The Dollar Game has been in use as a draft for some time. The publication cycle ran its course, however, and the final version is now officially available. The curriculum was sponsored by the University of Idaho’s Department of Agricultural Economics and Rural Sociology and is a published curriculum ^[1]Braak, Willem J., and Paul A. Lewin. 2015. “The Dollar Game Curriculum: Inspiring Wealth Creation in Rural Communities.” The Journal of Extension (JOE). Available at: https://commons.joe.org/joe/vol53/iss4/33/.

Teaching complexity through scenario games

Why use scenario games to teach economics? The traditional classroom setting does not lend itself easily to teaching the complex reality of community economics.  Take the controversial subject of “creating jobs”, where we can create a (admittedly incomplete) model with four principal feedback loops, each with its own multiple side-loops and collectively driving a dynamic balance:

• Increased exports from the region can involve increasing exports from existing producers or service providers and thus the need for employees, or solicit outside businesses to relocate to our region and thus “importing employment”.  Side-loops include the effect on (and competition for) local capitals. A logging company, for example, would be constrained by available forest (natural capital). Built capital can constrain as well: Silicon Valley export companies (and search services are also exports) rely primarily on human capital, where the influx of educated workers drives up housing prices and gentrification, and creates a dynamic balance of its own.
• Substituting currently imported products or services with locally sourced ones will create entirely new jobs and potentially new sectors for the region (with its own demand on local capital, and its own foreseen and unforeseen positive or negative feedback loops). This can, again, be serviced both by providers already in the region, or by soliciting outside businesses to relocate.
• Increased productivity will lift the local economy, but its effect on employment varies.
  • Export businesses and service providers become more competitive with increased productivity, and may need more employees;
  • Providers for local use (which includes local government) that provide the same quality service or product at lower cost may actually reduce their manpower requirement, but employment may increase if productivity gains translate into better service or products instead.
  • Regardless, increased productivity will have a secondary feedback loop through induced demand or benefits.
• Increased investment from businesses or local government can have a huge impact on local employment but is a bit of a wild-card, since different community characteristics provide different levers:
  • In smaller regions, “lowest-cost bid” requirements may drive investment dollars away from local businesses to larger contractors in remote communities and the investments may provide the local economy with very little benefit;
  • Local investment varies with business ownership. Local business owners will have a tendency to invest locally, whereas remote owners are more likely to siphon dividends away from the region.
  • There are a myriad of side-loops with regard to community investments. A community that invests in education and entrepreneurship  increases the long-term potential for innovation and improvements in services and products (productivity increase); investment in the local infrastructure (downtown, amenities) may, again longer term, assist the community’s businesses and services to attract outside investments or educated workers; the level of taxation will determine how many dollars are available for community investment (but is a diversion of  household and business spending), and political capital will determine how to invest.

This abstraction of a local economy is already very complex through multiple feedback loops and leverages, and starts to resemble a “living” ecosystem^[2]Positive and negative feedback loops in biological systems are very instructional; TED Ed created a nice video on positive and negative feedback: Anje-Margriet Neutel et al. Feedback loops: How nature gets its rhythms. Available at http://ed.ted.com. Without seeing these feedback loops in action, however, people tend to stick to the old recipes like “attract businesses that employ lots of people”. Even though these old recipes mostly disappoint^[3]The successful approach would be to attract companies that jump-start import substitution or a region-compatible sector, preferably with a need for higher educated employees. The disappointment of “smokestack chasing”, where companies are lured with tax-incentives to establish low value-added operations, is well documented, however , the linear thinking behind them persists because internalizing complexity does not come easily^[4]This legacy of linear thinking is not unique to economics and rules many aspects of our lives with half-truths like “cholesterol drives heart disease”, “calories drive obesity”, “DNA is the blueprint of our body and behavior”. There is, however, a gradual shift away from linear thinking with a merging of Complexity Theory and Systems Thinking (some try to introduce the term Complexity Thinking).  Capra and Luisi did a great job showing how thinking in terms of complex adaptive systems has emerged across disciplines: Capra, Fritjof., and P. L. Luisi. 2014. The Systems View of Life : A Unifying Vision..

