Kansas agriculture and the economy

What is the importance of agriculture to the Kansas economy?

United States Representative Roger Marshall said: “My district is the largest ag-producing congressional district in the country, with 60 percent of the economy being ag related. Forty percent of the Kansas economy is ag related.” ⁽¹⁾Quoted in the Wichita Eagle. Available at http://www.kansas.com/news/business/article125840694.html.

The Kansas Hospital Association argues: “In Table 5, the total income impact of health care services resulted in an estimated $19.4 billion for the economy. Thus, health care is directly or closely related to about 11.6 percent of the state’s total income.” ⁽²⁾John Leatherman. The Importance of the Health Care Sector to the Kansas Economy. Archived here.

The Kansas Department of Transportation produced a study that finds: “In 2017, $20.6 billion in annual economic benefit was supported by aviation and aviation-related activities in Kansas, supported nearly 91,300 jobs, and generated more than $4.4 billion in annual payroll.” ⁽³⁾Kansas Department of Transportation. Kansas Aviation Economic Impact Study. Available at https://www.ksdot.org/Assets/wwwksdotorg/bureaus/divAviation/pdf/2016EISExecutiveSummary.pdf. $20.6 billion is 14.9 percent of the $138.328 billion Kansas economy.

The nonalcoholic beverage industry says: “With a direct economic impact of $2.0 billion.” Then “Factoring in this retail impact further broadens the economic reach of the nonalcoholic beverage industry by an additional $1.7 billion beyond what our industry generates directly.” ⁽⁴⁾American Beverage Association. Available at https://www.ameribev.org/files/resources/kansas-2.pdf. The total of $3.7 billion is about 2.7 percent of the Kansas economy. That’s coming just from nonalcoholic beverages.

We can easily find other examples of industry groups emphasizing their importance to the Kansas economy. But these findings are almost always exaggerated, especially in the case of agriculture.

For example, the Kansas Department of Agriculture says “Using the most recent IMPLAN data available (2015) adjusted for 2017, 65 agriculture, food, and food processing sectors were analyzed to determine their overall contribution to the Kansas economy. These 65 sectors have a total direct output of approximately $47.9 billion and support 125,714 jobs in Kansas.” ⁽⁵⁾Kansas Department of Agriculture. Estimated Economic Impact of Agriculture, Food, and Food Processing Sectors. Available at https://agriculture.ks.gov/docs/default-source/ag-marketing/ag-contribution-2017.pdf. The document says this is 31.6 percent of Kansas GDP.

Direct output is defined in the same document in this paragraph: “Direct, indirect, and induced effects sum together to estimate the total economic contribution in the state. Direct effects capture the contribution from agricultural and food products. Indirect effects capture the economic benefit from farms and agricultural businesses purchasing inputs from supporting industries within the state. Induced effects capture the benefits created when employees of farms, agricultural businesses, and the supporting industries spend their wages on goods and services within the state.”

Adding indirect and induced effects results in $67,461,102,358 ($67.5 billion) in economic contribution, which the Department of Agriculture says is 44.5 percent of Kansas economic output, also called gross domestic product (GDP).

It is true that agricultural workers spend money like anyone else. They spend on food, shelter, taxes, recreation, cars, clothing, and other things. Therefore, an agriculture industry support group might say “Farmers keep small town Kansas restaurants in business, providing jobs for restaurant workers.”

Then, a restaurant industry support group might say “By buying meats and produce locally, restaurants keep Kansas farmers in business.”

All this is true. But we need to be careful when counting contributions to the whole. Here, when farmers eat at restaurants, that is counted as induced effects of agriculture contributing to Kansas GDP. But, the restaurant industry counts the production and serving of these meals as its own direct output to Kansas GDP.

Similarly, when the restaurant buys food from a farmer, the purchase counts as indirect effects of the restaurant industry as they purchase inputs and contribute to Kansas GDP. The farmer, of course, considers that as his direct output, again contributing to Kansas GDP.

This economic activity is good and natural, and the more, the better. But we can’t count it twice when allocating GDP to industries.

Consider the industry category “Dog and cat food manufacturing,” said by the Department of Agriculture to employ 2,183.7 people in Kansas, producing $3,125,350,139 ($3.1 billion) in contribution to the Kansas GDP. That’s 2.2 percent of Kansas GDP. Should all the output of this industry be considered part of Kansas agriculture? The manufacturing industry counts this as part of its contribution to GDP. It’s true that the inputs to the manufacturing are agricultural products, but we don’t know if they are ag products that are produced in Kansas and should be counted as part of Kansas GDP.

The nearby table shows that for 2017, agriculture counted for 3.2 percent of the Kansas economy. For the period 1997 to 2017, it was 2.7 percent. There are many industry groups with greater output than agriculture.

How are the GDP numbers for agriculture inflated to 44.5 percent? IMPLAN, that’s how. It is an economic model used to estimate contributions of economic activity to the larger economy. ⁽⁶⁾University of Wisconsin Center for Cooperatives. IMPLAN Methodology. Available at http://reic.uwcc.wisc.edu/implan/.

It’s true that when an industry produces economic activity, it spawns other economic activity. These are the indirect and induced effects that IMPLAN produces. But these numbers are hugely inflated. When considering all industries, economic activity is counted more than once.

When it suits their needs, industry groups, like other special interest groups, use IMPLAN to boost their importance. Consider manufacturing, which at 16.4 percent of GDP is the second-largest industry in Kansas. When manufacturing companies appeal to state or local government for subsidies, they use IMPLAN or related mechanisms to inflate their importance. Almost everyone does this. It’s standard procedure.

Except: When multiple industries the same indirect and induced economic activity, such analysis becomes meaningless. If we added up the IMPLAN-calculated value of each industry to the Kansas economy, we’d end up with a value several times larger than the actual value. This is what the Kansas Department of Agriculture has done. We expect this behavior from companies or local economic development agencies when they appeal for economic development incentives and other forms of special treatment. They need to inflate their importance to gullible government bureaucrats and elected officials. But government agencies should not do this.

On the other hand, what is the harm in overstating the importance of an industry? The harm is that policy decisions are made using false evidence.