Wednesday, April 22, 2015

Simple Arithmetic for California's Water Crisis

In 2013, California state GDP amounted to $2,220 billion, of which $46.4 billion (2.1%) was contributed by agricultural commodities.  All other output amounted to $2,173.6 billion (97.9%). 

In 2013, urban use of water amounted to 8 million acre-feet (AF), about 10% of state water resources. Irrigated agriculture consumed 23.9 million AF (41% of total), while environmental usage took 29.2 million AF (49% of total).

California agricultural statistics can be found here.  In 2013, the top 20 commodities ranged from a high of $7,618 billion for milk and cream to a low of eggs and chicken of $380 million.  But water usage does not correlate with the dollar value of output of each of these commodities.

Blaine Hanson in the Department of Land, Air and Water Resources at the University of California, Davis charts water use of California crops on page 4 of his report.

Here are a few shocking calculations.

Alfalfa amounts to $1.57 billion of output using 5.3 million AF of water.  Divide the value of output by the amount of water used yields $296 per AF.

Rice output is valued at $790 million, using 2.7 million AF of water. This amounts to $293 per AF.

Cotton output is valued at $623 million, using 2.3 million AF of water ($271 per AF).

All other non-agricultural state output amounts to $2,175 billion. Using only 8 million AF yields output valued at $271,875 per AF. Urban use produces 925 times as much output value as each of three of agriculture's most thirsty crops. (Except for pasture, all other cash crops produce higher valued output per AF of water than alfalfa, rice, and cotton.)

Alfalfa and rice use as many AF of water as all urban usage.  It is true that urban water usage can be made more efficient, enough to meet Governor Brown's statewide mandatory reduction of 25%.

But what if the drought continues for 1, 2 or more years?  Should California continue to allocate 8 million AF of water to growers of hay and rice?  This makes no sense, never mind historical rights. It's vital that the state legislature get cracking with a comprehensive overhaul of water usage (the Australian solution would be a good place to start) so that it can enact legislation if the drought continues through the 2015-2016 rainy season and beyond.

Thursday, April 16, 2015

Analysts Were Looking For a Number.....

that was [higher, lower] than actual [earnings, jobs created, unemployment rate, trade deficit, last quarter's GDP growth, etc.].

For example, the first Friday of the month (April 3, 2015) "New Jobs Created Report" for March fell dramatically short of consensus estimates.  Not a single prominent business or academic economist has stepped forward to claim an accurate forecast. Dozens of business and academic forecasters that were wildly inaccurate scrambled to find reasons why they were so off-target.

And yet, the Congressional Budget Office, Treasury, Office of Management and Budget, Social Security Trustees, private business forecasters, and professors routinely issue 1, 2, 5, 10, all the way up to 75-year forecasts of economic activity, government expenditure, unemployment rates, and so forth.

Reporters, pundits, and media personalities then report these forecasts with few qualifications about their future accuracy or inaccuracy as events unfold and new real-time data are released.

Any wonder that the federal government and most professional economists missed the Great Recession and financial crisis that erupted in 2008!  The forecasting community cannot get next month right, but have no problem issuing long-term projections.  Were John McEnroe a pundit, he would say "You cannot be serious!"

So please take every political candidate's statements on how their proposals will increase growth, reduce inequality, reduce deficits, improve middle-class wages, and so on with mountains of salt. Their promises are as accurate as next month's jobs report!

Friday, April 3, 2015

Governor Brown Signs Executive Order B-29-15 Announcing First-Ever California Mandatory State Water Reductions

On April 1 (No April Fool’s Joke), 2015, Governor Jerry Brown signed a seven-page Executive Order that imposed 25% mandatory water reduction in 2015 over 2013 usage for urban areas, commercial, industrial, and institutional properties (campuses, golf courses, cemeteries), along with other restrictions.  It is worthwhile to read the entire Executive Order.

Brown maintains that global warming is producing climate change, which can result in long-term drought.  So what took him so long to act?  Why did he wait four years until California was in a full-blown water crisis?  One or two more years of drought, which Brown acknowledges is a possibility, would reduce the lakes, reservoirs, and underground aquifers to catastrophically low levels.

We know the answer: Governor Brown is a hard-core environmentalist. Environmentalists have blocked all attempts to build new water storage facilities since the 1970s.

Governor Brown was careful to throw environmentalists under the bus only for a limited period of a year or so.  Nor did he address large-scale farming, which uses 80% of the state’s water.

Brown’s Executive Order contained 31 Directives.

To carry out directives 2-9, 11, 16-17, 20-23, and 25, Brown suspended regulations commencing with section 21,000 of the Public Resources Code until May 31, 2016.

To carry out directives 20-21, he suspended section 13247 and Chapter 3 of Part 3 of the Water Code.

In Directive 30 he suspended additional sections of the Government and Public Resources codes to accelerate the development and adoption of regulations to carry out provisions in his Order.

Australia was able to rationalize its use of water only after 11 years of drought.  It might take two more years of drought to rationalize the use of water in California, to the dismay of environmentalists.

Reality has a nasty way of impinging on ideology!

What is the OPTIMAL Marginal Tax Rate on the Top 1%?

Thomas Piketty and 250 of his French colleagues endorsed Francois Hollande for President of France in 2012 when Hollande promised to raise the top marginal tax rate (MTR) on the top 1% to 75%. Holland did just that in 2013.  But then he let the 75% rate expire at the end of 2014, restoring the previous 45% TMR (plus a 4% surcharge for those with taxable income over one million euros).

The 75% optimal TMR worked in theory, but not in practice.

For some economists, 75% is not high enough.  Dirk Krueger and Fabian Kindermann suggest that the optimal TMR on the 1% can be as high as 90%, with no deleterious effect on the economy. They contend that a TMR of 90% would enhance social insurance in the U.S. economy.  (They are not alone.)

The TMR hit 98% in postwar Britain and 91% in postwar U.S.  Wonder why those rates were not sustainable?