interviews
Water and the American West
by Richard Frank
October 25, 2021
This interview with Richard Frank, professor of environmental practice at the UC Davis School of Law and Director of the California Environmental Law and Policy Center, was conducted and condensed by franknews.
frank | Can you tell me a little bit about the story of water and how it's tied to the West, and to California in particular?
Richard | A friend of mine who's a Court of Appeals Justice here in California wrote an opinion on a water law dispute and started it with the quote, "the history of California is written on its waters." And I think that the point is true of the entire American West.
Water policy and legal issues are inextricably tied to the development of the Western United States; water is the limiting factor in so many ways to settlement, to economic development, to prosperity, and to the environment and environmental preservation.
Can you talk about the difference between groundwater and surface water– and the policies that regulate each?
There are really two types of water when it comes to human consumption. There's surface water: that is the water that is transmitted by lakes, rivers, and streams. Then there is groundwater, and a substantial amount of water that Americans and the American West rely on is groundwater. That is water that is stored in groundwater aquifers, which are naturally occurring groundwater basins. Both groundwater and surface water are critical to the American West and its economy and its culture.
Traditionally a couple of things are important to note, first of all, water is finite. Second, water gets allocated in the Western United States generally at the state level. There's a limited federal role. Primarily, policy decisions about who gets how much water for what purpose are made state by state.
I think allocation is really interesting in that it's more state-level than federal. How was water and the allocation of water in California designed? Is it a public-private combination? What goes on in terms of the infrastructure of water?
Another very good question. The answer is it depends. Most of our water infrastructure is public in nature.
Again, in the American West, the regulation of water rights is generally done at the state level, but the federal government, historically, has a major water footprint in the American West because it has been federal dollars and federal design and management that really controlled much of the major water infrastructure in the American West — you know, Hoover Dam, and the complex system of dams and reservoirs on the Colorado River in California, with the Central Valley Project that was built and managed by the federal government with Shasta Dam on the upper Sacramento River as the centerpiece of that project. But we also have a California State Water Project, the key facility being the Oroville Dam and reservoir on the Southern River that is managed by state water managers. If we were starting over, that kind of parallel system would make no particular engineering or operational sense.
But, we are captive to our history.
And then you have these massive systems of aqueducts and canals that move water from one place to another throughout the American West. They are particularly responsible for moving water from surface water storage facilities to population centers. In the last 50 to 75 years, these population centers have really expanded dramatically, so you need massive infrastructure to deliver water from those storage facilities, the dams, and reservoirs, which generally are located in remote areas to the population centers. So it takes a lot of time and energy to transport the water, from where it is captured and stored to where it is needed for human use.
California has faced continuous drought – what measures is the state taking now to manage water?
Just to frame the issue a little bit — we have, as I mentioned, a growing population in the American Southwest at a time when the amount of available water is shrinking due to drought and due to the impacts of climate change. We have growing human demand for residential and commercial purposes and at the same time, we have a shrinking water supply. That is a huge looming crisis.
And it is beginning to play out in real-time. You see that playing out in real-time. For example, several different states and Mexico rely on Colorado River flows based on an allocation system that was created in the 1920s, which is overly optimistic about the amount of available water. From the 1920s until now, that water supply has decreased, and decreased, and decreased. Now you have interstate agreements, and in the case of Mexico, international agreements that allocate the finite Colorado river water supplies based on faulty, now obsolete, information. It is a real problem.
What measures do you take now, knowing this information?
If you look at the US Drought Monitor, it is obvious the problem is not limited to the Colorado River. We are in a mega-drought, so cutbacks are being imposed by federal and state water agencies to encourage agricultural, urban, and commercial water users to cut their water use and, and stretch finite supplies as much as possible through conservation efforts.
In California, we have the State Water Resources Control Board, the state water regulator in California, and they have issued curtailment orders. Meaning, they have told water rights holders, many of whom have had those water rights for over a hundred years, that, for the first time, the water that they feel they are entitled to, is not available. Local water districts are also issuing water conservation mandates; the San Francisco water department is doing that, in Los Angeles, the metropolitan water district, is urging urban users to curtail their efforts.
And then agriculture. Agricultural users — farmers and ranchers — have had to get water rights in many cases through the federal government, as the federal government is the operator of these water projects. They have contracts with water users, individual farmers, ranchers, or districts, and they are now issuing curtailment orders. They're saying, we know you contracted for X amount of water for this calendar year, but we are telling you because of the drought shortages we don't have that water to supply. Our reservoirs are low at Lake Shasta or at the Oroville Dam.
