On the Use and Misuse of Input-Output Based Impact Analysis in Evaluation

Abstract

Estimates of economic activity generated and jobs created that are derived using input-output analysis are often presented in program evaluations and confused with the benefits resulting from the program. Two such cases are presented as examples. We argue that for two main reasons this type of analysis constitutes a misuse of input-output analysis. First, input-output estimates generated using the Keynesian closed versions of input-output models are biased upwards because they ignore the price and financial feedbacks that tend to reduce multipliers in macroeconomic models. Second, and more important, it is inappropriate to consider induced effects resulting from a particular program in isolation, because such effects can only be properly considered in the aggregate at the level of overall stabilization policy. In this paper we contend that cost-benefit analysis, with its assumption of full employment, is the most appropriate tool for analyzing the benefits resulting from particular programs. Input-output analysis should be confined to providing estimates of the industrial or regional breakdown of the direct impact of a program or of the employment impacts of program spending. It should not be used to generate Keynesian multipliers.