WASHINGTON — The Biden administration warned on Monday that a warming planet poses severe economic challenges for the United States, which will require the federal government to reassess its spending priorities and how it influences behavior.
Administration economists, in an annual report, said that reassessment should include a new look at the climate-adaptation implications of aid to farmers, wildland firefighting and wide swaths of safety-net programs like Medicaid and Medicare, as the government seeks to shield the poorest Americans from suffering the worst effects of climate change.
The White House Council of Economic Advisers also warned that, left unchanged, federal policies like fighting forest fires and subsidizing crop insurance for farmers could continue to encourage Americans to live and work in areas at high risk of damage from warming temperatures and extreme weather — effectively forcing taxpayers across the country to pay for increasingly costly choices by people and businesses.
The findings were contained in a chapter of the annual Economic Report of the President, which was released on Monday afternoon and this year focuses on long-run challenges to the U.S. economy. They come on a day when the Intergovernmental Panel on Climate Change, a body of experts convened by the United Nations, reported that Earth is barreling quickly toward a level of warming that will make it significantly more difficult for humans to manage drought, heat waves and other climate-related disasters.
The White House report details evidence showing the United States is more vulnerable to the costs of extreme weather events than previously thought, while suggesting a series of policy shifts to ensure the poorest Americans do not foot the bill.
“Climate change is here,” Cecilia Rouse, the departing chair of the Council of Economic Advisers, said in an interview. “And as we move forward, we’re going to have to be adapting to it and ensuring that we minimize the cost to families and businesses and others.”
The report broadly suggests that climate change has upended the concept of risk in all corners of the American economy, distorting markets in ways that companies, people and policymakers have not fully kept up with. It also suggests that the federal government will be left with significantly higher costs in the future if it does not better identify those risks and correct those market distortions — like paying more to provide health care for victims of heat stroke or to rebuild coastal homes flooded in hurricanes.
For example, the report cites evidence that private mortgage lenders are already offloading loans with a high exposure of climate risk to federally backed Fannie Mae and Freddie Mac. It highlights how the federal flood insurance program, which essentially underwrites all home flooding insurance policies 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 home buyers and corporate investors appear to be underestimating climate-related risks in their markets, which could lead to a financial crisis.
Understand Biden’s Budget Proposal
President Biden proposed a $6.8 trillion budget that sought to increase spending on the military and social programs while also reducing future budget deficits.
“Rapid changes in asset prices or reassessments of the risks in response to a shifting climate could produce volatility and cascading instability in financial markets if not anticipated by regulators,” the report says.
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To address those dangers, the report offers components for a federal climate adaptation strategy. Its recommendations — some of them already in early stages through existing administration actions — include producing better information about climate risk, helping financial markets accurately price that risk and better protecting the most vulnerable from the effects of climate change.
Perhaps the most significant proposal, and probably the most politically sensitive, is a call for Washington to exert more pressure on state and local officials, pushing them to be careful about where and how they let people build homes, businesses and infrastructure projects.
That proposal would address a core problem that has hindered America’s efforts to adapt to climate change. When people build in places that are most exposed to the effects of climate change — along coastlines, near riverbanks, at the edge of forests prone to wildfires — state and local governments get most of the benefits, in the form of higher tax revenues and economic growth. But when flooding, fires or other major disasters happen, the federal government typically pays the bulk of the cost for responding and rebuilding.
Yet for the most part, state and local officials, not the federal government, have authority over where and how development happens — so people keep building in high-risk areas, a classic example of what economists, including the authors of the report, call a moral hazard.
In response, the document proposes using federal funds to change the behavior of state and local officials, by tying that money to state and local decisions. That approach has been tried before, with little success. In 2016, the Obama administration suggested adjusting the level of disaster aid provided to states, based on what steps they took to reduce their exposure to disasters. States objected, and the change never happened.
Administration officials said they were already trying to leverage some spending from the infrastructure law President Biden signed in 2021 to influence state and local behavior. The report suggests much more aggressive action could be necessary.
It also proposes a rethinking of the nation’s system of insuring against disasters — moving away from separate localized policies that cover fire, flooding and other events, and more toward a nationally mandated “multiperil catastrophe insurance” system that is backstopped by the federal government.
Perhaps most sobering for Washington’s current fiscal moment — when Mr. Biden is battling with House Republicans who are seeking sharp cuts to federal spending and raising anew concerns over the growing national debt — is the report’s suggestion that climate effects could subject growing numbers of Americans to heat stroke, respiratory illnesses and other ailments in the years to come. That could further drive up government costs for health programs like Medicare and Medicaid.
The Council of Economic Advisers has begun a yearslong effort to project those climate-related effects on future federal budgets, which it detailed in a highly technical paper released this month.
The report released on Monday also included chapters on the economics of child care, higher education, digital assets and more.
In reviewing Mr. Biden’s economic record, White House economists dove deep into the issue that has bedeviled the recovery on his watch: persistently high inflation. The report lists several explanations for why price growth has surprised administration and outside economists over the last two years but never settles on a primary driver. It does concede that pandemic relief spending under Mr. Biden and former President Donald J. Trump may have played a role, by helping Americans save more than usual — and then begin to spend that extra savings.
“If the drawdown of excess savings, with current income, boosted aggregate demand, it could have contributed to high inflation in 2021 and 2022,” the report says.