Urban Adaptation to Low Probability Shocks: Contrasting Terrorism and Natural Disaster Risk

1. Urban Adaptation to Low Probability Shocks: Contrasting Terrorism and Natural Disaster Risk Matthew E. Kahn UCLA and NBER Institute of the Environment Department of Economics Department of Public Policy

2. Introduction • Paul Krugman in the New York Times, October 3, 2001 opinion piece, “Reckonings; An Injured City”: • “Will the terror attack permanently damage New York's position as America's economic capital? After all, America's pre-eminent city owes its position to historical accident. The natural advantages of New York -- its fine harbor, its location at the terminus of the only possible canal route to the Great Lakes --

3. More Krugman • were real enough during the city's rise. But those natural advantages have long since ceased to be important to the city's economy. What keeps New York a great city is circular causation; people and businesses locate there because of the opportunities created by the presence of other people and businesses. • And because the city's economy is sustained by circular causation, a sufficiently large blow to that economy could in theory do permanent

4. Some More Krugman • damage. If enough businesses and people leave, for whatever reason, the local economy could fall below critical mass and enter a downward spiral in which businesses leave because other businesses are leaving. • The beneficiaries of such an exodus would probably not be other great cities; instead, businesses would move out into the endless sprawl. I was not the only person in suburban New Jersey who, somewhat to my shame, felt

5. The End of Krugman • perfectly safe on Sept. 11: there are millions of people living and working nearby, but no obvious targets, because there's no there here. • The question is how large a blow would be needed to start such a spiral? How robust are cities, anyway? (Krugman 2001)”

6. My Questions • 1. Given that terrorist attacks will be likely to be concentrated in the dense downtown of Superstar cities, how will self interested households and firms respond? • 2. Could the greater metropolitan area suffer because of this re-organization? • 3. winners and losers from such migration? • 4. Are there counter-veiling trends that make us optimistic about Center Cities in this age of terrorism?

7. More Questions • 5. Is terrorism risk another “cross-city” compensating differential like climate (the Los Angeles/Detroit “exchange rate”)? • 6. Is the urban public focused on terrorism? • 7. Are there relevant lessons in contrasting coastal city terrorism risk and climate change risk?

8. Some Answers • All else equal, center city terrorism accelerates suburban growth • Wall Street was already leaving Wall Street before 9/11/2001 • Commute minimizers want to be close to jobs • Suburban jobs --- Google’s corporate campus and many others • Dilution and lower density protects us against terror risk (private cars, private campuses)

9. Negative Productivity Externality from Suburbanized Employment? • Ongoing urban economics literature measuring the productivity effects of proximity. Would a law firm be more productive if located close to other firms it works with? • Information technology • Speeds faster in suburbs • I don’t believe that the decline of the center city as an employment hub lowers the metropolitan area’s overall productivity • Center city as a co-ordination mechanism

10. Winners and Losers • Buildings in the center city are long lived durable capital • If terrorism hollows out the center city, then owners of those buildings will suffer an asset loss • Land owners in the suburbs and in substitute safer cities will enjoy a windfall

11. Counter-Veiling Trends • Center Cities as “consumer cities” • Mayor Mike Bloomberg’s Green City push • Declining center city crime - In 1990, there were 2245 murders in New York City while in 2008 there were roughly 500 murders • Declining center city air and water pollution • Increased investment in “Green Space” • These quality of life improvements can outweigh increased terrorism risk

12. Implications for DHS? • Benefits of center city efforts will continue to be high • Very rich people living and working in the center city • Philosophical question; When DHS calculates the benefits of its policies --- are all “statistical lives” equally valuable? • If Don Trump feels safer because of DHS efforts, how measure this benefit relative to if Matt Kahn feels safer?

13. Cross-City Competition • I believe that any migration induced by fear of terrorism will be center city to suburb moves within a Metro area • I’m not sure if Metro area to Metro area migration will increase because of terrorism risk • Cities such as Boston are not perfect substitutes for NYC. Unlikely to see hedonic real estate pricing gradient reflecting terror compensating differential

14. DHS and Private Self Protection • Are DHS and private anti-terrorism investments complements or substitutes? • I would conjecture that they are substitutes • Use the national media and Google Insights to see if people are focused on this issue. • If terrorism threat is real and people are tuning it out, then DHS policy is more valuable • Government action more valuable if private citizens are reducing efforts and not concentrating on the real threat

15. Television Stories

16. New York City Google Search Intensity

17. Climate Change Adaptation vs. Terrorism • Low probability, scary events that Superstar coastal cities such as London and NYC face. • In the case of climate change, more predictable no “intelligent design”. • Early warning systems for climate change --- more likely to be accurate and to lead to high frequency self protection by citizens

18. Conclusion and the Urban/Terrorism Research Agenda • The Rise of “consumer city”  center city terrorism will not accelerate “sprawl” • Terror risk will not lower MSA productivity • Research: Perception vs. reality concerning risk exposure at different spatial locations • Cost of DHS policies in terms of trust and social capital across urban groups and immigrants? • Cities as immigrant centers and endogenous “home grown” terrorism?