Saturday, March 29, 2014

Roger Pielke Jr's Piece and Superman's Lex Luthor

Nate Silver's new blog is generating some readers and some excitement. University of Chicago graduates are supposed to engage in active debate about important ideas and Silver represents the UC well.  Recently, there has been quite a lot of talk about Roger Pielke Jr's post for the 538 blog.  I would like to make a few points.

I was very happy to see in the piece that he cited my work on the death toll from natural disasters.  This downward trend is caused by economic growth as shown by evidence both across countries and within countries.   It is true that in very poor nations starting to urbanize that such migration causes a diversification problem that such nations have put millions of their eggs (the migrants) in one basket (a city) and can suffer a large loss of life because of this concentration of people in a poor city.

I am not qualified to judge whether climate change is increasing the count or the severity of natural disasters. I have assumed that this is the case.  As an economist what interests me is if we anticipate this trend, what actions will we take to reduce the anticipated trend's economic impact on us?

The simplest approach is to migrate to higher ground.  With good elevators, we can build high rise buildings in relatively small spaces (look at Hong Kong).  For each nation around the world, where is the higher ground?  Why aren't developers building there? What role is the nation's government playing in encouraging coastal living through implicit subsidies?

A mistake that climate change adaptation pessimists make is their view that the real estate capital stock (homes, apartments and buildings) to be infinitely lived capital.  Such buildings live a long but not permanent life.  If a coastal building has a lifespan of 75 years then when the new news that this building is at flood risk occurs, the owner of the building faces an expected present discounted value of lower lifetime rents over the life of this building.  This is his loss.  The rational owner will choose to invest less in maintenance of the building because of the expectation of a premature "death" of this building.  While this investor loses, there are other investors who will build on higher ground who will gain new demand for residential and commercial space from those who vacate the coast.  

Do you remember in the first Superman movie when Lex Luthor invested in Colorado real estate because he planned to nuke California and anticipated that Colorado would be the new coast?  So, this is almost a zero sum game.  A flooded Miami will reform on higher ground called "inland Miami".  Yes, there will be losers bu there will also be winners and the new capital stock will be built to higher quality.

As we grow richer, natural disasters will cause greater capital damage but I bet that the ratio of (capital damaged/total value of the capital stock)  will decline over time.

As I argue in Climatopolis, the insurance industry must be allowed to price gouge to provide strong incentives for owners of coastal real estate to take proper precautions to minimize the damage that such anticipated storms will cause.