Water Availability—The Crisis of the Eighties?

During the last few years, the popular press has bristled with predictions of a water crisis in the United States before the end of the century. Within government, the notion of impending crisis serves the secretary of the interior as justification for larger budget requests for water development, and pollsters report that clean water ranks high among public concerns. In the popular image, the western states comprise a vast aridity.

How much of this is hyperbole and how much solid fact? Is the country running out of fresh, clean water? How are Americans likely to react to changing circumstances for water in the next couple of decades, and what options does government have in developing water policy?

At the outset, I state the obvious: water availability varies greatly with geography, and general statements about the subject are suspect. Since the seasonal distribution as well as total amounts of rainfall differ greatly from place to place, the cost of making water available at a given place and time also varies widely. But this is very different than saying water is not physically available, or that water of a quality necessary for certain kinds of human activity is unavailable. Therefore, crisis is not an appropriate term to apply to most areas of the United States when describing water issues. And that includes most of the West.

Nevertheless, the nation is facing actual and potential increases in the unit cost of obtaining additional quantities of water of the quality to which we have become accustomed. Why is this occurring?

Demand and supply

On the demand side, aggregate economic and human activity is growing over time, and increased water use almost invariably accompanies both population and economic growth. In fact, lavish use of water has accompanied past growth because the nation has invested handsomely in water development, water has been available at a very low unit cost (often the result of generous subsidies), and there has been little incentive to economize on water use. An interesting parallel can be drawn between water and energy policy until the decade of the seventies, when we learned that permitting energy prices to play a role in allocation can have an enormous effect on consumption. But water still is available for many uses at very low cost, often at less than the real social cost of developing more water at the margin.

Historically, many major water development projects were undertaken to provide economic opportunity and to develop particular geographic areas. Water development became a way of transferring income or wealth from group to group and region to region, and the efficient or economical use of water rarely was a central issue of water development policy. The trend now is running in the other direction, and we are hearing more about user fees and the incentives affecting water use than has ever been the case. But this is a relatively recent phenomenon.

Adjustments also are occurring on the supply side. Declining rates of economic growth have made it increasingly difficult for the federal government to increase domestic spending without creating deficits or raising taxes, and the resulting competition for government funds is intense. Couple this funding competition with the fact that in most areas the best sites for water development already have been exploited and the result is rising unit costs of water development. Furthermore, as higher values are given to nonconsumptive in-stream uses—about which more below—supplies for development are becoming harder to find.

How will this increased cost of water affect industrial water use? Will U.S. industry be at a competitive disadvantage either because water is not available or available only at a very high cost? Or are water quality standards likely to be so high that the cost of meeting them will make the production of industrial goods uneconomic? Again, one must be conscious of geography in advancing answers to such questions, but generally speaking, the industrial demands for water typically are not large relative to the value of the final product or the available supply. Therefore, the incremental value of industrial water is high compared to the incremental value of water used, say, in agriculture—the largest user of water. Of course, some uses are more water-intensive than others: coal slurry pipelines, to take an obvious example, are more water-intensive than the production of computers. But overall, the cost and availability of water will not place U.S. industry at a competitive disadvantage internationally, although regions will differ in the extent of the water problems they will encounter. For example, if power costs in the Pacific Northwest continue to rise because of the disappearance of low-cost hydroelectricity, that region may lose some of its historic advantage in attracting energy-intensive industry.

The quality dimension

Water quality is a different matter. Despite the great popular desire for a quality environment, we in the United States have not been very successful in designing policies and programs to provide that quality economically. It may very well be that water quality considerations will make certain kinds of industries in certain locations uneconomical if the country insists on rigid adherence to particular policies. Granted, this may be as much the result of misguided policies as it is of the inherent nature of the water quality effects of industrial water usage. Nonetheless, geographic or areal adjustment is a way of providing environmental quality, and water quality may constrain industrial development in certain areas even though it does not greatly inhibit industrial development in the aggregate.

Perhaps because they usually serve collective values rather than private rights, some of the fastest-growing uses of water often get overlooked in discussions of the subject. These are the in-stream uses of water by all forms of aquatic life as well as those we might call aesthetic. The institutional devices used to relate these collective in-stream values to out-of-stream, individual water-right diversions are very crude and cry out for far more attention. How does one assign values to in-stream uses and intangible values so that they can be judged relative to out-of-stream commercial uses? If such values can be determined, how can they be reflected in decisionmaking? What uses should have preference under conditions of lower-than-average stream flow? This problem will become more acute as water allocation comes under increasing pressure.

Water allocation

If water availability is not to constrain industrial development, and if relatively less attention is going to be paid to water development projects, it is inevitable that greater emphasis is going to be placed on water allocation and on water conservation and efficiency in use. We know from our experience with energy that the cumulative effects of many small economies can be substantial. The lesson is clear: the great challenge for water policy in the 1980s will be to provide incentives that will result in water being viewed as an increasingly scarce resource. Most Americans have not yet come to that point of view.

Higher prices are an obvious way to indicate growing scarcity, but many people see some sort of conflict between pricing policy and legal structure. Let me lay that fallacy aside. There is nothing inherently contradictory between a system of water law and permitting economic forces to play a role in water allocation. The law governs water allocation. The only issue is the extent to which economic influences are reflected within the law. An efficient market requires the kind of social stability that often can be provided only by government and a legal system. There is nothing inherently inconsistent between a market for water rights and the legal protection of prior rights and third-party effects. Problems arise because of the unusual characteristics of water as a resource, the uncertain nature of stream flows, and the difficulty of measuring return flows. Thus, the problems relate more to hydrology and practicality than to philosophy or principle. It is instructive to observe the varying influence of economic forces as one goes from one western state to another, despite the fact that they share the same basic legal system.

