WASHINGTON — The Biden administration will warn Monday that global warming poses serious economic challenges for the United States, requiring the federal government to reassess its spending priorities and how it influences behavior.
Administration economists, in an annual report, will say the reassessment must include a fresh look at the climate adaptation implications of aid to farmers, forest fire suppression and a wide range of safety net programs such as Medicaid and Medicare, as the government seeks to protect the poorest Americans from suffering the worst effects of climate change.
The White House Council of Economic Advisers will also warn that, if left unchanged, federal policies like fighting wildfires and subsidizing crop insurance for farmers could continue to encourage Americans to live and work in areas with high risk of damage from rising temperatures and extreme weather – effectively forcing taxpayers across the country to pay for increasingly expensive options from individuals and businesses.
The findings are contained in a chapter of the annual report Economic Report of the President, which will be released on Monday afternoon and this year focuses on the long-term challenges for the US economy. They come a day when the Intergovernmental Panel on Climate Changea body of experts convened by the United Nations, reported that the Earth is rapidly approaching a level of warming that will make it significantly more difficult for humans to manage droughts, heat waves and other climate-related disasters.
The White House report details evidence showing that the United States is more vulnerable to the costs of extreme weather events than previously thought, while suggesting a series of policy changes to ensure that the poorest Americans do not pay the invoice.
Understanding Biden’s budget proposal
President Biden proposed a $6.8 trillion budget that sought to increase spending on military and social programs while reducing future budget deficits.
“Climate change is here,” Cecilia Rouse, outgoing chair of the Council of Economic Advisers, said in an interview. “And as we move forward, we’re going to have to adapt and make sure we minimize the cost to families, businesses and others.”
The report broadly suggests that climate change has altered the concept of risk in all corners of the American economy, distorting markets in ways that businesses, individuals, and policymakers have not fully kept up with. It also suggests that the federal government will face significantly higher costs in the future if it does not better identify those risks and correct those market distortions, such as paying more to provide health care for heat stroke victims or to rebuild flooded coastal homes. hurricanes
For example, the report cites evidence that private mortgage lenders are already downloading loans with high climate risk exposure for federally backed Fannie Mae and Freddie Mac. He highlights how the federal flood insurance program, which essentially underwrites every home flood insurance policy in the country, is at risk of insolvency.
At a time when administration officials and the Federal Reserve are struggling to stabilize the nation’s financial system, the report warns that homebuyers and corporate investors appear to be underestimating weather-related risks in their markets, That could lead to a financial crisis.
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“Rapid changes in asset prices or risk reassessments in response to a changing climate could produce cascading volatility and instability in financial markets if regulators do not anticipate it,” the report says.
To address those dangers, the report offers components for a federal climate adaptation strategy. Their recommendations, some of which are already in the early stages through actions by the existing administration, include producing better information on climate risk, helping financial markets accurately price that risk, and better protecting the most vulnerable to the effects of climate change.
Perhaps the most important proposal, and probably the most politically sensitive, is a call for Washington to put more pressure on state and local officials, forcing them to be careful about where and how they allow people to build homes, businesses and infrastructure projects. .
That proposal would address a central problem that has hampered US efforts to adapt to climate change. When people build in places that are most exposed to the effects of climate change (along coasts, near river banks, at the edge of forests prone to wildfires), state and local governments get the most part of the benefits, in the form of higher tax revenues and economic benefits. growth. But when floods, fires, or other major disasters occur, the federal government typically pays most of the cost of response and rebuilding.
However, for the most part, state and local officials, not the federal government, have authority over where and how development occurs, so people continue to build in high-risk areas, a classic example of what economists say. , including the authors of the report, call it a moral hazard.
In response, the document proposes using federal funds to change the behavior of state and local officials, tying that money to state and local decisions. That approach has been tried before, with little success. In 2016, the Obama administration suggested adjust the level of disaster relief provided to states, based on the steps they have taken to reduce their exposure to disasters. The states objected, and the change never happened.
Administration officials said they were already trying to leverage some spending from the infrastructure bill President Biden signed into law in 2021 to influence state and local behavior. The report suggests that much more aggressive action may be needed.
It also proposes a rethink of the nation’s disaster insurance system, away from separate localized policies that cover fire, flood, and other events, and toward a nationally mandated “multi-peril catastrophe insurance” system that is backed by the federal government. .
Perhaps most sobering for Washington’s current fiscal moment, when Biden is battling House Republicans who are seeking deep cuts in federal spending and raising new concerns about the mounting national debt, is the report’s suggestion that Climate effects could subject increasing numbers of Americans to heat stroke, respiratory illnesses, and other ailments in the coming years. That could further increase government costs for health programs like Medicare and Medicaid.
The Council of Economic Advisers has begun a year-long effort to project those climate-related effects into future federal budgets, which it detailed in a very technical paper released this month.
