Economic Models Consulting for Public Decision Making: REMI Training Workshop July, 2003

1. Economic Models & Consulting forPublic Decision Making:REMI Training & WorkshopJuly, 2003 Regional Economic Models, Inc. Amherst, Massachusetts

2. The Planner’s Monday Lament(or how to lose millions painfully) “Right back where we started from, Do-dah, do-dah, All the livelong day.”

4. Are You Involved In: Formulating policy? Making recommendations? Collecting and analyzing data? Implementing models? Consulting, using consultants, other? Now engage the audience. I’d like to get a sense and give all of you a chance to see who else is in the room. This way we can get an idea of what professions and perhaps what particular areas of interest we have represented. Ask for a show of hands from people who’s work and interest most closely parrallels the six policy areas. This will give you a chance to gague your audience and make a few witty, off the cuff remarks. I’d also like to get a sense of your levels of familiarity with economic modeling. Ask for another show of hands from peole who are: highly, somewhat, not at all familier with economic modeling. Lastly ask, how many of you have direct involvement with gathering information or interpreting the effects of various policy initiatives on the local economy. You might call on a few people to expalin their role.Now engage the audience. I’d like to get a sense and give all of you a chance to see who else is in the room. This way we can get an idea of what professions and perhaps what particular areas of interest we have represented. Ask for a show of hands from people who’s work and interest most closely parrallels the six policy areas. This will give you a chance to gague your audience and make a few witty, off the cuff remarks. I’d also like to get a sense of your levels of familiarity with economic modeling. Ask for another show of hands from peole who are: highly, somewhat, not at all familier with economic modeling. Lastly ask, how many of you have direct involvement with gathering information or interpreting the effects of various policy initiatives on the local economy. You might call on a few people to expalin their role.

5. Competition & Advantage Competition is any area in the world with quality goods and services to sell, and access to markets and transportation. Advantage goes to relatively productive total resources, not to merely cheap labor. Competition and advantage are regional.

6. Assess Long-range Effects Workforce training and public health planning School, elderly, ethnic, and total populations Employment, budgets, taxes, land use planning Transportation alternatives (ports, corridors, …) Cluster policy examples: Communications Chemicals (e.g., polymers, plastics, …) Motor Vehicles (e.g., multi-state regional industry) Furniture Industry and Lumber Industry products Misc Professional (e.g., geo-spatial NASA spinoffs)

8. REMI Policy Insight Features Applies economic theory, inter-industry links: Includes New Economic Geography Theory Is calibrated & estimated using regional data Is dynamic and predicts when results will occur Cause & effect model structure explains results Alternative structures allow sensitivity tests Is the leading Policy Analysis model in the U.S.

9. REMI Model Applications Economic development Energy Transportation Environment/Regulation Taxation National-level applications

10. Unexpected EventsModeling and Analysis Understanding the Problem REMI’s Modeling Framework Application Examples

11. Unexpected Event Applications Earthquakes for the U.S. Insurance Industry Flooding of the Mississippi River Hurricane Effects on Florida Port Disruption in the Northwest U.S. and Canada 9-11 Attacks; Economic Effect on New York Potential Economic Effects of a Bio-terror Attack in a Major U.S. City

13. Examples of Model Integration Energy 2020 E-GAS GIS UrbanSim HERS-ST NFIB

14. How Does REMI Do It?

15. REMI Policy Variable Examples

16. REMI Policy Insight Results: Sample Results by Industry

17. REMI Policy Insight Results: (Continued)

18. REMI Model Structure (2002 - )WITH ECONOMIC GEOGRAPHY LINKAGES

21. Integrated Modeling Approach REMI integrates Economic Geography (labor & product agglomeration, accounting for distance costs & non-homogenous factor & product markets) with key modeling tools:

22. Types of Models

24. Steps in Model Building Data preparation Model building programs Quality assurance Ongoing research & development

25. The New Economic Geography Monopolistic Competition Base Labor Productivity Concepts Commodity Price Concepts Revised Equations New Policy Variables “Nullify” Variables Bulletin on Demand Variables Group Policy Variables Market Share/Trade Flow, & Price Elasticities Transportation Costs Matrix Economic Geography Conclusion

26. New Economic Geography(Based on Monopolistic Competition) Increasing economies of scale for firms (decreasing marginal costs). Access to product varieties from different regions. Different delivered prices in the same industry due to transportation or other distance deterrence costs. Cross hauling, cluster agglomeration, and labor productivity are explained by microeconomic gains from having choice and variety.

27. New EG FeaturesLabor Productivity Concepts Labor Access Index Occupation & industry effects of selecting best workers Composite Labor Cost Relative wage rate adjusted for labor access index Includes commuter distance cost blended into wage rates Occupation Codes Standard occupation codes (SOCs) are implemented Better groupings with sectors for analysis & display

28. New EG FeaturesCommodity Price Concepts Delivered Price (wtd avg by sector at place of use) Source production cost + transport cost to place of use Production & transport costs reflect every source location Commodity Access Index (by sector at place of use) Producer & consumer effects of better commodity access Reflects market share changes due to composite price changes Composite Price (by sector at place of use) Delivered price adjusted for commodity access index Production Cost (by sector at place of use) Includes intermediate inputs from all sectors & locations Local production cost captures intermediate input composite prices; composite labor cost; and capital and fuel costs

