Billions Down the Drain

Why Californians are squandering their most precious resource.

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Water—a clear, colorless liquid, a simple combination of hydrogen and oxygen. We drink it, we cook with it, we clean with it. We pump it from the ground, draw it from lakes and streams, and move it from here to there. We bathe in it, shower under it, and play in it. And, most of all, we grow food with it—nearly 80 percent of all water consumed in the United States is consumed in agricultural irrigation.

What would we do without enough water? It's a question that analysts say will come up with increasing urgency across the country over the next decade. So it's not surprising that in California—the state that, more than any other state, couldn't be what it is without the deliberate development of water resources—there is raging a huge debate over water.

The focus of the debate is the Peripheral Canal, a water project planned for Northern California since 1966. Officials are calling it the "missing link" in a 50-year-old effort to slake the thirst for water throughout California. The state is already served by the largest water storage and transportation system in the world. From the rain-blessed north, some 1,100 miles of federal and state aqueducts fed by rivers and reservoirs carry water to population centers around San Francisco; farther, to the otherwise arid Central Valley that has made California the biggest agricultural producer in the nation; and, in a major engineering feat, over 2,000-foot mountains to the metropolises of Southern California. The Peripheral Canal and related projects (such as two new dams) are supposed to boost the capacity of California's State Water Project by 43 percent. On June 8, California voters will go to the polls to say yea or nay to the entire package, although "the canal" is the big issue.

Cost estimates run from an optimistic $700 million for the canal itself (from the Los Angeles Chamber of Commerce, in favor), to a depressing $23 billion for the entire project (League of Conservation Voters, opposed). The state voter pamphlet claims a total, inflation-adjusted cost of $5.4 billion for the multiyear project, but a task force set up by Lt. Gov. Mike Curb charges that the real price tag—when interest costs are included—is $12.5 to $17.5 billion, depending on the rate of interest. Construction was authorized by the legislature in 1980, but financing it is up to the California Department of Water Resources (DWR). The current referendum challenging the authorization was forced when opponents raised 850,000 signatures to put the measure on the ballot.

Canal Coalitions

For a rather moderate addition to the state's huge aqueduct system, the Peripheral Canal has aroused enormous controversy, even by California standards, where few important issues ever go by without a public referendum. The canal has touched the ever-exposed nerve of north-south rivalry. Farmers in the Sacramento Delta are livid that they will be shipping "their water" downstate to be used by rival farmers in the south. Meanwhile, Southern Californians fear they will go bone dry without the new construction. Environmental groups in Southern California are opposed because they still dream that choking off public services will turn Los Angeles back into the pleasant resort town it was in the 1920s. Business groups around the state suggest that the canal is absolutely necessary to keep California's economy from collapsing. All this is fairly predictable.

But the canal has also shattered many traditional political alliances. Some environmentalists in Northern California are pleased with the many safeguards that have been built into the plan. The canal—43 miles long, 400 feet wide, and 30 feet deep—would be built along the eastern side of the Sacramento-San Joaquin Delta, the largest inland delta in the continental United States. Made up of some 1,000 miles of waterways and 738,000 acres of islands, the area receives nearly half of the state's water flow and runoff (mainly via the Sacramento River) and is the core of California's massive water development system. Two giant pumps, one federal and one state, on the south side of the delta draw off water that would naturally flow out to sea through the San Francisco Bay.

State water officials insist that the canal is primarily designed to improve the delta area's ecology, which has been ravaged by the diversion of water. In addition to tapping the Sacramento River directly to carry water south, the project would act like a perforated garden hose, squirting fresh water into the delta at key points and driving back the saltwater incursions from San Francisco Bay that have hurt fish and waterfowl life and are threatening irrigation in the area.

"The truth is, the Peripheral Canal is the best thing that could possibly be done for the delta environment," says Dan Chapin, vice-chairman of the Delta Environmental Advisory Committee and a long-time environmentalist. "People who oppose this project on environmental grounds are just being unrealistic." As an added bonus, the legislature passed and voters approved in 1980 an amendment to the state constitution promising environmental protection of the delta and prohibiting development of California's northern coastal rivers for the benefit of southern water users. In a nice double-bind, this amendment will only go into effect if the Peripheral Canal measure is approved.

If the environmental community is having trouble agreeing on the issue, however, the state's agribusinesses are even more at odds. Most of the state-irrigated farmers in the fertile San Joaquin Valley are four-square in favor of the Peripheral Canal package because it promises to bring them more water. But the state's two largest land companies—J.G. Boswell Company and the Salyer Land Company, both in heavily irrigated Kern County just north of Los Angeles—have broken ranks. They have decided that the constitutional provisions against using the northern rivers are not worth the cost of the present proposal. As they are often quoted as saying, "We're going to have a canal with nothing to put in it." So they have decided to work against the canal proposal in the hope that they can eventually get the state to build a cheaper cross-delta project without the environmental restrictions.

