OUR MISSING MACROECONOMIC POLICY

Fiscal policy is not just, or even principally, the purview of the president. ~ Carly Fiorina

 

Appropriate fiscal policy has been missing-in-inaction (MII) since 2009. Every Econ101 student learns there are two complementary, federal macroeconomic policies – monetary and fiscal policy – that the government uses (ideally) to keep our nation's economy in "just-right" balance (not too much unemployment, not too much inflation). Monetary policy concerns changing the nation's money supply mostly by altering interest rates. Fiscal policy involves changing government spending and taxes through Congressional legislation.

All political eyes were focused last week on monetary side of macro policy. Fiscal policy remained the unspoken elephant in policy-makers' rooms, as it has for all too long. Why monetary policy? Because Janet Yellen was talking.

It was interesting to hear Ms Yellen testify before the Senate Banking Committee. She is expected to be the next Chairwoman of the Federal Reserve Bank (the first time that title has been used at the Fed). But before she receives the monetary scepter as this nation's (and the world's) primo central banker – and be in charge of US monetary policy – she needs to be confirmed by the Senate. Hence her testimony.

During her tenure on the Federal Reserve Board –as vice-Chair for the past 3 years and President of the San Francisco Federal Reserve Bank from 2004-10 – she has generally supported Fed's and Ben Bernanke's innovative, expansionary and controversial monetary policy called quantitative easing (QE). She has been correct in her support. Most recently, QE has involved buying $85 billion per month of long-term Treasury bonds and other financial assets to stimulate the economy. As a result of QE and other financial activities, the Fed now has more than $3.59 trillion of financial securities' assets on its balance sheet. Before the 2007 recession, the Fed held between $700 and $800 billion of Treasury note assets on its balance sheet.

Several senators questioned her testimony and implicitly her qualifications. Two of them, Senator Bob Corker (R-TN) and Senator Sherrod Brown (D-OH) characterized the Fed's QE-based monetary policy as “an elitist policy” and “a sort of trickle-down economics," respectively. They said monetary policy only helps the well-to-do Americans who participate in the (now rising) stock market rather than middle-class folks whose finances are far more precarious and puny. They have a point.

But politicians like Sen. Corker deserve gold medals for extreme hypocrisy and ironic blindness. The idea that a Republican Senator was berating Ms Yellen of implementing "elitist policy" would almost be humorous except for the huge harm Republican politicians like Sen. Corker have loaded onto working Americans during the past 4 years – because of their caustic, elitist policies. Recent examples include opposing increases in Federal (and state) minimum wages, drastically reducing funding for the food stamp (SNAP) and low-income food and nutrition (WIC) programs and opposing increased infrastructure spending. Such policies are terribly hurtful snap judgments.

If these senators want non-elitist, non-trickle-down economic policies, they themselves can create them – they're called fiscal policies. Republican and Democratic congress folk should wake up from their stupor and pass a fiscal stimulus bill, based on fiscal policies that have worked in the past.

Instead, after taking the Congressional hypocritical oath ("do no harm to those who pay for my re-elections"), Congress continues to sit on its thumbs and criticizes prospective monetary policy-makers like Ms Yellen for not doing what Congress itself (and President Obama) should be doing. Successful expansionary fiscal policy would offer much more broad-based economic benefits that come from directly increasing employment, putting more money in the wallets of middle- and working-class people and providing necessary support to folks who can't afford food, care and/or housing.

Why does fiscal policy remain MII? Why doesn't Congress authorize expansionary economic policy? Have its members forgotten what fiscal responsibilities they have? Not likely; it's because many of its members are too duplicitous and ideological to do what's needed for the public at large. They remain falsely fearful of non-existent inflation from ever-moderating deficits.

Ms Yellen was too demure in not forcefully stating to the Banking Committee that the Fed – soon to be her Fed – cannot by itself pull the US out of its continuing economic malaise with only its monetary efforts. Congress must re-activate its fiscal authority by passing substantive expansionary fiscal policy legislation. This means lowering taxes for the 97%, increasing government expenditures to improve infrastructure like roads, bridges and the internet, providing more employment-training funding, especially for the long-term unemployed, and increasing SNAP and WIC budgets. Senators Corker and Brown can rest assured these fiscal expenditures will not be elitist or trickle-down policies.

We would have all benefited from hearing Ms Yellen clearly describe the elephant in room and tell Congress to get on its fiscal stick and start doing its part to revitalize the economy, rather than berating the Fed for not doing Congress' job.

