Some Microeconomic Thoughts About the New Paper "The Macroeconomic Impact of Climate Change: Global vs. Local Temperature"

Mechanisms?

Not every NBER Working Paper makes the World News. Congratulations to the authors of The Macroeconomic Impact of Climate Change: Global vs. Local Temperature. You can access their paper here. The authors find that global extreme temperature events are associated with national reductions in per-capita GNP, investment and productivity.

As a microeconomist, I have several questions that I hope will interest general readers.

Q1 How do global extreme temperature events map into the weather that I experience today in Santa Barbara in late May 2024? What is the correlation between my local weather and global weather? Has this correlation increased over time because of climate change?

Q2: In this long paper, I do not see any discussion of “economic sectors”. The words “agriculture” and “farming” do not appear in the paper. The word “trade” only arises once in the paper in the conclusion where it is not related to sectoral or national integration of markets. The reason I mention farming is because this is the sector whose output is most sensitive to crazy weather. Urban productivity is more and more insulated from extreme weather. On horrible snowy Chicago winter days, the elite WFH workforce can get more work done because there are fewer distractions.

Here are some economics papers on the non-linear effects of high heat on farming;

The rise of the CRISPR DNA editing is trying to mitigate these effects. Will this adaptation through ingenuity really fail? You don’t have to be Julian Simon to reject the passive victim assumption that this paper embraces through its stationarity assumptions and its not modeling endogenous technological change. CRISPR is an example of the “Lucas Critique” that lurks here and this paper dances around.

Q2’ How does this quote from the Founding Leader of Singapore on the gains from air conditioning resonate for the authors?

Q3 Suppose that every nation was a closed economy with no trade, no capital flows and no immigration. Would the researchers have found the same results? How does market structure influence their findings? In a global CLOSED economy would they still have used the global temperature variation as their causal variable? If “no”, then they are admitting that market structure is key here but is never modeled or discussed.

Q4 The paper poses some very interesting empirical facts but the “mechanisms” section is just 1 short paragraph. Here is a quote

“Extreme events” are local. The terrorist attacks of 9/11 affected NYC, Washington DC, and Pennsylvania. Hurricane Katrina struck New Orleans (not Miami). Nations are diversified systems of cities.

Are the authors saying that the spatial correlation of Extreme Events is very large and will grow larger because of climate change? I would like to see evidence on this.

Why do I care about this? Suppose that Miami faces more disaster risk than Orlando and this is common knowledge. In this case, the Florida economy can better adapt to the Miami shocks as activity migrates to Orlando. If both Cities are shocked at the same time, then Florida has fewer diversification and adaptation strategies. Now, a point I make in my 2010 Climatopolis book is that if even a state such as Florida faces these extreme events then there are always other relatively safer areas (perhaps Kansas?) and economic activity will move there. The authors of this paper are implicitly saying that there is no “higher ground” around the world. We all just suffer in the face of extreme events. Yikes!!

Q5; Suppose the authors are right that “Extreme Events” are the causal shock here. This raises several new questions; How does their work compare to this paper that I like very much?

Cavallo, Eduardo, Sebastian Galiani, Ilan Noy, and Juan Pantano. "Catastrophic natural disasters and economic growth." Review of Economics and Statistics 95, no. 5 (2013): 1549-1561.

Are the global temperature extremes predictable? Perhaps a year before they occur? If they are partially predictable then how do forward looking firms use this “heads up” to plan their investments and their output? Do they front load their production to the cooler time and then take a “Siesta” when it is hot? How does the concept of “rational expectations” fit into this paper’s mental model?

Q6 Yes, it is difficult to incorporate endogenous adaptation into climate macro models. But, could the authors look Paul Romer and Chad Jones and the other “idea economists” in the eye and explain this paper to them? Why does modern growth theory not matter for studying how climate change impacts national growth?

This paper implicitly embraces a type of behavioral economics that the victims of the punches never learn, and never invest in proactive strategies to offset the damage that these scholars document. How is this possible?

They might say that until they wrote this study that nobody ever knew how costly climate change really is. They might say that because the world under-estimated the cost of climate change that we have under-invested in adaptation. In this case, they are the new Paul Revere!

If they have the machismo to state this, then this opens up a new optimistic adaptation margin. Now, that they have taught us what we didn’t know —- we can begin to adapt to this challenge. Back in 2020, I gave this LSE Video Lecture on the “Causal Effects of Climate Causal Effects”.

UPDATE:

I want to list some recent papers that are pessimistic about our economy’s ability to adapt to climate change.

Moscona, Jacob, and Karthik A. Sastry. "Does directed innovation mitigate climate damage? Evidence from US agriculture." The Quarterly Journal of Economics 138, no. 2 (2023): 637-701.

Burke, Marshall, and Kyle Emerick. "Adaptation to climate change: Evidence from US agriculture." American Economic Journal: Economic Policy 8, no. 3 (2016): 106-140.

Bilal, Adrien, and Diego R. Känzig. The Macroeconomic Impact of Climate Change: Global vs. Local Temperature. No. w32450. National Bureau of Economic Research, 2024.

This is an important set of claims that merit much more research. When I see empirical work document “slow” adaptation , I ask “why”? My favorite explanation for why rational people and firms fail to adapt focuses on government policies that muffle incentives to adapt such as price supports for farmers and public insurance. The political economy of pro-adaptation policies merits much more research.

If I was asked to construct a possible scenario where a climate shock snowballs into a real macro shock, I would return to this O-Ring paper that argues that the major earthquake in one part of Japan injured supply chains in unaffected areas because producers in the other area relied on crucial inputs from the injured area.

Carvalho, Vasco M., Makoto Nirei, Yukiko U. Saito, and Alireza Tahbaz-Salehi. "Supply chain disruptions: Evidence from the great east japan earthquake." The Quarterly Journal of Economics 136, no. 2 (2021): 1255-1321.

I have debated this point with two of the co-authors as I argued that redundancy in supply chains can help to adapt to this issue. If disasters are not spatially correlated (see my discussion above) , then firms that hold diversified supply chains face a lower probability of facing an input collapse. Such an input collapse for key inputs would leave their factories with nothing to do.