As long as water is sold for far less than it's value, there is no incentive to conserve and the future looks grim as our aquifers dry up and rivers run to their maximum.
And no, your low-water appliances aren't helping much, as consumers only use 11% of water in the U.S.
As water prices are set by municipalities, there is little incentive to raise prices, the politicians who control them don't have any interest beyond their next election.
There is likely to develop a semblance of a "Market Price" for water in the U.S. which will inevitably be higher.
As far as selling water rights, the biggest danger here is that the governments that currently own them will sell them for less than they are actually worth, primarily because there isn't yet a true "Market Price" for water. Or, of course, corruption.
but because his comment is not a top-level comment, I had better chime in with agreement. The submitted article read like something out of the hard-left 1960s when I was growing up and a lot of people thought that countries with centrally planned economies were doing better than countries with free markets. They never have. Markets in water are crucial for figuring out how different users of water really value water, and how to monetize improving the quality and distribution of water. I live high upstream of most of the United States (near a continental divide), in the well watered state of Minnesota ("the land of 10,000 lakes"). This year is a drought year (although it was rainy the last two days), and even at that, we have adequate water. A controversial issue here is sale of water from the upper Midwest to arid places in the Great Plains or even the Southwest through pipelines. Banning the sale of water across state lines is not going to stop the Mississippi River or Red River (of the north) from flowing, and all the arid places in the United States have elaborately developed legal systems (unlike the riparian common law system in Minnesota and other states with abundant water) for allocating water rights. If big interstate trade in water through unit trains on railroads or through pipelines develops, the law will be able to keep up, and water will be better used in the United States.
If similar trade develops internationally, or domestically in formerly poor countries, again the crucial thing to do is to develop laws so that people can trade according to their needs. When people trade, they all become richer. Water is generally cleaner and more available today, serving a larger and healthier world population, than it was in my childhood. That came about BECAUSE of market economics, while the stifling poverty that resulted in famine in China in the 1960s came about from anti-market policies. I'll stick with the market when allocating important resources.
AFTER EDIT: The comments kindly made to my comment reminded me of life experience from living in Taiwan when Taiwan was still part of the Third World that I should relate here. For decades, the standards for water treatment of municipal water supplies in Taiwan have been up to world standards for piped water, ensuring that bacteria are reduced in the water before it leaves the water treatment plant. But in the 1980s, the dictatorial government of Taiwan at the time forced local governments to keep city water prices abnormally low, so none of the cities could afford to maintain the network of pipes that delivered water to homes. And that meant that the water flowing out of home taps could NOT be assumed to be safe. Instead, everyone all over urban Taiwan paid out of their own pockets to install filters (possibly ineffective against bacterial or protozoan contamination) on public building drinking fountains, and home dwellers paid for bottled propane gas to boil their home tap water before drinking it. (Boiling water to let it stand and cool was a big chore in those days. Some people bought special electric water-heating machines that automated the process of heating and storing tap water for drinking safety.) After three years in Taiwan, the first thing I did when I reached the home of a relative in Los Angeles upon my return to America was drink a big glass of tap water, a luxury I had been denied all that while. And my wife was HORRIFIED to see me do that. She had never seen anyone drink a glass of tap water straight out of the tap in her life.
As Taiwan democratized in the 1990s, the press began reporting on how ridiculously low the price of tap water was in Taiwan, and it was proposed simply to raise the price of city water, so that the city could maintain the pipe network properly and ensure clean water stayed clean all the way to home taps. I'm not sure how much progress has been made in this project to date in what parts of Taiwan, but my wife (who has been back there more recently than I have) reports that Taiwan in general is cleaner than ever, healthier than ever, and generally thriving well under democracy and a free-market economy. The bureaucrats in Taiwan were always mostly technocrats, rather smart people even in the worst times of dictatorship, but using prices to allocate resources makes more sense than using bureaucratic fiat to allocate resources. Two heads are better than one.
There's actually not much agreement among modern economists on whether market-type policies for allocating life-critical resources work well, and in which circumstances. It hardly requires hard-left 1960s views; see, for example, the contemporary debate among generally mainstream market economists in both Europe and the U.S. over how to provision health-care services (I'd hardly consider the German ordoliberals, architects of the post-war West German economy, to be commies!).
