American Policy: Saving Trillions Part 2: Economic Spillovers

Part two of the American Policy portion of the Climate Change Policy Series: Act America, act now, sooner than later. Climate change inaction stands to cost Americans trillions of dollars due to loss of biodiversity, economic spillovers, national security, and migration. The bottom line, mitigating climate change now and swiftly will save Americans more money than inaction or slow action.

Unfortunately, many of today's American policy makers misuse climate models for short term gain. These models should be taken with a grain of salt; they are educated predictions of the future that leave out major considerations. Considerations oft ignored include economic spillovers, which are side effects of economic activity that affect an industry in a positive or negative way. In terms of climate change, most effects on countries and their industries are negative; there are no net winners of climate change. Economic spillovers caused by climate change stand to harm American supply, demand, and financial markets (Freeman & Guzman, 2009).

Regarding supply and demand shocks, the United States is a net importer. Among all the products and goods available to US consumers, from beverages and tobacco to machinery and transport goods, the USA is only a net exporter (by small margins) of food, live animals, and crude non-fuel, inedible materials (U.S. Census Bureau, 2009). Not only does the US rely heavily on foreign countries for oil, but it relies on foreign countries for everything else as well. American exports also share reliance on foreign markets: in 2007 US exports accounted for $1.6T and every year since 1997 exports have accounted for about 10% of US GDP (Freeman & Guzman, 2009). Just a 5% drop in demand for US exports would cost the US $80B a year; a 10% decrease in exports will cost $160B annually, so on and so forth.  Many foreign markets stand to shrink due to climate change, and so will their demand for US goods. Over time, this represents trillions of lost US dollars.

Regarding financial markets, the debt of the US is $12T. Because the US imports more than it exports (and spends more than it sells) it has for years borrowed from other countries to make up the difference. If lending countries become reluctant to aid the US the result would mean a rise in US interest rates, a drop in investments, and a drop in consumption. Economic weakness abroad also stands to harm many prominent US corporations; in 2007, 20% of US corporate profits were made overseas (US Dept. of Commerce, 2009). Shrinkage in foreign markets is shrinkage in US firms is shrinkage for US shareholders' portfolios. As we've recently seen, a market failure anywhere can be a market failure everywhere, which suffocates capital and credit availability.

The bottom line, mitigating climate change for protecting against economic spillovers alone could save trillions. The sooner, the cheaper; the best defense is a strong offense. Continuing the American Policy portion of the Climate Change Policy Series, the next post will cover National Security (Freeman & Guzman, 2009).

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