As water becomes more expensive, economic influences are almost certain to play a greater role in the coming decades. Yet, it is not a simple matter of "letting the market work." While markets can, and undoubtedly will, play a greater role in water allocation, they probably will be highly constrained and their nature will vary with legal jurisdictions and geographic conditions.

Designing allocation mechanisms that will permit economic influences to play a greater role is an enormous challenge to the water professional. It is most certainly not a job for the economist alone, but involves law, hydrology, and political acceptability as well. The prospects are not especially bright for a breakthrough discovery leading to a universal water market or pricing framework, but many different programs and policies already reflect economic forces in varying degrees; systematic evaluation of this experience would permit social policy to progress much more rapidly. It is unfortunate that so little intellectual effort is being devoted to analyzing this experience.

Interbasin transfers

Interbasin and international water transfers are but a special kind of allocation, providing for the transfer of water from an area of abundance to an area of relative scarcity. No doubt we will hear more discussion and debate about transfers as water becomes more expensive, and a few interbasin transfers may still be relatively inexpensive. If the value of water in a new use exceeds the value of its present or potential use in the area of origin, plus the cost of transport, a transfer is economic and is a viable policy alternative. In other words, such transfers are a way to put water to a higher-valued use.

But the cost of transport often is very high if water is to be transferred long distances. That is why many large transfer schemes will be hotly debated but not implemented. Enormous political tensions between basins—and sometimes between nations—are created by such proposals. Part of this stems from water-related activities that would be sacrificed or otherwise affected by transfer, but an overlooked source of tension is the often enormous regional income transfers that are involved.

Research that my colleagues and I did some years ago throws light on the politics of very large interbasin water transfers. We developed a hypothetical water transfer model based on some of the ambitious plans to transfer large amounts of water from the U.S. Pacific Northwest to the Southwest. We assumed the project was neutral with respect to economic efficiency (it had no net effect on national income) and attempted to deduce the effect it would have on the income of various regions. We assumed four regions—the area of water origin, the area of water destination, the area through which water would be transported, and the remainder of the United States. When both direct and indirect effects were taken into account, we discovered a positive net economic benefit in every region except "the rest of the nation," with, of course, the greatest benefit occurring in the area of destination. Thus, while transfer produced the expected losers in the area of origin, their loss was exceeded by the gains accruing to others in the same region. Under such circumstances, the political reaction to such schemes will be mixed even within the area of origin.

In the remainder of the United States, the aggregate loss was large, but the per capita loss was quite small and an enormous outcry from the citizenry would not be expected. Even so, though small raids on the Treasury may be tolerated or made feasible through logrolling, massive transfers of income to particular regions are not likely in times of budget stringency.

The point that our research makes clear, however, is that water often becomes a convenient political tool for doing something for one's constituents. In a political sense, it really is income rather than water that is being transferred.

Given the trends outlined above, what is likely to characterize water policies for the remainder of this century?

• Except in highly unusual circumstances, massive, capital-intensive, water development projects will not be major components of future water policy. The best sites in many regions already have been exploited, and many massive water development projects will prove to be uneconomic. It will be difficult for such projects to compete with other uses of public funds.
  Water development projects are likely to be smaller than many in the past and to be oriented more to local conditions and objectives. Because of this and the competition for public funds, greater emphasis will be given to cost sharing and partnership arrangements involving cooperation among various units of government as well as between the public and private sectors.
• We will see a great deal of experimentation with social incentives that influence the development and use of water. As rational beings, we will try to find ways to make water available at a lower cost and to put it to its most effective use as it becomes increasingly expensive.
  But we do not know as much as we would like about water pricing and the market allocation of water. Protecting both water quality and third-party interests is but one example of the complexities associated with the creation and use of incentives that would lead to more efficient means of water development and use. We badly need to record and evaluate the experience that is being acquired as we experiment with different institutional arrangements.
• Water quality considerations will play an increasingly important role. The clash of two imperatives—high quality and economic growth—will provoke a search for alternative means of accomplishing these dual objectives. Present policies provide enormous opportunity for improvement.
  International and interbasin water transfer plans will continue to be advanced, and some of these plans will become the focal point of much debate. But if such projects are capital-intensive and if the transport cost per unit of water is significant, they are not likely to become fact. The only exception I see is if such developments are the only means of meeting an international treaty or other requirement for water short of severe economic or political dislocation.
  Attitudes toward the concentration of people and industry in industrial societies may be undergoing fundamental change. Developments in communication and transportation permit much greater geographic decentralization in decision making. Thus, the central government may no longer feel the same pressure to supply services, including water, to accommodate the future growth of already populous areas.
• Competition between in-stream water values and diverted water uses will become increasingly severe, and ways to address these conflicts will be a significant part of future water policy. In-stream values will not be protected by a system of private property rights unless the market for water is constrained or regulated in light of these values.

These prospective developments create an enormous need for policy research. While I do not believe this kind of research is likely to yield major breakthroughs or brilliant solutions to water policy problems, it can provide a broad base of knowledge so that water policy actions can be progressive and evolutionary. High-priority areas for study include the experience with markets for water in different institutional and geographic settings; institutional devices for relating in-stream collective water values to out-of-stream individual rights; different institutional means for coping with uncertain water supplies; and ways of protecting third-party interests in the face of economic change.

In summary, developments in water will not be as exciting as they have been in the past, at least not to the person who is excited mostly by large projects or vast water diversions. But if vast projects are not in the cards, the nation still has water problems enough to solve. As I hope I have shown, crisis is not an appropriate term, but some substantial challenge, nevertheless, must be met. These challenges are more likely to be addressed by changing the way we manage and allocate water than by simply making more available at a low price. That was the way of the past; the future will be different.