There is also a lot of work in the emerging subset of economics based on dynamical systems theory, which looks at markets from the perspective of feedback and stability. There's probably no agreement there, but it's a much more open question than in the old-style equilibrium analysis, where you just assume axiomatically that markets clear and respond smoothly, instantaneously, and with no system-internal dynamics to supply/demand changes. I.e., sort of like analyzing mechanical systems under the assumption that turbulent fluid flow is impossible, and catastrophic resonance doesn't happen. It's at least an open question whether a securitized market in water could increase volatility and failure modes, especially given that it's very time-critical (you can't generally go without water even for temporary periods of allocation shortage, so even a short-lived "financial crisis" in water could be devastating).
Health care is a bad example. It's a multiple edge case, and a uniquely terrible choice for market solutions. The time when a patient can best make a market decision is the time it's probably too late.
I don't see why a resource being "life-critical" should make something not work for market solutions. Food and housing are already market allocated, and you'll have a hard time finding an economist who wants to centrally plan those things.
"But the poor have poor access to food and housing." I'm not too worried about this as enough water is a lot cheaper, even at a market price. Anyway, it's not like we don't already allocate water when and where it is scarce--just in an unfair, inefficient, and broken way. And it's not like anyone wants to deregulate the pipes to your faucet. And it's not like it's free to use that faucet.
I agree few economists want to outright central-plan housing, but I believe many are skeptical of the degree of financialization it's ended up with: mortgage-backed securities in their various forms are looked suspiciously on by a significant proportion of economists (though perhaps a minority?), and some argue that they contribute to volatility in housing markets and severity of cyclical crises.
Though here in Denmark there is actually a significant degree of central planning of housing, via a strong state role in the overall urban-planning framework, and laws that encourage owner-occupation and cooperatives, while discouraging absentee real-estate investment. There are constant debates over it, but going to a fully liberalized market approach doesn't seem too popular.
The #1 seller of mortgage backed securities were, by far, the government through the GSEs Fannie Mae and Freddie Mac. The #1 money losers on the resulting disaster were--again--the GSEs to the tune of several hundred billion dollars. By contrast, the private market bailouts are actually above water.
Mortgage backed securities are not a very good example of free market distortions.
Edit: I noticed you've added something about the housing ownership structure in Denmark. I think this is not very relevant to the discussion, but I also think it would be nice in the US if the law were more encouraging to the sort of ownership structures you described. I also think that kind of thing would still be rare because US citizens are a lot more mobile than Europeans and happen to like it that way.
Mortgage-backed securities were put in place to fix the last problem with the mortgage market. Which was caused by the fix put in place to fix the problem before that.
EDIT probably too late to fix the downvotes, but Regulation Q limited the interest rate that banks could pay out. After banks had lent out their money, they couldn't raise any more, especially if interest rates were high, as happened more than once. But if they could sell off their loans to the GSE, they could get more capital back, and lend it out some more.
Of course, this led to problems. But if we don't understand the psychology that led to securitization as being the natural solution to the previous column, how do you know you are being any wiser about suggesting what is going to replace securitization?
(I simplify a bit, because securitization also allows banks to diversify geographically.)
The best way to induce conservation of something is to raise it's price. If the price is artificially low, than the existence of a "Market Price" for water will raise it, and result in conservation and the development of more water-efficient technology.
I do generally agree that the price of water should go up, and that can be done in part by reducing the special subsidies currently given to agriculture (e.g. in California, farmers pay much less than anyone else, and generally less than the cost of even maintaining the state-owned aqueducts). But that's a different question from whether thoroughly securitizing water and trading it on futures exchanges would improve the situation. We could at least try the less radical change of "reduce the massive subsidies" first and see how large water users respond to a ramp-up in prices.
I agree entirely. As long as we are still subsidizing something, removing subsidies should be the first thing we try when we decide to liberalize. Oil is a good example. Its production is subsidized and its consumption is taxed.
Until industries lobby government for subsidies, either individual or for the entire commodity (look at corn) so they can buy water at the "market" price and sell the resulting products below what should have been the market price.
Another possibility, making water artificially expensive and so monetarily valuable creates incentive to corner the market on water, water contracts, water derivatives and other games, pricing the little guy out of the market for water.
Making water artificially expensive and valuable provides incentive for people to regulate and otherwise restrict innovation in water use and reclamation. Bad for business if people can just suck water out of the ground.
Is it possible that the governments of poor countries don't value water enough? If they were willing to pay more, surely they would try to ensure their citizens have access to it. Given that they haven't been able to provide it, I'm not sure how they would be able to operate in a market that does not recognise that the need for water is far greater than a financial need.
