Relevant and even prescient commentary on news, politics and the economy.

Living with Water Scarcity

David Zetland just published Living with Water Scarcity.  Ed Dolan at Economonitors reviews the book…(the review is re-posted with permission of the author).

Living with Water Scarcity: A Refreshing Take on a Hot-Button Issue

by  Ed Dolan   (is an economist and educator with a Ph.D. from Yale University. Since 2001, he has taught at several universities in Europe, including Central European University in Budapest, the University of Economics in Prague, and the Stockholm School of Economics in Riga.  During breaks in his teaching career, he worked in Washington, D.C. as an economist for the Antitrust Division of the Department of Justice and as a regulatory analyst for the Interstate Commerce Commission)

Review of David Zetland, Living with Water Scarcity, Aguanomics Press, 2014

Whether it’s cowboys facing off over a muddy water hole in an old Western, or the dirty looks you get if you fill your supermarket basket with bottled water, no one ever denied that people feel strongly about water. David Zetland’s new book, Living with Water Scarcity, explores hot-button water issues in a refreshingly pragmatic way. There are no “-isms,” no blanket condemnations of government or capital. Zetland does care about water—he cares passionately—but he keeps his rhetoric cool while he explains how government water managers have too often failed to do their job while markets, which have worked where they have been tried, need to be used more widely.

The right price

Zetland begins with a simple distinction between scarcity and shortage. Water is scarce in the sense that different people have different purposes for it—drinking, growing crops, sustaining flows to streams and wetlands—but there is not enough to meet all of them all in full. Water is not unique in that regard. We spend our time and money in pursuit of scarce goods every day. We would always like to have more time and money, but we live with what we have.

Shortage is different. A shortage means you can’t get the water you want no matter how much time and money you have. A shortage is a sign of failure to manage scarcity.

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Local versus regional control…(what is the watershed area?)

by David Zetland

 Local versus regional control

In response to this:

“The public sector is often better at handling inter-agency cooperation and the private sector is often better at delivering cost-effective, measured results. In either case, the local government plays the most important role as it needs to oversee and regulate all players. Poor regulation can lead to bad results, regardless if projects are done through the private or public route.” Zetland interview with BNamericas [PDF].

Jim Brobeck of AquAlliance sent this example:

The concept of local control is being touted in the creation of the Northern Sacramento Valley Integrated Regional Water Management Plan (NSVIRWM). Individual counties are the units of local control that are considered. The “local control” ideology is preventing the regional counties from devising a regional plan to manage export/transfer/sale of water. Counties and irrigation districts all have different groundwater management plans.

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Delivering water quality to the tap

David Zetland at Aguanomics reminds us that we always need to get people on board and invested with results of policies, and perhaps a way to keep track relevant to daily lives as well.  Water delivery is pretty local so far in the US, but taken for granted in only parts of the US:

Delivering water quality to the tap

I’m now in Kiev (looking into their water utility regulation), and a typical problem has popped up, i.e., the difficulty in delivering water quality to the tap.
The physical layout of water systems — taking raw water from ground or surface sources, treating it, pumping it through large pipes to smaller pipes, then to building pipes and finally to the tap — means that there are multiple points at which clean water can get contaminated. There’s the problem of dirty water at source and poor treatment, of course, but the more common problems occur when water in transit gets dirty from old or leaking pipes.
By my understanding, most utilities run their systems to deliver clean water to the building (usually at a meter), with the quality of the piping between the meter and the tap being the building owner’s responsibility.
Building piping has two problems. The first is old or leaky pipes that may contaminate the water. The second is that some buildings have many residents who share the same pipes (and sometimes the same meter). Neighbors therefore need to find ways to share their water (rather, the bill) as well as keep their communal and unit-plumbing in good condition.

There are several ways to share the bill (divide by people, install submeters, etc.), but I want to concentrate on the plumbing problem in buildings and networks. The first issue is to know whether the water is safe to drink at the tap. If that’s not true, then it’s important to find where it gets contaminated. That question can result in finger pointing between customers and the utility as to who should pay for water testing, so I came up with this idea, taking as given the fact that utilities (and their regulators) need to ensure that water is safe to drink; it’s not the customer’s obligation, even if it’s in the customer’s interest. Such a “fact” means that utilities need to take the lead on quality testing, and here’s how I’d do it.