When you drive from San Francisco to LA on the five, you see a lot of signage from the agricultural farming community about water. There's apparently some frustration about this. What are the other options for them?
About 80% of all human consumed water goes to agriculture. That is by far the biggest component of water use, as opposed to 20% used for urban and commercial, and industrial purposes.
Over the years, ranchers and farmers, and agricultural water districts assumed that the water would always be there — as we all do.
And the farmers and ranchers have, in hindsight, exacerbated the problem by bringing more and more land into production. You see on those drives between San Francisco and Los Angeles, particularly in the San Joaquin Valley, all these orchards are being planted. Orchards are more lucrative crops than row crops — cotton, alfalfa, and rice. But, if you are growing a row crop, you can leave the land fallow in times of drought.
We don't have to plant. If the water stopped there, or if it's too expensive to get, it may make economic sense, but if you have an orchard or a vineyard it's a high value, those are high value crops, you don't have that operational flexibility and they need to be irrigated in wet years and in dry years. Now, you see these orchards, which were only planted a few years ago, are now being uprooted because the farmers realized that they don't have the water necessary to keep those vineyards and orchards alive. For ranchers, the same thing is true with their herds. They don’t have enough water for their livestock.
The water shortage has never been drier than it is right now. Farmers and ranchers are being deprived of water that they traditionally believed was theirs and they're very understandably, very unhappy about it. They see it as a threat to their livelihood and to the livelihood of the folks who work for them. Their anger and frustration are to be expected, but it's nobody's fault.
To say, as some farmers do, that it is mismanagement by state and federal government officials, I think is overly simplistic and misplaced in the face of a mega-drought. Everybody's going to have to sacrifice. Everybody's going to have to be more efficient in how they use water. All sectors are going to need to be more efficient with the water that does exist.
Looking at this percentage breakdown of water use – is it actually important for individual users to change their water habits?
Well, every little bit helps. When you're talking about homeowners, about 70% of urban water use is for outdoor irrigation. So we're talking parks and cemeteries and golf courses and folks' yards. You know, that used to be considered part of that American dream and the California dream — you would have a big lawn in front of your house and behind your house. Truth be told, that has never made much sense in an arid environment. That's where the water savings in urban areas is critical in the way it really involves aesthetics rather than critical human needs, like water for drinking and bathing and sanitation purposes. There is a growing movement away from big lawns, and away from the type of landscaping that you see in the Eastern US — there is no drought in the Eastern United States. As Hurricane Ida and other recent storms have shown, the problem is too much water, or rather than too little in most of the Eastern United States. So it really is a tale of two countries.
We just need to recognize that the American West is an arid region. It has always been an arid region, we can't make the desert bloom with water that doesn't exist. We need to be more efficient in how we allocate those water supplies. And it seems to me in an urban area, the best way to conserve and most effective way is to reduce urban landscaping, which is the major component of urban water use.
You also write about water markets and making them better – for those who don’t know, what is the water market?
Water markets, that is, the voluntary transfer of water between water users, is more robust in some other Western states. Again Arizona and New Mexico come to mind. California somewhat surprisingly is behind the curve. We are in the dark ages compared to other states. Water markets are kind of anecdotal. There is not much of a statewide system. It is done at the local level, through individual transactions without much oversight and without much transparency. And I have concerns about all of those things.
I believe conceptually watermarks are a way to stretch scarce, finite water resources to make water use more efficient. I can, for example, allow farmers or ranchers to sell water to urban uses or commercial usage or factories in times of drought.
Farmers sometimes can make more money by farming water, than they can by farming crops.
There are efficiencies to be gained here.
The problem in my view is really one of transparency. The water markets are not publicly regulated, and some of the people who are engaging in water transactions like it that way, frankly, they want to operate under the radar.
In my opinion, water markets need to be overseen by a public entity rather than private or nonprofit entities. We need oversight and transparency, so that folks like you and myself can follow the markets to see who's selling water to whom, for what purpose, and make sure that those water transfers serve the public interests and not just the private interests.
There have been a number of stories in the New York Times and the Wall Street Journal and the Salt Lake City Tribune about efforts in some parts to privatize water transfer. Hedge fund managers are buying and selling water, as a means of profiting. And it strikes me that when you're talking about an essential public resource — and in California, it is embedded in the law that public water is an inherently public resource, that water is owned by the public and it can be used for private purposes, but it is an inherently public resource — the idea of commoditizing water through the private, opaque markets is very troublesome to me. I think it represents a very dangerous trend and one that needs to be corrected and avoided.
Why is California so behind?
