23 July 2023
Edward Lotterman
In their first chapters, many introductory econ texts list “challenges every economy must face.”
“How does the economy adapt to change?” usually is on the list.
That question confronts us now as we face extreme weather events and climate change.
Policies and institutions matter. When faced with challenges, different countries and cultures have different outcomes.
A colleague born in Japan described how his family dug a cave into a railroad embankment after their house was lost to U.S. firebombing. “We lived there the next two years” he said. Ironically, I had just read a parallel account by a Russian woman whose family lost their house in the battle of Stalingrad. They dug into a hillside “and we lived there for the next 17 years.”
Japan, Germany, Poland, the Soviet Union and other countries suffered enormous destruction during World War II, but they had different economic systems and their recovery varied greatly. The market-based ones were much more successful than the centrally planned ones. Prudent policies played by varied governments also were crucial.
When it comes to climate change, the economic impacts, potential and real, are myriad. Burying our heads in a cave is not the answer.
Some basics: Gross Domestic Product is a key economic indicator. It measures the value of all goods and services produced before any adjustment for existing goods worn out or discarded. But that adjustment is a key one in getting to the “real per capita disposable personal income,” that determines what of our society’s needs and wants we can satisfy. Changing climate will destroy or make useless many things produced in the past.
Much housing and other infrastructure is vulnerable to destruction by weather to an extent we did not realize. Temperature changes will make living in some regions much more difficult or expensive. Cropping and grazing patterns will change. Crop yields may decline. That will affect food prices and availability.
Public infrastructure such as roads, bridges, dams and harbors will need rebuilding. So the gap between “gross” and “net” product may well widen considerably as more output must be devoted to just keeping us from going backwards. “Personal income” may take a hit.
On the other hand, while natural disasters destroy wealth, they can spur economic activity and income. Consider the 1997 flooding in the Red River Valley, causing hundreds of millions in damages. But in following months business activity boomed. Plumbers, carpenters, heating and cooling companies, building supply and appliance stores, tool rental outlets all were swamped as recovery progressed. Unemployment was extremely low. Productivity extremely high.
Understand that was possible in great part because the disaster was localized. Insurance companies had funds to pay for damages and ample federal assistance for a relatively small area was not even a blip in federal budgeting. These might not hold true for more widespread global destruction, but the general rule that disaster recovery spurs output is important.
Also realize that necessary adjustments will not just be nationwide but will be occurring around the world. There may be great tragedies.
Consider the human costs. There will be migrations. These may be minor, people moving off Atlantic and Gulf Coast barrier islands and inland from tidewater areas or northward from parts of Florida where home insurance tilts between unaffordable and unavailable. We already are seeing large migrations from south to north: Africa to Europe, Central America to the U.S., and within Asia. Much of these are for economic reasons, poverty and food availability, exacerbated by heat. These will engender greater conflict.
We may be inconvenienced when fresh vegetable production in California is disrupted by water shortages. And we may see doubling or tripling or greater in wheat and rice prices globally with carry-through effects on meat, milk and eggs in the grocery store. In other nations, this may mean mass starvation.
There are lessons from the past to keep in mind. Keep the private sector involved in developing responses to new challenges. Provide incentives for individuals and businesses to be innovative. Use market forces and avoid command-and-control regulations whenever possible.
However, don’t create perverse incentives such as “rent seeking,” or the exploitation of unintended opportunities for fraud. Florida roofing companies that seek out homeowners after minor storms, simply to take advantage of near guaranteed insurance company payouts, is an example.
Another lesson is to facilitate adjustment but don’t throw good money after bad trying to fight nature. Many of the houses on Atlantic and Gulf Coast barrier islands are doomed. So are neighborhoods only a few feet above sea level in Florida or on Long Island for that matter. So are cliffside coastal houses in California. And so may be houses and infrastructure across the nation that were considered out of flood zones, with the rainfall averages from initial European settlement through the 1980s, but now are vulnerable to 7 or 9 or even 11-inch violent rains.
The creek through our farm often got out of its banks but water never overtopped the Murray County road it parallels before 2010. The grade of the road is more than a foot higher than when I was a kid, but it has been overtopped seven times in the last 10 years and water lapped has gotten within 50 feet of the south barn. That, in microcosm, is the problem facing tens of thousands of communities, farms and homesteads. One response is to move dirt to hold back the waters. But a planned, orderly retreat, may be better.
So it may prove far cheaper to buyout people into abandoning coastal and riverfront houses than to build seawalls or levees or pump and repump sand onto beaches.
Plan for extreme events. Some spring, the Missouri and Ohio rivers may rise in synchrony so that the flow of the Mississippi at Vicksburg hits 4 million cubic feet per second, wiping out whole water control systems and even coastal communities in southern Louisiana. Other times, the river may be so low that commercial shipping is impossible. We’ve already seen this prospect as well. Either scenario contains economic costs, but have the prospects of loss prompted significant economic preventative measures? Not so far.
It’s clear that political divisions within our nation and around the world complicate responses. Don’t expect government to act with any real solutions. But money talks, as they say, so we likely must wait until mitigating climate change becomes profitable enough — or climate change itself costly enough — for the private sector to act. Problem is, it may be too late.
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St. Paul economist and writer Edward Lotterman can be reached at [email protected].