To do this, they have tried an extraordinarily Machiavellian gambit. Boswell and Salyer have become the principal financers of the environmental opposition. The pro-canal Los Angeles Times ran a series of stories in February revealing that the two companies had so far provided $548,000 of the $810,000 raised by environmental groups working against the project. Environmental groups, in turn, have charged that the Times and its owners, the Chandler family, themselves major landowners in agricultural Kern County, are only trying to consolidate their empire by ensuring access to state water.

Perhaps the only person in California who is not passionately arguing one side or the other of the issue is good old Governor Jerry Brown. He is using the June primary election to try to move up to the Democratic nomination for the US Senate and is morbidly afraid of offending any major constituency over what might be termed, if you will, a peripheral issue. Brown is reported to have mumbled some early support for the project but has generally maintained an unearthly silence.

Let's see now, have I missed anything? Oh yes—a crisis. No such controversy would be complete without a crisis. In this case, it is the long-arriving results of a 1964 US Supreme Court decision, which ruled that the federal government had been overly generous in granting water from the Colorado River to Southern California when the original apportionments were made back in the 1920s. Arizona wrung a larger allotment from the Court and will finally start taking its increased share when its own aqueducts are completed in 1985.

At present, the Colorado provides close to 70 percent of the water used in Southern California. The region will be losing about 17 percent of its legal entitlement, which works out to about 12 percent less water than it is now using. (For the Metropolitan Water District, which serves urban users in Southern California, the figures are 55 percent and 35 percent.) In wet years, this can probably be made up from other sources—groundwater supplies, the present California Aqueduct system, and the Los Angeles Aqueduct, which brings down water from Owens Valley in the Sierras. (The scandals surrounding the 1920s construction of this aqueduct formed the background for the movie Chinatown.) But in dry years—like the drought that nearly paralyzed farming around the state in 1976–77—the extra input into the California Aqueduct made possible by the Peripheral Canal and other projects on the ballot could be crucial—or so state officials argue.

Peripheral Issue

For two weeks this February I toured the state of California, trying to make some sense out of this devilishly complicated issue. I visited the state's aqueduct, wandered along a swollen Sacramento River, basked in the balmy 75-degree weather in Los Angeles, stayed indoors in Sacramento for two days while a near-monsoon inundated farmlands and threatened new mudslides in the San Francisco area, and talked with more than two dozen people involved, to one degree or another, in the passions of the debate.

There was no need to go hunting for the issue. The newspapers ran stories about it daily. Practically every television news program seemed to be running its own five-part series on the state's water problems. When I was through, I took home a small suitcase full of literature and spent another three weeks wading through every shade of opinion on the issue.

Unfortunately, I must confess that after all this effort, I still have no idea how I would vote on the Peripheral Canal measure today. There is much to be said on both sides. The canal itself seems not to be a bad idea. It is intelligently conceived, with the purpose of protecting the environment foremost in mind. It is probably everything its supporters say it is. It does not seem overdesigned or ridiculously expensive.

Still, when all is said and done, it is hard to escape the conclusion that the Peripheral Canal is nothing more than the "missing link" in a system that is enormously overbuilt and environmentally destructive. If I had the chance to choose, I would probably want to say, "Yes and no, with the following reservations…"

But that, of course, is the whole dilemma. Why is such an important issue being decided through such a clumsy mechanism that is so weighted with catch-22s and counterproposals that, even after the vote is over, people will have difficulty deciding who has won and who has lost?

The problem with the Peripheral Canal referendum is that it gives voters the illusion of choosing between alternatives when the real issue is not even being raised. The key question for California's water system today is not whether or not the Peripheral Canal is going to be built. The crucial issue is, how long can the state continue to live with a system that is essentially designed to waste resources and is inevitably going to end up taxing nature beyond the point where it is going to be able to provide? That is the question that is not going to be on the ballot this June. But it is the one that Californians—and the rest of the country, for that matter—are soon going to have to start addressing.

Conservation's Contradictions

As Alfred Cuzan argues in a chapter in a forthcoming book, Water Use in the West, the history of water development in the West has been a history of government enterprise. Much of this was done under the aegis of the Conservation Movement of the early 1900s, which held that resources must be protected from the depredations of private enterprise. In particular, the Conservationists complained about "too much competition," which only produced "unplanned chaos" and overdevelopment of resources.

But much of it was also done under the aegis of the contemporaneous Progressive Movement, which argued that private enterprise was not efficient enough in developing resources for the benefit of the people. Government, said the Progressives, could do a better job.

