Feb 14th 2015
The Northeast of the U.S. including Michigan has a weather alert that snow and cold would hit the region again. In this week, Ann Arbor’s lowest temperature becomes a way below zero degrees Fahrenheit. Many people agree with the idea that cold weather (especially when it has snow) causes lower productivity as well as traffic jams, however a new research paper refutes the argument. According to Wall Street Journal, “A working paper from the National Bureau for Economic Research suggests that hot days can hurt productivity by more than $20 per person per day, and offers a look at what climate change will mean for long-term economic growth.” Researchers also did look at the effect of cold weather, but they only could find a little productivity dip for moderate coldness, which was not consistent enough to make a claim.
The research paper written by Tatyana Deryugina and Solomon M. Hsiang that I mentioned above is about the environmental effect on the economy. More specifically, it reveals the relationship between the income and daily temperature. Two authors tested the United States as a target and found that the single environmental parameter continues to play a large role in overall economic performance. The paper concludes that when each 1.8 °F increases in daily average temperature above 59°F, roughly 1.7% productivity declines.
It sounds not a big deal, but when we apply those estimates to the whole U.S. economy (assume that their estimates are correct), warmer daily temperatures can lower annual growth by 0.06 – 0.16 percentage points. People know that global warming is an international issue, but this new research focuses the severity of hotter weather because now there would be some direct “environmental” effects on the economy. From the environmental economy course, I learned that economists calculate the price of the environment before they set any policy which can affect on the Earth. In other words, when the government should decide whether it allows a new factory construction, officials must compare the benefits from preserving the environment and the benefits from the construction.
Measuring the environmental benefits is controversial because it could be subjective. However, a new research about the relationship between the daily temperature and labor productivity emphasizes the importance of environmental impact as well as possibility of objective measurements. I hope that the research helps to change people’s recognition about the environmental protection and finally understand that the environment is closely related to the economy.
The city of New York is, even as I write, battering down for what it expects to be one of the worst blizzards in the history of the city. As Charlie Baker, governor of Massachusetts, put it it in the New York Times, “this is a top-five historic storm, and we should treat it as such.” Subways are shutting down, roads are banned, flights are being held, businesses are closing their doors, and schools are out – at least for a day or so. New York City is by far and away the most populated metropolis in the United States, and is home to much of the nation’s corporate activity on top of being one of the world’s leading financial centers. So it seems reasonable enough to pose the question: how big of an impact will New York effectively shutting down have on the nation’s economy, even if just for a day?
Being the preeminent center of American industry that it is, most would suspect that New York accounts for a significant chunk of the United States economy, but many might be surprised at just how disproportionately large that chunk is – I know I certainly was. As Alexandr Trubetskoy demonstrated in The Week Magazine (a link to his data is available in the article, in spreadsheet form), the greater New York metropolitan area accounted for a whopping 8.52% of the United States GDP in 2013. According to the Bureau of Economic Activity, US GDP in 2013 was 16,768.1 billion dollars (link leads to excel file). Going off of Trubetskoy’s estimate, New York was responsible for roughly 1428.64 billion dollars worth of economic activity in that year. If we multiply this by 1/365, we get 3.914 billion dollars. This is merely a back-of-the-napkin estimate, but it is still nothing to bat an eye at. New York shutting down for a single day could cause a loss of ~3.9 billion dollars of economic activity, or .023% of the nation’s GDP (using 2013’s numbers). When dealing with such massive numbers as the United States GDP, even that mere fraction of a percentage is something that will be sorely missed. And that is if we assume that New York is the only area affected – which it isn’t. As reported by MSNBC, five northeastern states have declared states of emergencies, two of which are homes to cities (Boston and Philadelphia) which are amongst the top ten contributors to US economic activity. As corporate headquarters lose a day of work and traveling workers are halted in their tracks by the freeze (no pun intended) on flights, the impact of the storm could reach well beyond the northeast. Power outages and the costs to the government of emergency services and road workers will only lengthen the strain on the local economies.