DIMINISHING RETURNS. When sunsets might be useful.

Golden Gate sunset - Jan. 2014; © Bruce A. Smith 

The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first law of economics. ~ Thomas Sowell
The second lesson of economics is diminishing returns: adding more of a productive input will eventually result in a decline in the additional output produced. The second lesson of politics is to disregard the second lesson of economics. ~ C.B. Ladler

The Law of Diminishing Returns, a keystone proposition of economics, states that in all productive processes, adding ever more of one input (say, labor), while holding all others constant, will at some point lead to a decline in the additional amount of the resulting product.[1] The consequence of adding the last laborer is less than the added product when the second (or perhaps five hundredth) worker was added. There are many documented examples of this principle after it was described in the early 19th century by economists like David Ricardo and Thomas Malthus.

It remains relevant in the early 21st century. But politicians and bureaucrats either choose to not recognize its relevance, or more likely, falsely believe diminishing returns does not apply to programs and policies they deal with. Despite their hopes, diminishing returns always applies (in addition to the first lesson of economics – scarcity). Here are several examples.

The Value of a College Degree.  The US and many other nations have hugely benefited for a long time from improved and lengthened formal education of its citizenry. Two weeks ago the Obama administration publicly renewed its efforts to promote greater support for low-income youth to enter and graduate from college. Such support is important and needed. But well-meaning politicians never mention the changing labor market dynamics – based on the law of diminishing returns – that follow from ever-more college graduates entering the labor market.

As I've mentioned before, now that 30%+ of young adults (YA's) have college degrees there may be some downside consequences based on diminishing returns. The unemployment rate of YA's (20-24 years old) remains high: the Dec 2013 rate is 11.1%, much higher than the overall unemployment rate of 6.7%. However, with a B.A. degree, the current YA unemployment rate dramatically drops to 3.3%. At a macro level, having more college graduates continues to be demonstrably beneficial for many reasons.

 Nevertheless, from a micro perspective the relative value of completing college is lessening because the law of diminishing returns holds for B.A.'s as well as virtually every other good or service produced. Having a B.A. is becoming a new normal minimum requirement for a broader number of jobs, some of which have not historically required this skill level. For example, 15% of taxi drivers are college graduates. These B.A. job requirements were not present previously, when a smaller minority (roughly one-in-five in the 1990's) of young job market entrants was college graduates and when the US economy was growing strongly.

Now things are different. Having a B.A. is becoming less distinguishing. This is in part why employers can be choosier and state that a B.A. is needed for being a receptionist or gofer. And why YA's with B.A.'s may wonder where the superior job prospects long-promised by parents and teachers have gone. Their jobs (and wages) may not be as bright as expected. As even more YAs receive B.A.'s, graduates' initial career expectations may need adjustment.

Politicians pushing programs that support more college graduations should recognize both the macro and micro consequences. These politicians should also endorse policies that increase job-creation so the more-numerous folks with college degrees can actually find fulfilling jobs rather than be a call-center automaton with a B.A.

National Defense and Security.  Examples of diminishing returns inhabit every large, bureaucratic institution. Perhaps the preeminent illustration is the federal government's expenditures for national defense and security. These expenditures are the single-largest non-entitlement expense in the federal budget. Remember the $600 toilet seats the Department of Defense purchased in 1987 (which in 2013 would be worth $1,231)? They're still buying stuff like that, lots of it.

In fiscal year 2013 the government's "all-in" defense/security budget is $1.6 trillion. This includes expenditures for the DOD as well as NSA, CIA and DOD intelligence budgets. This colossal sum is equivalent to spending $182.5 million per hour every hour every day. It is impossible to imagine that diminishing returns are not very much alive and well inside this gargantuan level of spending. After all, Defense Secretary Chuck Hagel called the Defense Department “bloated” in a 2011 interview.

How could we diminish DOD's diminishing returns? By not reversing the Sequester-based DOD budget cuts – sadly, last week Congress overturned most of these cuts. Also, "unify" the military and intelligence services by combining the Army, Navy, Air Force and Marines into one integrated service, something Canada did with positive results over 4 decades ago. And really change procurement practices so no more generals (or privates) sit on $1,200 toilet seats. Yet attempts to reduce our defense/security budget are invariably met with misologistic statements of misguided vitriol that often boil down to diminishing returns be damned.

the Mars Rovers.  NASA's budget has been repeatedly cut by the Obama administration, much to the consternation of its proponents and contractors. One of NASA's impressively successful programs – the Mars rovers –illustrates how budget constraints can force an organization like NASA to evaluate the net benefit of each of its programs in order to eliminate expenditures where diminishing returns may be present. The Opportunity rover has been operating far beyond its expected lifetime. Opportunity has slowly motored in the Martian soil for 10 years doing experiments. It was designed to work for 3 months; its annual operating budget is $14M. Curiosity, a much more capable rover, will complete its 2-year mission in June; its annual budget is $67.6M.