And therein lies the contradiction that is at the heart of almost every resource problem now confronting the western part of the country. It affects electric utilities, irrigation projects, inland shipping, and water distribution, as well as federal grazing and forestry.

The enthusiasts of the era of Theodore Roosevelt, which spawned both the Conservation Movement and Progressivism, never saw the inherent inconsistency in these two positions. The proponents of government ownership and development of resources (Roosevelt's "New Nationalism") never noticed that they were simultaneously accusing private enterprise of being both too efficient and not efficient enough in extracting resources from nature. Their solution was to put all resource development in the hands of government enterprise, bypassing the private system. We are paying for their mistakes today.

It is only today becoming clear to many people that government enterprise not only inherits the problem of should-we-or-shouldn't-we-develop-resources but is far less efficient than private enterprise at doing either. Rather than bringing an optimal number of goods to market in the most efficient manner—the ultimate in conservation—government both overexploits resources and underproduces from them in terms of efficiency. It overtaxes the ability of nature to provide, while at the same time leaving us with less than we would have had otherwise.

Only recently have many people who might otherwise favor government effort begun to realize this. One of them is Donald May, Southern California representative of Friends of the Earth. Says he: "I think we're at the point where many groups that have traditionally supported big government projects for resource management are now realizing that the market can do a much better job in these matters. I know this makes me sound like a libertarian, but I think a lot of environmentalists have started to reach the same conclusions. Every time we set up one of these regulatory agencies, we end up fighting them four years down the road. The truth is, all government enterprises end up doing is subsidizing consumption. I think environmental thinking is reaching a historical turning point on these issues. We're much more interested in leaving the market free to operate."

The Conservation Movement, one of the major oars in the galleon of Progressivism, was conceived by eastern scientists like John Wesley Powell and Gifford Pinchot. Trained in resource management and usually employed in the federal system, they concluded that the government would have to play a much more active role than it had previously in protecting resources. At the end of the 19th century, when they were developing their ideas, there was plenty of reason for their response.

At the time, with huge parts of the West still unsettled and people rushing there to seek their fortunes, the nation was facing a dilemma that California environmentalist Garrett Hardin has defined as "the tragedy of the commons." In his famous 1968 essay in Science magazine, Hardin used the example of the common pastures of the Middle Ages to illustrate the dilemma. Given access to a commonly owned pasture, wrote Hardin:

The rational herdsman concludes that the only sensible course for him to pursue is to add another animal to his herd. And another; and another…But this is the conclusion reached by each and every rational herdsman sharing a commons. Therein is the tragedy.…Ruin is the destination toward which all men rush, each pursuing his own best interest in a society that believes in the freedom of the commons. Freedom in a common brings ruin to all.

Such a common ruin was occurring rapidly in the West near the end of the 19th century. Perhaps the most spectacular example is the destruction of the buffalo. This was largely the result of the unchecked depredations of white hunters—plus a deliberate effort on the part of the US Army to deprive the Indians of their major resource.

It was not simply the intentions of the settlers, however, but the existence of the buffalo as an unowned, "fugitive" resource that lay at the heart of the problem. Montana State University economists John Baden, Richard Stroup, and Wallace Thurman have noted that the Indians' early conservation of the buffalo may have been largely a matter of technological limitations. In earlier centuries, when hunting was done on foot with arrows, killings were rare, and "among the Blackfoot alone over 100 different uses were found for one animal."

[But] the introduction of the horse, steel tools and later firearms lowered the "price" of the animal.…During this period many buffalo were killed merely for the tongue and the two strips of back strap. By 1840 the Indians had driven the buffalo from portions of its original habitat.

In contrast, the authors note that in the Northwest, coastal Montagnais Indians practiced strict conservation in trapping at stationary beaver lodges.

Unlike the buffalo, virtually condemned to extinction as common property, the beaver were protected by the evolution of private property rights among the hunters. By the early to mid-18th Century…the Montagnais were managing the beaver on a sustained yield basis.

One anthropologist who studied the early practices noted that "the Western Montagnais farms his territory by marking his houses, ascertaining the number of beavers in them, and always leaving at least a pair."

It was only when white hunters, who felt no continuing stake in the territory, invaded the country in the 19th century that this conservation program fell apart. The new trappers began to kill the beaver indiscriminately. The Northwest Indians, seeing their conservation efforts coming to naught, eventually joined the slaughter.

The same syndrome was occurring with western forest lands and mining areas in the late 19th century. Access to federal lands was being handed out with few restrictions—and almost no enforcement. Timber lands were leased to small operators who immediately stripped them bare. Miners would burn down whole hillsides to get a better look at what might be underneath the soil. The terms of federal leases were so broad that they could be used to do almost anything. There was no thought of conserving for the future. The public at large would pick up the cost.

