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California's Water Problems

Kevin Williamson has an excellent article in the National  Review on how California is (and how it should be) dealing with it's drought-induced water shortage.

He frames the problem as one that should be familiar to any economist: how do we allocate a scarce resource.  He also makes the point that scarcity is a fact of reality that cannot be wished away or swept under the rug.  

About agriculture, he writes:

“Farmers, who by some estimates consume about 80 percent of the water used in California. Agriculture is a relatively small component of California’s large and diverse economy, but California nonetheless accounts for a large share of the nation’s agricultural output. Both of those things are, in a sense, the good news: If market-rate water costs were imposed on California farms, as they should be, then any higher costs could be passed along — not only to consumers, but up and down the supply chain — in a very large global market, where they should be digested more easily”

So, how should we allocate water?

“There are two possible ways to allocate water in California: The people in Sacramento, Governor Brown prominent among them, can pick and choose who gets what, with all of the political shenanigans, cronyism, inefficiency, and corruption that brings. Or Californians can get their water the same way they get most everything else they need and value: by buying it on the open market. This is an excellent opportunity to apply the cap-and-trade model that many progressives favor when it comes to carbon dioxide emissions, with an important difference: This deals with real, physical scarcity, not artificial scarcity created by regulation.””

More precisely, here's a route forward.

“As noted, the water-rights picture is complicated, but it is not so complicated that California could not 1) calculate how much water is available for consumption; 2) subtract preexisting claims; 3) auction off the remainder, with holders of preexisting water rights allowed to enter that market and trade their claims for money. A gallon of water used to green up a lawn in Burbank and a gallon of water used to maintain a golf course in Palm Springs and a gallon of water used to irrigate almonds in Chico would be — and should be — on exactly the same economic and political footing.”

To the extent one is worried about the poor being able to afford water, use block rate pricing or take some of the receipts from the sale of water and re-allocate to the poor to let them decide whether it is worth buying.  

Impotence or Death?

Last week I was in Italy teaching a short course and speaking at a conference.  At the conference, I attended a session where the author described an an experiment on alcohol warning labels.  He had people choose between different bottles of wine that had different warning labels.

I thought this was a bit of a strange experiment because once you've seen one bottle with a warning label, doesn't it tell you something about all the bottles?  When I voiced this concern, my friend Maurizio Canavari pointed out that in Italy, different cigarette packages have different warning labels (apparently determined at random).

He sent me this picture yesterday, which reminds me of the joke he told me after the session.  A man walks into a tobacco shop and asks for a pack.  On his way out, he notices the warning label on the pack says that smoking may cause problems in the bedroom (e.g., see the above label "Il fumo riduce la fertilita").  He goes back in and hands the pack back to the shop owner and says: I'll take the one that just kills you.

Seriously, I wonder about the effectiveness of spreading information out over multiple packs vs. trying to cram it all on one.  And, I do wonder if people are more/less likely to pick packs with certain labels despite the fact that the labels warn about smoking in general and not about the effects of one particular pack or brand over another.

 

Update on Meat Prices

It's been a little less than a year since I last weighed in on the change in  meat prices.  So, what's been happening?  

Below is a graph of retail prices from the  Bureau of Labor Statistics over approximately the last five years (from January 2010 to February 2015).

Beef prices (ground beef and steak) have continued their rise, while pork products (pork chops and ham) have come down a bit off their highs in the summer/fall.  Chicken prices have remained relatively steady.  

It is a little easier to focus in on changes by looking at the following graph, where I've plotted the changes in each meat's price relative to its price in January 2010 (and multiplied by 100).

Compared to five years ago, ground beef prices are 54% higher (an annual increase of over 10%) and steak prices are 43% higher (an annual increase of 8.6%).  Pork chop and ham prices are 30% and 39% higher than they were five years ago despite the recent declines.  Chicken prices today are only about 10% higher than 5 years ago (experiencing annual increases of only 1-2%).  

On at least a couple of occasions (here and here), I've discussed the driving factors behind these price changes, and none of that has really changed.  The fact that pork prices are now falling and beef isn't is likely due to the shorter life-cycle of pork relative to beef.  A sow can produce two litters per year (with about 9-12 pigs/litter) and those baby pigs are big enough for our dinner plates in about half a year.  By contrast, a cow will typically have one calf in a year, and it takes a little less than 2 years before that calf becomes our hamburger.  Both hog and beef producers want to produce more animals to take advantage of the higher prices (a move that will eventually bring down prices), but biological lags mean pork producers will be able to respond more quickly.  

So, when will beef prices begin to come down?  If biological lags are the answer, I'd say wait about a year and a half.    

Credit Availability and Farm Land Booms and Busts

This according to a paper just published in the American Economic Review by  Raghuram Rajan and Rodney Ramcharan about bank failures and farm land values in the 1920s:

“How important is the role of credit availability in inflating asset prices? Our evidence suggests it matters. Of course, the influence of credit availability on the asset price boom need not have implied it would exacerbate the bust. Continued easy availability of credit in an area could in fact have cushioned the bust. However, our evidence suggests that the rise in asset prices and the build-up in associated leverage were so substantial that bank failures (resulting from farm loan losses) were significantly more in areas with greater ex ante credit availability. Moreover, the areas that had greater credit availability during the commodity price boom had depressed land
prices and lower credit availability many decades after the bust, probably because farm loan losses resulted in the failure of banks that lent to farmers, and altered banking market structure in subsequent decades.”