A Case for Rethinking Economic Development Metrics

This article is adapted from a keynote given at the 2022 Annual Meeting of the Coeur d'Alene Area Economic Development Corporation on September 7, 2022.

"Gross National Product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl. It counts napalm and counts nuclear warheads and armored cars for the police to fight the riots in our cities. It counts Whitman's rifle and Speck's knife, and the television programs which glorify violence in order to sell toys to our children. Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile. And it can tell us everything about America except why we are proud that we are Americans."
- Robert F. Kennedy, remarks at the University of Kansas, March 18, 1968

The International Economic Development Council (IEDC) defines economic development as the “intentional practice of improving a community’s economic well-being and quality of life. It includes a broad range of activities to attract, create, and retain jobs, and to foster a resilient, pro-growth tax base and an inclusive economy.” ChatGPT gives a similar response, in part saying, “Economic development typically involves a range of strategies to promote economic growth, such as increasing productivity, creating jobs, attracting investment, and expanding access to education and training.”

Under such definitions, many communities have a lot to hang their hat on. They can point to job growth, gross regional product (GRP) growth, wage growth, low unemployment rates, higher education attainment rates, and other traditional metrics that signal success.

Take my backyard for example. Spokane County, WA has seen 7% job growth from 2017 to 2022. As of December, the unemployment rate is 5.2%. Over the last five years, GRP is up 25% and education attainment 21%. Between 2017 and 2022 the average earnings per job also increased by 21%. Tax revenue has risen a whopping 45% over that same timeframe, from $1.7B to $2.45B. By the standard economic development metrics, there appears little work left to be done.

But most of us can look around and naturally wonder if those numbers tell us everything. And indeed, there are other numbers we could look at that paint a different picture. In Spokane, the labor force participation rate sits at 60.9%, well below the pre-COVID rate of 62.7%. That might not seem that significant at first glance, but that’s more than 5,000 people no longer working; no longer engaged in one of the most life-giving things we can do. We should wonder why a substantial number of people are opting not to work. 

Lightcast data shows that in February 2023 there were 1,013 unfilled nursing roles in Spokane County (1,146 unique job postings but only 133 hires). That’s a lot of need for care and very few people available to give it. While falling, the median price for a home is $375,000, up 79% from five years ago ($209,500). This figure looks very different depending on where you sit—in a home or wanting to be in one. And while overall earnings have increased, it depends a lot on your line of work. Since 2017 real wages for auto mechanics are down 14%, light truck drivers down 10%, and electricians are flat. Stockers and order fillers real wages are down 7%, receptionists 7%, and janitors 4%. These are the types of roles that keep daily life running smoothly: answering the phone when we need to schedule an appointment or fix our car so we can get our kids to school and practices. Sometimes, quite literally, they keep the lights on. And in real terms, many are making less money than they did five years ago. 

You could do this with lots of data points, find some that paint a rosy picture, others much less so. And you can do it with almost any community. What this seemingly indicates is that the metrics we’ve historically used to measure success in economic development don’t tell us what they used to. You simply can’t point to GRP and the unemployment rate and say we’re humming along. Basic supply and demand doesn’t even seem to work. The “critical, ongoing shortage of auto technicians” (high demand) should result in higher wages to increase supply. But it hasn’t. 

Why this is the case is complex, but it seems rooted in the fundamental shifts that have occurred over the last few decades in how markets operate: a shift to a digital economy, emphasis on “the knowledge economy," expansion of e-commerce, rapid globalization, etc. You bundle these and other seismic shifts, and all of a sudden the old indicators aren’t giving us a full picture. 

Goodhart’s Law and economic development 

Consequently, it’s likely we are measuring the wrong things and have the wrong goals when it comes to economic development. This problem is compounded by the fact that the goals should have never been goals in the first place, they should have been measures. In this way, economic development has long been suffering from Goodhart’s Law, which says that when a measure becomes a goal, it ceases to be a good measure.