There's no good reason for it. It's largely inexplicable that since the state was created on September 9th, 1860, we've been fighting over water. In the 19th century, it was miners versus farmers ranchers. In the 20th century, with the growth of urban communities, the evolution of California into one of the most populous states with 40 million Californians, it has been a struggle between urban and agricultural uses of water.
In the second half of the 20th century, there was a recognition that some component of water had to be left in streams to protect ecosystems, landscape, and wildlife, including the threatened and endangered wildlife. That suggestion has made agricultural users in California angry. You will see those signs that allude to the idea that food and farming are more important than environmental values. I don't happen to believe that's true. I believe both are critically important to our society. But the advocates for the environment have a proverbial seat at the water table. So that's another demand for water allocation that exists.
Do you maintain optimism?
Yes. I think it's human nature to look on the bright side. I try to do that through research scholarships and teaching. There are models for how we can do this better in the United States. Israel and Saudi Arabia and Singapore are far more efficient with their water policies and efforts. Australia went through a severe megadrought. They came out of it a few years ago, but they used that opportunity to dramatically reform their water allocation systems. That's an additional model. I think most people would agree in hindsight that their previous system was antiquated, and not able to meet the challenges of climate change and the growing water shortage in some parts of the world.
Here in the United States, we can learn from those efforts. There are also some ways to expand the water supply. Desalination for one. Again, Singapore and Saudi Arabia have led the world in terms of removing the salt content from ocean water and increasing water supply that way. In Carlsbad, California, north of San Diego, we have the biggest desalination plant in the United States right now, and that is currently satisfying a significant component of the San Diego metropolitan areas’ water needs. It's more expensive than other water supplies, but the technology is getting more refined, so the cost of desalinated water is coming down at a time when other water supplies, due to shortages and the workings of the free market are going up.
At some point, they're going to meet or get closer. Unlike some of my environmental colleagues, I think desalination is an important part of the equation.
In a proposal that came up in the recall election, one of the candidates was talking about how we just need to build a canal from the Mississippi River to California to take care of all our problems. That ignores political problems associated with that effort, as well as the massive infrastructure costs that would be required to build and maintain a major aqueduct for 2000 miles from the Mississippi to California. That's just not going to happen. Some of those pie in the sky thoughts of how we expand the water supply, I think, are unrealistic.
interviews
The Saving Glut of the Rich
by Ludwig Straub
September 22, 2020
This interview with Ludwig Straub, assistant professor at Harvard, was conducted and condensed by franknews.
Ludwig | I started working on inequality and debt related issues during my Ph.D, and since then I have been fascinated by how the distribution of resources across households can have macroeconomic impacts. Inequality and debt are just two examples of how these distributional aspects matter to the economy.
frank | To begin, what is the general economic understanding of the role debt plays in financial crises?
Debt is an important contributor to, and sometimes the cause of, economic crises.
Obviously, it does not cause all economic crises, as we have seen with the COVID crisis, but we have fantastic evidence as to the role that debt plays -- like that from my coauthors Atif Mian and Amir Sufi as well as Moritz Schularick and Alan M. Taylor -- who find that household debt run-ups for multiple years often culminate in a large, subsequent economic crisis.
We also see that debt can make financial crises, meaning the crises in which banks lose a lot of their equity, worse. Studies show that financial crises that occur after such household debt run-ups are much worse than other types of financial crises.
Why is a household holding debt dangerous to the economy?
Typically there's some kind of a saving glut – meaning there is a large amount of saving in the economy. This can be a global saving glut, or a domestic savings glut, like the savings glut of the rich that we write about.
Once that saving glut enters an economy, its financial system needs to digest it. In practice, this means the financial intermediaries, such as banks, who are holding the funds, will look for investment opportunities. They might increase lending to businesses and households. If there's not enough demand for those funds from businesses, the funds will flow to households and we will start to see households being offered lower and lower interest rates. We will see households get increased advertisements for using debt to finance all sorts of purchases, even those for every day goods such as furniture or appliances. That sort of thing becomes more and more prevalent the more desperate the financial system is to invest -- in other words, lend -- the funds originating from the saving glut.
One very natural thing that happens here is that people will be more likely to buy a house or a larger house, using mortgage debt. This demand raises house prices, and will ultimately start feeding on itself: if you have five, six, or seven years of steady house price growth, at some point, people irrationally believe that house prices will continue to grow forever. If that is your belief, then anyone’s best response is to go out and invest in housing, raising the price of housing even more. We call this a housing bubble. And all of it is financed by debt.
