I enjoyed reading this Substack piece because it gives me a chance to do some educating. Andrew Dessler writes well as he argues that the people in Phoenix and other places experiencing a very hot summer are poorer now because of the extra expenditures they are making on air conditioning (the extra electricity, the extra equipment) and other products (ice, cold water) that they do not necessarily want but they are buying because it is so hot outside this summer.
On one level, he is right. In summer 2023 in Phoenix, people are making these expenditures but on a deeper level he is wrong. Permit me to explain.
We have to live somewhere in the United States. The opportunity cost of living in Phoenix is that one can live in Chicago, or Las Vegas or Detroit. While the weather changes day to day, the average monthly temperature in cities such as Phoenix and Detroit can be predicted pretty well.
If Phoenix July temperatures are anticipated to be rising faster than Detroit summer temperatures, then basic economics tells us that rents will decline in Phoenix relative to Detroit. Spatial real estate prices adjust to incorporate the rising disamenity from the extreme heat. Otherwise, more people will move away from the place with rising disamenities.
If hot Phoenix is losing firms (as they move to more pleasant places) and is losing residents, then wages will decline in the place suffering from worse amenities and rents will decline even more. Property owners in Phoenix will lose from the rising disamenities of the city (the even nastier hot summers) but renters are compensated for their misery by paying lower rents than they would have had the summers not become hotter.
If home prices decline in a hot Phoenix because people are no longer bidding as aggressively for housing there, they will bid more aggressively for housing in a place that performs better perhaps a Boise , Idaho. In this case, this “cross-elasticity” means that Phoenix’s misery is increasing the wealth of Boise incumbent home owners. The New York Times ignores these wealth effects in writing up about the “cost of climate change”. Since we have to live somewhere, relative quality of life is key. Those places that perform relatively better in adapting to climate change will enjoy real estate gains. This creates a self interest incentives for home owners in places to compete to boost their city’s resilience because this will protect their asset’s resale value. This was the logic of my 2010 Climatopolis book.
The New York Times and other media outlets who claim that extreme weather “causes” inflation ignore this spatial equilibrium rent point. In disamenty areas, RENTS decline by the amount that defensive expenditures (cranking the AC unit) increase. In spatial equilibrium, mobile people (i.e the young and the educated) do not want to move from Phoenix to a Detroit or Boston. The media implicitly has a mental model that people “are stuck” in their current city and can’t leave. This isn’t true. Of course, middle aged and older people face higher migration costs because they have planted roots in the area but there is always a new generation of young people who are “on the fence” of where they will move and this marginal group determines the equilibrium prices of real estate such that aggregate demand for real estate equals aggregate supply in each city such as Detroit and Phoenix.
UPDATE: A point that fascinates me in much of the “doom and gloom” literature is this implicit claim that people are not flexible and cannot change their ways to adapt to the new weather conditions we now face.
Let’s look at one of Andrew’s examples;
“One tiny impact
Let me give you an example of a tiny impact that I just heard about. My wife told me about a new group of members at her gym: active 70-ish-year-olds who used to go on walks around their neighborhood. Due to the unbearable heat in Texas, though, they joined a gym and now walk indoors on treadmills. This story embodies several aspects of climate impacts that everyone should understand.”
Kahn replies; “Why can’t these active seniors walk at 6am or 9pm when it is cooler? How “costly” is it for them to walk at the mall? In a few weeks, it will be cooler and they can go back to their old routine. What have they really lost in this case? How does Dr. Dessler “know” that people are so inflexible?
The adaptation mindset requires flexibility. There is always a silver lining from experimenting and trying new things.