So how do we allow people to internalize complexity? There is no right answer, of course, but lecturing, in our experience, is not the answer. Scenario games take advantage of the fact that most people are much more able to thin-slice through experience, and find patterns by observing a feedback loop in action. The Dollar Game uses a rapid succession of scenarios to engage the players and expose them to some of the feedback loops in a community economy.

I invite you to check out the game page on this website and download the curriculum. And do let us know what you think!

The post The Dollar Game Published: Teaching Complexity through Scenario Games appeared first on ECSInsights.

What is ASAM? The short of it: it is an Excel Application that facilitates economic contribution analysis of an industry sector. It does this by taking data from a source like IMPLAN (not included) and transparently calculates base economic output, employment, wages and value added. The code can be downloaded from GitHub.

So below is the long answer…

Some Background

I confess. When I was “in business”, managing factories and companies, I thought of a local economy as simply the sum of local business success. And, you guessed it: I thought that “my company” was making a major economic contribution.
So what changed my mind on how a local economy works? When analyzing economic contributions of businesses and sectors I started to see how different each business or sector (government included) affected a region. The key to that difference was its value-chain: the “food chain” from raw material to end-user. A local video-store or gas-station is at the tail-end of a NIMBY value-chain. That represents a value chain where most of the wealth generation happens elsewhere and little to ‘Nothing In My Backyard’.

When a community embraces streaming or electric cars, the disappearance of the video-store or gas-station will be just another casualty of disruptive innovation; probably barely noticed. Now witness a small-town’s local dairy go out of business! The effect cascades through the entire community. Transportation companies, engineering firms, machine shops, all kinds of local services, they all loose a chunk of business overnight.

The induced effect is even wider: disappearing wages that fueled local restaurants and retail, and supported healthcare and mortgages. It may hit home even better if you play the following story in reverse: when yogurt maker Chobani built a $450 million plant in Twin Falls, Idaho, in 2012, they not only leveraged the dairy sector in the surrounding region, but affected all kinds of services from construction^[1]Source: Idaho department of Commerce to education^[2]The College of Southern Idaho instituted special programming to support Chobani: link to wastewater treatment^[3]The The City of Twin Falls spent $6,523,445 to upgrade its wastewater treatment facility for Chobani: link. And the induced economic effect is just starting to build…

Economic Contribution Analysis

So how does economic contribution analysis provide insight in the value chain? And what is ASAM?

Economic Base Analysis

Economist use a method called Economic Base analysis to determine the contribution of an industry or sector to a local economy. It looks at those activities of a community that bring in “new money” and then follow the money trail. There is a potential for these studies to be self-serving. As Watson et al phrase it: “Criticism of [economic contribution] studies focuses on the perverse incentive for publicity and advocacy purposes to double count the contribution of a given sector by making its direct, indirect, or induced effects appear responsible for a larger share of the economy than the observed data can support” ^[4]Watson, Philip, Stephen Cooke, David Kay, and Greg Alward. “A Method for Improving Economic Contribution Studies for Regional Analysis.” Journal of Regional Analysis and Policy, 2015. Available at: www.researchgate.net. An accepted solution is to track all economic contributions in a (social accounting) square to make double counting impossible.

ASAM: Automating the Grunt Work

Even though working from a SAM (Social Accounting Matrix) is a fairly foolproof solution (contingent to reliable data), you may have picked up on the downside: it amounts to an enormous amount of work!! I took a class in economic modelling from University of Idaho’s Phil Watson, a young energetic professor well versed in economic contribution analysis. When I wanted to do historical and regional comparisons I found the amount of work staggering. So I automated the SAM work in MS Excel.

Open source

Then I shared the excel application with Phil, who shared it with Abelardo Rodriguez – a professor in UI’s extension organization. Abelardo, keen on showing the nuts and bolts of local economies to community and business leaders in a region, pushed to make it into a stand-alone excel application that could be used by local extension educators^[5]Rodriguez, Abelardo, Willem Braak, and Philip Watson. 2011. “Getting to Know the Economy in Your Community: Automated Social Accounting.” Journal of Extension, August. Available at: www.joe.org.