WATER, WATER EVERYWHERE, NOR ANY DROP TO DRINK

When the well is dry, we learn the worth of water. ~ Ben Franklin


The Earth has 1,386,000,000 cubic kilometers (km3) of total water resource, counting all the oceans, lakes, rivers, aquifers, glaciers, icecaps and icebergs. But the world's freshwater glass is less than half-full and becoming increasingly scarce. Scarcity of freshwater isn't a new thing. Throughout history, civilizations have fallen due to lack of water and droughts. These include ancient Egyptian, Hittite, Mycenaean civilizations more than 3,200 years ago that irreparably suffered from a 150-year drought beginning in 1250 BC, and the Anasazi people in the American Southwest during the 12th century AD. "Water security" is now a growing concern in many places.

The importance of water for all life forms on Earth cannot be overstated. Without water, especially freshwater for creatures like us who don't live in the seas, there can be no life on the Earth. Humans can stay alive for only 3 to 5 days without water. It is the basis of Leonardo da Vinci's apt observation, "Water is the driving force of all nature." This truism is  reflected in Samuel Taylor Coleridge's fluid words from his Rime of the Ancient Mariner:

Water, water, every where,

And all the boards did shrink;

Water, water, every where,

Nor any drop to drink.

"Nor any drop to drink" references that only 2.5% of all water on the Earth (total water) is freshwater. Of that, glaciers and ice caps account for 1.7% of total water; fresh ground water accounts for 0.75% of total water. Fresh river and lake water accounts for 0.0009% of total water. There are 34.6 million km3 of fresh water on our planet, which seems like a lot, but.

There are 2 reasons for the growing scarcity of freshwater. First, human population continues to increase. More than 7.1 billion humans now live on the Earth, every one of whom requires daily potable water to survive. The world’s population has doubled in the last 40 years; its use of fresh water has quadrupled.

Second, every human not only needs water, he/she also needs food stay alive. Agriculture consumes more freshwater than any other single use. Irrigation of cropland, first used by Sumerian farmers more than 7,500 years ago, is how agriculture uses water, often lots of it. In the proverbial average year, the UN's Food & Agriculture Organization believes 1,000 m3 of water per inhabitant is considered as a minimum to sustain life and ensure agricultural production in countries with climates that require irrigation for agriculture. According to David Suzuki, an environmental advocate, more than one billion people lack adequate access to clean water.

In the US, irrigation accounts for 37% of all freshwater withdrawals, the single largest use. That's 67% of all US groundwater withdrawals and 28% of all surface water withdrawals. California is the largest consumer of irrigation water in the nation, representing 19% of all US irrigation use. Within California, irrigation accounts for 73% of the State's total freshwater usage.

The world's freshwater resources are not distributed evenly. Nine "water-rich" nations account for 60% of world's natural freshwater resources (listed in order of their internal freshwater resources, biggest first): Canada, Brazil, Peru, Columbia, Russia, Indonesia, US, China and India. At the other end of the world's water glass, 33 countries depend on other nations for over 50% of their renewable freshwater resources, including; Argentina, Egypt, Israel, the Netherlands, Pakistan, Syria and Viet Nam.

Asia, which has 60% of the world's population, has 28% of its freshwater resources. Africa, with 15% of the world's population, has 9% of its freshwater resources. By contrast, the Americas (North, Central and South) are relatively awash in water with 13% of world population and 45% of its water. A fair amount of North America's water lies frozen in Alaska's and Canada's far north (although now melting more and more into the Arctic sea).

Consumption of water also varies significantly by nation. India withdraws the most water for its use than any other country (761 km3/yr), followed by China (579 km3/yr) and the US (482 km3/yr). The ordering of water withdrawal/consumption by nation is much different when considering per capita usage.

On a per capita basis, the world's largest water user is Turkmenistan (4,762 m3/p/yr); who'd of guessed? Turkmenistan is a central Asian nation of 5 million people. It uses 98% of its total freshwater for irrigation, mostly thirsty cotton plants – it is the world's 9^th largest cotton producer. The US' per capita water usage is ranked 10^th highest (1,518 m3/p/yr).

Throughout recorded history, nations that can afford it have sponsored massive and costly water projects that have brought freshwater from afar to its citizens. The Romans famously built aqueducts. In the arid West, Americans built canals, aqueducts and captured entire rivers for drinking and irrigation water – Los Angeles' controversial expropriation that drained the Owens Valley's water in the early 20^th century (at a cost of more than $557M in current dollars). Subsequently, LA managed to get a substantial portion –about 50% – of its water needs from the Colorado River that allowed the parched LA basin to dramatically grow. Other water-grabs by semi-desert Southern California include 2 aqueducts begun in the 1960s that start in the San Joaquin-Sacramento River delta near the San Francisco Bay and transport water southward for 700 miles.

