A government agency just warned this week’s West Coast wildfires could spark a financial crisis. A top economist thinks the effects could linger for years.

Apple Fire
Firefighters battle wildfires in Southern California on Saturday.
  • The Commodity Futures Trading Commission (CFTC), the government agency that regulates the US deriviatives markets, released a report this week that said increasing wildfires in the US could spark a financial crisis. 
  • Further, the CFTC said climate change 'poses a major risk to the stability of the US financial system and to its ability to sustain the American economy.' The ripple effect on home values, state tourism, and local government could be profound, per the report. 
  • Matthew Khan, distinguished economics and business professor at John Hopkins University, said the west could see a 'brain drain' if the perception emerges of a declining quality of life due to ever-increasing wildfires.
  • Khan also said the next generation is at risk of developmental problems due to air pollution, which would impact their productivity down the line. 
  • Workers are less productive when there's high air pollution, studies show. Rising air pollution that would impact millions could therefore impact GDP, Khan suggested. 
  • Visit Business Insider's homepage for more stories.

More than 85 wildfires are ripping through California, Oregon and Washington state, and people's lives and homes aren't the only things at risk. 

The historic 2020 wildfire season, which has already burned over 3 million acres, is far worse than last year's due to climate change, scientists have said. The trend has economists saying the economy for the region — and even the country — is in danger.  

These climate risks could exacerbate some of the stresses brought on by the coronavirus pandemic, such as declining home values, state tourism, and local government budgets, the Commodity Futures Trading Commission (CFTC), a government agency that regulates the US derivatives markets, stated in a recent report

"Beyond their physical devastation and tragic loss of human life and livelihood, escalating weather events also pose significant challenges to our financial system and our ability to sustain long-term economic growth," Rostin Behnam, CFTC commissioner, said in a press release. 

The West Coast —  home to Silicon Valley and tech giants like Microsoft, Google, and Apple — could take a dramatic hit over the next five to 10 years because of increasing wildfires, according to Matthew Khan, a Bloomberg distinguished professor of economics and business at Johns Hopkins University and a provost professor of Economics at the University of Southern California. 

For one, Apple, Google, and Microsoft may not want to keep their headquarters there, if there's a perception that these wildfires are threatening their workers' quality of life. 

"If there's the belief that California and the West will face a decline in quality of life because of ever-increasing wildfires, then this could actually lead to a brain drain if these companies move headquarters to higher quality of life places in the US," he told Business Insider. 

This would hit the state's tax revenue stream hard, he said. And thousands of workers could potentially move with their companies, resulting in declining home values and consumer spending. 

But on a more macro level, labor productivity across a major portion of the US could be at risk, which could impact GDP. 

Workers are not as productive when there's high levels of air pollution, numerous studies show. 

One 2019 study found that top chess players made significantly more mistakes when the indoor concentration of fine particulate matter (PM2.5) — air pollution — increased. 

Another study (conducted earlier this year by Khan and his colleagues) found that high levels of air pollution decreased outdoor worker productivity. It also lowered the day-to-day sentiment of the overall population (including indoor workers). Research has found that happier workers are more productive

"People are less productive when it's polluted outside," Khan said. 

Increasing wildfires would also be detrimental to the next generation of America's workforce: Children, particularly low-income children who live in higher risk areas and whose families may not be able to afford expensive air purifiers. 

"Epidemiology has shown us that prolonged exposure to air pollution is terrible for people's health and children's development. And so if it continues, and millions of children, millions of lower-income children are exposed to this pollution, it lowers their development, their work potential," he said. 

Khan added, "That would have really bad consequences." 

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