From my State Representative:
More than 240 contracts totaling $824 million have been awarded for highway and bridge projects across North Carolina since March, and about $723 million of that funding has come from the federal American Recovery and Reinvestment Act (ARRA). According to the Federal Highway Administration, every $1 million spent on transportation creates 30 jobs, and according to the construction industry, every dollar invested in transportation generates $6 in economic impact.
However, economic impacts mix up benefits and costs. Expenditures are added to incomes, tax revenues and etc. According to the National Income Accounting Identity (PDF) and illustrated by the circular flow diagram, income equals expenditures in the aggregate:
C + S + T = C + I + G + NX
where C is consumption, S is savings, T is taxes, I is investment spending and G is government spending. The left hand side of the equation sums to income and the right hand side sums to expenditures. Adding income to expenditures, as we do when conducting economic impact analysis, amounts to double counting.
Plus, which of these measures of economic activity makes people happy (i.e., generates utility)? In my opinion it is consumption, a little bit of investment (housing expenditures) and some government spending. Everything else is either delayed gratification (savings) or a bad thing (taxes).
Given these issues, when the construction industry says that their multiplier is 6, you know that is not a valid way to measure the impact of government-induced construction spending on people's welfare.
I'd prefer that the demand for misleading economic analysis (i.e., impacts) be replaced by a demand for analysis that recognizes both benefits and costs of economic activity (i.e., benefit-cost analysis).
