Sunday, November 04, 2012

Some Puzzles About Coastal Development

This is a blog post focused on things I don't know.  While there are many things I don't know, I will try to focus on incentives and coastal development.  Let's start with the facts.

Fact #1:   The U.S population and income is moving to the coasts;  see Rappaport and Sachs 2003.     The coast is beautiful and the amenity of the coast acts as a magnet.  There is nothing intrinsically productive about locating on the coasts.  Consumer city takes place along the coasts.

Fact #2:  Mayors are placed based.   The Mayor of Manhattan is more powerful if more people and $ locate on his island.  If everyone leaves his island, he has a boring job.

Fact #3:   The population differs with respect to their subjective views over the risks of coastal living.  Some are Homer Simpsons who believe that nasty disasters can't happen (they haven't happened in the recent past) while others are Mr. Spocks who form rational expectations of future random events and recognize that climate change means that these probabilities increase over time (non-stationary distribution).

Fact #3 tends to imply that there will be self selection such that the Homer Simpsons will be more likely to cluster in dangerous places as the Spocks head to higher ground.

Observation #1:  Even if we all have the same expectations of the likelihood of random events, there will still be residential sorting as dare-devils will tend to live in risky places and wimps will seek out Higher Ground.

Observation #2:  There is historical evidence that migration patterns do respond to disaster conditions.

Fact #4;  Coastal areas do expect a "bail out" by the national government when rare disasters take place.  While lost life can't be replaced, a lot of infrastructure can be.

So, a strange cohesive interest group arises that I will call the "coastal coalition".  This coalition consists of amenity lovers, place based coastal mayors,  coastal land owners, dare-devils and Homer Simpsons who work together to declare that the losses they have collectively suffered are not their fault.  The bad gal in this story is Mother Nature.  Given that the "coastal coalition" are "victims",  a fair and kind people will help them get back on their feet again.  We are a national team and we fight as one, so let's unite and send checks to the coasts.

Given the realities of adapting to climate change, how does a kind people create "rules of the game" (i.e dynamic incentives), that allows people to live on the coasts but nudges them to make more resilient choices?  Do we have the best rules for balancing these goals?

To an economist, the simple answer is "skin in the game" and a no Federal bail out commitment.   That's "tough love".   I feel no "warm glow" as I write these words but credibility is a key way to achieve greater long term success.    Ben Bernanke and President Obama continue to wrestle with how you build up a credible reputation for fighting inflation and terrorists, respectively.  Credible promises tend to achieve their goals.  What are the short run costs of such promises?  Who bears these costs?  This merits future research.

For those of you who seek "win-win" solutions, the answer may come from improvements in architectural design and urban planning that allows Mother Nature to do her thing without destroying coastal infrastructure and buildings.  This will require imagination and create "green jobs".  This merits future research!

From a real estate perspective, do you feel sorry for the investors who purchased coastal real estate?  As land in flooding areas declines in value, they lose.  Should others compensate them?   Permit me to repeat a point I make in Climatopolis.  Many people bet on the Super Bowl.  After the game is played, do you feel sorry for the guys who lost $ betting on the losing team?  No.  Why is there a difference between these two bets?   When are we victims?  When are we simply folks trying to blame the gods for our errors?

UPDATE:  The NY Times has a very strong piece listing some of the choices that households, firms and governments will need to make to decide how to build a more resilient metro area. This is the "small ball" of urban adaptation.