CSBDF releases annual economic impact assessments of its lending activities. In this post, Vice President of Economic Development Policy Jamie McCall gives an overview of the FY21 report’s findings and highlights some challenges related to this type of analysis.
CSBDF’s theory of change is simple but nuanced: by providing affordable small business financing, we seek to grow and foster community economic development.[i] But what does that mean? We believe that economic opportunity is the key to making sure North Carolina’s communities prosper. That prosperity includes having a vibrant small business ecosystem, which creates a positive economic and social impact.
Economic Modeling is an Imperfect Science
One way to think about the economy is picturing a machine with thousands of levers. Every combination of levers pushed or pulled can have a different effect on what the machine does. Economic models attempt to take that machine and create a simpler version of it. But to create a working model, assumptions must be made about how the economy works. To continue the metaphor - instead of trying to model the innumerable combination of levers which can be pushed/pulled, we isolate a few of the most important levers.
CSBDF uses a model which assumes the economy is in a state of equilibrium.[ii], [iii] In economics, equilibrium is reached when the supply of goods matches the demand.[iv] Input-output models assume that investments – via capital expenditures, distribution of lending capital, etc. – temporarily disrupt that equilibrium. This is often a valid assumption, but we know there are seismic economic events where supply does not match demand for a long period of time. There is perhaps no better example than COVID-19.[v] The pandemic has caused a cascade of supply disruptions in everything from toilet paper (fueled by consumer panic buying[vi]) to lumber.[vii] Small businesses are effected by these supply disruptions just as much, if not more so, than larger businesses.[viii]
This means how confident we can be in our results this year is lower than normal. Importantly though, lower confidence doesn’t mean the model’s output is invalid or wrong. It just means the figures are less accurate (have larger error terms).[ix],[x] Despite such limitations, we think this type of exercise is a worthy endeavor because it is simply one dimension of our overall, multi-faceted impact story.
Let’s Talk Numbers
CSBDF’s economic impact is estimated via its effects on (1) payrolls, (2) jobs, and (3) tax revenues. Each of these impacts has a “multiplier.”[xi] A multiplier in this case is how earnings, employment, or tax revenues created by CSBDF’s clients amplifies other economic activity. For example, a multiplier of 0.38 for payrolls means for every $1.00 in payrolls directly support by CSBDF’s lending clients, another $0.38 is generated across North Carolina.
Surviving and Thriving Amidst COVID-19
This year’s report estimates the net economic impact of 126 loans issued by CSBDF between July 1, 2020, and June 30, 2021 within North Carolina. Though this period includes some of the worst of the pandemic, entrepreneurs receiving CSBDF loans were still able to make a substantial contribution to the state’s economy:
CSBDF’s lending clients created $39M in new earnings through payroll positions. An additional $38M of payroll impact comes from other businesses that were supported by CSBDF’s lending clients. For every $1.00 in earnings created by lending clients, an additional $1.01 of earnings was generated across the state’s economy.
On average, each of the small businesses assisted by CSBDF during the analysis period supported 14.2 jobs. For every full-time position created by CSBDF’s lending clients, an additional 0.7 full-time positions were created across the state.
Small businesses help create tax revenues through their payroll, collecting sales tax, and by paying taxes on production and services. We estimate the tax contribution of new lending clients in FY21 is about $9M each year. The vast majority (85%) of new tax revenues benefits localities and North Carolina’s state government.
Why This Matters
In sum, the data show how the 126 loans issued by CSBDF between July 1, 2020 and June 30, 2021 had a significant economic impact. In real terms,[xii] the average economic impact of each CSBDF loan increased between FY2020 and FY2021.
As of August 2021, CSBDF is 1 of 567 revolving loan fund community development financial institutions (CDFIs).[xiv] We, like all loan funds, operate from a theory of change[xv] which views credit access as the cornerstone of community economic development. However, the effectiveness of this strategy relies on lending to entities and individuals that can be expected to repay the debt.[xvi] Measuring and evaluating impact is critical because CDFI interventions can result in adverse outcomes.[xvii] By conducting annual economic impact analyses, CSBDF aims to incrementally advance knowledge on how CDFIs add value to the communities they serve.
The results of CSBDF’s FY21 economic impact analysis are available as a full report and 2-page brief. The dataset for the FY21 lending economic impact analysis is available at CSBDF’s dataverse.