29. New EG FeaturesRevised Equations The Housing Price Equation Population & Real Disposable Income Changes The Wage Equation Employment Opportunity & Occupational Demand The Stock Adjustment Process New Parameters The Economic Migration Equation Empl Opportunity, RWR, Consumption Access Index The Market Share Equations Economic Geography & New Price Elasticities More sensitive to production cost changes

30. New EG FeaturesNew Policy Variables Industry Sales & Industry Employment-nonlinear Ignores firms being displaced in a region by new firms who are competing locally or in nearby markets. Treated as “international exports” for “demand source.” Applies input value less the local economy’s indirect effects on international exports due to production costs. Firm Sales and Firm Employment-nonlinear Accounts for firms being displaced in a region by new firms who are competing locally or in nearby markets. Displacement effect correlates strongly to the degree to which current firms already serve competitive markets.

31. New EG Features“Nullify” Variables Industry Sales and Employment: nullify applies. Firm Sales and Employment: nullify not defined. Nullify Workaround (Firm Sales & Employment) Defined for nullify investment only. Apply to non-residential capital stock variable only, in same amounts, sign, & year as the inputs for detailed construction (any non-residential) and for investment (non-residential). Apply to residential capital stock variable only, in same amounts, sign, & year as the inputs for detailed construction (any residential), and for investment (residential). Apportion as appropriate between non-residential capital stock and residential capital stock for the input to construction (non-detailed).

32. New EG FeaturesBulletin on Demand Variables Demand Variables They now cause an output response in every region which supplies the region with the changed demand. The regional trade flow shares drive the response. Applicability Exogenous demand Intermediate demand Investment (structures) demand and PDE demand Consumer demand and government demand Indirect demand from bridge tables such as I-O table, demand vector tables, and translator tables

33. New Policy Insight FeaturesGroup Policy Variables Users can define several policy variables as one. Users can include input values or not as desired. Useful for applying the same variables to many simulations, or applying then editing as needed. Example: define your own visitor days variables as group variables, with or without values, e.g.: Consumer demand variables (include transportation, food & beverage, clothing & shoes, gasoline, other services, etc) Hotel sector Amusement & Recreation sector (or detailed output sales) Motion Picture sector (or detailed output sales)

34. New EG FeaturesMarket Share/Trade Flow,& Demand Price Elasticities Market Share/Trade Flow Displays Share of local demand met by regions in model. Demand Price Elasticities Alternative elasticities option for new regional controls. For any given simulation, test your model’s sensitivity.

36. Delivered Price – Credit & Finance

41. Delivered Price – Motor Vehicles

47. New EG FeaturesTransportation Costs Matrix The transportation cost matrix is a new component of the economic geography model of REMI Policy Insight. There are three components of the matrix: Commuting costs Accessibility costs Transportation costs The three components respond to changes in the effective distance between regions.

48. Effective DistanceEffective Distance is Derived as Follows Capture all trade flows among all counties. Back calculate the distance (“effective distance”) which yields the observed trade flows, given the gravity model’s distance decay parameter (ß). The ß parameter by economic sector is the factor which best explains a change in regional output, given a change in demand. Thus, the ß parameter drives the regional purchase coefficient (RPC), which is the ratio of self-supply to demand for each economic sector.

49. Commuting Costs Commuting costs affect the effective distance in the occupational labor access productivity equation (by adjusting labor cost relative to the average wage rate), which feeds into industry labor access productivity and from there into composite wage rates, ultimately affecting both the composite cost of production by industry and the relative wage rate in the economic migration equation.

50. Accessibility Costs Accessibility costs affect the effective distance in the intermediate input access index, which reflects a price elasticity of demand (price is sensitive to distance) and which feeds into the moving average commodity access index. The commodity access index feeds the composite input cost equation and the consumer access equation, ultimately affecting both the composite cost of production by industry and the consumption access index in the economic migration equation.

51. Transportation Costs Transportation costs affect the effective distance in the delivered price equation for each sector (relative to time and to wage rates, or only to time if wage rates are unchanged), which feeds into the composite input cost equation to producers by sector and also into the consumption equation to consumers by commodity, ultimately affecting both the composite cost of production by industry and the consumption access index in the economic migration equation.

52. Matrix Input Internal UsageEffective Distance Equations Intermediate Input Access Index (Eq. 1-4) Labor Productivity by Occupation Due to Relative Labor Access by Occupation, and Relative Labor Productivity Due to Industry Concentration (Eq. 2-1a, 2-1b: Commuting) Delivered Average Price (Eq. 4-3: Transport) Share of Domestic Demand Supplied (Eq. 5-1)

54. Matrix Input ProcessingStandard Policy Variables vs Matrix Inputs Standard Policy Variables In most simulations, inputs are made by sector or demand source based on how each direct shock will affect each part of the economy as an element within the overall shock being assessed. Matrix Inputs Economic Geography matrix inputs for Commuting, Accessibility, and Transportation work their way through all sectors and regions in a set-up process before participating in the simulation itself.

55. Matrix Response SensitivityAssuming 1% Change in Effective Distance Elasticity is inverse to the degree to which: Region or state is compact in size and shape. Supply chain and labor sources are remote from the region and from nearby compact regions or states. Shock is focused (i.e., degree to which shock applies a matrix change to one directional effective distance concept rather than simultaneously to intra- and inter-distances).

56. Economic Geography Conclusion

57. REMI’s Objective