Practical Economics


The Mounting Economic Toll of Erratic Weather

Jim Patterson

A harsher climate spells new costs for businesses and homeowners, especially as government aid dries up.



Severe drought. Late-season hurricanes. Widespread wildfires. Whatever the cause, erratic weather events have pummeled much of the country in recent years. And the damage done by Mother Nature is becoming a real headwind for the economy.

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2012 saw everything from scorching heat to catastrophic coastal flooding in the wake of Hurricane Sandy. Insurance giant Munich Re pegged the weather-related tab for 2012 at $100 billion, the second-worst since 1980, and the fifth time in nine years that the total has exceeded $70 billion. Tornado damage last year clocked in at the second-highest level on record (only 2011 was worse), while the amount of forestland burned by wildfire was eclipsed only in 2006 and 2007, according to government records going back to 1960. As for drought, the Department of Agriculture labeled last year's scorcher the worst since the 1950s, withering crops from Texas to the Corn Belt.

Now, all that rough weather is prompting reassessments of future risks, both within government agencies and the private sector. And while no one can predict next year's flood or drought, weather-sensitive industries such as insurance and agriculture are adjusting to reflect harsher climate conditions ahead.

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Perhaps the biggest shift will occur in flood insurance. Long provided by the federal government at discounted rates, flood insurance is about to cost substantially more for many homeowners and businesses. A little-noticed law passed last summer will base future premiums on an insured property's actual flood risk — not the subsidized price Uncle Sam has historically charged.

Meanwhile, federal and state government agencies are busy updating floodplain maps to more accurately pinpoint which properties are in harm's way. Larry Larson, senior policy advisor at the Association of State Floodplain Managers, says the redrawn maps will encompass many more properties along the Atlantic and Gulf coasts, requiring more owners to purchase flood insurance just as premiums are headed higher.

Real estate markets will have to contend with changing weather patterns, too. Historically, coastal property prices haven't suffered in the wake of destructive storms, says Stan Humphries, chief economist at Zillow.com; in fact, prices of beachfront properties often rise after big storms, showing how short buyers' memories can be. However, the loss of inexpensive federal flood insurance could up-end that long-running pattern. Plus, many homes near the ocean will actually require expensive renovations to elevate them above flood levels in order to quality for coverage — a prospect that could ding selling prices and deter would-be buyers.

Away from the coasts, farmers have to contend with both flooding rivers and parching drought. Dr. Wayne Honeycutt of the Department of Agriculture's National Resources Conservation Center says his agency is engaged in a "huge effort" to encourage farmers to adopt new practices that protect soil from both too much and too little moisture. Methods under consideration range from planting special grasses and other cover crops between primary growing seasons, to halt erosion and keep soil moisture levels steady, to low-flow irrigation systems that limit evaporation in summer to reduced-till planting, which keeps soil moist and fertile by allowing the remnants of last year's crop to decompose in place.

Beyond the threat to agriculture, Uncle Sam is actively monitoring a whole host of weather-related risks. In fact, President Obama recently created a full-time climate position on the National Security Council, the same body that advises presidents on everything from foreign military threats to cybersecurity. But this heightened alertness can't conceal the fact that the federal government's financial resources for responding to severe weather phenomena is running up against the reality of tighter budgets.

Cutbacks put in place by the recent budget sequestration will trim about $1 billion from the Federal Emergency Management Agency's fund for responding to natural disasters this year, while forcing the Forest Service to skip wildfire mitigation projects on 200,000 acres of woodlands. Even the recent move to hike flood insurance premiums was a byproduct of budget constraints: Huge claims stemming from Hurricane Katrina in 2005 effectively bankrupted the program's trust fund.

So as Uncle Sam pulls back, state and local governments can expect to shoulder a greater share of the burden when weather-related disasters strike. And ultimately, that spells higher taxes for their residents. Combine that with the outlook for more widespread floods, costlier storms and destructive wildfires, and it's fair to say the long-range forecast is taking a decidedly gloomier turn.



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