The problem is that at some point the bubble will burst, and households will see that they have accumulated a large amount of debt and that their investments are not doing so well anymore. As a result, they start cutting back on their spending. What's very important to understand here is that these are often middle-class people, people with high marginal propensities to consume. When they get worried about the depreciating value of their home, or about losing their job, they're going to respond with a dramatic cut in spending.
This is a key distinction between bubbles that happen in the housing market compared to bubbles that happen in the stock market. The majority of the stock market wealth is held by the top few percent of the wealth distribution. The wealthy typically have a low marginal propensity to consume. If they lose wealth in the stock market, they're not going to cut back their spending in a significant way.
That distinction explains why housing bubbles have much stronger effects on the real economy.
Is that a widely accepted view of debt and crises, specifically in the 2008 crisis?
There are two broad views on the 2008 crisis, and they each have their own set of supporters. Nearly everybody agrees that household debt and the housing bubble in the early 2000s played a role in the crisis and that we did have a crisis in the financial sector. The two camps just differ on how much weight they put on either factor.
Is the saving glut always tied to inequality?
A savings glut can happen in many different ways. I'll give you a few examples.
For the global savings glut of the early two-thousands, we need to look at what happened in 1997. After the East Asian financial crisis in 1997, central banks in East Asia feared they might run out of foreign reserves again, so they began and have continued to purchase massive amounts of U.S. treasuries. U.S. treasures are the go-to asset for central banks wanting to accumulate reserves outside of their country. Another well-studied source of a saving glut is an aging population. As people get older, there are more wealthy, older households compared to less wealthy, younger households. That is a phenomenon that is very pronounced in Italy and Japan, for example.
In our research, we focus on the saving glut that has emanated from rising inequality. The key idea is quite intuitive.
When you speak to the idea that more saving means more lending to households, what does that decision-making process look like?
That is something we don't have a definitive answer to yet. For instance, one of the big surprises that we found in our work is that when presented with that strong increase in saving, the financial system did not successfully channel those funds into businesses.
One of the most well-known relationships in macroeconomics is that saving is equal to investment. If there are more savings, typically the lending rate will go down, and businesses invest more. The thought is that we will have more investment overall and stronger growth; everybody will be better off no matter where the saving is coming from, whether it is from abroad or from the rich.
Quite frankly that surprised us. It goes against the standard logic macroeconomists grow up with.
More research is needed to understand whether the fact that the funds did not flow to businesses is because businesses didn't seem to want the investment, or if banks had preferences against lending to businesses and instead preferred to lend to households. I don't know the answer to that question, but I'm very interested in doing more work on it.
Are there policy solutions to look towards?
There are a number of solutions.
One possible solution is to have governments invest more. If businesses are not investing, why don't governments take advantage of low lending rates and invest, for instance, in infrastructure? Public investment has never been so low, and it has been falling over the past few decades. That could be one way to substitute for some of the missing private investment.
Another solution is redistribution, away from richer savers towards less rich spenders. And that is important for several reasons. One is that a heavily indebted population reduces demand. Whenever an economy generates less demand, central bankers cut their interest rates in order to stimulate the economy as much as they can. Currently, we are at zero percent interest rates, which means that one of the big steering wheels we used to navigate past crises is out the window. We are up against a constraint – we can’t go lower with interest rates than the zero lower bound. That is a major challenge that is coming about from too much borrowing in the bottom rungs of the wealth distribution.
How do you see the role of debt in the crisis we are in now?
The precise role remains to be seen, but there are already a few indicators as to what the role might be.
So far, household debt seems relatively stable, but since the extra unemployment insurance benefits in the Cares Act have not been extended, it might be the case that households need to begin to borrow more to make ends meet. That will have all of the macroeconomic implications related to debt that we spoke about earlier. So that is something to watch.
I think that the two types of debt that are going to be most affected are corporate debt and government debt.
For corporate debt, one key issue is going to be something called debt overhang. Consider a restaurant in New York City. After the pandemic, the restaurant's debt payments may be two or three times higher than before because the owners had to borrow in order to stay in business. This level of debt can make them less willing or able to invest in new locations.
That's the debt overhang problem, and that will put an additional drag on corporate investment in the coming years. That, I think, is another factor we need to watch.
For government debt, the risk that many economists think about is that there might be a loss in confidence in the dollar as the world’s reserve currency if we don't manage to get deficits under control. I don't think this is a risk that will materialize in the next 10 years. There's still ample room to go before that risk starts to become threatening, but at some point, if there is no sign of willingness to bring deficits under control, it may certainly become a threat. In that case, we would potentially see foreign central banks turning to other assets as opposed to U.S. treasuries, like Chinese or European bonds. But to emphasize, I think this is one is, luckily for us, more of a long term problem.