  1. Any utility that says its water is safe also needs to persuade customers of that fact.
  2. So it can include coupons in a few hundred bills (every month or so) that can be used to get a free water test at the customer’s tap by a qualified tester. The real cost will be $10-100, depending on local labor costs.
  3. Qualified testers are listed on a website; they are certified and equipped to test water in the house. That website also provides them with free advertising.
  4. Customers contact a tester who measures their water quality (hand held testers are getting better and cheaper). Test results are posted on the internet (without an exact address) and to the utility.
  5. “Safe” results allow the tested customer (and some share of neighbors) to have a better opinion of their water — and drink more of it.
  6. “Unsafe” results will trigger a second test by the utility, to determine if water at the mains is clean (thus the building plumbing has issues) or also dirty. Those results will make it easier for the utility and/or building owner to take action.
  7. There’s a potential problem if tester trying to get false results of unclean water (to get more business), which can be reduced by witholding payment from those whose tests are contradicted in a retest. Those who get too many false positives can be removed from the list (in 2), which will hurt their business. So they are likely to be honest.
  8. We also hope that the utility is honest, but that’s the regulator’s responsibility — and no utility will be able to cover up bad test results for very long.

This idea will help utilities find contamination problems and persuade customers that water is safe to drink (and thus worth paying for!) at the same time as it supports an independent industry for assuring water quality. (Such an industry could survive in places like the Netherlands because testers are also likely to be plumbers who are ALWAYS needed.)

Bottom Line: Water quality is hard for an individual to determine, but utilities can make it easier — and make their product more attractive — by paying for random water tests.

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These numbers don’t add up

by David Zetland, a series of posts highlighting major points over time. The paper must be downloaded to read.  Wageningen UR – Environmental Economics and Natural Resources Group; PERC – Property and Environment Research Center
Economists Owe Ecology an Apology
March 9, 2013

Part 2 Nature Bats Last

Pare 3  These numbers don’t add up

These numbers don’t add up

Gross Domestic Product (GDP) was invented during the Great Depression for politicians who wanted to know if their policies were working. GDP as a measure of production has several flaws. First, it only counts payments for goods and services. It does not reflect our work—and pleasure—in the home. A home-cooked meal contributes less to GDP than Happy Meals from McDonalds. Second, its measures are based on prices, not values. An innovation that lowers the price of phone calls, for example, appears to reduce the benefit from calls—and totally misses the greater value of calls on Mother’s Day. Third, GDP ignores the benefits of functional ecosystems and grows when unpriced environmental inputs become priced outputs—when water moves from rivers to irrigated fields, for example. Economists know about these measurement problems (Stiglitz et al., 2009), but they cannot prevent the widespread abuse of GDP statistics.

Goddert’s Law states that “a measure that becomes a target ceases to be a good measure,” and that’s what happened with GDP. Politicians claim they will increase GDP—and thus prosperity, happiness and national pride—while their opponents will destroy it. Those claims lead to policy. Why protect an unpriced wetlands when you can convert it into a housing subdivision and boost the economy?  Why promote walking to work in 20 minutes when people can buy cars and use gasoline to drive for an hour on highways whose construction costs boost local GDP?  There is no GDP value in the unpriced time people spend commuting or the air pollution that results, but there’s plenty of GDP value in the (priced) resources burned on the way.

Economists’ attempts to improve GDP (adding up the negative impact of excessive congestion delays, for example) failed to clarify costs or improve understanding because those adjustments to GDP—a measure of the flow of goods and services—did not account for the capital depletion of burned fuel that might be valuable in the future, the negative impact of pollution on the capital stock of local and global air quality, and the socially and psychologically relevant fact that an hour spent in congestion free traffic is still an hour lost from either work or leisure. Reasonable people know that the flow of our economic activities is bound to affect stocks—it’s not possible to live (or enjoy life) without taking water from streams, cutting a few trees or taking fish from the sea—but there’s a difference between reasonable and excessive taking. We may disagree on the appropriate flow of these takings, but we can’t discuss “appropriate” without an accurate measure of their level, and GDP doesn’t include levels. GDP doesn’t help us understand where we are or where we’re going—it sows confusion and scrambles priorities.

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What is a water manager?

David Zetland  at Aguanomics asks a very basic question about our perceptions of what constitutes management:

Question of the week

I’m thinking that “water manager” is not the right title for people who work at drinking water utilities, irrigation districts, and other water organizations.