Is it possible that if you create a capitalist market for water, poor countries without any coveted natural resources will never be able to pay enough for water?
I recoil from Wall Street getting involved in water markets not because I'm opposed to putting a fair price on water (I'm OK putting prices on lots of things, like air or light) or water-rich regions selling to water-poor regions. I am terrified of Wall Street getting in on the action because Wall Street means bubbles.
The goal of capitalism isn't to allocate resources efficiently, the goal is to make money and good resource allocation is sometimes a nice side effect.
That's my sentiment as well (as an engineer who formerly worked as an associate analyst on the equivalent of Wall Street in Brazil).
The only way I could get behind the financialization of water is if there is the equivalent of a "Water bill of rights" which guarantees enough free water to meet the needs of humans using that water for drinking and washing up of cooking equipment. I think this is a guarantee that should extend to every single market/country in which Wall Street wants to trade water. Want to trade water in third-world Country X? Fine, but before you can make any profits, you first must set aside a cut of revenue to subsidize the minimum guaranteed amount of water per person in that country and subsidize the infrastructure to get that water to each citizen.
Assuming individuals have a human right to the water they need, the big risk is what trading in water will do to the cost of food. I don't think this is necessarily a bad thing as it will force agriculture to start innovating on how they use water, perhaps moving into mass aquaponics or other solutions that minimize water use and buffer society against volatility in food prices due to droughts and mother nature.
The main risk of the subsequent rising inflation is how many people it could return to poverty. Again this is somewhere, where I think regulation could be used to shield or subsidize markets where rising water prices will cause an increase in the number of people living below the poverty line.
Overall, the right to earn profits should come with the obligation to prevent poverty and improve the human condition at the bottom.
The problem is that the market has all sorts of failure modes, and allocation of something like water is going to hit all of them. Vague analogies to the effectiveness of the market in doing completely different things (allocating steel production to bolts versus screws) is wildly irrelevant.
Which is the standard human excuse for intervening in everything deemed essential for life. It doesn't even begin to address the real possibility that humans can't actually improve upon the market solution.
A market solution is a human solution. People decide how to structure their societies, of which economies are a part. They also decide how to structure their markets, when they choose to create them.
I should point out that when I say "markets", I mean as they generally exist in developed countries. There are plenty of markets in other parts of the world that most of us view as undesirable. The Soviet Union, for instance had a fully-functioning underground market economy that relied on smuggling and moonlighting. Most people prefer formalized markets, where participants have some sort of official (read: government and its monopoly on violence) recourse in cases of fraud and abuse.
The idea that markets are naturally occurring and "spring forth" out of a vacuum really isn't well-supported. Russia certainly didn't end up with anything even approaching a theoretical free market despite the best efforts of American and European economists (laissez faire may apply to markets themselves, but not to building them and training people to use them).
In reality, markets are constructed and managed by people (hence the discussion around "creating" a market for water). Therefore, they can (and do) possess all the flaws and failures that go along with humanity in general (not speaking theoretically here, but practically).
The reality is that when you create an actual, existing market you introduce all sorts of inefficiencies and problems. These problems are not theoretical and their existence doesn't necessarily undermine the theory of markets. The problems are practical, in the same way that the problems associated with representative democracy or even Marxism (which would work swimmingly if only human psychology would cooperate) are practical.
I am comfortable with the theoretical performance of markets. I am extremely uncomfortable with many markets as they exist and are created and managed by deeply flawed humans.
We have an even more complex and active system delivering something as essential for life as food. And no generation before us, at least in the West, was as well fed as we are.
Yes, and it isn't working very well. That's part of the objection. We have plenty of agricultural capacity, and yet food prices are volatile (which markets are supposed to help prevent) and generally rising quickly.
A lot of the starvation in China was also precipitated by the fact that Mao often gave grains and other foods to communist eastern European countries to curry favor with them to the detriment of the Soviet Union. Many people starved in China so that people in Eastern Europe would not.
It depends on what's being traded and who's trading. Someone buying meth is engaging in trade, but it not necessarily ending up "richer".
Generalizing that the "market is good" is as much of a mistake as generalizing that "the market is bad". There are lots of ways markets can be gamed and corrupted that, in the end, make the market difficult to distinguish from corrupt/incompetent central planning.
Water is essential to life. If a country's politicians get bribed and broker the sale of a country's water in exchange for some currency they can potentially exchange the long-term health of the country they are stewarding for personal gain.
I'm sure the Wall St types see a great opportunity here.