We named it Automated Social Accounting Matrix (ASAM) and Abelardo provided a download location for the application at UI’s website.

Git repository

When Abelardo left UI in 2009, the webpage remained available but was no longer maintained. I still get questions from individuals that use the original ASAM application or report bugs. So I updated the application and created a GitHub repository for those that want to use the work, or build on it. A stand-alone application can also be downloaded from GitHub.

A word of caution…

Economic Base analysis has limitations, discussed here. It is still a valuable tool in thinking through a region’s economic development perspective. It helps in separating the NIMBY sectors from those that can deepen and leverage a region’s strengths. ASAM, in this process, is merely an automation tool. But it sure can lower the threshold to take on the effort.

The post ASAM Economic contribution analysis appeared first on ECSInsights.

Staying “livable”, however, requires perpetual reinvention and reinvestment. It takes vision and a community pulling together. And, of course, money. When growth happens, or expensive infrastructure like sewage treatment needs updating, ongoing (tax) revenues are rarely sufficient. Borrowing through bonds used to be the solution, but fast-growing cities outpaced even their borrowing capacity. So they started passing some cost on to developers through ‘exactions’. The rational was straightforward: if the presence of public infrastructure is expected when someone buys a house (and is thus reflected in the house’s price), the developer’s cost should reflect that investment – otherwise it would be a community-paid-for windfall for the developer.

Externalities

Exactions were, of course, challenged in court, but are now common practice^[3]TIF (Tax Increment Financing), where local governments borrow against expected increases in property taxes, became another popular method of financing infrastructure. The reasoning was that, if revitalizing a downtown would be bound to increase tax revenues, a downtown district could then agree to set aside those increases for loan paybacks. When property values plummeted with the Great Recession of 2007 TIF financing became risky, and experienced state-imposed restrictions.. They not only contribute to infrastructure, they also create an opening for steering development the right way. Think of developments in flood-prone areas, or remote areas subject to frequent wildfires. Whereas signs like Nashville’s “High water mark” may create awareness, exactions put a price tag on decisions. Exactions can then pay for the infrastructure to prevent the flooding disasters (and flood insurance payouts) that we have seen in recent decades, or signal that a particular development is simply uneconomical. Having developers internalize the cost of these risky developments, i.e. making the cost of infrastructure or mitigation part of the development instead of pushing it to the community, makes economic sense. The trick, then, is for developers and community to agree on who should pay for what costs.

Nexus

This is where the 2013 Supreme Court case Koontz v. St.Johns comes in. Coy Koontz Senior wanted to develop his property. The problem was that 90% of the proposed development was protected wetland. When Florida’s St. Johns River Water Management District wanted mitigation, Koontz offered to deed a conservation easement on about three quarters of his property. The district did not feel this was sufficient, and one of their suggestions for additional mitigation was for Koontz to hire contractors and make improvements to District owned wetlands several miles away. Koontz sued, stating that excessive government demands prevented him from reasonable development of his property (i.e. a Fifth Amendment property “taking”). The case ended up at the Supreme Court, which referred it back for additional judicial review, but with the following ruling: (1) a permit denial can indeed still cause a taking (one of the reasons the Florida Court had decided against Koontz), and (2) the level of monetary exactions should have a fair relationship to the issue. Planning organizations and law schools alike immediately zoomed in on the difficulty of “The Federal Constitution thus [deciding] whether one town is overcharging for sewage, or another is setting the price to sell liquor too high.” As an American Planning Association amicus brief cites the Supreme Court’s dissent: “If every suggestion [for mitigation] could become the subject of a lawsuit […], the lawyer can give but one recommendation: Deny the permits, without giving Koontz any advice — even if he asks for guidance.”

