A General Equilibrium Investigation of the American Dust Bowl

Economic adjustments through trade and migration can mitigate environmental shocks but may also propagate them to other parts of the economy. Using a dynamic spatial general equilibrium model, I quantify the transmission of environmental shocks by capitalizing on the 1930s American Dust Bowl. The counterfactual analysis shows that the Dust Bowl decreased aggregate U.S. welfare by 3.80% per capita by 1940. The local shock in agriculture more than proportionally transmitted to consumer services, while the tradable goods-producing sec-tor mitigated the shock. Such a disparity hindered structural change to services in the Dust Bowl region. Instead, economy-wide adjustments relied on the spatial reallocation of workers. Moreover, the Dust Bowl region exported price increases in agricultural goods, leading to a sizeable welfare loss in the non-Dust Bowl region despite the relative increases in real income.