As Garrett Hardin later concluded, "The tragedy of the commons…is averted by private property, or something formally like it." Ideally, the solution was to get the western lands into the hands of private owners, who would have a personal stake in seeing that their resources were protected. But this was not easily done. There was just too much land and not enough people to occupy it.

Tragic Solution

The problem, as it has often been expressed, was that America did not have a feudal aristocracy. Had the huge tracts of western lands been in the hands of an American barony, there would have been no need for public intervention. Private interest would have solved the problem. In Europe, where a landholding aristocracy left over from the Middle Ages still controlled whole rural districts, there was never any need for a Conservation Movement. The land was managed by the people who owned it.

In America, though, it would have been necessary to create such a landholding nobility in order to achieve the same results. In a sense, this had been tried with the Homestead Act, which had been parceling out 400-acre plots to settlers for three decades, but the mountains and high plains that remained were unsuitable for small farming. Huge tracts had been given away to private enterprises like the railroads, but the public reaction had been overwhelmingly negative.

The Conservationists, under the leadership of Theodore Roosevelt, decided to solve the problem by retaining ownership of vast tracts of the western states in federal hands. This was not without precedent. In many European countries the crown had retained title to "the king's forests." In setting up the national forests and the Bureau of Reclamation, the Conservationists were essentially doing the same thing—even though it went against the American grain of free access to land.

The Conservationists carefully defined the purposes for which land could be leased—timber lands only for timber cutting, mineral rights only for mining. They developed the concept of "multiple use" and began reserving lands for their "highest use." In general, they took responsibility for being the nation's landlord. They did not, as many eastern preservationists were urging, intend that these lands should be left forever in their pristine state—something that contemporary environmentalists still have a great deal of difficulty understanding.

Conservation, then, was an appropriate response to the dilemma of unclear ownership and an unclaimed commons. As long as the federal government protected resources and collected proper "rents" on their use in an operating market, the tragedy of the commons could be avoided.

The germ of the Conservation Movement's undoing, however, lay in a companion idea of Progressivism: that government should also play the role of developing these resources in place of private enterprise. The notion was that, in bypassing the profits of private industry, government enterprise would be able to develop resources "solely for the benefit of the people."

What the Progressive Conservationists did not perceive was that by putting the government in the position of owner-developer they were only moving the tragedy of the commons within the government's bureaucratic domains. Now, instead of decisions being made according to the economic efficiencies of the market, they would be made through the logrolling of the political system. And, by not allowing the rents and profits on these resources to be determined by the market, the government only assured that they would be overdeveloped, because they were being undervalued. The result is the huge problems of government misallocation and overdevelopment of resources—water being only one of them—that plague the American West, and much of the rest of the country, today.

Subsidized Depletion

Kern County, California, is a magnificent example of the varying fruits of government enterprise. A 40-mile-wide sector straddling the southern end of the central San Joaquin Valley, the former dusty scrubland is now a beautiful carpet of rich agricultural fertility. Even in February, mile after mile of green cropland lie spread out beneath the mild California skies. "We grow every kind of crop you can imagine here," says Jeff Thomson, 32-year-old scion of a family that has farmed in the area since the 1890s. "We grow cotton, hay, grains, vegetables, garlic, and grapes. We've incorporated for business and tax purposes, but this is still basically a family farm." Thomson and his father and brothers now cultivate about 3,000 acres—a moderate size for the region.

On the subject of water, Thomson is adamant. "We draw part of our water from our own wells and part from the state aqueduct," says the 200-pound former college football player, who serves as state cochairman of Citizens for Water. "Why should we let all that fresh water flow out into San Francisco Bay and the ocean, where it isn't doing anybody any good? The canal will make everyone richer—particularly people who eat, which means just about everybody."

Chuck Bennett, deputy agricultural commissioner for Kern County, agrees. "All the people benefit from water here," he says. "This is one of the greatest valleys in the world for agriculture. We couldn't live here without agriculture. If we didn't have enough water, things would just dry up."

True enough, anyone would have to agree. But the point is, how much water is economical, and when does it become more efficient to use less—changing crops, switching to drip irrigation, providing better protection against evaporation? Any use of water is possible as long as the government keeps pouring in subsidies to make it look efficient. But that only means that other people somewhere else are bearing the higher costs.

