Dam Fools

Why federal water management is all wet--and why environmentalists are right to question it.

James V. DeLong from the April 1998 issue

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Federal Physics

The idea that the federal government is exempt from the laws of both physics and economics is not a recent innovation, and by the end of the 19th century both political parties enthusiastically adopted the idea of a big reclamation program for the West. The Newlands Act passed in 1902, establishing the Bureau of Reclamation. In a fateful portent, the law contained the first subsidy for users of irrigation water. They were to repay construction cost over 10 years without interest, and, when even this schedule could not be met, Congress soon extended the payment period to 20 years with a five-year grace period.

Relatively few dams are seriously controversial. Most were built in the well-watered East or far Northwest by private interests or as part of local construction of water works. Many were indeed subsidized by the federal government as part of the New Deal public-works efforts or as farm ponds and are subject to all the usual concerns inherent in federally subsidizing projects of local benefit. But they do not seem to have aroused serious environmental concerns, wasted undue amounts of money, or seriously distorted other social decisions.

The big controversies involve the federal dam-building efforts conducted under four major public-agency umbrellas: The Bureau of Reclamation in the Department of the Interior; the U.S. Army Corps of Engineers; the great electric power administrations, such as the Tennessee Valley Authority; and the Federal Power Act of 1920.

These agencies divided up the country according to geography and function. The Bureau of Reclamation got most of the 17 states west of the Mississippi. Its basic function was to provide water for irrigation, with power generation and municipal water supply tacked on because any dam can be used for multiple purposes. The Corps of Engineers had been charged by Congress in 1917 with flood control and navigation, which meant it got the Mississippi and the East.

A few areas were left open. Both the bureau and the corps operated in the water-rich Northwest, damming the Columbia and the Snake rivers. They struggled over the Missouri River, with the bureau pushing the Sloan Plan, which would have put a series of high dams in the upper basin to generate electric power that could be sold to pay for irrigation projects. The corps wanted the Pick Plan, which called for low dams downriver for flood control and navigation. They compromised on the Pick-Sloan Plan, which built all the dams wanted by either agency--112 of them.

TVA was set up in the 1930s as an economic development agency, designed to provide cheap power to the Tennessee Valley and, incidentally, to control floods. The fourth program, the Federal Power Act of 1920, provided for the licensing of privately built dams to provide electric power. At the time, it was thought that hydropower would become the biggest source of electricity, and as of 1935 it supplied one-third of the electricity in the United States. Thereafter, declining fossil fuel prices shifted the balance, and today hydropower accounts for less than 9 percent of electricity generation, but the United States has 2,300 hydroelectric power plants.

Red Ink Reservoirs

The federal dam-building program depended not only on a revolution in the technology of building dams but on a revolution in man's ability to fudge a cost-benefit analysis: A key component of the boom was the dam builders' ability to cut themselves loose from economic constraints.

The initial Reclamation Act of 1902 was the template. By relieving beneficiaries of any need to pay interest on heavy capital investments, Congress ensured that uneconomic projects would become common. It also ensured that they would become political footballs. One of the early projects approved was in the Strawberry Valley of Utah in 1905. It drove a 600-foot tunnel through a mountain to benefit a local group that was unwilling or unable to finance the project itself. Setting a pattern that has continued for a century, the final cost was triple the estimate, the portion of the cost to be paid back by the beneficiaries was set far too low, and even this amount was not repaid for 75 years.

Rep. William Hepburn of Iowa deserves canonization as a patron saint of the public choice school of political analysis for his 1902 comment on the Reclamation Act: "[T]his bill is the most insolent and impudent attempt at larceny that I have ever seen embodied in a legislative proposition. These gentlemen...ask us...to give away an empire in order that their private property may be made valuable....[T]his is a thinly disguised attempt to make the Government...pay for this great work--great in extent, great in expenditure, but not great in results."

The devices for avoiding economic rationality were many, but they relied heavily on the public's lack of interest in cost accounting. Congressmen could say, with a straight face, that the beneficiaries of irrigation would pay the costs of a project when, in fact they: 1) paid only the marginal costs of the irrigation facilities that were added onto a dam built for power generation or flood control, not the basic costs of the dam itself; 2) were relieved of any interest charges during construction; 3) got repeated forgiveness of the debt. The result, as calculated in 1989 in The Market for Federal Water by Robert Wahl, a former analyst with the Department of the Interior, is that the average subsidy to users of agricultural water is over 80 percent of the costs of construction.

The Bureau of Reclamation also invented such devices as River Basin Accounting, under which all projects on a river system are brought under one cost-benefit umbrella. That means that a "cash register" dam can be built to generate power, and the revenue from it then can be used to support irrigation projects that could not stand on their own. The bureau also chronically overstated the value of crops to be grown with the water supplied and counted as "benefits" huge sums that represented transfers of money from other parts of the country into the favored locality rather than true increases in national wealth. And once a project passed the cost-benefit tests, augmentations could be adopted without triggering any new analysis.

The Corps Problem

The Army Corps of Engineers, the other great dam builder, did not get into the business in a big way until the Flood Control Acts of 1936 and 1944. At the time, dam building was seen as a depression-fighting jobs program. Some deference might be given the concept that benefits should exceed costs, but the real idea was to put men, and hard-pressed engineering firms, to work. From 1936 right up to the present time, the corps and its congressional patrons have understood that none of them were in the business of finding reasons not to build projects.