Koontz is seen by some as just another hurdle to deal with economic externalities: situations where, unchecked, developments or activities push costs on to us as a community. Others see the glass as half-full, however, where Koontz inspires a more transparent way to calculate the cost of externalities. They argue that Koontz may lead to a more transparent way to deal with Climate Change^[4]See also: “Legal Lessons”, Aug/Sep 2015 APA Planning Magazine August 2015. Available to subscribers at: https://www.planning.org/planning/2015/aug/legallessons.htm, and allow us to put a price on carbon.

Scarcity

British Economist Lionel Robbins is often quoted for his 1935 definition of economics: “the science that studies the relationship between ends and means that have alternative uses” (this quote is from the Britannica). What Robbins actually said was: “the relationship between ends and scarce means”^[5]Lionel Robbins, An Essay on the Nature & Significance of Economic Science, (London: Macmillan, 1935), 15, Available at https://mises.org/library/essay-nature-and-significance-economic-science.. Scarcity makes all the difference. In a world where an increasing population challenges the carrying capacity of our environment, economics can help make exactions a tool to manage that scarcity. I better side with the “glass-is-half-full”…

The post Koontz v. St. Johns (2013) – how US communities combat externalities… appeared first on ECSInsights.

“The roadside trash cans are covered with solar photovoltaic panels so they can light up at night; free electric buses connect different districts; the drainage wells for storm water are all embedded in the curbs. […] The pavement is laid with pervious sand bricks for efficient drainage, and the water supply is designed to minimize leakage. Rainwater and wastewater are collected separately, and 18 submersible axial flow pumps capable of pumping 42.1 cubic meters of water per second divert the rainwater to artificial wetlands.”

So in what country do you think this is? Germany? Japan?
I certainly can imagine it located in any one of these two countries. But this is Tianjin Eco-city, China’s first attempt at sustainable development. Only some 20,000 people have moved there, but the least you can say is that China takes their growing environmental problems serious. And admire their willingness to experiment and innovate; which is also why the city was featured in MIT’s Technology Review^[1]Yiting Sun, “A Chinese Urban Experiment,” MIT Technology Review, November 18, 2014.

There are a few other thoughts that come to mind. One is on China’s willingness to put some serious money into solving its problems; $6.5 billion, according to project officials. Yes, that is a big community investment. But huge societal problems are rarely solved by small initiatives, and targeted community investments can be very effective. To be effective, however, I believe that the community investment should promote innovation in search of the best solution. It fails if the spending supports a single centralized (or worse still: lobbied) solution. As research scientist Anthony Townsend puts it in the same MIT Technology Review^[2]Berg, Nate. “No Single Smart City Mold.” MIT Technology Review, November 18, 2014. MIT Technology Review:

“A city that’s taken over by computers designed by a big technology company is going to look like a machine. It’s going to be highly automated, highly centralized, and very efficient. It may not be a lot of fun, it may not be terribly respectful of our desire for privacy, it may not be very resilient. On the other hand, we could design cities that have a very decentralized, very redundant kind of infrastructure where the services that we create using sensors and displays and all these digital technologies are trying to achieve objectives that are more in line with increasing social interaction, increasing sustainable behaviors, reinforcing the development of culture, creativity, and wellness. So there are very different possible outcomes. It’s really up to the choices we make.”

Here is another thought that comes to mind. If Japan would have created this city, the solar panels may very well have come from China and stimulated China’s economy and industry. Even a decade ago that would have been different. The energy crisis in the 1970s had propelled photovoltaic development in Japan to the highest in the world. Stimulated by community investments, companies like Sharp, Sanyo Electric, Panasonic, and Kyocera became clear leaders in solar technology. But then Japan turned away from solar in favor of nuclear power^[3]Fairley, Peter. “Post-Fukushima, Japan Looks for a Solar Renewal.” MIT Technology Review, December 18, 2014. MIT Technology Review, 2014. Without the public support to fuel development, Japan’s industry lost its lead.

Germany’s public investments in solar might, today, lead to an economic stimulus for China as well. Like Japan, Germany was a forerunner in the fabrication of solar panels, but by 2010 China had taken over that position^[4]Forbes, 2013.