Del Gardner is an agriculture economist at the University of California at Davis (20 miles from Sacramento) who has labored long and hard trying to convince people that water should be treated "just like any other scarce resource." When I saw him in his offices, he was looking flushed and healthy, just back from a trip to Egypt (where he said government subsidies in the economy are "infinitely worse"). "Much of the agriculture undertaken in California over the last 30–40 years never would have been attempted if we had been paying the proper price for water," he said. "It isn't that people wouldn't be farming. They just wouldn't be farming in the same way.

"There are places here in the Sacramento Valley where farmers are using tremendous amounts of water to grow rice," he continued. "They flood their fields so that they're underwater for several months. Obviously, this water could be used much more efficiently by shipping it to places where it would have a higher value. If the farmers were paying the full costs, probably about half the land would be in other crops. But valley farmers are allowed to take water out of the Sacramento River without paying any incremental costs. Therefore, they overuse it. The same thing occurs in the federal Reclamation Bureau projects, where water is delivered far below cost. We're not talking about putting farmers out of business in California. We're just talking about working much more efficiently with the resources we've got."

The Bureau of Reclamation, established by the Reclamation Act of 1902, is a prime example for critics who charge that governments are overdeveloping and squandering resources through large, subsidized projects. The bureau was set up to develop multipurpose dams and reservoirs so that the West could be settled by small farmers. In many instances, this has meant exercising eminent domain and squeezing private entrepreneurs out of favorable sites. In others, it has involved building dams and irrigation systems where no private entrepreneur ever would have invested.

The desert has been made to bloom, there is no doubt. But as Mason Gaffney, a member of the Public Utilities Board in Riverside, California, and a long-time dissenter on the subject of subsidized irrigation, points out, the costs have been almost incomprehensibly high. "The Reclamation Bureau has never even charged farmers in the Central [San Joaquin] Valley for the interest on its debt," he notes. "All farmers are paying is the maintenance costs, and these are being paid at fixed rates on contracts signed in the 1950s. Right now, farmers are paying about $3 per acre-foot for federal water, whereas the marginal costs in the valley may be as high as $70."

In 1947 the Hoover Commission investigated the Reclamation Bureau's activities and found that it had spent $1.2 billion in its 45-year history, while reclaiming revenues of only $120 million. Estimates are now that when the bonds issued to finance the Central Valley Project, which serves the Sacramento and San Joaquin valleys, come due in 2035, the bureau will have lost $8–$9 billion on this one project alone.

California's State Water Project subsidies have not been as great, but they are still substantial. In addition to bringing water to Southern California urban areas, the state has been serving land in the San Joaquin Valley since the California Aqueduct opened in 1971. Water is more expensive in the state system, but one important difference is that the federal programs restrict ownership to only 160 acres. This was part of the Progressives' original intentions that California and the Southwest be settled by a race of yeoman farmers. The federal restriction has often been circumvented, but farms in the system are generally much smaller. On the western side of Kern County in the San Joaquin Valley, on the other hand, large tracts are owned and leased by corporate giants such as Getty, Shell, and Chevron (who are drilling oil in the area), plus the Southern Pacific Railroad and the Los Angeles Times.

Some radical environmental groups have seized on this corporate ownership to try to turn the Peripheral Canal battle into a classic face-off between "the people" and "big business." But that is hardly the point. The corporate owners are usually leasing their land to ordinary farmers, and a whole way of life has grown up around the state water system.

As Pamela Naylor, director of the nonprofit Western Water Education Foundation, puts it: "It's fine to talk about freeing the market to get rid of subsidies to a few large landowners. But it's the little people who are going to be hurt out there. We're talking about whole communities that have grown up around the state system. You're talking about the small farmers, the leasing farmers, plus the grocer, the plumber, the dentist, and everybody who makes their living in these communities. These people depend on the subsidies build into these projects."

So it goes when you're trying to undo the damages created by bureaucratic enterprise. But trying to extend the present overextended system can only make things worse in the end. Somebody has to start biting the bullet some time.

Water as a Scarce Good

The real solution to California's water problems—and the only one that is ever going to work in the long run—is to begin treating water like any other good, allowing it to be bought and sold in the marketplace. As Garrett Hardin finally concluded, "The tragedy of the commons…is averted by private property, or something formally like it." Someone must claim ownership to water and market it in order to maximize both rents and profits. Otherwise, it will simply remain in a political taffy-pull, with everyone claiming inalienable "rights" and "needs" and the government frantically running around trying to fulfill its self-assumed responsibilities, until there are no resources left to be had. As long as the government subsidizes consumption, people will always use more than they would demand under ordinary market conditions.

Charles Phelps, a resource economist at the Rand Corporation, has come up with the most comprehensible proposal for reforming California's water system. He was the principal author of a lengthy Rand report, Efficient Water Use in California, which ended up being debated on the floor of the California Assembly even before the finished editions had left the printing shop in 1980. The report has since become the focus of an effort to introduce market mechanisms into water allocation.

