California’s Water, Class Conflict and Monetary Illusion

California, the New World’s west coast that Ralph Waldo Emerson assumed would be home to humanity’s transcendence, is introducing water rations.

A large cloud gathers over the skyline of San Francisco, California December 12, 2014. REUTERS/Robert Galbraith

 There’s no doubt that the situation there is dire and action needs to be taken, not least because unlike other parts of the American West, California abandoned the old Spanish water laws, a decision that led to wheeling and dealing and overtapping groundwater supplies to produce the now infamous almonds.

That rations be introduced, especially in a putative wonderland, is sobering but also perhaps exhilarating if seen as a concrete example of how old economic nostrums have failed us since 2008.

Sure, there are the modern monetary theorists and their kin, eager to remind us that loans create deposits and private banks literally make money. But water, which is also being rationed in San Paulo, Brazil’s largest metropolitan area, is somehow less ethereal. Indeed, as California’s farmers, currently taking a crash course in media spin, now say: Water makes food, not just agriculture.

Water used for other human purposes is now evidently at a premium. Actually, no, there simply is not enough water to meet demand, so one of the state’s largest wholesalers is planning to slash by 15 percent the water it delivers to a host of cities where 19 million people live. Many households are going to face indoor usage caps of around 50 gallons a day per person. The State Water Resources Control Board has already passed an emergency regulation that if tapped would give local agencies the power to hand down $500 fines for violations, noting it can sniff them out using census records and aerial photography.

Water politics literally made Los Angeles, so there is going to be a battle in the months ahead. Already some state officials insist there will be no rationing but rather an “allocation-based rate structure,” meaning customers will pay hefty price for water above a certain quota.

 

Swan song for the price signal

The price signal is a beautiful notion but it’s hard to put it forward as a credible one at a time when global monetary authorities are fiddling with it in order to prop up financial institutions and their remarkably well-paid senior employees. Even farmers in the Midwest know the Federal Reserve is fiddling with asset prices, adding perhaps 25 percent to the value of local farmland.

It’s not at all clear that now is the time to be talking about the price signal. Per capita water use in Malibuis more than double the city average and four times that of less-affluent neighborhoods such as Santa Ana according to official data that the Los Angeles Times used to decry what it called a “class” conflict.

Besides, price doesn’t matter for the rich. A surcharge would have to be astronomical to impact behavior, as proven by all efforts to use sin taxes to curb consumption of targeted goods.

That was essentially demonstrated in a drought that hit North Carolina recently. A careful study showed that municipalities that opted for mandatory prescriptive policies – aka rationing – focused on outdoor watering restraints achieved a 10 percent reduction in aggregate demand. Achieving that would have required raising the average price of water – not just the over-quota amount – by 30 percent. In short, using the price lever, the wealthy and largest water users did not care while the poor suffered. Interestingly, the wealthiest 20 percent of families were twice as responsive to mandatory policies where those were introduced in the state.

While economists love the price signal, there are plenty of options currently in use. Lotteries are used as a distribution channel, there are club goods, some universities claim to distribute student places according to merit, and of course there is that deep-culture institution, the queue or line, where service is given on a first-come, first-serve basis.

Rationing is often associated with wartime policies, and so to a crisis – much like California’s water crisis is being depicted. But is it part of the toolkit for the new normal?

The alternative is of course to hail the market. The Hamilton Project, part of the progressive Brookings Institution, has a new discussion paper out advocating better water-trading institutions. Interestingly, the authors of “Shopping for Water”  also argue against the “beneficial use” doctrine that strip water rights from those who don’t use them, and their final suggestion is “expanded federal leadership.”

Those latter points highlight how new powers – enlightened technocrats, or perhaps just urban financiers - may wish to wrest water from its old custodians –peasants, or grizzly ranchers, say - citing prim and proper goals such as the common interest and greater productivity.

And there’s little doubt some kind of new approach to water governance is going to be adopted. The Anthropocene, after all, may not really be about romantic nostalgia for an era when Nature existed, but a codified appeal to technocracy and the pre-Copernican notion that man is its rightful manager.

 

Change when the facts do

But our technology is mainly just a communications network; after all, we haven’t invented any ways to replenish acquifers or reverse global warming. That may make rationing more appropriate, triggering Portuguese economist Jose Viegas’s call for an urban transportation policy based on granting all taxpayers a quota of mobility rights and then levying road fees electronically. Given that richer households spend four times more on transportation than poorer ones, this could end up usefully countering income inequality trends based on wealth.

Intellectually, rationing conveys that money alone can be a useless form of purchasing power, just as the financial crisis is reminding us that printing more of it doesn’t automatically trigger the flow of credit.

Rationing is associated most with wartime, and experiences then may be useful now. It had upsides, such as gasoline rations in the U.S. – ration cards for sugar, coffee, fish, meat, eggs, cheese and fabric were also issued in 1942 - promoting carpooling, and unexpected downsides, such as the upper-class embrace of crime in both the U.K. and the U.S.

That latter point is definitely a worry. If rationing creates a grey zone, the well-connected can exploit opacity better than members of the hoi polloi. That’s why Mitt Romney was able to say that half of Americans are “takers” in the fiscal sense while disregarding that the largest tax giveaways the United States offers are for health insurance, capital gains and home mortgages, all of which are strikingly regressive.

However, rationing on paper ought to be more transparent: all Californians get the same amount of toilet-flushing water is pretty straightforward. To be sure, that may make people hate it – just as Britons hate the Council Tax and Italians their new residential property taxes, as these tend to require explicit payment rather than get lost through being withheld at source of buried, like V.A.T., in the sales price. On the other hand, such hatred can be tonic. As Kristian Niemiets notes for the U.K. Institute of Economic Affairs, if all taxes were as blunt and transparent at that, government debt “could never have risen to anywhere near its current level.”

Most economists today cling to the idea of the price signal and consequently the design of markets best able to weed out the noise. But as Queen Elizabeth and others have lamented, they failed to notice a few issues along the way, leading to the vast amounts now being spent on propping up zombies rather than the forging of a sustainable welfare-enhancing world.

But might not rations, derived from Latin ratio, or reason, not be the right candidate to step up in the void led by rational-expectations models based on value-at-risk calculations gamed by insiders?

In 1977, Martin Weitzman at MIT wrote a paper asking “Is the Price System or Rationing More Effective in Getting a Commodity to Those Who Need it Most?”. He concluded that the price system is preferable in a relatively egalitarian world, but the converse is true when income inequality is greater.

The average male real wage has stagnated since he wrote that, suggesting that the current answer to his question may have changed.

@CHCEmsden

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