripples it causes.

In many ways, the multiplier effect is easier to understand in reverse. Using the most recent example, it is clear that the total impact of the closing of the Bumble Bee sardine cannery will be greater than the sales of sardines that won’t be canned or the 128 workers who will lose their jobs.

CMP will lose some revenue when the lights go out; local machinists and repair techs will lose work keeping the conveyor belts running smoothly; truckers will lose some cargo; local grocery stores, landlords and banks will feel a bit of a pinch as local payroll spending declines; the town will lose some property tax revenue.

But will the total financial impact — the total sales lost to all Maine businesses somehow connected to the cannery — be 10 times, five times, even twice the sales of the cannery?

Will the total number of jobs lost to the Maine economy after all the affected Maine businesses adjust their payrolls to their newly reduced sales totals amount to 10 times or five times or even twice the 128 jobs originally lost? No way.

Any estimate of the total impact will require a careful examination of the actual commercial connections, the actual flow of money from the cannery, the ripples, as it were, of its economic impact. And any such careful examination will show that many of those monetary ripples pretty quickly spread beyond Maine.

Yes, machinery repair technicians will lose work. In many Maine mills the machinery and conveyor belts have actually been fabricated on the spot. But the machinery parts and the metal for the sardine tins don’t come from Maine.

Yes, truckers will lose cargo, but their trucks aren’t made in Maine, and the fuel that powers them isn’t refined in Maine.

Yes local retailers will see their sales drop, but the producers who stock the bulk of their shelves aren’t in Maine.

None of this is to diminish the undeniably devastating effect on a local community of a major plant closing.

Rather, it is to say that, in a globally interconnected world, the total impact on Maine as a whole will not be orders of magnitude greater than the original direct impact.

And in the reverse case, the total impact of a new plant opening will not be orders of magnitude greater than its total sales or total employment.

Neither exaggerated claims of economic disaster nor exaggerated claims of economic salvation serve the cause of good public policy.

That depends on the far more prosaic task of seriously trying to define the devils (or the angels) wrapped up in the actual details.

Charles Lawton is senior economist for Planning Decisions, a public policy research firm. He can be reached at:

clawton@maine.rr.com

 

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