Last weekend’s winter storm made national news, especially after the Metrodome roof collapsed under 17 inches of snow, causing the Minnesota Vikings’ ‘home’ game to be moved to Detroit. But how much did the storm affect the economy?
What economists call “exogenous shocks,” seemingly random events from outside the economic system like earthquakes and wars, do have national or even global effects on output, incomes or the stability of financial systems. For example, some economists argue that having to pay for losses from the San Francisco earthquake forced insurance companies to sell stocks and bonds, contributing to the severe panic of 1907.
But when you hear anyone attributing large costs to something as mundane as a big snowstorm, take it with a grain of salt. Yes, the immediate and local effect may sound large. But short-term or local effects usually are offset somewhere else or at some later date. The overall impact on society as a whole often is negligible.
A couple of news stories this week tried to assess the impact of the storm. One reported on an estimate by two University of Minnesota extension economists that moving the snowed-out Vikings-New York Giants game would reduce metro-area economic activity by about $9 million. Another article noted retail sales were down sharply on the second-to-last shopping weekend before Christmas, and speculated that if another storm hit the next weekend, it would make a significant dent in area retail sales this season.
There is not necessarily anything incorrect in any of that. People attending football games, particularly those coming from out of town, spend money on hotel rooms, restaurant meals, taxi rides, souvenirs and so on. If the game is canceled because the stadium roof collapsed, most will stay home and not spend on such items. There will be a decline in sales for the hotels, restaurants and stores where fans might have slapped down their plastic. (It should be noted, however, that $9 million is not much, considering the gross domestic product for the Twin Cities metro area was recently about $194 billion.)
In the same way, when bad weather keeps people indoors — or chained to the handles of their snowblowers — they don’t spend money in stores. I observed that myself when I went to buy a pair of boots at a local mall at the height of the snowfall. The easiest way to the shoe store from the parking lot was through a Barnes & Noble bookstore that reportedly was the company’s largest when built in the 1990s. There were perhaps six customers in the store. I was the only one in the shoe store. Seasonal vendors in the mall’s concourse were doing crosswords, no customers in sight.
So the storm did affect sales at businesses that cater to sports fans, and for a couple of days at least, it reduced holiday spending below what it would have been given decent weather.
Moreover, those lost sales may be permanent for specific businesses. Losing one home football game may mean that local hospitality establishments well may have lower sales and profits for 2010 than otherwise. One bad-weather weekend followed by another may lower seasonal sales for some retailers.
But it will do little to reduce overall household spending or national output. Disappointed Vikings fans who did not drive in from around the region won’t plow many of their unspent dollars into mutual funds.
Yes, some Giants fans spent their money in Detroit rather than here or are spending it back home. Business in the Twin Cities is very marginally down but the nation not affected one whit.
Ditto for holiday spending. Yes, repeated storms this close to Christmas might reduce total holiday spending by procrastinating shoppers like me. And yes, even if we go out and spend our temporarily saved dollars at post-holiday clearances, we may not buy the same sorts of things we might have two weeks earlier. So some individual business owners will be correct in attributing a bad year to adverse weather.
Of course, people who had to spend money on snowblowers or getting their cars out of hock at impound lots will have a slightly less materially blessed holiday. But toy store and boutique losses are gains for hardware stores, small-engine repair shops and snowplowing services.
Again, most households will spend about as much money over the year regardless of exactly when peak periods of credit card swiping occur or in exactly which establishments it takes place. The state, national and global economies won’t be affected.
This is an example of the distinction economists make between “partial equilibrium” and “general equilibrium.” Partial equilibrium deals with first effects of some change, holding all other things equal. If corn prices rise due to demand in China, farmers will plant more corn. They thus will plant fewer soybeans and use more nitrogen fertilizer. Those are first effects.
The secondary effects are too myriad to count. An acre produces more tons of corn than soybeans, so in the fall truckers will have extra business. They will buy extra fuel and tires. Soybean processors may have marginally less business. They will have to pay more for beans and will get more for soybean meal and oil. Pacific ports may load slightly higher tonnages while Gulf of Mexico ports will load less. A bottle of cooking oil may cost a few cents more. One could go on and on.
Economies are so complicated and economic interactions so complex that following all the resulting changes to their ends is impossible. But it takes events much bigger than bad snowstorms to really affect the economy.
© 2010 Edward Lotterman
Chanarambie Consulting, Inc.