A new study on data center economics shows hyperscale data centers have an outsized impact on the local economy.
Co-author Justin Ross, professor of public finance and economics at Indiana University’s main campus in Bloomington, did the study alongside Saurav Roychoudhury, professor of finance and economics at Capital University in Columbus, Ohio.
“The public discourse is like a cacophony of ideas,” Ross said, so he wanted to get hold of the numbers to study the actual economic impact.
The Northwest Indiana Forum, which funded the study, helped Ross and Roychoudhury get the numbers they needed to complete the study.
“This study is the first true Northwest Indiana-specific academic analysis of what hyperscale data center development (the kind of investment Microsoft is building in LaPorte) would actually deliver to Northwest Indiana’s economy,” Ross said.
The Microsoft data center, a 1 gigawatt facility, will generate $16.1 billion in regional economic output over 20 years, Ross said.
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That comes with 14,651 construction job-years, with $1.08 billion in construction earnings, and 2,090 ongoing jobs supported across the regional economy once the data center becomes operational.
Annual worker earnings will be $176 million as a result of the data center once it’s operational, Ross said.
If you think that’s big, Hobart’s data center will have an even bigger impact, at 1.5 gigawatts.
Lifetime regional output from Amazon’s data center in Hobart will be $24.2 billion with 21,979 construction job-years, the study said.
“The scale of impact here is significant for Northwest Indiana. We apply standard input-output modeling carefully with conservative assumptions at every step and find a single hyperscale campus generates billions in regional output and thousands of jobs,” Ross said.
“This is the kind of sustained economic activity that can meaningfully strengthen a regional economy over the long term.”
The Northwest Indiana Forum has been a staunch supporter of data centers, but that didn’t color the study’s findings, Ross said.
“While we feel like this is a conservative study, we are very encouraged by the findings and the impact these types of projects can have on our regional economy,” Northwest Indiana Forum President and CEO Heather Ennis said.
Michael Hicks, director of the Center for Business and Economic Research at Ball State University, said he is preparing a peer-reviewed academic paper on the subject.
“You can see the jobs they create, but you don’t know where the jobs came from,” he said.
“I think a community thinking that these are going to bring a lot of jobs is mostly a mirage,” Hicks said, other than the construction jobs to build them.
“Data centers are not going to build the AI ecosystem of labor. They’re going to take advantage of what’s already there,” he said.
Hicks has looked at three studies, two of which say there’s no significant economic impact over time.
“Think of them as a very small warehouse with a little bit of headquarters,” he said.
Some of the jobs, swapping out computers, would pay only in the $40,000s or $50,000s, Hicks said.
“For some places, you may be worried about new development bringing in new high costs” like having enough classroom space for employees’ children and parks and other recreational facilities for the new families, he said.
“Data centers don’t use a lot of public services because they don’t bring new people with them,” Hicks said.
There are some potential downsides. “The biggest one is if you’re building it in a tourism area, there’s some evidence that it stops tourism or at least slows it down.” But Hobart isn’t Savannah, Georgia, he notes.
“If they’re actually paying taxes, and they’re paying their energy right, and they’re paying for their water usage,” data centers can be a benefit for communities, Hicks said.
Just don’t expect R&D firms and a lot of high-paying jobs to come with a data center, he said.
Hicks criticized state policy regarding data centers.
“Indiana is the most egregious state for giving tax subsidies to data centers,” he said. “Indiana has just been profligate for tax incentives.”
Like everyone else, Ross has seen headlines about proposed data centers that include really big numbers. “What is actually underneath that number? What does that actually mean,” he wanted to know.
“In the Northwest Indiana case, they’re dealing with it in real time,” Ross said.
Co-author Roychoudhury, who lives just outside Columbus, Ohio, is “right there in the thick of this data center area,” Ross said.
Getting at the numbers isn’t easy. “Data, by necessity, is historical. It’s looking backwards.”
Yet data centers are new, and the industry is in rapid transition. “We can’t just strictly assume that every relationship is exactly the same,” Ross said.
“We had to do some amount of deconstruction in what are you actually purchasing to build it out,” he said. Industry publications helped put the study together.
But analyzing the construction costs includes predicting what the supply chain – disrupted during the COVID-19 pandemic – will look like in the future. “Things will always have to keep being updated.”
The proliferation of data centers has had a major impact on semiconductors and memory. “At least at the level of chips, they’re not buying those from something produced in the Northwest Indiana region,” Ross said, so that wasn’t a factor in determining the regional economic impact of data centers.
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Energy inputs, however, are a big challenge. Some data centers produce their own energy. “You’ve really got to get to the specifics on an actual deal.”
Ross and Roychoudhury relied on the empirical record, looking at studies from others who have studied this issue. “It seems like it’s a bit mixed. “Maybe the evidence favors a slight lowering of energy prices,” Ross said.
“If you’ve got the capacity, you could be driving the average costs down,” he said.
“On top of that, there’s energy policy surrounding prices, which is not forced to adhere to any kind of economic reality,” Ross said.
NiSource has set up a separate division for power-hungry customers like data centers to protect other NIPSCO customers from paying for additional power for the new customers. However, NIPSCO also expects that existing customers will see their bills eventually decrease as data centers come online.
It’s not unusual for data centers to pay for expanding power generation, nor is it unusual for different types of customers to pay different rates, Ross said. That’s already the case with NIPSCO.
“So many things are in flux as they try to work out the deals,” he said.
Yet to be determined are other ways data centers could affect residents, Ross said.
“The industry is just in such rapid transition,” he said.
“There’s this chokepoint in the supply chain regarding turbines. There’s only like three turbine manufacturers in the world,” Ross said. But manufacturers already producing turbines for other uses are retrofitting now to produce wind energy, even if less efficiently.
“It doesn’t need to be the perfect turbine,” he said. “You can make them work and you can scale them somewhat.”
Regulations could be revised to ramp up solar production, too, and natural gas is back on the table for generating additional capacity.
The nuclear option – building small nuclear reactors – might work, too.
Meanwhile, some economic impacts are clear. Building data centers in the Columbus, Ohio, area has been good for trades that are now in high demand.
“Life has never been better to be a plumber or an electrician in Columbus,” Ross said.
Doug Ross is a freelance reporter for the Post-Tribune.