Using proper economic analysis

It would seem to me important for economists and finance professors to be clear when they are using concepts like the economic multiplier in the public domain.  In this column, J. Colin Dodds, president of Saint Mary’s University and a professor of finance in the Sobey School of Business, makes the following statement:

To reinforce the economic argument, let me use the data from the CAMET report: For 2009/10, international students contributed $175 million new money to the Atlantic economy with multiplier effects across the economy with a total impact of $565 million. To be specific, for every $1 spent by Atlantic provincial governments on international university students, the rate of return averaged $2.68 of new money.

I know what he is saying, but to the average joe, it would seem that he is saying for every $1 taxpayer dollar in there are $2.68 new tax dollars in.  That is not what he is saying here (at least based on this narrative). He is saying for every tax dollar in (spent by provincial government) you get $2.68 of ‘new money’ – which is economic activity not new tax revenue.  I don’t know what the tax take is on the $2.68 but it somewhere far less than $2.68.

So if $1 of tax payer dollars in = less than $1 in new tax revenue + the increased cost of government services for the international students (albeit this is a low cost).

The case for international students in Atlantic Canada, based on this analysis, shouldn’t be primarily an economic one.  It should be partially economic, partially a workforce feeder system argument, partly an intellectual horsepower argument, etc.

But if governments want to make a pure economic case, they need to find investments where $1 tax dollars in generates $4 or $5 tax dollars out.    $1 in for $2.68 in ‘economic activity’ out doesn’t cut the mustard as an economic argument.

The lesson here is for the broader economic development efforts.  We aren’t measuring at all right now so it is a moot point but if we were it has to be “for every tax dollar invested, we get $5 new tax dollars in revenue over time.

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10 Responses to Using proper economic analysis

  1. richard says:

    Why not call a spade, a spade? He was, in all likelihood, being deliberately deceptive.

  2. mikel says:

    Come ON, are your blinders on that tight (Richard)?? READ what he said, did he SAY that this was ‘new tax revenue for the provincial government’? NO, he said it was new money into the ECONOMY. VERY few students get into NB or Canada on humanitarian reasons, and I’d add that to the least of why to take in refugees, immigrants, students, activists, etc.
    THey pay a lot more money in tuition than canadian students and they bring in money from home. Thats NEW money.
    Provincial governments spend VERY little on international students, in fact I’d say the rate of return is far higher. They really don’t get any ‘one on one’ training, they are just part of the class. In fact their tuition is probably the FULL price that government puts in, which means the government isn’t contributing ANYTHING.
    But as for economic arguments, lets face it, immigrants are about the best class of entrepreneurs canada has. The guy who started RIM-immigrant. Go watch Dragons Den, three of them are immigrants, and two of them are children of immigrants. There’s a reason why every corner store is owned by an immigrant, and if you can run a convenience store nowadays and make ANY money you are doing something right.
    The argument FOR is a no brainer. Here in ontario its much different, if it weren’t so creepy to do, I sometimes think of videotaping a drive through the university here and post it on youtube just to give people out east a glimpse of what its like to be a minority. At the university here its VERY rare to see a ‘white guy’, even at Wilfrid Laurier, which is more arts focused. I’m not arguing this from a racial point of view, but the fact is that Ontario now has fewer people getting post secondary education than even in the states. I work pretty low brow and I see the castaways from the educational system, I try to tell them to get an education-which is easier now that there are no jobs-but living paycheque to paycheque is fine for most young people.
    But in the maritimes its really a no brainer-take what you can get, but make sure NBers are getting an education too.

  3. The $2.68 in ‘New money’ refers to the $175 million spent (at a rate of $29K per) spent in Atlantic Canada by international students.

    That’s not the same as ‘economic activity’, as you suggest in your column. The economic activity is the total impact of $565 million. So we actually get about $8.70 in ‘economic activity’ per dollar input.