Thanks to horrific governance, you have water-rich places (like the Northeast of the US) with local governments that operate on the brink of bankruptcy. At the same time, you have fifty years of massive government-subsidized buildout of suburban sprawl and industry in the South and in the desert.
So instead of treating water resources as a public commons, we'll let some financiers borrow cheap money (courtesy of the Feds suppressing the interest rate market), buy up munipical water companies and rape the public for all time.
Makes me glad that I live somewhere which has absolutely no shortage of clean water and where water supply and sewer systems are handled by what appears to be a reasonably efficient state owned company.
Market allocation of water has to be the dumbest idea since god knows what. Doesn't it occur to any egg-head economists that a resource as necessary as water is going to invoke market failure? It's the healthcare problem writ large.
Cities like Vegas, Tucson, and Phoenix were created because of federally subsidized water. Allowing water prices to 'float' to the market value might keep these areas from growing beyond their resources.
Seems a bit extreme. Other parts of the US have significant problems to deal with as well. The west coast (earthquakes), midwest (tornados and drought), south (hurricanes) and northeast (snow) all have problems which cost lots of money (sometimes federal tax dollars) to deal with. You could call building in any of these areas a "mistake", but that doesn't really help solve the problem.
Yeah sometime those places get disaster aid, but the southwest is really the poster child of unintended consequences of government infrastructure spending. Those places would not exist without Herculean irrigation efforts by the Army Corps of Engineers in the 19th century. As the result of these efforts cities rose up were they should not have, and when the water runs out those cities will be reclaimed by the desert.
I'm not the poster you're replying to, but I'd guess (given "It's the healthcare problem writ large") s/he is thinking of the notion that the demand for products genuinely essential to life (such as life-saving medicine, or water) will be very price-inelastic, and as such, allowing a free market to determine the price may lead to a price that is cripplingly high for consumers at the low end.
In my mind, it's nowhere near as simple as that in this case (although I'd say it is nearly that simple for, say, the life-saving medicine case (but I'm getting side-tracked here)) -- there's a lot of non-essential uses of water, and those sources of demand would be price-elastic, which may be enough to prevent that sort of market failure. I suppose it would depend on what proportion of the demand for water is "essential".
You can't make any useful comparisons between "water" and "healthcare" outside of saying "people generally want as much as they can consume with minimal cost".
If you can point me to a faucet that I can use to fill a jug with a few gallons of "healthcare" then you can make more detailed comparison but not until then.
Just before this particular parade gets rolling, let's all take a moment to reflect that "market failure" has a particular meaning to the dismal scientists.
And it's not "I don't like the outcomes".
There are some cases where a market in water is absolutely the best way to balance usages. It's important to understand that we are not just talking about the construction of infrastructure for municipal supply -- that's an example of a public good where market failure can occur.
We're talking about balancing the demand of different uses for water. Municipal supply vs agriculture vs industry vs environmental flows. This is the kind of hyper-distributed problem that markets are very good at solving.
I'm well aware what market failure means. And I'm referring to it in the technical sense. The economist response to water privitization is not uniform, and the consequences of market failure in the area would be catestrophic.
The thing is that the way it's allocated now is ... well, it's awful. Or at the very least: completely accidental.
He holds up the Ruhr as a good example. It isn't; it just means that the input into allocations is purely political. Democracy has notorious failure modes too.
Here in Australia, for example, we have been having an unending fight over the waters of the Murray-Darling basin since before Federation.
How do you balance between providing drinking water to Adelaide, a city of 1.2 million people; and the production of food in the vast irrigated projects upstream?
Right now: through god awful bunfights. It simply doesn't work.
There's been attempts to introduce a market in water rights, but it's hampered by the fact that a person holding rights in South Australia simply has no way to stop someone in Victoria taking that water out of contention.
The dispute only exists because the water isn't fully private property.
Is there anywhere where water itself is fully private property? I'm just curious how that works when it comes to a river.
[NB Not being snarky - I genuinely want to know how it works to "own" water in something like a river which by its very nature doesn't stay in one place]
What has been tried in Australia is allocation rights -- X litres of water per year. The problem is that the market doesn't have coverage of the whole supply.
Plus you actually need derivatives to deal with the fact that ... um ... river flow varies from year to year. So some rights have to be more secure (and more expensive) than others.
The key though is that for the system to work it has to be enforceable against people upstream. Otherwise it's pointless.
We don't have that. That rivers cross borders is not a Federal responsibility is a known bug in our constitution.