"In the battle between hawks and doves, I'm an owl," said Phelps, sitting in the Santa Monica offices of the Rand Corporation, an uninspiring pink building that looks as if it could be the headquarters of the Santa Monica Highway Department. "We're not taking any side on the Peripheral Canal issue, and we're a little disappointed that the report has become a part of the debate. We're trying to take a much longer-range look at what has to be done to make the system operate correctly."

The Rand report suggests that the state remain a wholesaler of water to local water districts but that these districts be allowed to buy and sell water among themselves at whatever the market will bear. "At present," said Phelps, "the districts get specific allotments, which entitle them to certain amounts of water. In a wet year, anything the state can supply beyond the allotment is declared 'surplus.' This is then sold to the agricultural districts at a price that only reflects the cost of transportation. Thus, there is no reflection of marginal costs in the system. The agricultural districts get extra water very cheaply, and the municipal districts have little incentive to conserve because there's no financial reward for using less."

One of the constant points of contention between advocates of market mechanisms and the water bureaucrats is whether prices will have any effect in encouraging people to conserve. "All our evidence shows that people will conserve, and the higher the price goes, the more conservation-conscious they become," said Phelps. "There's no reason why water shouldn't act like any other good under market conditions."

As it is, the state system is not geared toward prices at all but functions on a clumsy system of "needs" and "entitlements." The state Department of Water Resources is basically laboring to fulfill contracts for future water supply that were signed 20 some years ago and projected the levels of consumption for 75 years to come, independently of any price considerations. These long-range obligations, of course, give the state a mandate to go out and find water wherever it can.

But as the state has drawn more and more water out of the northern areas (where two-thirds of California's rain falls), local users have become more vociferous about their "rights" and "needs." The state has finally compensated them with an "area-of-origins" principle, which says that local users have first claim to all the water they request as long as it is used for "reasonable" and "beneficial" purposes. This has left the state like a one-armed paperhanger, frantically juggling resources in an increasingly fruitless effort to keep everybody happy. During the 1976–77 drought, there was serious talk about going into Oregon and Washington, or perhaps even as far as Alaska, to fulfill the state's water requirements.

The Power Of Prices

Could prices make a difference? Perhaps the best analogy is electrical consumption, another consumer item that has been defined as an unalterable "need" by public regulatory bodies and consistently priced below the cost of providing additional electricity. In the early 1970s, electrical demand was still rising at a steady four percent per year, and both federal studies and utility projections were talking about a 1,000-reactor nuclear electrical system by the year 2000. In the mid-'70s, Amory Lovins published his Soft Energy Paths, which pointed out that this entire orgy of overconsumption was being fueled by the average pricing practiced by the utility commissions for the supposed benefit of consumers. He noted that consumers were coming nowhere near to paying the actual replacement costs—marginal costs, that is—of electricity. This, he said, was leading to a huge overcapitalization of nuclear power plants.

Consumers are still not paying anywhere near the marginal costs of electricity. Yet even with the increases that have come from higher oil prices, the demand for electricity has turned out to be far more flexible than anyone ever imagined it could be. Lovins's predictions have proved to be devastatingly accurate, and those utilities that have gone on building without taking heed of the effects of pricing have ended up near bankruptcy, holding costly white elephants.

Could the same break in traditional demand patterns happen with water use? The answer seems to be, unquestionably, yes. There is undoubtedly enough slack in the system now that conservation efforts would make a huge difference in cutting down the need for new supply sources. For example, three-quarters of California's irrigation, which itself accounts for 85 percent of water use in the state, is by "gravity methods" (mostly, open-ditch irrigation). Irrigation via sprinklers uses only 18 percent as much water, and drip irrigation uses only 1 percent as much. But because drip systems cost more in labor than surface methods, subsidized water prices make such conservation uneconomical for farmers.

Conservation would not necessarily make the Peripheral Canal an unneeded extravagance. It is possible that its positive environmental effects in the delta would still make it worthwhile. But that could all be decided later.

The point is to find out what the system needs now. All sorts of ideas are being passionately advocated all around California, of course. Environmentalists grind out figures showing it would be cheaper to cover the aqueducts and prevent evaporation. Prodevelopment groups say that conservation can serve a purpose but still won't be enough. Others say that nothing but new supplies can help.

Yet all this amounts to is a group of blind men groping around in the dark. No one has the information that would tell them whether it is now more economical to conserve or to supply, to prevent groundwater seepage or to build wastewater recovery plants. That is because the only information that ever conveys any accuracy about how we can improve our efficiencies is what reaches us through the price system. Right now, nobody in California knows what the true cost, and thus the appropriate price, of water really is.

