Foxconn Multiplier Overstates New Jobs
The 2.7 economic multiplier is absurdly high. Here’s why.
When evaluating government spending of the magnitude of the Foxconn proposal, it is not sufficient to estimate the benefits of the deal in isolation; consideration must also be given to the benefits that would have been generated by the money taken out of our economy to attract the firm to Wisconsin. Many citizens have reacted negatively to the potential transfer of $3 billion of taxpayer money to Foxconn, expressing concern for valuable alternative ways of spending a similar sum on our deteriorating roads, our K-12 education, and our UW system. Are the benefits to be derived from Foxconn greater than the benefits forgone?
Consultants with very impressive credentials have issued estimates using the economic concept of the “multiplier.” The multiplier is an arithmetic formula meant to capture the fact that as Foxconn enters into construction and production phases, their suppliers will also add to their workforces. Since the expansion of the suppliers is due to the expansion of Foxconn, it makes sense to add supplier jobs to estimate the total jobs added. Their analyses use a multiplier in the neighborhood of 2.5 – 2.7; so if Foxconn directly adds 10,000 workers to the Wisconsin workforce, the total number of new jobs attributed to the Foxconn deal would be between 25,000 and 27,000.
But, it gets worse: even if their multiplier were measured accurately, it would be a “gross multiplier,” i.e., a multiplier that refers to Foxconn alone, without taking into account the negative effect of drawing the money totally from the Wisconsin economy. It’s as if the $3 billion fell out of the sky, having no valuable alternative use. When applying the multiplier concept to evaluate spending money that has alternative uses, we must calculate a “net multiplier” by simply subtracting the multiplier associated with the alternative spending from their estimated gross multiplier.
If the money is raised by new taxes, the taxpayers lose the opportunity to spend the money according to their own preferences. If the taxpayers had instead spent that money, their spending would have had a multiplier. That multiplier would then have to be subtracted from the Foxconn gross multiplier to yield the net multiplier. Alternatively, if the money is acquired through spending cuts, say, to the university system or K-12 education or more delays in road repair, spending on those activities would have to be reduced, and the state would forgo the spending multiplier generated by those activities. Again, this requires subtraction to arrive at the net multiplier; it’s the “net multiplier” that counts, not the “gross multiplier,” when estimating the net benefit of the Foxconn subsidy.
The closest we can come to spending money that has no alternative use is federal money earmarked for specific purposes, such us the money once offered Wisconsin to invest in trains, Medicaid expansion, and rural internet broadband expansion. Of course, the Governor and Legislature chose to spurn these billions of dollars. Because they were dollars from outside the state, the evaluation of the economic impact of those dollars circulating through the state economy would have a much higher net multiplier than the Foxconn net multiplier.
Before the Senate votes, they should send the consultants back to their laptops to re-evaluate these estimates. As of now, they provide no valid results for the Senate to vote responsibly as they try to advance the economic welfare of the taxpayers, the workers, and the state.
William L. Holahan is emeritus professor and former chair of the Department of Economics at the University of Wisconsin-Milwaukee. Charles O. Kroncke served as Professor and Associate Dean of Business at UW-Madison as well as Dean of the School of Business at UW-Milwaukee and the School of Management at UT-Dallas. They are co-authors of “Economics for Voters.”
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