Jerry’s Choice And The California ‘Drought’

Not long ago I wrote a short piece here on No Nonsense Economics noting that the current water situation in California should more aptly be named a ‘water shortage’ rather than a ‘drought’, the difference being that a drought is a water shortage with significant negative economic consequences. Such consequences are not something the state has experienced over the last few years given the over 3% employment growth, sharp increases in taxable sales, rising home prices, and rapidly declining unemployment rate.

Drawing a sharp line between the meaning of ‘drought’ and ‘water shortage’ is not meant to be taken too seriously—but it is intended to combat the hyperbolic descriptions of the water situation that are so prevalent in the media, including such extreme adjectives as ‘crushing’ and ‘devastating’.

Clearly we haven’t seen any effects that come close to this. The state has avoided substantial economic suffering despite the lack of rain largely because of wise investments in conservation and storage. This view was recently echoed in a report from the California Legislative Analyst’s Office (LAO), which pretty much said the same thing, albeit with slightly different reasoning—a point I will return to.

Nevertheless, another dry winter and rapidly emptying reservoirs has meant the shortage is getting worse and the situation might well turn into a ‘drought’ if something isn’t done to better conserve remaining supplies. That said, I was glad to hear the state government was finally getting serious about addressing the issue— until I found out what they had in mind.

Like many, I was dismayed to learn that Governor Jerry Brown’s preferred course of action was to impose a draconian 25% cutback on water consumption in urban areas while completely ignoring the agricultural sector in the short term. This seems crazy given that the 2% of the California economy we call agriculture uses 80% of the state’s water.

My first inclination was to think the Governor was being politically expedient by avoiding a fight he may have lost, with disastrous consequences. The agricultural industry is deeply intertwined with Federal policymakers. One of the two canals that carry water through the Central Valley was built by the Feds primarily for agricultural use. Last year, after a mandated reduction in deliveries through those canals, the agriculture lobby pushed in Washington DC to get a bill passed that would have forced more water into the canals despite potential environmental consequences for the Sacramento Delta. These efforts never went anywhere but it was still an impressive show of political muscle.

From comments made since the cutback was announced however, it seems Governor Brown has different motivations for lumping the majority of pain on urban users other than avoiding a fight with the Feds. He asserts it is because farmers aren’t using their water ‘frivolously’ the way urban users are. Instead, they are growing food, which is too important to target for cutbacks.

To paraphrase my favorite late night host Jon Stewart, “whaaaaaaaaaaaaaat?”

The flaws in the Governor’s reasoning on this issue are essentially the same two failings in the LAO report. As mentioned above, while I agree with the LAO’s overall findings, I do not agree with their underlying logic. The first issue has to do with the economics of ‘frivolous’ urban consumption. The second has to do with the assumed but incorrect relationship between the health of California agriculture and water usage.

The LAO suggests there will be little economic impact from the current ‘drought’ because reductions in urban water availability create little drag on the economy—after all showers and lawns don’t create jobs. This more or less supports the Governor’s decision to put the bulk of the cutback pain on urban users.

But the logic isn’t entirely true. While it’s accurate that up until now there has been little economic impact on urban areas, water rules regarding new construction raise the price of housing. New restrictions on water usage will likely slow new home production further from its already too-slow pace. California’s housing shortage may be the greatest threat the state faces to its long-term economic health. While the lack of housing may not show up in a dramatic fashion in terms of job and income growth, it has very real economic consequences in the long run.

But putting housing to one side, there are still very real economic losses that come from reducing consumption of what the Governor labels ‘frivolous’. The rules of consumer behavior boil down to a person allocating their budget across a wide variety of goods and services—from healthcare to automobiles to food to lawns and showers—in a way that makes them happiest. If I want to reduce my consumption of food in order to spend that money on watering my lawn, there is nothing ‘frivolous’ about that choice—as long as I am paying a fair market price for the water.

Using rules and regulations to force people to get rid of their lawns and take fewer showers than they want in order to subsidize the production of more food leads to very real economic losses, even if those losses don’t show up in current estimates of employment and income. And as far as paying the right price, bear in mind that farmers already pay on average 1/20th of what a typical urban user pays—so the scale is already heavily tipped in favor of food.