In the absence of any real information, people substitute "cost-benefit analyses," those sophisticated instruments of economic astrology that can be made to prove anything. Numbers are picked out of the air and batted back and forth like shuttlecocks until everyone reaches the sensible conclusion that statistics are meaningless. Meanwhile, the only number that would really mean anything—the market price for water at the bottom of a monthly water bill—is shunned the way alcoholics fear sobriety.

Says Del Gardner, who lives in Davis, where there is no such thing as a water meter: "I must admit that, despite my clear economic understanding of how much water really costs, I still let the lawn sprinkler run on far too long. Information has to be effective—meaning it has to hit you in the pocketbook—before it's going to motivate you to do something about it. What's the sense of worrying about any commodity if you don't have to pay for it?"

Environmental Economics

What are the possibilities that such reforms can occur? Now, as ever, there isn't much of a constituency for the market. The general good rarely appeals to the greatest number. Instead, people find it more useful to organize into little affinity groups and ask that the market be distorted a bit in their favor.

Right now the group that is arguing for a market solution is environmentalists who are opposed to the canal. State Assemblyman Ted Bates, who represents Oakland and Berkeley, introduced a bill last year that would eliminate the Department of Water Resources' $3-million annual subsidy from tidal oil land revenues and would allow local water districts to buy and sell water among themselves.

"The investments that are being proposed in the Peripheral Canal bill are highly inefficient," says Lenny Goldberg, staff economist for Assemblyman Bates. "They're going to be ultimately detrimental to the economy of California. What we're proposing is to reform the whole system and make it more efficient.

"Our first priority is to get rid of the tidal-oil monies," says Goldberg, noting that this has already been the source of $550 million of interest-free money for the DWR, a grant that stands to be doubled over the next 20 years. "Then," he continues, "we want to weed out subsidies within the system. Under the present system, water users are supposed to pay back the state for the operating and maintenance charges, plus capital costs, at a rolling rate of interest of 4 percent a year. That's a significant subsidy to begin with. But even that isn't being collected. So far, none of the capital costs have been repaid. All they're doing is charging operating costs, plus the low interest. This means water is being tremendously underpriced.

"The immediate effects of eliminating these subsidies, plus allowing transfers, could be strong. There are estimates that the marginal price for water in Kern County [in the San Joaquin Valley] may now be as high as $100 per acre-foot. This would promote conservation, instead of the usual pattern of subsidizing new construction.

"A lot of people are surprised at our position," he adds. "They say, 'I thought liberals weren't supposed to like the free market.' But I don't see any other way of correcting the distortions in the state's current use of resources."

It is encouraging to see environmental groups finding market mechanisms more attractive. But a caveat should be offered. Their interest in the market may be something of a temporary expediency.

Environmentalists have been playing an odd, and in some ways unprecedented, role in American political life. They have been, by and large, a group of highly educated, fairly affluent people adopting the traditional role of a landed aristocracy. They have argued for environmental protection, the conservation of resources, the slowing of growth, and a stemming of the tide of mediocrity in America's mass-marketing system. Their principal method to date has been to influence the economy through government regulation.

In the Reclamation Bureau, the Army Corps of Engineers, and the California State Water Project, however, they have run up against something quite unexpected. They have encountered bureaucracies that are far more politically entrenched than themselves. Therefore, the usual tactics of regulation and political maneuvering have not worked very well. Finding themselves rather helpless against these state juggernauts, environmentalists have begun to turn to the market as a countervailing power that can be pitted against the bureaucracy.

But as a kind of postindustrial aristocracy, environmentalists are still mainly interested in the underutilization of resources, just as most preindustrial aristocracies have always been. Therefore, their romance with the market is likely to have its limits. Environmentalists will support it as long as it serves as a tool to throw against the tendency toward overutilization that comes with bureaucratic enterprise.

But that does not necessarily mean that they will be uncompromisingly committed to private enterprise. In fact, just the opposite will probably be true. If water resources, land development, or electrical demand were put entirely in private hands, they would probably spin the system back the other way and use government regulation to hamper the workings of these private enterprises. Environmentalists are making an important contribution to the current debate over water resources in California. But their overall commitment to the market may be something less than passionate.

Peripheral Vote

All this being said, then, the controversy over the Peripheral Canal will make little difference unless it serves as a touchstone for Californians to start dealing with water "just as if it were any other resource"—which, of course, is just what it is. As Del Gardner puts it: "Only in the Garden of Eden was it possible to use resources without somehow contributing to someone else's scarcity. Since our fall from Bliss, the most practical alternative we have left is to use our resources according to the laws of economic efficiency. We'll still have equity problems to solve, but if we increase the total size of the pie, we'll probably be better off."