[i] Ron Shaffer, Steve Deller, and Dave Marcouiller, “Rethinking Community Economic Development,” Economic Development Quarterly 20, no. 1 (February 1, 2006): 59–74, https://doi.org/10.1177/0891242405283106. [ii] Scott R. Baker et al., “COVID-Induced Economic Uncertainty,” Working Paper (Washington, DC: National Bureau of Economic Research, April 13, 2020), https://doi.org/10.3386/w26983. [iii] Jonathan Crapuchettes, Hank Robison, and Deacon James, “EMSI Multi-Regional Social Accounting Matrix (MR-SAM) Modeling System” (Moscow, ID: Economic Modeling Specialists International, March 30, 2017), https://kb.emsidata.com/wp-content/uploads/2016/02/SAM-Public-Doc-1.pdf. [iv] V. L. Makarov, “Some Results on General Assumptions about the Existence of Economic Equilibrium,” Journal of Mathematical Economics 8, no. 1 (March 1, 1981): 87–99, https://doi.org/10.1016/0304-4068(81)90014-8. [v] Ferran Giones et al., “Revising Entrepreneurial Action in Response to Exogenous Shocks: Considering the COVID-19 Pandemic,” Journal of Business Venturing Insights 14 (November 1, 2020), https://doi.org/10.1016/j.jbvi.2020.e00186; Adam Rose and Dan Wei, “Modeling the Economic Impact of COVID-19” (PowerPoint, CREATE Homeland Security Center, University of Southern California, Los Angeles, March 19, 2020), https://www.remi.com/wp-content/uploads/2020/03/USC_REMI_Webinar_COVID-19_Rose-and-Wei_3-18-20F.pdf. [vi] Kang Sim et al., “The Anatomy of Panic Buying Related to the Current COVID-19 Pandemic,” Psychiatry Research 288 (June 2020): 113015, https://doi.org/10.1016/j.psychres.2020.113015. [vii] Julianne Dunn, “COVID-19 and Supply Chains: A Year of Evolving Disruption,” District Data Brief (Cleveland, OH: Federal Reserve Bank of Cleveland, February 26, 2021), https://www.clevelandfed.org/newsroom-and-events/publications/cfed-district-data-briefs/cfddb-20210226-covid-19-and-supply-chains. [viii] Brent H. Meyer, Brian Prescott, and Xuguang Simon Sheng, “The Impact of the COVID-19 Pandemic on Business Expectations,” International Journal of Forecasting, March 5, 2021, https://doi.org/10.1016/j.ijforecast.2021.02.009. [ix] Duo Qin and Christopher L. Gilbert, “The Error Term in the History of Time Series Econometrics,” Econometric Theory 17, no. 2 (April 2001): 424–50, https://doi.org/10.1017/S0266466601172063. [x] Shelby D. Gerking, “Input-Output as a Simple Econometric Model,” The Review of Economics and Statistics 58, no. 3 (1976): 274–82, https://doi.org/10.2307/1924949. [xi] David W. Hughes, “Policy Uses of Economic Multiplier and Impact Analysis,” Choices 18, no. 2 (2003): 25–29. [xii] Anis Chowdhury, “Methods Explained: The GDP Implied Deflator,” Economic & Labour Market Review 2, no. 6 (June 1, 2008): 53–56, https://doi.org/10.1057/elmr.2008.91. [xiii] Carolina Small Business Development Fund, “Lending Amidst the COVID-19 Pandemic,” Intermediate Outcome Evaluation, The Economic Impact of Assisting Small Firms (Raleigh, NC, June 2021), https://www.carolinasmallbusiness.org/post/lending-impact. [xiv] Community Development Financial Institutions Fund, “List of Certified Community Development Financial Institutions (CDFIs)” (US Department of the Treasury, August 20, 2021), https://www.cdfifund.gov/sites/cdfi/files/2021-08/CDFI_Cert_List_08202021.xlsx. [xv] Anne C. Kubisch, James P. Connell, and Karen Fulbright-Anderson, “Evaluating Complex Comprehensive Community Initiatives: Theory, Measurement and Analysis,” in Rebuilding Community: Policy and Practice in Urban Regeneration, ed. John Pierson and Joan Smith (London: Palgrave Macmillan UK, 2001), 83–98, https://doi.org/10.1057/9781403919878_5. [xvi] Thomas H. Stanton, “Help Borrowers, Don’t Hurt Them: Federal Credit Programs Need to Focus on Outcomes, Not Volume,” Public Administration Review 77, no. 6 (2017): 815–16, https://doi.org/10.1111/puar.12814. [xvii] Jamie McCall and Michele Hoyman, “Community Development Financial Institution (CDFI) Program Evaluation: A Luxury but Not a Necessity?,” Community Development In Press (2021), https://doi.org/10.1080/15575330.2021.1976807.
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