27 Oct 2014

Reviewing Libecap's review of Living with Water Scarcity

I was pleased to see a review [page 7-9 of this pdf] of Living with Water Scarcity in Regulation, a monthly quarterly review published by CATO, a free-market think tank based in Washington DC, but then I was disappointed.

The author of the review, Gary Libecap, is a professor at UC Santa Barbara with decades of experience in water economics. We can see the depth of his experience in the review, of which two-thirds is devoted to his work and one-third to my book. This is a pity not due to the lack of space for my ideas but for Libecap's extended "rebuttal" of ideas I do not hold and his omission of ideas I propose to put his life's work into use.

Let's start by acknowledging Libecap's contribution to the role of property rights in enabling markets for water for economic use, as well as the importance of minimizing interference with markets by overweening regulators or citizens invoking a "duty to public trust" as an excuse to nullify or restrain the use of rights. These factors are indeed important when discussing water markets. Libecap, sadly, appeared to miss my extensions of his ideas. On Page 66, for example, he says:
Auctioning would confiscate existing prior appropriation rights, not strengthen them... water would be moved from existing owners into the political process... the discussion does not make clear whether such auctions would be recurring, or... whether water could be traded subsequently.
In my book, however, I address all of these concerns, i.e.,
I designed a forced market that was not an oxymoron. An all-in-auction (AiA) puts all rights (or allocations) into a pool and allows eligible parties to bid for that water in a single-price auction. The key innovation is that the proceeds of the AiA are distributed among those whose rights are auctioned. The AiA moves water to those who value it most without violating the rights of owners because owners can "bid for their own water" if they want to keep it... AiAs should be matched to local conditions [i.e., in frequency or as complements to existing markets]. Rights owners decide who can bid.... Note that this market --- like any other --- can reallocate permanent rights or temporary flows. [p 54]
Libecap's critique, in other words, does not apply to the auction I describe in the book. But what about his concern that the "public trust" will impede market efficiencies? On page 65, he says:
Zetland allows the public nature of water to confound potential private solutions... The community is never defined, and why politics fails in one case but not the other is not explained... [and] how will scientists weight the value of competing uses or opportunity costs.
It's unfortunate that Libecap failed to notice that I had addressed exactly these problems, i.e.,
Interacting economics and politics complicate water management. I have tried to simplify matters by grouping chapters into two parts. Part I covers economic topics in which one person's action or water use does not necessarily affect others. A bottled water company need not affect agricultural irrigation; long showers do not prevent green lawns. Part II covers political topics in which people's decisions or uses interact. A dam changes flood risks, environmental flows, and the cost of irrigation. The separation of personal topics in Part I from social topics in Part II clarifies whether we should rely primarily on economic or political tools...

The book's ordering of parts and chapters does not imply that water should be managed in that order. Indeed, it is often necessary to resolve political issues before implementing economic policies. It is not possible, for example, to set the right price for drinking water without an engaged and knowledgeable regulator. Allocations to farmers should, for similar reasons, only occur after water is set aside for the environment. [pp 4-5]

From this, we address his worry about "political interference" in markets for water as a private good while allowing for a political discuss of social allocations of water as a social good. What about over-conservative scientists? On page 90, I say
Greater environmental flows will upset some people and please others. Some people will change their habits or business models. Others will gain (real or imagined) benefits from increased flows. Extraction limits can be administered with prices, regulations, or other techniques, but their level needs to be agreed upon though a political mechanism that reflects social priorities.

"Acceptable" levels should not be set by those with an interest in diverting water. They should be set by scientists who understand the connections between flows and healthy ecosystems. Scientists may be vulnerable to the bias of reserving too much water for nature. That means we should make changes if their recommendations lead to outcomes that over- or undershoot the community's ecosystem targets. These adjustments will add or subtract water available for private uses, but a two-step allocation (reserve environmental flows before allocating remaining waters among human uses) is much easier to manage than balancing between "co-equal goals."
I don't know if Libecap read that passage or if he distrusts my mechanism, but his response -- "Private water rights are routinely traded for augmenting stream flows by Oregon's Freshwater Trust" [an example I also mention] -- does not even come close to supporting his conclusion that such an example proves that "state environmental mandates are not necessary to protect aquatic and riparian habitats" [p 66]. I wish that was true, but ill health of rivers in the US (and around the world) shows that Libecap's solution is far from being implemented on any reasonable scale. "Flow augmentation" will not restore the Colorado River Delta, let alone protect ecosystems under assault in Europe, the Middle East, South Asia, China, Brazil, and so on.

Finally, we need to consider the audience for my book: people who want to know more about how to manage scarce water to balance among different economic and social demands. Libecap's review will cover familiar ground for CATO's government failure choir. I know those tunes, but I have also spent a lot of time with people opposing those arguments -- people who hold sensible views in terms of logic and passion. I wrote my book for both groups in the hope of creating consensus on reasonable steps. Libecap missed an opportunity to evaluate this middle ground when he argued against a straw man I've never met.

Bottom Line: I hope Regulation's readers put Libecap's perspective aside until they form their own opinions. It will only take them a little time with the book (free download!) to read what I really said on liberating water management from dysfunctional perspectives and outdated institutions.

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