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By Gary W. Yohe, Wesleyan University 

The devastating wildfires in Los Angeles have made one threat very clear: Climate change is undermining the insurance systems American homeowners rely on to protect themselves from catastrophes. This breakdown is starting to become painfully clear as families and communities struggle to rebuild.

But another threat remains less recognized: This collapse could pose a threat to the stability of financial markets well beyond the scope of the fires.

It’s been widely accepted for more than a decade that humanity has three choices when it comes to responding to climate risks: adapt, abate or suffer. As an expert in economics and the environment, I know that some degree of suffering is inevitable — after all, humans have already raised the average global temperature by 1.6 degrees Celsius, or 2.9 degrees Fahrenheit. That’s why it’s so important to have functioning insurance markets.

While insurance companies are often cast as villains, when the system works well, insurers play an important role in improving social welfare. When an insurer sets premiums that accurately reflect and communicate risk — what economists call “actuarially fair insurance” — that helps people share risk efficiently, leaving every individual safer and society better off.

But the scale and intensity of the Southern California fires — linked in part to climate change, including record-high global temperatures in 2023 and again in 2024 — has brought a big problem into focus: In a world impacted by increasing climate risk, traditional insurance models no longer apply.

How climate change broke insurance

Historically, the insurance system has worked by relying on experts who study records of past events to estimate how likely it is that a covered event might happen. They then use this information to determine how much to charge a given policyholder. This is called “pricing the risk.”

When Americans try to borrow money to buy a home, they expect that mortgage lenders will make them purchase and maintain a certain level of homeowners insurance coverage, even if they chose to self-insure against unlikely additional losses. But thanks to climate change, risks are increasingly difficult to measure, and costs are increasingly catastrophic. It seems clear to me that a new paradigm is needed.

California provided the beginnings of such a paradigm with its Fair Access to Insurance program, known as FAIR. When it was created in 1968, its authors expected that it would provide insurance coverage for the few owners who were unable to get normal policies because they faced special risks from exposure to unusual weather and local climates.

But the program’s coverage is capped at US$500,000 per property – well below the losses that thousands of Los Angeles residents are experiencing right now. Total losses from the wildfires’ first week alone are estimated to exceed $250 billion.

How insurance could break the economy

This state of affairs isn’t just dangerous for homeowners and communities — it could create widespread financial instability. And it’s not just me making this point. For the past several years, central bankers at home and abroad have raised similar concerns. So let’s talk about the risks of large-scale financial contagion.

Anyone who remembers the Great Recession of 2007-2009 knows that seemingly localized problems can snowball.

In that event, the value of opaque bundles of real estate derivatives collapsed from artificial and unsustainable highs, leaving millions of mortgages around the U.S. “underwater.” These properties were no longer valued above owners’ mortgage liabilities, so their best choice was simply to walk away from the obligation to make their monthly payments.

Lenders were forced to foreclose, often at an enormous loss, and the collapse of real estate markets across the U.S. created a global recession that affected financial stability around the world.

Forewarned by that experience, the U.S. Federal Reserve Board wrote in 2020 that “features of climate change can also increase financial system vulnerabilities.” The central bank noted that uncertainty and disagreement about climate risks can lead to sudden declines in asset values, leaving people and businesses vulnerable.

At that time, the Fed had a specific climate-based example of a not-implausible contagion in mind – global risks from sudden large increases in global sea level rise over something like 20 years. A collapse of the West Antarctic Ice Sheet could create such an event, and coastlines around the world would not have enough time to adapt.

The Fed now has another scenario to consider – one that’s not hypothetical.

It recently put U.S. banks through “stress tests” to gauge their vulnerability to climate risks. In these exercises, the Fed asked member banks to respond to hypothetical but not-implausible climate-based contagion scenarios that would threaten the stability of the entire system.

We will now see if the plans borne of those stress tests can work in the face of enormous wildfires burning throughout an urban area that’s also a financial, cultural and entertainment center of the world.

About the Author:

Gary W. Yohe, Huffington Foundation Professor of Economics and Environmental Studies, Wesleyan University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

By Tom Kemeny, University of Toronto 

One need only glance at headlines about Jeff Bezos, Elon Musk and other super-wealthy individuals to understand that wealth in America is increasingly concentrated in fewer and fewer hands. Inequality is sharply on the rise.

Until now, however, little has been known about where the richest households are located, which cities are the most unequal and how these trends have evolved.

In a new analysis I conducted with my colleagues, we reveal where wealth is most concentrated within and between communities, cities and states. The result is GEOWEALTH-US – the first data that tracks the geography of wealth in the United States and how it has changed since 1960.

The overall picture is worrying. The wealthiest cities in the U.S. are now almost seven times richer than the poorest regions, a disparity that has almost doubled since 1960. Meanwhile, especially in urban coastal areas, wealth has become highly concentrated in the hands of a few. The picture from the geography of wealth suggests we are even more divided than we thought.

Mapping inequality

To measure wealth locally, we built precise models of household wealth, applying sophisticated machine learning techniques to data from the Federal Reserve’s survey of consumer finances.

We then used the models to estimate wealth among households in the decennial census and American community survey, where we can identify where people live.