Remember the IEDC definition of economic development. The goal here is to improve the economic well-being and quality of life of a community. But that’s not how it usually looks. The measures and goals in most communities are the same thing and usually focus on the end of the definition: create and retain jobs and create a pro-growth tax base.

The measures need to be separated from the goals. GRP, job growth, tax revenue, education attainment, etc. are all measures. They should tell us we’re moving in the right direction toward some goal or target, but they aren’t the goal themselves. In basketball, the goal is to win the game. Measures such as shooting percentage, assists, steals, and turnovers tell you if you are likely to achieve that goal. But any team would gladly trade exceptional measures in these categories for the goal of winning the game itself. That is, the goal is to win the game, not to have good stats. And of course, you can optimize for the measures to the detriment of the goal—think of a player scoring 50 points but their team loses the game. 

Thinking differently about economic development metrics

What might be different goals? Since it’s people that make up a community, those goals which are more people-centered seem to be a good place to start. Goals such as greater job access and greater economic stability would improve the well-being and quality of life of residents, and consequently, the community. Metrics indicating progress towards such goals would then include things such as job proximity, broadband connectivity, housing burden, and rate of food insecurity.

And indeed, traditional economic development metrics shouldn’t be done away with. They should simply be returned to their proper place as measures. A strong economy produces tax revenue that allows for a working health and educational system and certain living standards, which is good for people and the community. Measures such as per capita GDP or job growth will be indicators of movement toward that strong economy. 

Greater Memphis Chamber and their People Powered Prosperity is an example of a community that has separated goals from measures. They state, “Thriving people are the key to a prosperous future for the Greater Memphis region.” That is a much different goal and purpose than many economic development organizations. More likely you are to see the attraction of target industry businesses, robust GRP growth, or a percentage of residents at a certain education attainment level as the goal (which all make great measure).

In the case of Memphis, they came up with a scoring system for their goals and then also ranked themselves against peer communities. Depending on how well their programs and initiatives are impacting their measures, they will then see a change in their score (goal).

Communities looking for inspiration when it comes to people-focused goals could explore the Social Capital Project or the Social Captial Atlas. 

The Social Capital Project, an initiative of the Joint Economic Committee in Congress, seeks to “increase social capital through reconnecting Americans to work, improving investment in youth, making it more affordable to raise a family, increasing family stability, and rebuilding civil society.” The Social Capital Index measures states and counties based on measures such as family unity, social support, institutional health, and others.

Opportunity Insights notes that social capital “has been shown to play an important role in outcomes ranging from income to health.” Their Social Capital Atlas measures cohesiveness, economic connectedness, and civic engagement to determine social capital at various geographic levels, even down to zip code level or by high school or college. All with the goal of understanding how social capital connects to children's chances of rising out of poverty.

Truth vs. Facts in economic development metrics

Many may argue that these goals aren’t in the purview of economic development. The field's name “economic” development directs where its endeavors should be focused. But the large market shifts mentioned earlier have altered what is needed for people and communities to develop economically. As an example, housing was never thought to be in the realm of economic development. It had long been a community development priority. But you’d be hard-pressed to find an economic development organization these days that isn’t in some way involved in housing. That is to say, the line between economic and community development is increasingly blurred. The economic well-being from the IEDC definition includes, and is dependent on, factors outside of pure economic measures.

I was once told not to let the facts get in the way of the truth. I found that an odd thing to say, and at first didn’t believe it made sense. The facts are the truth. But in thinking of Goodhart’s Law, goals, and metrics in economic development, this statement made more sense. If using the common definition of economic development, the fact is jobs and tax revenue are growing in many places, so communities need not concern themselves with economic development. But we know the truth is that our communities are often struggling and not how we believe they should be. Having goals that address the truths of our communities, with metrics that impact those goals, is one way to get them closer to how we’ve envisioned them.