    Agreed, economic activity still isn’t the same as tax revenue. But if we apply a HST rate of 0.14 to the $8.70 spent we get $1.21 in tax revenue, which means that investment in international students is showing a respectable rate of return to the government.

  4. richard says:

    “Come ON, are your blinders on that tight (Richard)??”

    Now, now, my little friend. Please read David’s post. The point was that the govt invests in attracting foreign students but there is little evidence of a net return in tax revenue. The uni pres who wrote the column was clearly implying a net tax benefit when there is no evidence that is the case.

    Why do govts try to promote economic growth? They need tax revenue. There is no inherent benefit to attracting foreign students unless the tax dollar investment provides a return. It doesn’t matter if is new money if the return in tax revenue isn’t there.

    In an era of limited growth and debt financing, govts should be investing their ‘economic development funds’ where the ROI will be greatest. We in NB are in no position to be in the foreign aid business.

    The rest of your rant re immigrants and education is irrelevant.

    “But if we apply a HST rate of 0.14 to the $8.70 spent we get $1.21 in tax revenue”

    To determine the case for NB, you’d have to adjust your calculations to account for the lower number of foreign students here (much lower than in NS), then use the appropriate HST. And that would be assuming the multiplier is accurate.

  5. mikel says:

    It might be irrelevant to YOU, but its certainly germane to the issue. But again, just reread the comment, its YOU who are inferring that he means tax revenue, when he says no such thing. So its YOU who are being dishonest.
    The multiplier effect is a complicated issue, and even Mr. Campbell has sometimes ‘stooped’ to making arguments based on it. As mentioned above, foreign students pay virtually their entire cost of their education, which means it isn’t funded by the government. Which means thats money that stays in the government’s pocket, which is virtually the same as getting tax revenue-money is money whether you saved it or got it from somewhere else.
    In fact it would be downright silly for the author to be talking about ‘tax revenue’, which is why he didn’t say it. Foreign students have numerous hurdles that makes it harder to find work, plus they are usually more likely to be ‘full time’ students. So there is no income tax. So really the only tax revenue is whatever the province can garner from booze, cigarettes, and food. That’s going to be fairly insignificant, however, the money they put into the economy is different. It also includes rent, textbooks, plus the items mentioned above.
    So if you are going to criticize, at least be good enough to criticize what somebody SAYS, and not what you think they mean. If there is another quote in there that says something different, then post it, the link doesn’t work. But the paragraph that is printed here is pretty straightforward and I’m really amazed that somebody could so badly misinterpret something so straightforward. But for ‘dishonesty’, now you’re just heading into la la land.

  6. mikel says:

    The link is finally working, and its a very good article. I disagree that the ‘average joe’ is likely to think any such thing. He doesn’t say anything close to that. He says right before it that international students pay double tuition, which is all that provincial government contribute.

    It’s clear Mr. Campbell is using this to make HIS point, or to remake it, and there’s no trouble with that, just don’t do it at the expense of somebody’s writing, implying that they are not using ‘proper economic analysis’. That’s just, well, creepy. The point is simply that he is not talking about the same thing as you, he says (again) that it is about growing the ECONOMY.

    That brings us to the next point, which is the oft stated claim that economic variables can only be measured by the “government puts one dollar in, gets two dollars out” kind of reasoning. If you believe that, then just state it, don’t pretend somebody else is doing something ‘incorrect’, and again, the assertion that beyond that they are ‘being dishonest’, is just mind blowing.

    I would say that when measuring whether a DIRECT government investment, say, a beer plant, then ‘the Campbell scale’ is the correct one to use.

    However, to say that this is the best measure for ALL government initiatives is a bad way to go. Is spending money on health care for a senior viable if that person never contributed X amount of dollars for health care in their taxes? Likewise, international students isn’t a ‘thing’ that government puts money into. So how can it be measured coming out? The closest you can do is IF that international student is taking a spot away from a canadian student, that’s my concern here in ontario, whether its true in NB I don’t know.

