Streetfighting (mathematics) for economic development

| Posted in analysis, economic development, incentives | | 1 Comment

I just came across Sanjoy Mahajan’s work on Streetfighting Mathematics. Can his approach help us make better economic development decisions?

A recent podcast on Inquiring Minds featured Mahajan’s work, which can be summed up as:

“In problem solving, as in street fighting, rules are for fools: do whatever works – don’t just stand there!”

In other words, we often don’t need exact answers or 100% accurate solutions to start figuring out problems. In fact, what we actually need to know when we are making decisions is how numbers relate to each other.

This struck me as especially true for incentive and economic development decisions. Having super-accurate output from an economic impact analysis isn’t that meaningful unless you know the size of the economy.

We also need ways to make decisions when we don’t have the time or capacity to go through a full-scale impact analysis. That’s where the street fighting comes in.

I thought about how this might apply to an incentives decision, and Washington state’s $8.7 billion package for Boeing came to mind. While Mahajan mostly talks about physics, he starts his book with an economics example in which the net worth of Exxon ($119b) is compared to the GDP of Nigeria ($99b). He explains that this is a meaningless comparison because GDP is a monetary flow – its value is dollars per year – while net worth is an amount at a single point in time. If we think about Washington state’s Boeing incentive package, the first thing to understand is that time matters and the value of the incentives is estimated over a 20 year period – the $8.7 billion cost is not a one-time cash outlay.

We can also think of the relative costs. Taking some liberties (this is streetfighting after all):

  • We can calculate the incentive package as roughly $435 million per year.
  • The Washington state operating budget is about $40 billion per year – so the incentive costs are approximately 1% of that total.
  • The gross product of Washington state is approximately $400 billion, with slightly more than 10% coming from durable goods manufacturing, which includes aircraft.
  • Boeing revenue is roughly $90 billion and it estimates total aerospace industry revenues (not just Boeing) are $50 billion in Washington state. We don’t know, but it seems reasonable that Boeing directly accounts for 1% of state GDP.
  • We do know the company employs over 80,000 people in Washington and there are roughly 3 million total jobs – that’s 3% of the total.

This does not automatically mean it was a good deal, but by putting both the $8.7 billion and the Boeing operations into an economic and fiscal context, it does imply the size of incentive package is not nearly as ridiculous as many have suggested.

Governing magazine has pointed out that lack of financial understanding is one of state and local government’s biggest problems. The same is true on the economics front. I think Mahajan's streetfighting mathematics techniques can help leaders make better decisions as they work their way through complicated economic and financial options.

1 Comment

We have looked into similar issues with economic impact studies in the past. This apples-to-apples comparison done by Ms. Harpel (putting the numbers in the right context for comparison purposes) is right on in my opinion. If you want to read a related but slightly different twist on the issue of economic impact studies, try http://www.greenfieldadvisors.com/how-useful-are-economic-impact-studies/.

Posted by Clifford A. Lipscomb, Ph.D., MRICS on May 22, 2015

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