I have moved my blog over to Substack (and I've lost many readers). Please join me there. Here is a recent column. The Wall Street Journal has published an important piece about how the high heat is reducing economic activity in Houston. The piece has a pessimistic tone that the heat melts the city’s infrastructure and shaves off economic activity as people don’t want to go outside. When microeconomists study consumer expenditure dynamics as people buy cars, go out to dinner and buy groceries. During hot spells, people are less likely to go out for dinner or to play multiple rounds of golf. A microeconomist would say that this evidence indicates that people have “state dependent preferences”. In English, this means that how much we enjoy a steak dinner at an outdoor restaurant depends on whether it is 75 degrees outside or 95 degrees outside (this is the “state of the world”). I certainly believe that hot and humid Houston is in a type of “macroeconomic Siesta” right now and this reduces economic activity. But, permit me to make some counter-points. #1 The money people in Houston do not spend on the hot July 28th 2023 is still in their bank account and they can spend it on a cooler November 5th 2023 day. Note this intertemporal substitution. The media focuses on the direct effect of the heat (that high heat is reducing economic activity today) but my counter-hypothesis is that it displaces expenditure to the future when it will be cooler later this year in Houston. So, will the New York Times write a piece saying that high summer heat causes a fall boom in Houston? I don’t think so. This type of cross-elasticity is ignored by the “climate crisis” focused media. #2 The WSJ interviewed a few people who want to leave Houston. As always, they are free to choose. As more workers can engage in WFH, those who hate the high heat will leave the city in summer. If they own a home, they can AirBNB it. WFH is a climate adaptation strategy as it makes people more geographically footloose. I discuss this in my 2022 book. #3 We have to live somewhere. Is Houston becoming more miserable to live in summer than other cities? If the answer is “yes”, then its home prices will fall. Here are some data from Zillow. Even with higher interest rates, I don’t see a collapse here in the Zillow index. Are you going to sell short Houston homes as your strategy to get rich? Incumbent home owners form a strong interest group to invest in adaptation strategies to protect their asset’s value. WHAT are possible adaptation strategies? #1 Road construction materials can be re-evaluated to reduce the urban heat island effect. Read this report. The City has strong incentives to embrace the cost-effective strategies discussed here. #2 Golf courses can open up part of the area and charge people to enter on hot days to use them as private parks. #3 Here are personal cooling strategies. On a personal level, of course the city needs access to strong air conditioning. Firms that make them and repair them will enjoy a boom. The Electricity GRID must remain reliable. The Climatopolis logic is that Houston competes with other cities to attract successful people and firms. The system of cities and the fear of brain drain gives Houston’s leaders and land owners strong incentives to be pro-active in adapting to climate change. Such efforts will be messy as there will be fights over who pays for such local public goods but the end result will be a more resilient Houston where the high heat causes less economic damage in the short term and medium term. This is the climate change adaptation hypothesis.

The New Economic Geography of WFH Matthew E. Kahn Over the last three years, companies from all over the world have learned valuable information about how their firm’s productivity and worker satisfaction is affected when workers can engage in Work from Home (WFH) on at least a part-time basis. Each firm faces fundamental tradeoffs in not requiring workers to return full time to the office. On the one hand, WFH accommodates worker lifestyles and responsibilities at home. WFH workers gain from commuting less often and some may choose to live further from their place of work because they commute in on fewer days. Firms with happier workers are less likely to face retention challenges and will pay less retraining workers. Given that WFH is a non-taxed perk, firms that offer this job amenity can be less generous in giving workers pay raises. Firms located in expensive areas can economize on expensive commercial real estate. If a firm requires that workers be in the office just half the week, then a firm can reduce its space requirements by 50%! On the other hand, firms benefit from face to face communication. Younger workers gain more from such mentoring. Building up the firm’s culture and monitoring worker effort is easier to do if workers are on site. Each company has a strong incentive to experiment with different workplace practices to learn what works best for their organization. The pursuit of profit actually accelerates this learning process. Economists are always looking for new ways to study firm dynamics. The rise of the WFH economy opens up many questions related to what types of firms will encourage their workers to engage in WFH. Famous executives such as Elon Musk at Tesla and Jamie Dimon at JP Morgan have been encouraging workers to return to the office. Why? Up until now, a lack of data has hindered the systematic analysis of what types of firms prioritize allowing workers to engage in WFH on at least a part-time basis. The newly released Flex Index provides a unique opportunity for researchers. As an urban economist, I am especially interested in the geographic determinants of why different firms engage in hybrid-WFH. The Flex Index provides data on each firm’s headquarters’ location. I focus on those that are based in the United States. I use data for 2528 of them. For this set of firms, I merged in three geographic variables. The first variable is the Zillow Median Home Price Index. Zillow uses a repeat home price index methodology to create a standardized “apples to apples” measure of home prices that can be compared across cities at a point in time or within a given city over time. In the analysis I present below I use Zillow data from December 2022. The second variable I merge in to the Flex Index is the percent of voters in the Headquarters State that voted for Joe Biden in the 2020 Presidential Election. The third variable I merge in from the Zillow data base is the city’s size. So, New York City is the first ranked city in the nation because it is the largest city. I use these data to test two hypotheses; Hypothesis #1: All else equal, firms are more likely to engage in WFH work if home prices are higher in the HQ City. Hypothesis #2: All else equal, firms are more likely to engage in WFH in more Progressive states. To test these hypotheses, I use a linear multivariate regression framework. To standardize the firms, I include industry fixed effects (this variable is in the Flex Index database). The dependent variable is a dummy variable that equals one if the firm’s workers all work on site. In the database, 39% of the firms report having the workers work fully on site. Table One reports four regressions with each column reporting a separate regression. I use the regression output to test the hypotheses presented above. Main Results All else equal, firms are more likely to engage WFH work if home prices are higher in the Headquarter (HQ) City. Based on the results in columns (1) and (3), I find that for the full set of industries and for the Healthcare and Biotechnology industry that workers are more likely to be engaging in WFH if home prices are higher in the HQ’s city. Based on the results in column (2), a doubling of home prices is associated with a log(2)*-.088 = -.06 or a six percentage point reduction in workers working solely on site. This effect is even larger for the Health Care industry. For this subset of firms, a doubling of local home prices is associated with a 12.7 percentage point increase in WFH. For the other two industries, I fail to reject the hypothesis that firms are not more likely to allow workers to engage in WFH as a function of local home prices. All else equal, firms are more likely to engage in WFH in more Progressive states. The test of this hypothesis is based on the coefficient on the 2020 Joe Biden vote share. Across all four specifications presented in Table One, I find consistent evidence that firms are more likely to allow their workers to engage in WFH when the HQ is located in a more liberal state. A ten percentage point increase in Joe Biden’s vote share is associated with a 3 percentage point increase in the probability that a firm allows its workers to engage in WFH on at least a part-time basis. Conclusion The Flex Index is a terrific new data source that allows empirical researchers to study how different firms are incorporating WFH into their work routines. In my 2022 Going Remote book, I hypothesized that the rise of WFH would benefit workers in high home price areas. The evidence presented here supports this hypothesis. Here, I also find a Red State/Blue State divide such that firms located in Blue States are more likely to allow their workers to engage in WFH. Future research should explain why we observe this fact. Are such firms in progressive states more concerned about work/life balance and gender equality issues? There are many open questions that improved data access will allow for us to provide credible answers.