Experts define wealth as the difference between the value of a household’s assets – cash, real estate and stocks, for example – and its liabilities, including mortgages, student loans and credit card debt. Wealth is also called “net worth.”

Using GEOWEALTH-US, we show that the wealth distribution across the U.S. has transformed since 1960. Inequality between the nation’s flourishing urban centers and other areas of the country, especially in parts of the South and Midwest, is higher than it has ever been over the previous 60 years.

The expansion of wealth inequality is a challenge to the American Dream: the notion that, with hard work, opportunity and prosperity are accessible to all.

Wealth enables choice and stability. Poorer households have more trouble providing the best nutrition and education for their children. Additionally, people growing up in lower-wealth households are less likely to spur innovation in a field or start successful new businesses. Wealth also profoundly affects one’s health, leaving the least wealthy in our society significantly more vulnerable to premature death and disability.

Large wealth gaps between places

We analyzed average household wealth across the U.S. between 1960 and 2022, using census-defined communities of about 100,000 residents.

At the community level, the lack of wealth can make a major difference in how well cities work for their residents.

People who grow up in wealthier places can reap benefits that span generations. As a result of property taxes and philanthropy, wealthier communities have greater resources for schools, health care, transportation and other infrastructure.

Good schools are one benefit of wealthy communities that may improve social mobility even for children born into poverty, studies suggest.

The map for 2022 reveals major disparities in typical (median) net worth across communities. Many of the least wealthy locations are in poor neighborhoods in some of America’s biggest cities – for instance, parts of the Bronx and East Harlem in New York, and areas of Houston and Milwaukee. A typical household in the five poorest communities had assets worth about $18,000. Many households in these locations held more debt than assets. Other wealth-poor areas of the country included parts of Baton Rouge, Louisiana, and Cincinnati, Ohio.

The wealthiest communities today tend to be found in urban coastal areas.

Palo Alto, California, and Nassau County, New York, are two of the nation’s five wealthiest places. The top five areas had median household net worth of nearly $1.7 million. That’s almost 90 times wealthier than the poorest five places.

These wealth divides help explain why, between 2019 and 2021, according to the school finance indicators database, the Palo Alto Unified School District in California spent about $7,000 more per student than the minimum required to achieve national benchmark test scores. Meanwhile, the East Baton Rouge school district spent almost $4,000 less per student than is required to meet those same national standards. Cincinnati Public Schools underspent by more than $9,000 per pupil.

Large wealth gaps within places

We also looked at wealth divides in cities and communities. Average wealth levels in a community matter, but so does their unequal distribution.

Inequality, especially when a community is racially diverse and spatially segregated, has been linked to underinvestment in public goods such as schools, roads and hospitals.

Our research identified large gaps in wealth within communities.

For example, in certain parts of California such as San Jose and Santa Monica, we found that the richest 10% of residents are about seven times wealthier than the median household. In contrast, in many parts of Utah and Minnesota, the wealthiest 10% of households are only about three times wealthier than the median household.

Coastal areas, then, are not simply wealthier than the rest of the country; wealth in these places is also less equally shared.

We also found that wealth is unequally distributed across many parts of the South. This reflects the legacy of slavery, discrimination and uneven economic development over generations.

Regardless of geography, across America we found that the most unequal places were likely to have larger populations of African Americans, Hispanics and other people of color. In these locations, white households were overrepresented among the wealthiest. Households of color, meanwhile, generally had much lower net worth.

The map of wealth is changing

Extensive testing shows that our model estimates wealth with a high level of accuracy. And by mapping household wealth rather than household income, which is what researchers more commonly use to assess economic well-being, we found that place-based divides are much worse than previously believed.

Our data shows that wealth gaps between places have grown much more than income gaps since 1960. By 2020, gaps in average wealth levels were about 60% higher than equivalent income gaps.

This appears to be driven by the changing economic fortunes of cities.

Average wealth levels in the San Francisco Bay Area, Seattle, New York and Boston have risen dramatically as these areas have cemented their leadership in high-technology sectors and finance.

The loss of manufacturing jobs, meanwhile, destroyed wealth in many American communities. In 1960, the industrial hub of Cleveland, Ohio, had among the highest levels of average household wealth in the country, according to our data. In 2020, Cleveland ranked 466th out of the 722 areas in our study.

Within cities, we also observed a rise in wealth concentration. In the Minneapolis metropolitan area, for instance, the share of total wealth held by the richest 0.1% of households has almost tripled, from about 3% in 1960 to almost 9% by 2020. This means that, compared with the past, just a few families there now own a much larger piece of the pie.

Ladder to success becoming harder to climb

Multiple factors may explain the growing pooling of wealth. They include the rising concentration of high-paying jobs in major metro areas and the explosive growth in housing values in these high-performing cities.

Changing federal tax policies have also favored the affluent at the expense of regular Americans.

If such policies continue under the next Trump administration, the divided geography of wealth may well grow worse – with significant consequences for U.S. democracy.

About the Author:

Tom Kemeny, Associate Professor, Munk School of Global Affairs & Public Policy, University of Toronto

This article is republished from The Conversation under a Creative Commons license. Read the original article.