That’s because they are not really supposed to manage water supply and demand as much as make it easier for the real users,  get the water they their customers, to need.                                    (Customer service is job 1)

Managers move people or objects around to meet   organization goals that they set, but water managers don’t really know the goal. They know how much water there is. Customers know the goal.

I’m thinking that “managers” are more like waterboys who deliver water where and when it’s needed, on command.
But that’s not a very powerful title, is it?
Got a better one?
Or, got another reason for why they should be called managers or a different reason why they should be called something else?

Dan here:   For those who think stewardship is part of management he recommends Land Stewardship: Duty of care as a foundation.

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Your inefficient grandmother was onto something

This is the third post of  a series of posts highlighting parts of the paper by David Zetland Wageningen UR – Environmental Economics and Natural Resources Group; PERC – Property and Environment Research Center
Economists Owe Ecology an Apology
March 9, 2013

Part 2 from the series Economists owe ecology an apology

Part 3 below:

Your inefficient grandmother was onto something

The Folk Theorem of behavioral economics is not named after Professor Folk. It refers to the “obvious” fact that people are more cooperative when they interact over time—negotiating, trading, rewarding and punishing—instead of just once. This theorem is not, unfortunately, taught to most economics students; even worse, it is ignored in economic research that relies on simple models to “prove” how people will interact. The Prisoner’s Dilemma and Tragedy of the Commons, for example, are related in their dire predictions of how self-interested people who should cooperate will defect, leaving prisoners and the environment worse off. These models are often used to justify policies, actions or inactions that make the common man shake his head in wonder. Cooperation on climate change?  Nope. Regulation of high-seas fishing?  No. Sustainable groundwater management?  No sir. Starving the poor by sending corn into gas tanks. Sure—they’d do it to us if they could!

I could fill a book with examples of failures to coordinate and address actions and problems that have pushed us closer to brutish, nasty and short. These examples cannot be blamed on economists or their theories—humans have suffered from similar problems for ages—but we can blame economists for promoting the idea that miserable outcomes are logical or inevitable. It was Keynes, after all, who spoke of our potentially misleading power:
The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. —Keynes (1936, p. 383)

Economists’ focus on single transactions over repeated relations means that we design systems and incentives that emphasize short-term advantage over long-term cooperation, whether it be with other humans, beasts or ecosystems. The irony of these misplaced theories is that humans lacking the wisdom of clever economists often have better relations with each other and their surroundings (Polanyi, 1944; Lansing, 1991). They may have fights and they may be superstitious or poor, but they usually find ways to cooperate in building robust institutions for managing their natural, social and environmental resources (Axelrod and Hamilton, 1981; Lansing, 1991; Ostrom et al., 1994; Henrich et al., 2001; Dietz et al., 2003).

But they were as not as rich as we were, right?  Didn’t that mean that their cultures and systems were inferior and simple?  Perhaps, if we compare discrete purchases, disposal and recycling of products but not if we pay attention to the streams of continuous value provided by natural processes and social relations. Should we quantify and monetize ecosystem services and social networks?  That cure may be worse than the disease.
That statement brings us to a difficult junction. A few people think that humans should do the planet a favor by turning our entire population and civilization into an elaborate compost pile (others think we’re on the way), but most people agree that we should use resources and the environment to improve our lives. The question the majority wants answered, then, is “how much can we take without harming ourselves? ” Economists—as specialists in getting the most benefit out of scarce resources—have certainly spent a lot of time trying to answer that question. But our tendency to push for efficiency using faith-based numbers and models has led us to use concepts like “maximum sustainable yield,” “optimal exploitation” and “the economics of extinction.” These phrases should make us all pause.

What if optimal exploitation turns into an unexpected extinction?  Should we allow private profits from exploiting a resource that belongs to us all?  Will people be smart enough to include a safety margin?  If the financial crisis has taught us anything, it’s that we should not bet on forbearance over greed. Economists, unfortunately, have sometimes invited greed to join us.