One of the aims of the DollarGame is to show the importance of a local community “ecosystem” where skills, knowledge and demand create a self-reinforcing loop of innovation. Bigger problems may just require the commitment from a larger community; perhaps even federal spending. My hope, in that case, is that the spending promotes decentralized solutions and competing innovation.

Sustainability, after all, implies resilience…

The post Community investments… appeared first on ECSInsights.

The Leaking Economy

A community’s wealth is represented by the money it generates, and wealth goes where the money goes. Money stays in a local community only as long as it can find a supplier for goods or services. We don’t grow bananas in Washington State, so folks in Washington (or better: their supermarkets) buy them from a more sunny place; and so goes some of Washington’s wealth to that sunny place. Economists call it “leakage” when the money leaves the community to buy goods or services elsewhere. The word “leakage” stems from British professor Kenneth Boulding ^[1]Boulding, K. E. (1945). Economics of Peace. Prentice Hall. who, in 1945, used the analogy of a leaky bathtub to represent the wealth of a community. In this analogy, the wealth of the community can be increased by plugging the leaks (reduce imports) or adding new water (increase exports). Here is another trick to slow down the leakage, however: keep the dollar working in the same community as long as possible: a farmer who pays the local dentist who pays the local bakery who pays a local farmer until finally it “leaks out” to purchase “the banana” – goods or services from elsewhere.

From deep to shallow

Think of the TV series’ gold-mining town Deadwood as the ultimate “shallow” economy: a few dollars might stay in the local town spent at the bar or brothel, but most of the created wealth either leaves town or “leaks” to purchase food, tools and supplies from remote suppliers.We can think of rural communities in the 1800s being on the opposite side of the spectrum: with local farms, diaries, blacksmiths that were almost completely self-reliant. Most of their economy relied on bartering and barely needed money; but if they would have used dollars in stead of bartering, those dollars would have gone around and around, only “leaking” from the region when outside merchants would come through. Whereas in Deadwood dollars would have been spent once or twice before leaving town, the self-reliant region with a deep economy would see the same dollar go around for tens of times or more.

Most rural communities in the US gradually lost the ability to keep money in their local economy. Commodity pricing, business consolidation (sometimes through debatable food-safety regulations), drove the local dairies, meat processors and mills to sell-out or close shop. Downstream businesses in the value-chain, a local blacksmith, local machine shops, often followed suit with the loss of the local industry’s demand. Rural areas ended up with a shallow economy where dollars barely touch ground before they leave for goods or services provided by the nearby metropolitan area. Or by the internet.

Humpty Dumpty

Putting Humpty Dumpty back together is very difficult; “buy local” does not make much impact if the majority of added-value in goods or services are generated outside the region. What can really matter, however, is rebuilding value-chains: businesses that are linked with each other in the supply chain. The example I often use is the one of the local brewery that changes to using locally grown hop ^[2]Economist call changing to a local supply “import substitution”; or brings a local micro-maltery on board, using locally grown barley. Every additional beer sold now leverages the local economy by using more local hop, malt and barley. The success of one becomes the success of all. Less leakage, a deeper economy, and a good chance that the profits are invested back into the community — especially if operations are locally owned. Local ownership is therefore an important factor in an economy’s metabolism. Other examples written about are the grain chain ^[3]The Western Rural Development Center works with its public and private sector partners to promote excellence in research, education and Extension for the prosperity of western rural communities. They published an interesting article: Rebuilding the Grain Chain. and the timber chain ^[4]Generating wealth creation models in the Appalachian wood-products industry: Wealth creation through Sustainable Forestry

Growth from within

This “growth from within” is what new economic development methods such as Rural Wealth Creation^[5]the USDA issued an overview report on Rural Wealth Creation research and experience in 2012: link and Economic Gardening^[6]Woods, J., & Gibbons, C. (2010). Economic Gardening. Public Management (00333611), 92(9); see also link promote, and are a fresh departure from the classic economic development efforts based on business recruitment (smokestack chasing).

Maybe we should call it economic bootstrapping?

The post Bootstrapping rural economies appeared first on ECSInsights.