Bloomberg View: On Climate Change, the Market Has Spoken; Alan Krueger’s Assets
POLITICS VS. PROBABILITY
On at least one subject, the free market and its traditional political supporters have been thrust into conflict. That subject just happens to be the most important one facing the planet. A number of Republican Presidential candidates have made questioning the legitimacy of climate change a significant part of their campaign strategy. Rick Perry and Michele Bachmann dispute whether global warming is man-made. Perry suggests that climate is affected by many variables, which scientists can manipulate “so that they will have dollars rolling into their projects.” Mitt Romney is on the fence. Only Jon Huntsman Jr. has declared definitively that he “trust[s] scientists on global warming.”
Politicians have been known to dissemble about risk because voters don’t generally like to hear bad news. The insurance industry makes its money telling it to you straight—how long you’ll likely live, what price your home will fetch, whether to repair or trade in your car. For this reason it’s worth noting that insurers already factor climate change into their models for measuring, pricing, and distributing risk. Insurers have no incentive to lie. If they are more scared than they should be in pricing risk, shareholders will punish them. If they aren’t scared enough, nature will do the job.
No one can say for certain that any single weather event flows from the warmer air caused by carbon emissions, which in turn leads to more rainfall, floods, and snowfall over some parts of the planet and more severe droughts in other parts. But last year was the hottest on record. Arctic ice is at record low levels. Regardless of what politicians say, insurers must factor all this into premiums.
Swiss Re, the second-largest reinsurer, is developing scenarios using probabilistic modeling to help government officials cope. It studied the effects of climate change in vulnerable areas such as Samoa, Mali, the Caribbean islands, and Miami. No matter which model it chose—current patterns continue, moderate changes, or extreme changes—Swiss Re concludes it’s cheaper to adapt now rather than wait. It recommends building codes that require more water- and wind-proofing; zoning laws that prevent planting trees close to buildings and power lines; redesigned beaches that absorb storm surges; and restoration of wetlands.
Hurricane Irene, and the estimated $5 billion to $7 billion in damage claims insurers now face, has been swept up in this debate. Irene traveled farther north than hurricanes usually do—and dropped extraordinary amounts of rain. At the same time parts of the U.S. are experiencing record-high temperatures and Dust Bowl conditions. (Houston hit an all-time high of 109F the same day Irene was roaring up the Eastern Seaboard.)
A storm with Irene’s fury will only cause more damage in the future. Rising sea levels will allow storm surges to penetrate farther inland. And Americans pushing relentlessly toward the East and West Coasts are putting themselves and their property in harm’s way.
If elected officials want to help constituents prepare for disaster, they could fight for legislation to curb carbon emissions and could keep people from building along coastlines. Politicians have enjoyed enormous success calling scientists into question. The market may not prove to be such an easy target.
THE RIGHT ADVISER AT THE RIGHT TIME
With unemployment stuck above 9 percent, the U.S. needs all the job-creation expertise it can get. For that reason, President Barack Obama’s choice of Alan B. Krueger, an eminent labor economist, to head the Council of Economic Advisers is an inspired one.
Krueger, a Princeton University professor, has built his academic career on the study of labor markets, wage structures, and long-term unemployment. He also has strong policymaking credentials. During the first two years of the Obama Administration he served as chief economist at the Treasury Dept., where he helped devise the first stimulus package, the cash-for-clunkers effort, and the Build America Bonds program.
Krueger has shown he understands the need for a strong government role as an antirecessionary force, especially after a contraction brought on by a severe financial crisis. He also has made it clear there can be no meaningful job recovery if business confidence isn’t restored. As the President’s top economic adviser, Krueger can draw even more on his background as a labor economist by designing focused programs that will help put millions of people back to work. A successful job-creation initiative will depend on broad-gauge measures, such as extending the payroll tax cut, to make it easier for all businesses to hire. Other initiatives are needed to target specific groups of unemployed.
Applied in concert, such steps can help the U.S. escape a self-fulfilling dynamic in which high unemployment, lackluster consumer demand, and low business confidence combine to weaken the economy.
Obama has announced that he will propose a comprehensive jobs plan on Sept. 7. He has some powerful tools at his disposal, including stepped-up public-works spending (particularly if the Administration is willing to rescind the costly and outdated Davis-Bacon Act that inflates costs); a tax credit for companies creating jobs; income support for new hires; self-employment assistance as a return-to-work option; and an easing of rules that prevent people with minor criminal records from reentering the workforce.
In an interview with Bloomberg Radio in July, Krueger was on the right track when he called for a fresh round of infrastructure spending and a new tax credit to encourage companies to hire. With the economy weakening since then, he ought to think bigger—and the Senate ought to act quickly on his nomination.