If anyone can be accused of engaging in frivolous activities it is an agricultural community that regularly uses water to grow incredibly water intensive crops in the desert, including alfalfa, cotton, and Sudan grass (otherwise known as hay)—not items that have ended up on my dinner plate lately.

The second problem with the Governor’s and LAO’s logic is more profound—it is the assumption that California’s agricultural economy is suffering severely as a result of the current water situation and can’t be asked to accept additional pain from further cutbacks. One citation suggests that the state has lost 17,000 jobs within the agricultural industry and incurred $1.5 billion in losses. These numbers aren’t even exaggerations. They are simply contrary to the available evidence, which suggests the industry is doing just fine even with limited water supplies.

Farm employment over the last 4 months, according to the California Employment Development Department’s official numbers, has averaged 416,000 jobs. This is lower than last year’s record high 425,000 jobs, but that is a blip in an otherwise volatile data series. Average employment over the past 4 years since the drought began has been about 410,000 jobs, lower than the current total. Over the 4 previous years before the drought began employment averaged 380,000 jobs. Farm employment today is the highest it has been in 20 years.

And employment isn’t the only place we see the economic strength, not weakness, of the state’s agriculture sector. Farm proprietor’s income over the last four years has remained about $10 billion, up 60% from the pre-drought level of $6.1 billion. Overall earnings are up by 34%, from $12.1 billion to $16.2 billion. And the gold rush is just beginning. While scare stories speak of thousands of fallowed acres, a drive down the I-5 or State Route 99 reveals the planting of thousands of new nut trees.

Claims that the industry has lost $1.6 billion are beyond me—that number is either made up or based on one of the greatest twisting of facts in recent memory. This isn’t to say that some farmers aren’t suffering – they are. But others are making money hand over fist on the basis of record high prices of some crops. In the aggregate, it’s pretty clear that not only is the state’s agriculture sector doing fine despite the current situation—they are doing great.

But all this really isn’t much of a surprise. When looking back at the history of agricultural output in California, two things immediately become clear. First is that past droughts have actually had surprisingly little impact on agricultural revenues in the state. The graph below displays revenues earned by state agricultural operations compared to data on water shortages from the National Oceanic and Atmospheric Administration (NOAA) Palmer index. During the 6 year ‘drought’ between 1987 and 1992, overall agricultural revenues grew by close to one-third. And there was a downturn during the 2007 to 2009 ‘drought’, but that was due more to the ‘Great Recession’ than the water issue. And revenues have grown for the first two years of the current situation as well.

But more significantly is that real output in the industry today is roughly 4 times what it was back in the late 1970s—despite the fact that the state has not seen any significant increases in water availability over that period of time (the graph below shows the U.S. Bureau of Economic Analysis’s estimate of real agricultural output in the state over the period). How? By using the water it has available in smarter ways, with better irrigation systems and less water intensive crop selections. In other words, the industry has proven over time that it has the ability to do more with less in both the long and short term. These efforts imply that water shortages can—and should—be absorbed by everyone, not just urban areas.

There is still plenty of slack in the system. Agriculture in Australia for example thrives despite even smaller supplies of water. Statistics from that nation indicate that Australia used about 7 million acre-feet of water to produce agricultural output valued at roughly $50 billion (see here and here). California agriculture uses 30 million acre-feet to produce the same value in output. One news article cited the following: “While farmers are moving to more efficient irrigation practices, they still practice wasteful flood irrigation on about 40% of irrigated acreage, said Heather Cooley of the Pacific Institute, an Oakland think tank. ‘We have a long way to go,’ she added.”

The future of California lies in our ability to manage growing water scarcity. Because 80% of the state’s water is consumed by agriculture means that the industry must play a significant role in the solution—there is simply no other option. To pretend otherwise is unrealistic. And this isn’t about less agriculture and more showers. It’s about agriculture treating water as the scarce resource it is, rather than acting almost as if it is unlimited in its supply.

Forcing the industry to start making tough decisions sooner rather than later will not only help the greenness of your lawn and the cleanliness of your body, but when the rains do return it will mean the state has more water to fill reservoirs and replace all that ground water—things that will be a huge help when the next water situation rolls around, as it inevitably will. But in the meantime we need to combat the myth of a fragile agricultural sector and a frivolous urban consumer.