Wildfires have always been a regular occurrence in Southern California, however, in recent years, they’ve become increasingly frequent and destructive. This is mostly due to climate change, which makes summers more intense and droughts more frequent. This shift has never been more evident than during the series of ongoing wildfires in the Los Angeles area. These most recent fires, the most intense of which are the Palisades and Eaton Fires, have been raging since January 7th and have caused catastrophic physical and economic damage to the surrounding areas.
The damage to homes, businesses, infrastructure, and nature in Southern California has had extreme economic ramifications. The initial property damage is the most obvious economic cost, with CoreLogic estimating the insured losses to be between $35-45B, including both commercial and residential property. Brandon Hall, a Research Analyst at JP Morgan, explains that if this estimate is true, these wildfires would be one of the costliest natural disasters in US history.
Hall also explains that with wildfires becoming more frequent and destructive, the insurance industry will likely respond by increasing rates or declining policies. Many insurers in the area have already begun increasing rates or refusing to renew policies since well before this series of wildfires. Due to the increasing risk of wildfire-related damages, insurers are increasingly likely to pay out for damages, and, as a result, have been raising insurance rates to offset the higher number of fire-related claims. As IBD reports, Travelers increased their rates in California by 15% this past May, and State Farm, the state’s largest insurer, has declined to renew thousands of insurance policies statewide over the past year, with 1,600 declined in the Pacific Palisades alone.
With insurance rates rising and coverage decreasing, prospective homebuyers will be deterred from buying in Southern California, which will drive housing prices downward and in turn push rent costs upward.
Housing is not the only part of the local Southern California economy that the wildfires will impact. SoCal is a crucial area for crop production in the country, so a significant piece of the local economy is driven by the agricultural industry. According to IMPLAN, over 86,000 people are employed in the industry in the affected areas, with an additional 89,000 jobs that are indirectly associated with agriculture. As such, the local labour market will likely see a short-term increase in unemployment in the area due to the loss of many specialized agricultural jobs.
As of 2023, California accounts for 14% of the national GDP and is the 5th largest economy in the world. With nearly half of the state’s population concentrated in the Los Angeles metro area, many are wondering what the national economic ramifications of the wildfires will be. However, as Hall describes, the broader economy should be relatively immune to the economic impact of the disaster. National inflation and GDP will likely see mild effects, but it’s unlikely that we will see any significant long-term change. Price levels will increase for goods where the supply chain has been impacted, but it’s unlikely that aggregate inflation will see any sort of notable increase at the national level. Furthermore, national GDP growth will likely see a drop in the short term, but stimulus packages and government expenditure on recovery efforts will offset any long-term effect on GDP growth.
Price levels will increase for goods where the supply chain has been impacted, but it’s unlikely that aggregate inflation will see any sort of notable increase at the national level.
The most significant economic implication for the broader public comes from the effects on the supply chain and food production. With the affected counties nationally accounting for 27% of fruit farming and 24% of vegetable and melon farming, there will be a significant dent in the national supply of produce. Many crop fields have been destroyed by the fires and even more will see reduced quality and quantity of crop yields. It’s hard to tell right now whether or not this supply shock will be a long-term issue, as it largely depends on how long the fires persist and how severe the damage will be. The more severe the damage, the longer it will take for crop production to return to its pre-wildfire levels, leading to more significant national price increases.
With the affected counties nationally accounting for 27% of fruit farming and 24% of vegetable and melon farming, there will be a significant dent in the national supply of produce.
Despite most of the fires being more than 95% contained, many Californians are in the dark about their next steps. With thousands of homes turned to ash and rubble, the focus will shift towards recovery. Many of the economic implications are currently unclear as no one knows exactly how much time or money is needed to rebuild the neighbourhoods, businesses, and natural fixtures of Southern California. According to the University of Southern California’s Wrigley Institute for Environment and Sustainability, it will likely take years for the local economy to recover and for housing to be rebuilt, despite many regulations being lifted to speed up the processes.
Regardless of the economic impact, the damage these wildfires have had on the once-picturesque landscape of Southern California and its inhabitants is immeasurable. With at least 29 deaths, countless injuries, and thousands of homes lost, the human cost of this disaster is nothing short of astronomical. One can only hope that as these wildfires become more and more frequent the economic, climatic, and human impact can be mitigated in the future.