As they do every two years, NASA officials will soon conduct a review of the spacecraft that have outlived their original missions. For the 2015 fiscal year, which begins Oct 1, NASA faces some difficult choices. Opportunity may still be knocking, but NASA's fiscal guillotine may kill it as well as Curiosity and other "extended missions" (budgeted at $140M this year) that don't measure up in terms of returns. The Opportunity cost may be too high.  Although painful, NASA's biennial review appears quite consistent with a goal of maximizing returns from available funds. More agencies should conduct such program reviews.

The Major League Baseball season.  Following a long tradition, Major League Baseball's 2014 season will again be 162-games long. This year, spring training games begin on Feb 26. The season-opening game will be played on Mar 22 down under in Australia (who'd of guessed). US fans will see the Dodgers and Padres play on Mar 30. The season ends on Sep 28. The Red Sox won the last year's World Series on Oct 30; break out the Halloween candies. The full baseball season is thus 8 months long!

It may once have been America's national game, but really how many fans really want to wear down jackets and gloves to baseball games amid snow flurries in places like Minneapolis, Chicago, Boston and Toronto at the beginning (or very end) of the season? The 2013 season saw fan attendance drop slightly, compared to 2012. No surprise.

I have a suggestion; reduce the number of games in the season. A century ago, major league baseball teams were playing 140-game seasons, which seems far more reasonable (unless you're an owner or player). Don't you think that diminishing returns becomes well-entrenched even before 140 games, and certainly by the 162nd? Isn't baseball supposed to be a summer game? Shorten the season; reduce diminishing returns; make each game worth more.  

Nth-Stage Regulations. Regulations affecting our behavior surround our every move. New or revised regulations grow more numerous with every tick of the clock. A number of them are essential (like environmental and airplane safety regulations– although I'm not so sure about allowing cell phones to be used in a flying airplane), many others may be less indispensable. Safety regulations continue to be added, like having turn signal displays within a car's side mirrors that have diminishing marginal benefit than prior regulations. Should we stop augmenting regulations because we may have reached diminishing returns? That is a fraught question, and was behind rules that sometimes require cost-benefit calculations to be made before certain new regulations are enacted.

An example of an N'th stage regulation includes a mother who has petitioned the Food and Drug Administration to prevent American firms from using artificial dyes to color M&Ms and other candies. Her son apparently has a very rare, hyper-allergic reaction to such dyes but loves, really loves, this chocolate. So she has to buy European M&Ms for him that don't have "bad" dyes. She wants to stop Mars from using artificial dyes (as has been allowed by FDA regulations) in all US-made M&Ms, so she won't have to keep buying European M&Ms to keep her son's meals happy. Wow.

Corporate and Personal Subsidies.  Finally, there's the swampy morass of subsidies. However well-intentioned they may have been when inaugurated, subsidies are also subject to diminishing returns for those who pay them – us taxpayers. Subsidies here include not just tax breaks, R&D and price supports, but direct payments as well. In general, people and businesses believe government-provided subsidies are wasteful and unfounded – and offer unequivocal evidence of diminishing returns that they'd rather not pay for (and unintended consequences). That is unless you are receiving a particular subsidy; in which case it is wholly and forever appropriate. Subsidies are a fine example of fiscal beauty being in the eye of the beholder.

Illustrations are legion: mortgage interest subsidies for home-owners are estimated to cost $70 to $100 billion annually. Subsidies to the oil and gas industry cost an estimated about $4B a year – and have been provided for more than 80 years. Agricultural subsidies for producing food for livestock and humans are worth up to $35B per year, not including numerous US tariffs that raise the price of imported food. Renewable energy producers (like home-owners and businesses who have installed solar and wind energy systems) have received federal subsidies worth about $50B over the past 30 years – roughly $1.7B a year. Boeing recently used the threat of moving to a nonunion, low-wage state to win a record subsidy package – $8.7B from Washington State – to remain in Everett, WA.  

After one starts identifying government subsidies it's hard not to believe that virtually all consumers and businesses are receiving several sorts of subsidies. Justification for subsidies, especially for "infant industries" like petroleum and solar that haven't been infants for a long time, is ultimately not founded on economics, its politics. So it goes, despite diminishing returns.