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Nature bats last

David Zetland writes a well written nine page look at the limits of economics in at least the media and political level, and a look at the limits of what economic models have to offer most people. This will be a series of posts highlighting major points over time. The paper must be downloaded to read.

by David Zetland Wageningen UR – Environmental Economics and Natural Resources Group; PERC – Property and Environment Research Center

Economists Owe Ecology an Apology
March 9, 2013

Part 2 from the series Economists owe ecology an apology

Nature bats last

“When we try to pick out anything by itself, we find it hitched to everything else in the Universe.” —John Muir (1911)

“The economic problem of society is…a problem of the utilization of knowledge which is not given to anyone in its totality.” —F.A. Hayek (1945)

John Muir and fellow conservationists, environmentalists and ecologists understood the world not as a machine to bend to man’s will but as a life-supporting organism that reckless humans could damage. They worried about the conversion of wetlands to farm lands, of forests to timber, of rivers to ditches of industrial effluent. Their worries were not based on simple calculations of costs and benefits; they were based on endless observations of the delicate, surprising and endless connections among flora and fauna, rocks and rivers, air and light. They worried that we were harming the ecosystems supporting our prosperity under the dual influences of ignorance and hubris. Economists sympathetic to these views worried that complex human interactions could be mismanaged and damaged like ecosystems. F.A. Hayek, Ronald Coase, Elinor Ostrom and other institutional economists argued against oversimplifying complex systems into reduced-form models and suggested simple policies and limited actions when it came to managing society.

Their humility did not appeal to politicians who liked to direct, bureaucrats who liked to push and pull, or industrialists whose machines rested at the center of (calculated) national wealth—all of them active managers when it came to manipulating factors and adjusting accounts in a quest to achieve the optimal mix of visible costs and benefits. Machine managers disliked fuzzy, vast conceptualizations of biomes that evolved in chaotic directions; they preferred the mechanisms and flow diagrams of industrial consultants who bestrode the world delivering a future from logical minds uncluttered by doubt. Sure, they added columns and rows to “internalize the externalities” in their ledgers, but they could not add what they could not measure. Their optimal exploitation and discharge diagrams seemed complete, but they failed to include the wisdom of ages: don’t shit where you eat.

It was soon clear that the absence of evidence of problems does not equal the absence of problems; unexpected damages pulled expected outcomes off course. Although trouble could be blamed on techno-optimism, national security, consumerism, and other forces, economists deserve blame for promoting accounts, models and theories that promised to quantify life quality, optimize human action, and integrate the environment, but they failed. Not all economists should be blamed for these failures—we’ll hear from them below—but the mainstream majority can be. Their dominance and influence drove the process and created a reputation which only some of us deserve but all of us bear. Let’s review the charges.

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Economists Owe Ecology an Apology

David Zetland writes a well written nine page look at the limits of economics in at least the media and political level, and a look at the limits of what economic models have to offer most people. This will be a series of posts highlighting major points over time. The paper must be downloaded to read.

by David Zetland Wageningen UR – Environmental Economics and Natural Resources Group; PERC – Property and Environment Research Center

Economists Owe Ecology an Apology
March 9, 2013

…two substantial defects in how we understand and affect our economy and the ecology. The larger defect arises from a human tendency to simplify the world into “sensible” concepts that may be inaccurate. Although we might laugh at past versions of this mistake (a flat Earth at the center of the Universe, the spread of malaria from “bad air,” woman springing from the side of man, and so on), we continue to make it today when we underestimate the complexity of our human and natural worlds. That miscalculation leads to the second defect in which economists promote theories, observations and prescriptions that fail to include this complexity (or a humble acceptance of it), a problem that worried Adam Smith over 250 years ago:

The man of system…seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider…that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it…[Failure to acknowledge the motion of pieces means that] society must be at all times in the highest degree of disorder. —Smith (1759, pp. 233-4)
These disorders did not just manifest in human affairs (via Stalin, Mao and others)—they showed up in the natural systems that we neglected and misunderstood. Climate change—and the unprecedented threat to humans that it represents—has forced our eyes open, but we’re not yet wise (Peters et al., 2013; Marcott et al., 2013).

This apology is neither a wholesale rejection of economic thought and perspective nor an admission of error in our understanding of ecological values or human impacts on the environment. Life is complex. It’s an apology for the unintended damage that’s resulted from misapplying economic ideas: GDP fails to include non-market costs and benefits; transaction-based models mischaracterize dynamic relationships; aggregate social efficiency overlooks distribution impacts; technological advances can have substantial, unmeasured environmental impacts.

The rest of this essay will explain how we made these mistakes and how we can learn from them in facing a perilous future. This structure is not intended to provoke sympathy or excuse error. It’s just a way for us to reset a discussion that’s gotten tangled up in irrelevant details.

