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Saturday, January 8, 2011

The Multiplier Effect -- Not a Bakken Story

Economic impact of various "industries" is determined by using a "multiplier effect," which in high school and college laboratories, students always refer to as "fudge factors" to get the answers the teacher or the professor wants.

I guess they do the same in the "real world" as noted by the aforementioned "multiplier effect."

The story is too complicated for me to summarize, so I will simply link it for those interested.

But the bottom line is that for every dollar the state or the federal government spent (with tax dollars) in various enterprises, there is a "multiplier effect" with regard to how much is returned to society.

A multiplier simply measures the number of times the money recirculates within an area’s economy before leaving into another area’s economy, according to the story.
For the university system, that multiplier turned out to be about 2.94, which is to say the system spent $1 billion in state and non-state funds and had an impact of $2.95 billion (There’s rounding involved, which is why it’s a bit off.). UND had a multiplier of 2.95 and NDSU 2.92.
For the North Dakota university system, the multiplier effect is a "whopping" 2.94.
For North Dakota retail: 2.09
For North Dakota agriculture: 3.69
For North Dakota oil industry:1.92


It's my understanding the report was commissioned and paid for by one of the universities.

2 comments:

  1. An old saying: "Figures don't lie, but liars figure!".

    The multiplier effect first gained popularity with Keynesian economics then with the Great Society" welfare programs of the 1960's. These claimed a 5X multiplier. Admittedly, the lowest income are more "hand to mouth" so there is the most immediate "economic stimulus" there but after half a century the streets in the hood are not paved in gold.

    Highly mechanized farming might have the best multiplier because a $50K net farmer can easily go through a million dollars of supplies, most of them bulky relative to value so most likely to be produced locally.

    To give an idealized example of "spontaneous money", let's say I sell a broken piece of equipment for $100 from someone who needs it for parts. Easy money so I decide to take a friend or two out for dinner and beer and the local bar. Chicken, burgers, steak or pork chops are probably from Minnesota. There are several local craft beers like Summit on tap. Potatoes and salad are probably outstate.

    If we define Twin Cites as "local" not a lot. The South St. Paul stockyard closed a decade ago. There are suppliers to the bar but most of this is "imported" (from outside the Twin Cities) materials. The bar employs a number of people. My "fling" would be part of the revenue needed to operate.

    Locally, there would be less than a one-third "multiplier effect".

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  2. I did not know the connection between the "multiplier effect" and Maynard Keynes. If you go to my "Million Dollar Literature" blog you will see how much I've read and how much I've enjoyed regarding Maynard Keynes, Virginia Woolf, and the entire Bloomsbury Group.

    Thanks for posting.

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