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

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 resultin g from die program. Two such cases are presented as examples. We argue that for two main reasons this type of analysis con stitutes 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 macro-economic models. Second, and more important, it is inappropria te to consider induced effects resulting from a particular program in isolation, because such effects can only be properly considered in the aggr egate at th e 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 confin ed to providing estimates of die industr ial 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.