Subsidies are all wet

Posted: Mar 19, 2004 12:00 AM

For years we have been hearing about a water shortage in the western states. To most people, that might suggest that there just is not enough water for all the people in those states. But, when an economist hears the word "shortage," it has an entirely different meaning.

What specifically is a shortage? It is a situation where you are willing to pay the price but simply cannot find as much as you want. To an economist, the question is: Why doesn't the price rise then? If it did, some people would demand less and others would supply more until supply and demand balanced.

Put differently, a shortage is a sign that somebody is keeping the price artificially lower than it would be if supply and demand were allowed to operate freely. That is precisely why there is a water shortage in the western states.

Even in California's dry Central Valley, less than 10 percent of the water available from federal water projects is used by cities and industries. The vast majority of it is used by farmers, who pay a fraction of what urban users pay, thanks to federal price fixing.

Like everything that is made artificially cheap, water is used lavishly, including the growing of crops like cotton that require huge amounts of water. It is one thing to grow cotton in Southern states with abundant rainfall. It is something else to grow it out in a California desert with water supplied largely at the taxpayers' expense.

The long-term contracts under which this ridiculous arrangement goes on expire this year, so theoretically these contracts could be renegotiated so that everyone who uses water supplied by federal water projects has to pay his own way and cover the costs of the operation. Alas, this is an election year, so you can bet the rent money that no such thing is going to happen.

A Department of the Interior spokesman explains it this way: "We don't think it is a good idea for California or the nation to adopt punitive pricing proposals that might have the effect of driving more agriculture out of existence."

Isn't that a lovely thought? Apparently the only people toward whom the government can be "punitive" are the taxpayers.

We live in what is often called a profit system but, as Milton Friedman explained long ago, it is really a profit-and-loss system. The losses are just as important as the profits, though not nearly as popular.

Running up losses because you are using resources that are more valuable somewhere else is precisely what forces you to stop the waste. If you are too stubborn to stop, then you will get stopped by bankruptcy.

In other words, some enterprises should be forced out of existence, however much that might shock the delicate sensibilities of the Department of the Interior during an election year.

As for agriculture, we have been running chronic agricultural surpluses for more than half a century and scrambling to find some way to store it, export it or just plain give it away. So many other countries have the same problem that we might be able to eat heartily -- and remain overweight -- even if we stopped farming entirely and bought up their agricultural surpluses instead.

Things are never going to get to that point. But it illustrates how fraudulent it is for the government, the environmentalists or farm lobbies to try to scare us with the specter of losing agricultural land.

Incidentally, these kinds of policies can be found halfway around the world in India, where government-subsidized water is used so lavishly that the water table is falling in the Punjab. Similar incentives produce similar results in various times and places.

Nobody is going to risk losing the farm vote during an election year. However, even though rationality is not likely to triumph when government water contracts are renewed this year, it should be possible to put limits on the insanity.

First of all, the contracts could be set for much shorter periods, to limit how much longer the damage goes on. And they could be set to expire in an odd-numbered year, when there are no federal elections.