Saturday, December 31, 2011

Moving to Higher Ground

Leah Boustan, Paul Rhode and I have completed a draft of our paper that we will present at the Chicago AEA meetings next week.  Here it is.   After writing my Climatopolis book, I have sought to continue to do research on the microeconomics of climate change adaptation.  The problem for an empirical nerd is that this adaptation will take place in the future and this makes empirical work hard.  Climatopolis  offers many predictions about how capitalism will help us to adapt to climate change but as of 2012 it is too early to "fail to reject" these predictions.

Similar to Michael J. Fox in Back to the Future,  I have teamed up with two leading economic historians to take a look at how young men in the 1920s and 1930s in the United States coped with natural disaster risk.   Young people are highly likely to migrate to areas that offer good earnings and quality of life.  If an area has recently experienced natural disasters such as floods, tornadoes and hurricanes then such individuals can protect themselves by not moving to such areas or moving away. This is private self protection in the sense that Gary Becker and Ehrlich used this term.

Now, government can invest (think of New Orleans and Sea Wall construction) to make an area safer.  This is public investment in protection. Our paper argues that it is likely that Public investment displaces private investment. In a Peltzman sense, an unintended consequence of government place based investment in climate proofing an area is to attract more "victims" to live there.   The rise of the New Deal in the 1930s (relative to the no New Deal 1920s) allows us to test this hypothesis.

Here is the paper's intro;

"Natural disasters cause significant loss of life and property damage in the United States. In 2005, Hurricane Katrina destroyed large sections of New Orleans, resulting in the death of thousands. This salient disaster highlights that millions of people have chosen to locate in geographical areas that are at risk of natural disasters. In fact, the attraction of coastal living has encouraged more and more people to move to areas at risk from hurricanes and flooding (Rappaport and Sachs, 2003). Despite the fact that developed nations suffer less than poor countries from a disaster of a given size, natural disasters are imposing larger economic costs over time (Kahn, 2005; Pielke, Jr., et al., 2008). Many forecasters predict that climate change will only exacerbate these risks.
            An individual’s exposure to natural disaster risk is a function both of private choices and of governmental decisions over land use zoning and infrastructure investment. Government actions intended to protect the public can reduce the incentive to engage in private self-protection. An intuitive example of such “crowding out,” analyzed by Kousky, Luttmer and Zeckhauser (2006), is building new sea walls in New Orleans. More people will stay in or move to a risky area if they believe that sea walls will be built. In this case, government investment can displace self-protection against risk (Peltzman, 1975). Such efforts could be disastrous if the public is overly optimistic about engineers’ ability to protect the public.
In this paper, we examine one form of private self-protection, net migration away from disaster-struck areas, during the 1920s and 1930s, a period of high disaster activity taking place before the advent of coordinated federal disaster management. In this era, disaster relief was directed by the American Red Cross (ARC). We use ARC documents to compile all major natural disasters from 1920 to 1940. Floods and tornados are the two most common types of disaster events; our dataset also contains a small number of earthquakes and hurricanes. Migration activity is measured in two new panel datasets, the first following individuals from 1920 to 1930 and the second tracking location from 1935 to 1940, both using Census sources. We find that, on net, young men move away from areas hit by tornados but are attracted to areas experiencing floods. Early efforts to protect against future flooding, especially during the New Deal era of the late 1930s, may have counteracted an individual migration response.
Migration away from tornado-struck areas in this era before significant government protection is consistent with Hornbeck (forthcoming), which documents out-migration from the Dust Bowl in the mid-1930s. This historical pattern is in sharp contrast with Deryugina (2011), which finds no net population change in counties struck by hurricanes in the 1980s and 1990s. Instead, affected counties receive $356 (2008 dollars) per capita in immediate disaster aid and $670 per capita in additional federal transfers, principally through unemployment insurance and income maintenance programs, over the next ten years. She speculates that these federal transfers may create moral hazard problems, “leading individuals to live in riskier places” (p. 3). The declining private response to natural disasters over the twentieth century provides support for the “crowding out” hypothesis. An unintended consequence of the growth in disaster relief and government investment in protective infrastructure may be to expose more people to risk as they choose not to leave disaster-prone areas or to move to such areas."