Environmental Protection and Economic Well-being by Power Thomas M

Author:Power, Thomas M.
Language: eng
Format: epub
ISBN: 9781317472605
Publisher: Taylor & Francis Ltd

7. The Economic-Base Model as a Model of Short-Run Economic Shocks

The economic-base approach is so primitive that many professional economists see it only as a tool for forecasting the impact of short-run economic shocks on a local economy. For the short run, over a year or two, the primary sources of economic growth can perhaps be ignored. For instance, if a large factory begins operation or a power plant is constructed or the military closes a base, the economic-base approach may predict the short-run impact of these events on local jobs and income. Some researchers initially found convincing empirical evidence that the economic-base model was useful for this limited purpose (Williamson, 1975).

This would be a relatively modest undertaking that left to others an analysis of the long-run forces operating in the local economy, but the economic-base model does not even seem to do this very well. The problem is that its vision of money being injected into the local economy and then being spent and respent as it circulates does not specify how long all this takes. Does it take a year for the full impact to be realized, or less? Or does it take many years? When economists have tried to measure empirically how quickly the predicted multiple impact will follow an external shock applied to the local economy, they have come up with widely divergent answers. Some have found lengthy time lags, four to twenty-five years, and have emphatically stated that the economic-base approach is worthless for predicting short-run impacts (Moody and Puffer, 1970; McNulty, 1977; Tiebout, 1956). Where careful statistical searching has revealed a measurable short-run multiplier impact, the multiplier often has been small, only 1.5, and most of the changes outside the economic base could not be explained by changes in the economic base (Henry and Nyankori, 1981). Finally, whatever multiplier may be measured, it may well change significantly from year to year and certainly will differ from one area to another (Richardson, 1978). Thus, factually, we cannot have much confidence that even in the short-run the economic-base approach tells us something about how our local economy will change in response to external shocks. The multiplier seems to be unstable and unpredictable.

For many reasons, it may take some time before additional jobs and income are generated locally as a result of export expansion. Local businesses may have some excess capacity, which would allow them to serve the new customers without hiring additional workers. Even after that excess capacity is fully utilized, expansion is likely to depend on the businesses’ longer-term expectations about whether the additional spending is temporary or permanent. In either case, the additional hiring may be delayed for a significant time. This will slow each cycle of expansion and possibly stretch the total expansion out over a lengthy period. Households, like businesses, also do not react instantaneously to increases in income. Households tend to plan their budgets and expenditures on the basis of long-term expectations of their reliable level of income. Higher levels of

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.