Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. A shorter version appeared at Project Syndicate.
A two-decade drought in the western United States, the worst in more than 1,000 years, has pushed chronic water shortages to a critical point, notwithstanding above-average precipitation this past winter. Similar water shortages afflict Europe and some parts of Africa, Asia, Australia, and Latin America.
Forty million people in western US states get much of their water from the Colorado River. On May 22, their representatives reached a supposedly historic agreement to solve their conflicting claims for the time being. California, Arizona and Nevada managed to negotiate how to allocate reductions of 14% by 2026, in water drawn from the river.
Can there be any problem to which economists believe so strongly that they have the answer, and yet where their logic is so little included in policy deliberations, as the problem of water scarcity?
It’s not advanced economic theory. Introductory textbooks explain that if public policy keeps the price of a resource artificially below its fundamental value, demand for the resource will be high, supply will be low, and the result will be shortage. The solution to the shortage of water in the western states is to raise the price of water, which could be done by market pricing. A higher price would encourage conservation, especially where the water is now lavished on wasteful or inefficient uses. A large majority of residents would benefit from such a reform, relative to the alternative of running out of water.
Why has the price mechanism been so little used? The reality, of course, is status quo politics. The few who would stand to lose from the change care far more about the issue than those who would win, and they are prepared to base their votes and campaign contributions on the single issue. As Mancur Olson in 1971 pointed out, it is much harder to inform and organize a large diffuse interest group, such as consumers, than a small concentrated interest group, such as producers benefiting from government protection. This political economy underlies many distortionary government practices.
In cases where reform does not address a problem that society is even aware that it has, it is particularly difficult in political debate to overcome the opposition of those who benefit from the status quo. A classic example is trade policy.
It is surprising that the economists’ solution is not even considered in this case, in that everyone is well aware that there is a water crisis. It will only get worse in the long-term future, due to increasing population in the Southwest and, especially, to global climate change. Deciding how to allocate Colorado River water among three states does little to address the long-term problem, which is that demand exceeds supply.
The excess demand for H2O shows up as depletion of aquifers and draw-down of reservoirs. In Lake Mead, the largest American reservoir, water levels have fallen to record lows over the last year and threaten at some point to turn to “dead pool.” That means that the water would be too low to reach the intake valves on Hoover Dam and the Colorado River would stop flowing, which would cut off the water supply downstream altogether. Clearly the shortfall must be eliminated, one way or another, preferably before the disaster scenario does the job.
How exactly is the water currently used? Guess which of these uses the most:
- The City of Los Angeles
- The City of Phoenix
- The City of Las Vegas
- The alfalfa crop
- The cotton crop
- The almond and pistachio crops
Alfalfa, a crop used to feed cattle, uses the most (37%). Alfalfa, grass hay, and other livestock feed together use 70 % of the water taken from the Colorado River. Cotton comes next. Then wheat, corn and barley, in that order. Followed by almonds, rice, and other crops. Altogether 79 % is used for crop irrigation. Similar statistics apply to other sources of water in the western states. Total urban water uses — including residential and business uses — account for only 11 % of water consumption in the West. To underline the point: the populations of Los Angeles, San Diego, Phoenix, Las Vegas, and all the other cities of the southwest combined, use less water than alfalfa alone.
Farmers point out that, without access to relatively cheap water to grow alfalfa and other crops used to feed livestock, beef and dairy products would be more expensive. True. But why should the American public subsidize beef and dairy? The gap between current water prices and the market-clearing price is indeed a subsidy. Recall that government money built and maintains Hoover Dam and the rest of the western water system. If farmers don’t think of it as a subsidy, that is only because they have been getting it for so long that it has become part of the landscape.
There would be good arguments for taxing beef or alfalfa or water. Taxation would be a more effective way to achieve important health and environmental goals than current efforts by doctors and environmentalists to persuade American consumers to cut back on their high beef consumption voluntarily. A libertarian would oppose such taxation, of course. But what justification is there for subsidizing water usage, which is what the government does when it keeps prices below the market-clearing level? What sense does it make to grow thirsty crops, even a monsoon crop like rice, in arid lands?
It would be advisable to compensate those groups who would otherwise lose out from raising water prices. These groups include farmers and low-income consumers. In the plans of which the May 22 three-state agreement is a component, the federal government is to compensate water conservers by $1.2 billion. But far more funds than this could be generated to pay compensation if the price were raised, without the adverse effect on the federal budget.
Implementation of the general strategy of using the price mechanism to deal with water shortages runs into all sorts of practical complications, political roadblocks, and historical constraints. There is scope for clever ways to go about it. Pilot progams could test consumers’ willingness to conserve water. Market mechanisms, whereby city or state governments buy farmers’ water rights or pay them to reduce their water intake (by switching crops or improving irrigation techniques), could be regularized and expanded.
An acute crisis such as the shortage that the American West is facing ought to be enough to overcome the political inertia of the status quo and to enable public discussion of a radical solution like allowing price to equilibrate supply and demand.
This post written by Jeffrey Frankel.