The Real Economic Cost of Snow

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How much does a snow storm cost? Every year, on days like the one we are having today on the East Coast and in the Midwest (according to this map 63% of the United States is covered in snow today), economic forecasters try to estimate the impact of all the white stuff falling from the sky. The numbers are always huge. And they are always wrong. Here’s why:

The biggest reason is that snow storms are often looked at as a snap shot. What is the money spent or lost on that day. That ignores how the economy really works. And it ignores the way snow works. Money spent today doesn’t disappear. Snow on the other hand does. Snow expenditures go into the economy and pop out somewhere else. Money not spent today doesn’t disappear either.

Lets take first the most common cited cost of snow storms: Snow removal. Here’s one story that says snow storms cost North Carolina $4.5 million. And another estimating the cost of $3.4 million to Philly of a December storm. Yes, states and cities do have to shell out money to plow, remove snow and spread salt. But the economic cost of all that is much less than the actual cost of doing those activities. As this blog pointed out a year ago, snow removal costs are mostly fixed. With a lot of the money already having been spent before the snow falls on plows and the actual salt. The new expenditures come in the way of labor costs. NYC is paying $12 an hour to people hired for snow removal. So some of that money will come back to the local government in the form of taxes. Yes, most of these people probably fall in a very low income bracket, but chances are they will spend most of the money they make, generating sales tax, and more economic activity. There’s no published economic multiplier for snow removal spending, but here are some numbers from Moody’s So I would put the multiplier of snow spending at about 1.6. Call it the snow stimulus.

But snow removal costs are small when compared to what people try to say is the real cost of snow storms: Lost economic output. Here’s where you get the huge and absurd numbers. Check out this guy’s math from a year ago:

According to the Financial Forecast Center, America’s GDP in March should be somewhere in the neighborhood of $646.27 billion per day. The 17 states that are hardest hit by this storm contain approximately 38% of the U.S. population; assuming that 20% of workers won’t show up for work today (based on the British average), we’d hit a figure of $48.8 billion in lost productivity.

To his credit, the author admits that this is high (not sure why he did the math then, and why I won’t). The reason is that just because people don’t make it to work doesn’t mean work doesn’t get done. And that is particularly true these days. I’m writing this blog post from home. Yes, when my 3-year-old gets back inside from playing in the snow (don’t worry she is with my wife), less work will get done. But that doesn’t mean the article I have to write won’t get written. It just means some of the work will get done tomorrow. And that’s true for all sectors of the economy. Typically, purchases get delayed. But most people still end up buying a Valentine’s gift or whatever they planned on purchasing today. 

How is the stock market reacting to all this? Not great. Stocks have been down most of the day, sometimes as much as 100 points. But this is probably psychological and again temporary. A study a few years ago found that the market does better on sunny days, than it does on cloudy days. But on an annual basis there seems to be no real correlation between snowfall or weather in general and market movements. For example, in winter of 2001-02 New York had just 3.5 inches of snow. Yet the market was down -22% in 2002. In 1995, we had 75 inches of snow in New York City. A record year for snow. That year the stock market was up 38%.

So when you read that today’s snow storm cost the country tens of billions of dollars. Remember that there is always tomorrow.