So how exactly do we know that the political failure modes, in this case, would be worse than the market failure modes? Last I checked, formalized, real existing markets are extremely vulnerable to political manipulation by both public and private actors/participants (using the public actors as proxies).
So we trade in political volatility for political volatility plus market volatility (positive, though perhaps small)? That doesn't sound like a good deal to me...
In addition, how on earth are you going to make water fully private? If I look up and open my mouth when it's raining will the police bludgeon me? What about if i set a bucket outside (some municipalities already punish this, actually)? Will a representative of Goldman Sachs insist on weighing me before and after I go rafting, lest I take more water than I paid for home in my stomach and soaking wet clothes?
I'm not being (entirely) hyperbolic here, look at intellectual "property" as an example. It isn't a perfect fit, of course, since water is finite. However, the blunt-instrument style enforcement is, I suspect, an excellent model for what would happen if water were to be made 100% private property.
How many people have been sued for minor infractions? How many times has the government drastically overstepped its authority to enforce IP laws? How many lawyers have grossly abused the court system to enrich themselves on the backs of innovative companies that accidentally violated vague patents?
These things happen partly because IP laws are really, really hard to enforce adequately and evenly. I see no reason why enforcement of water "ownership" would end up any differently.
> So we trade in political volatility for political volatility plus market volatility (positive, though perhaps small)? That doesn't sound like a good deal to me...
I invite you to name a successful country with a high standard of living which has only political volatility, according to your model.
> In addition, how on earth are you going to make water fully private?
Not what I was proposing. And you are correct that private property does not make a good fit "non-excludable" goods. However, some water is excludable (river flows, lakes, tanks, pipes) and some isn't (rain).
Where a thing can be traded, there are well recognised advantages to allowing that trade. Arbitrage can smooth prices across multiple markets, some derivatives can smooth prices across time. The use of floating prices allows water to mostly wind up where it is currently most urgently needed.
As you can imagine, we talk about water a lot in my country. We seem to have the same key distortions as everyone else: an agricultural sector that is either directly or indirectly subsidised at the expense of everyone else. Sometimes it's an industrial sector that gets the unusually cheap water.
Hayek has an interesting chapter in one of his books[1] (not sure which exactly) about why people distrust the market: it seems like you're being dealt an unfair hand by an invisible agent. And surely if one agent can deal a bad hand, another agent can set things to right.
But there was never such an agent to begin with. It was an emergent phenomenon.
I have a blog post outline somewhere that ties this into faces in clouds and Borges's The Lottery in Bablyon[2]
[1] The chapter title is "'Social' or Distributive Justice", I read it in the collection Essence of Hayek.
I'm not arguing that trade can't work, I'm arguing that a market in water would be a magnet for abuse and exploitation. The problem I often have with these sorts of economic debates is that economists tend to see politics as an after-thought, something that will "take care of itself" and can assumed away or ignored. The devil is in the details, and economists hate details.
I don't recall where I heard it, but one of my favorite quotes is that economics takes as its domain the set of solved political problems. Based on a quick search it was Abba Lerner. Galbraith has a similar quote about this issue. Saying that trade in water will get it to where it needs to be implies that there are no political issues involved.
Will every politician really just sit back and tolerate net outflows of precious water? Doubtful. What about "bubbles" in a hypothetical water market? Even if you assume that the government usually causes market bubbles by meddling, they still happen. Is there any reason to believe they would not happen in a market for water? A housing or tech stock bubble is unfortunate, a water bubble could be devastating.
My point is that a formal, large-scale commodity market for water could, and probably would, be manipulated beyond recognition as a means to achieve political aims and personal enrichment (of the less-than-savory kind). This is not an economic problem. The efficiency of markets is completely irrelevant if the actual, existing markets themselves are inefficient. The problem, it seems to me, is a political one, and it has not been solved.
Does anyone know if this has any tangential relationship to the fact that billionaires like t.boone pickens are buying up water rights across the country?
And no, your low-water appliances aren't helping much, as consumers only use 11% of water in the U.S.
As water prices are set by municipalities, there is little incentive to raise prices, the politicians who control them don't have any interest beyond their next election.
There is likely to develop a semblance of a "Market Price" for water in the U.S. which will inevitably be higher.
As far as selling water rights, the biggest danger here is that the governments that currently own them will sell them for less than they are actually worth, primarily because there isn't yet a true "Market Price" for water. Or, of course, corruption.