Council Chairman Phil Mendelson recently took an important step towards greater transparency and accountability for the District government when he mandated that an economic impact analysis be performed on proposed legislation in the new Council period.

Measuring the impact your policy prescriptions will have on the District’s economy, and understanding the effects your legislation will have on job creation are critical components of good government. This analysis will lead to better decision making.

Now the question is what should an economic impact analysis analyze? Here are some guidelines:

An economic impact analysis typically measures or estimates the change in economic activity between two scenarios: one assuming an economic event, such as a change in public policy, happens, and one assuming it does not.

Economic impact analyses generally study macroeconomic effects. These are the big variables that affect the entirety of the economy. The classic example is tax rates. Tax rates affect the behavior of every business and every resident in the city.

It’s critical that an economic impact analysis be limited to measuring the effects the various legislative provisions of a bill will have on the private economy as a whole.

Another important factor is simplicity. Economic analysis can get sideways in a hurry the more variables you add. The likely methodology for these analyses will be economic simulation modeling. These models can vary widely in complexity. It’s important that these models be kept as simple as possible.

The economist who is assigned to conduct the economic impact analysis by the District government should be given only two missions:

  1. Analyze the value-added impact of the major provisions of the assigned bill. Value-added impact calculates the expected increase (or decrease) in state domestic product (SDP) that a change from current law will have on the District’s economy. SDP is the terminology used by the Bureau of Economic Analysis to represent the sum total of goods and services produced by a state in a given time period. DC is a state for the purposes of measuring SDP. In short, tell us what this law will do to economic activity. Will it induce more or less of it? Will it add to SDP or subtract from it?
  2. And tell us what the provisions of this law mean in terms of job creation. Will this law induce changes in behavior that would cause business owners and managers to increase or decrease the number of people they employ?

Mechanisms for maintaining the independence, impartiality and credibility of the analysis will be crucial to maintaining the integrity of the work. They will have to be built into the function. The question of who employs these analysts will be critical to the perception of the independence of the work.