Like California, China's water dilemma is mostly founded on geography but also behavior. Eighty percent of China’s water is in the south, principally the Yangzi River basin. Half the people and two-thirds of the farmland are in the north, including the Yellow River basin. Beijing has the sort of water scarcity usually associated with Saudi Arabia: just 100 m3 per person a year is locally available. The water table under Beijing has dropped by nearly 1,000 feet since the 1970s. Because of massive, unchecked industrial pollution, only 50% the water sources in Chinese cities are now safe to drink. More than 70% the groundwater in the north China plain is unfit for any human contact, even for washing.

To remedy this calamity China has wholly focused on increasing available water supplies for its dry northeastern region, where Beijing lies. Thus, the nation has been busy constructing dams (including the world's largest, the Three Gorge Dam) and a gigantic series of engineered waterways – called the South-North Water Diversion Project – that will link the Yangzi River with the Yellow River and transport water over 1,800 miles northward. Will these hugely expensive efforts work? At least 600 million parched people hope so.

More generally, what alternatives should we consider to slack our growing thirst? Aside from offering alms to Lono and Chaac (the Hawaiian and Mayan gods of rain, respectively), there are 3 related actions that should be carried out. The first 2 focus on reducing demand for water, one via technology, the second through our tried-and-true economic stand-by, prices. The last action addresses increasing the supply of water.  

1.       Improve the water-efficiency of agricultural irrigation, and industrial and residential usage (in that order of importance);

2.       Raise the price of water, especially for non-residential consumption; and

3.       Continue searching for new freshwater resources.

Improving water efficiency (also called water productivity) is necessary to "stretch" existing water resources. Efficiency can include process improvements that use less water as well as improved recycling and treat water methods so it can be used again "downstream." Industry and agriculture account for 87% of total water use in the US. For agriculture it means getting rid of traditional, water-inefficient irrigation methods such as flooding and high-pressure (e.g., center-pivot) spraying methods. Instead, crop irrigation needs to use much more efficient low-pressure (e.g., drip) systems. Such changes can save 25 to 50% of water used for crop irrigation.

Why haven't industrial and agricultural water users already adopted these efficiency options? Because the cost of using water is nonsensically low, so new water-efficient techniques and technologies aren't cost-effective. Thus, these users stick with the water-wasting status quo. This leads to the next action.

The second action is founded on Ben Franklin's quote given at the beginning of this blog. Our collective well isn't yet completely dry, but as water volumes from aquifers, lakes and rivers are reduced, users and policy-makers need to recognize the value of water now all too often exceeds its price. The price of water, especially for non-residential users, should increase, probably substantially.

With few exceptions, water is distributed in the US (and beyond) by public agencies – the US Bureau of Reclamation and local water boards, irrigation districts and municipal utilities. These agencies have pricing authority for virtually all water sold to the public. For most of their history these agencies practically gave away the public's water to users. Reflecting the unstated but adhered-to motto of the Bureau of Reclamation – "economics be dammed" – the Bureau was compelled by the 1926 Omnibus Adjustment Act to set water prices according to the then mostly dry dirt-poor farmers' "ability to pay," not the actual cost of providing the water. Electricity sales revenues from the Bureau's multitude of hydroelectric dams were used to substantially subsidize water prices. Many irrigating farmers – meaning virtually all farmers in Arizona, Utah, Idaho and California – have benefited enormously.

In recent years a small but growing number of these agencies have revised their give-away policies, moving from being quite benthic, to raising water's price to better reflect its worth. More agencies should to do this. Freshwater remains a seriously under-priced resource. With higher water prices, first for non-residential customers, users will have real incentive to install technologies that employ this precious resource more efficiently and effectively.

Finally, efforts should continue to search for new water resources. Just like oil and natural gas companies devote money, time and effort to discovering more reserves, so too should governments look for "new" water. And I don't mean building more dams or lassoing glaciers. I mean discovering new aquifers, like recently happened in Kenya. It was announced in September that the just-located Lotikipi Basin Aquifer in northern Kenya may hold 250 billion m3 of water. This and several other aquifers were discovered in Kenya using satellite and drilling technologies. Hopefully, these techniques can add supply in other drought-prone areas of Africa and beyond.

With some luck, these demand- and supply-side actions will provide more vital drops of water for us to drink. We need every one of them.