Only a careful delineation of property rights and the free functioning of a market system will assure that people will get the best our technology can now afford as well as guarantee that we do not overuse and squander future resources in a fruitless search for a false present prosperity. Remarkable as it seems, the market not only optimizes our present efficiency. It also assures that we will not overstrain our resources in trying to extract more from nature than she can provide.

If it would send a message to the state that water must be treated as a resource, then a "no" vote on the Peripheral Canal might make sense. Otherwise, in terms of solving California's water problems, it really matters very little whether or not the canal wins or loses on June 8.

William Tucker has written for Harper's and many other magazines. His book Progress and Privilege: America in the Age of Environmentalism has just been published by Doubleday. This article is a project of the Reason Foundation Investigative Journalism Fund.


Mono Lake's Market Level

One of the first things that critics of the market usually charge is that it can't protect esthetic or ecological values—things on which "you can't put a price." Yet a fuller understanding of property rights and market mechanisms makes it clear that the market is actually far more efficient than politics at handling such things.

Take, for example, the case of Mono Lake. Located high in the Sierras, the lake is ordinarily fed by a half-dozen mountain rivers. Lately, though, Los Angeles has been diverting much of this water to its Owens Valley system. As a result, the level of the lake has been sinking.

The results were unusual. As the water level fell, it was revealed that the lake contained clay pillars caused by upwellings from hidden springs. The strange formations give the lake a lunar quality and have attracted many photographers, nature-lovers, and environmentalists.

At the same time, however, the receding waters have limited the habitat for migrating birds and driven many of them away. Thus, even though there is a certain irony involved, environmentalists are now campaigning to stop the diversions and "give Mono Lake a drink."

What will happen in the political arena? Basically, it will be a test of strength between environmentalists and the city of Los Angeles. Environmentalists have already mounted an emotional campaign, replete with pictures of the odd clay pillars and the remains of dead birds. Los Angeles, on the other hand, will remain bureaucratically stolid and say the needs of its citizens are more important. There may even be a vote on the issue some day—although it is not clear who should be doing the voting.

How would the market handle the situation? Well, the Mono Lake dilemma represents an excellent example of what resource economists would call a "failure to establish clear property rights." The federal government owns Mono Lake (it lies within a national forest). The city of Los Angeles, on the other hand, owns property through which flow the many rivers that feed the lake and thus, under long-standing laws, claims the right to divert these rivers to its own uses.

But moving water is what economists call a "fugitive resource," meaning that it does not stay in the same place all the time. Therefore, use by one consumer reduces its availability for other consumers, even though the first consumer may never step on the next person's land.

Economists have proposed a system of "in-stream rights" as a solution to the problem. This means that an upstream user would have to pay a price for using water in a way that makes it unavailable to the next downstream user. As it is, there is no economic reward for simply leaving such a resource in its place. This is why it becomes so cheap to move resources around rather than just letting them be.

Under an in-stream-rights system, Los Angeles would have to pay fees to all downstream users—buy the rights, that is—for any water it diverted without putting it back. (For example, since farmers often have lots of water left over after irrigation, it would be easy for them to save money by returning it to the original sources.) The amount of water diverted—and the amount left in place—would be determined by the willingness of both parties to pay for the right to use the resources.

Thus, Californians would still be faced with the same dilemma at Mono Lake but would have a far more efficient mechanism for solving it. For the federal government, it would be a question of how much it was willing to outbid Los Angeles to allow more water to flow into Mono Lake. For Los Angeles, the question would be how much it is willing to pay to use this water rather than practice better conservation or seek alternative sources.

The nice thing about the decision is that it wouldn't have to be made with a crude "yes-or-no" vote or bureaucratic directive. As Thomas Sowell points out in his brilliant book, Knowledge and Decisions, market decisions are more "fungible"—they can be bent more easily to fit changing situations. Los Angeles might decide that, for the most part, it would be cheaper to improve conservation and draw from other sources. The federal government might decide that it wanted the lake fuller—but not so full as to cover over the clay pillars that have enhanced its curious scenic value.

In any case, all the incentives for proper decisionmaking would be in place. Los Angeles would have a higher incentive to minimize its use of this water precisely because the federal government (and presumably its wider constituency) placed a higher value on the ecology of the lake.

Such considerations as scenic beauty, wildlife, and ecological value are not underrated because the market does not work. They are underrated precisely because the effort has not been made to define the proprietary rights involved and draw their values into the market network. Calling them "priceless" and thus throwing them into the realm of politics only aggravates the problem. Economic decisionmaking can handle all human values as long as we take the trouble to define clearly what it is we are talking about.

—W.T.

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