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Derivatives, water and financial risk

David Zetland comments on future funding of ‘water’ risk management.  There are plenty of examples of misguided government interventions, as well as examples of private enterprise run amok.  Now a derivatives market? :

The danger of flashing wrong signals

Have you heard the stories of people who have driven through fields, into lakes or off cliffs while following their GPS units? Any outsider would have told them to use their common sense before making a right turn over a cliff, but are WE so wise when it comes to our indicators?
Although the water sector really needs more and better information (that’s why I founded the water data hub*), I worry about people putting the wrong weight on the wrong information — a worry that puts these recent stories into a different context:

Now, I’m not worried about the discussion of water risk. I think that it’s a topic of growing importance, as the end of abundance exposes business models, bureaucratic assumptions and personal habits formed in an era of too much, too cheap water to a new reality of scarce water that cannot be taken for granted.

From the IBM/Waterfund  link comes this excerpt:

The principals involved sat down with the Daily Ticker to explain.

“At one end of the spectrum you have housing, the most over-financialized sector of our economy,” Scott Rickards, President and CEO of Waterfund. “At the other end, you have water – there’s not a single financial product. Investors, Wall Street have pretty much ignored water. What we’re doing is using derivatives and insurance products to link to the index and enable risk management to actually take place for the first time in the water industry.”

“There’s plenty of capital that’s beginning to take an interest in investing in water,” notes Peter Williams, IBM Distinguished Engineer and Big Green Innovations CTO. “What we think the index will do is make it easier to invest in water by establishing a risk benchmark against which people can then lend. And the idea then is to encourage capital inflows into the water sector.”

This means for governments, municipalities, and water agencies looking for ways to finance the estimated $1 trillion in investment needed in water infrastructure in the U.S. alone, they could more easily raise this money and keep the liquidity (i.e. water) flowing to citizens.

On the note of risk, the misadventures of mortgage-backed securities during the housing crisis (not to mention commodity bubbles) may raise eyebrows when it comes to the idea of speculation over an element so essential to life.

Rickards argues, “It’s taken 25 years for housing to go from non-financialized to where we are today after everything that occurred four years ago.” When it comes to water, “if it ever gets there where speculation is a problem, that will not be a bad thing because we will have come a long way in the meantime.”

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Water, energy and the economy

David Zetland writes more on pricing water in relation to energy concerns at Growing Blue:

Water, energy and the economy

…let’s set aside the issue of environmental water and concentrate on water as a resource that can be used for economic activities. Most resource water is managed, priced and distributed by local monopolies, whether it’s an irrigation district delivering water to farmers or a utility delivering water to residential and industrial users. These monopolies often sell their water at the cost of delivery — covering the fixed costs of pipes and variable costs of treatment and pumping. It’s extremely rare that water prices reflect water scarcity, which means that it’s also rare for the price of water to rise when demand exceeds supply. This means that some users may consume “too much” water, leaving other users high and dry. (Or they may not – deciding that they’ve taken “their fair share,” but such restraint is rare when it’s possible to use more cheap water to increase profits.) Water managers may not work to prevent these shortages, since they are not penalized for shortages, allowed to raise their prices above cost, or worried about losing business to competitors.

That’s not the case for energy, steel or trucks, as each of these businesses operate in markets, where prices adjust to equalize supply and demand and where competition makes it easier for new suppliers to meet demand when their competitors run out of inventory.

The impact of water shortages are much greater than implied by lost sales of water. A restaurant may pay one dollar for 100 gallons of tap water that is used to produce food worth thousands of dollars. An industrial facility may pay the same to produce products worth hundreds of times more. All of these users would be willing to pay far more in the event of water shortage, but their money is worthless when there’s no water. They then have to close the restaurant, turn off the turbines and shut down the machines for producing silicon chips or potato chips. Workers lose their wages, customers lose access to products — the effects multiply and spread, all for lack of “cheap” water that does not exist.

The solution to these problems is the same solution that will end our need to discuss the water-energy nexus: price water for scarcity. Such a solution would treat “economic water” as we treat oil, coal, shoes, coffee or any other product: prices will rise when demand exceeds supply and fall when supply exceeds demand.

Prices that reflect scarcity will keep supply and demand in balance, rationing water to those willing to pay more and preventing shortages. (Water managers will make more money than the cost of delivery, of course, but they can refund excess revenues to customers under the supervision of their regulators.) These operations require only a change in perspective: we need to treat water as a valuable input to our economic activities.

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