    I think you are maybe being too critical on this piece because not enough attention was being brought to the ‘getting investment’ idea so popular here. But again, he somewhat addresses that when he talks about international students leaving. That creates a much larger network, and I’d stress that as a reason for paying more attention to how they are treated here-I remember some chinese students having racial epithets yelled at them in St. John. The point is that in a society where investment CAN be as easy as whether a billionaire really likes you, then ALL these factors need to be taken into consideration. I thought the piece was very well written, in fact, I’m going to go tell him so:)

  7. richard says:

    “In fact it would be downright silly for the author to be talking about ‘tax revenue’, which is why he didn’t say it.”

    As David pointed out, the author of that column was being at least misleading. He stated that tax revenue was being invested, then implied that there was a bet gain in tax revenue. He knew exactly what he was saying. It was a deliberate attempt to mislead. That is dishonesty.

    The issue is the net tax benefit to investment in attracting and training international students. Whether they remain in the country afterwards and become productive citizens is a separate issue. Let’s be clear here; unis are asking govts to support their attempts to attract foreign students on the basis that govts will benefit re tax renvenue. There are both new costs and incremental costs in attracting and training those students. Those investments come from taxpayers pockets; i.e. its tax revenue. The onus is on the unis to prove there is a net benefit; the column was a misleading attempt to provide that proof.

  8. Mikel, you should keep your powder dry for more substantive debates. You wasted a lot of ink on this, IMO. I was only saying that his assertion that “for every $1 spent by Atlantic provincial governments on international university students, the rate of return averaged $2.68 of new money” would be taken – by some – as $2.68 in new money for governments. My broader point was that we need to be careful when using these kinds of studies to be clear about this. As Downes pointed out, there may we be an incremental tax amount for every dollar spent but we don’t know it from this column.

    By the way, I have made similar mistakes (I think it is a mistake) in the past comparing apples and oranges and confusing the reader – I try to be as diligent as possible these days.

  9. mikel says:

    “He stated that tax revenue was being invested”

    No, he didn’t. Nowhere in his article does he say any such thing. You may THINK he IMPLIED it somewhere, but that doesn’t make it so. If YOU misunderstand, then don’t blame him.

    After the above quote he says that its great because there is almost no government bureaucratic spending because universities take care of that.

    So he’s not being misleading, you just misunderstand. If you think you are right, then please cut and paste the sentence in here, because I’ve read through it six times, and he says nothing of the kind. And your first clue that you may be off track is if you have to say that somebody “implied” something.

    But again, David’s points were pretty moderate, what was ‘offensive’ was the ‘implication’ of the title, which ‘implied’ that he was using ‘incorrect economic analysis’. But again, to stretch that to ‘dishonest’ is just crazy. Just post the sentence where he SAYS that tax revenue is being invested. Because nowhere does he say that, and NUMEROUS times he talks about ‘growing the economy” (I can post all those if you want).

  10. richard says:

    “No, he didn’t. Nowhere in his article does he say any such thing. You may THINK he IMPLIED it somewhere, but that doesn’t make it so. If YOU misunderstand, then don’t blame him.”

    Sorry, you are confusing things. Just where do you think the govt investments in training foreign students are coming from? Mars?

    ” there is almost no government bureaucratic spending because universities take care of that”

    And their budgets also come from Mars, I take it? No, they come largely from tax revenue. There are incremental and new costs associated with attracting and training foreign students. The money for doing that comes from the taxpayer.

    The author of that post, as David pointed out, conflated govt investment and economic activity. He should have compared tax revenue in with tax revenue out. He chose not to do that. Why? I think he was attempting to mislead. That’s disceptive, but typical of the way our unis are run.

    “Just post the sentence where he SAYS that tax revenue is being invested”

    OK, here it is:
    “To be specific, for every $1 spent by Atlantic provincial governments on international university students”

    That’s what the author said. Perhaps you don’t understand this, but money spent by govts comes largely from tax revenue. The author was talking about tax revenue. Did you fail Econ 101?

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