By Jay L. Zagorsky, Boston University and H. Sami Karaca, Boston University 

Capitalism, communism and socialism are the world’s three major economic systems. While the phrase “economic system” may seem like a yawn, countless people have fought and died in major wars over which one should dominate.

Shifts from one system to another, like the 1989 fall of communism in much of Eastern Europe, changed the lives of millions. And while researchers know that a country’s economic system dramatically impacts people’s living standards, less is known about how attitudes toward these systems have changed over time.

We are professors working at Boston University’s new Ravi K. Mehrotra Institute, which is trying to understand how business, markets and society interact. Given many recent criticisms of capitalism, we were surprised to find positive sentiment toward capitalism is slowly rising over time.

The main economic systems explained

Capitalism, communism and socialism are economic and political systems that differ in their principles and organization. Capitalism emphasizes the private ownership of resources and the means of production, driven by profit and market competition, with minimal government intervention.

Communism, on the other hand, advocates for a classless society where all property is communally owned. In communism, wealth is distributed according to need and there is no private ownership, which aims to eliminate inequality and oppression.

Socialism falls between these extremes. It focuses on the collective or state ownership of key industries and resources. This allows for some private enterprise, with the aim of reducing inequality through social welfare programs and obtaining a more equitable distribution of wealth.

Modern economies blend capitalism with socialism to address challenges like inequality, market failures and negative externalities, like when a business harms the environment. Governments intervene through regulations, welfare programs and public services to tackle issues like pollution and income inequality. This creates what economists call a “mixed economy.”

The amount of state involvement varies from country to country. At one end is market capitalism, where markets dominate with a limited government role. The U.S. is one such example.

At the other end is state capitalism, like in China, where the government directs economic activity while incorporating market elements. The goal is to combine market efficiency and innovation with measures to contain capitalism’s social and economic costs.

How to measure people’s attitudes toward economic systems

Some surveys have asked people directly how they feel about these systems.

For example, the Pew Research organization’s most recent survey on the issue found the proportion of Americans with positive views of either capitalism or socialism has declined slightly since 2019, with capitalism remaining more popular overall. Nevertheless, Americans are split sharply along partisan lines. About three-quarters of Republican voters have positive views of capitalism, compared with less than half of Democratic voters.

Unfortunately, there are no long-running surveys tracking people’s feelings toward the three systems. Because of this shortcoming, we used artificial intelligence to analyze references to the three systems in more than 400,000 newspaper articles published over a span of decades.

We identified every news story that discussed capitalism, communism or socialism using ProQuest’s TDM Studio. ProQuest has digitized almost all the articles in major English-language newspapers – including The Wall Street Journal and The New York Times – starting in the mid-1970s, with partial archives from earlier years.

The AI model was designed to assess the tone of each article across several dimensions, including anger, surprise and happiness. After the model scored each article on those qualities, we combined the emotions into three categories: positive, negative, and neutral or unknown. For example, an article discussing capitalism might be rated as 60% positive, 20% negative and 20% neutral.

Using an AI large language model allowed us to track shifts in press attitudes over time – which, to be fair, might not match popular opinion.

How views have changed since the 1940s

When we looked at newspaper articles from the end of World War II to the present, we found something unexpected. In the 1940s, capitalism was not well regarded. The average article containing “capitalism” or “capitalist” got a 43% negative and 25% positive sentiment score. This is surprising, since we looked at newspapers published primarily in countries with capitalist systems.

However, just because capitalism didn’t get a high positive score doesn’t mean that newspaper writers loved communism or socialism. In the 1940s, articles with those words also got relatively high negative scores: 47% on average for articles containing “communism” or “communist,” and a 46% negative rating for “socialism” and “socialist.”

Since that time, however, positive sentiment toward capitalism has improved. In the 2020s, the average article with capitalism got a more balanced 37% negative and 34% positive sentiment score. While capitalism clearly isn’t loved in the press, it’s also not disparaged as much as it was just after World War II.

The news media’s attitudes toward capitalism improved more than attitudes toward socialism or communism over time. In the 1960s, positive attitudes toward all three were roughly the same. Today, however, positive sentiment toward capitalism is 4 or 5 percentage points higher than the other two. The climb wasn’t steady, since the number of favorable articles about capitalism fell during recession years.

Still, some contemporary commentators fret that capitalism is in crisis.

Not long ago, The New York Times – a newspaper located in the world’s financial center – ran an op-ed headlined “How Capitalism Went Off the Rails.” A recent book review in The Wall Street Journal, a newspaper that is a bastion of capitalism, starts, “Our universities teach that we are living the End of Times of ‘late capitalism.’”

But while capitalism clearly isn’t beloved by all, we didn’t find evidence that it’s being overtaken by socialism or communism. Instead, using AI to process the attitudes reflected in thousands of newspaper articles, we found that people – or at least the press – are slowly warming to it.

About the Author:

Jay L. Zagorsky, Associate Professor of Markets, Public Policy and Law, Boston University and H. Sami Karaca, Professor of Business Analytics, Boston University

This article is republished from The Conversation under a Creative Commons license. Read the original article.