Subsidies present a good case for introducing sunset provisions at the beginning of subsidy expenditures. After a specified number of years (say 10 for oil/gas and solar/wind), the subsidy would stop. In a variant of this idea, California's solar subsidy was designed to diminish over time and end when a specified amount of solar capacity had been reached. Such fiscal sunsets elicit howls of outrage from recipients, but would give them plenty of time to prepare for the day when they would have to survive without public fiscal support, saving taxpayers millions.

Having sunsets on solar (and other) subsidies is a good idea.


A JAN 29 ADDENDUM.  Here's another subsidy story, but with a twist. In 2012 Congress passed the Biggert-Waters Flood Insurance Reform Act, a law that rectified a significant taxpayer subsidy for homeowners in flood zones whose houses were damaged – not too surprisingly –when flooding occurred. The fund that provides payments for flood damage was $24 billion in debt after paying out megabucks for costs from Hurricanes Katrina, Irene, Isaac and Sandy. The new law was designed to have the folks who chose to locate homes in flood zones pay more for their flood insurance themselves; and as a consequence we taxpayers wouldn't pay as much in the future. Sounds good so far. Except when flood-prone homeowners received their new federally-backed flood insurance policies, they found premiums had risen, quite a bit, as they were destined to with the reform law. An example, a flood-insurance policy that used to cost $600 per year now cost $4,500. The flood-prone homeowners were incensed; and let Congress know how they felt about losing their subsidy. Guess what? Congress is now about to pass another law(with 180 sponsors)  that would block, repeal and/or delay the reform law. We unflooded taxpayers never had a chance.  
  

 

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[1] See Economics, by Paul Krugman and Robin Wells, (2nd ed.)Worth publishers, 2009.

 

AN ECONOMIC TOUR OF THE ENGLISH COUNTRYSIDE, STARRING DOWNTON ABBEY – ACT II

That is the thing about nature; there is so much of it. ~ Violet Crawley, Dowager Countess of Grantham

My first part of this tour (see here) recounted the centuries-old business model of the owners of England's countryside – landed-gentry like Lord Grantham of Downton Abbey – that was challenged by changing economics of the early 20th century. These changes had been building for a considerable time. Four (4) sets of events in the 19th and 20th centuries conspired to destabilize the steady world of the British aristocracy, including Lord Grantham.

First, Parliament passed the Corn Laws in 1815 that protected English and Irish farmers with significant tariffs on less expensive, imported grains, and thus raised the domestic price of bread and other agricultural products. Riots occurred in London and other cities after the laws' passage. The Corn Laws helped agricultural interests – that were squarely based on the landed gentry, including Lord Grantham's forebears – and who had reaped large financial benefit from an increase in land prices and agricultural products due to the Napoleonic Wars (1803-1815). But the emerging merchant/industrial class in England was strongly opposed to the Corn Laws because these laws kept the price of grain and bread high that in turn required wages to rise, so workers could afford necessities like bread.

After several decades of the Corn Laws and with the Industrial Revolution in full bloom in England, the balance of political power began to shift and these laws were repealed in 1846. The new "industrial elite class" had arisen. Grain imports into England from the US and other nations rapidly increased after repeal. England imported 2% of its grain in the 1830s, 24% in the 1860s. As a consequence, the British price of grain decreased by more than 30%. Britain's domestic grain producers (including most estate-based farms) could not compete with growers in Indiana, Illinois and elsewhere. By 1885, more than one million acres of domestic corn were withdrawn from production in England. Farm income for estates like Downton Abbey (DA) dropped greatly.

Lord Grantham does not seem to define his estate as acres of land subdivided into farms that produced foodstuffs. He mostly saw it as people whom he and his ancestors have taken care of forever. One doesn't dislodge trustworthy tenants simply to stay in business by dismissing them. In this sense, he obdurately went against the grain of modern agriculture. Furthermore, new, more efficient agriculture was (and continues to be) more capital-intensive – which requires more investment – something that Lord Grantham doesn't seem to have any talent at obtaining. Even if he could, he is not one to substitute cold capital for his honorable, loyal labor.

Second, the Panic of 1873 that included a stock market crash and a financial crisis added to the economic misery of investors (the landed gentry) in England and beyond. This bank panic created a deep recession and considerable poverty throughout Europe (and also the US) that reduced demand for agricultural products and other goods and services for at least 6 years. Both workers' and producers' incomes dropped as a consequence. This economic calamity, called the Long Depression, very likely added to DA's fiscal and personal woes.

Third, just as change in international trade patterns and macroeconomics were adversely influencing British estates' income stream, new residential technologies were emerging. Specifically, the telephone, central heating and electricity, not to mention the automobile, were altering what "comfortable living" entailed the late 19th and early 20th centuries. Abbeys, castles and manors built before the late 19th century – like Downton Abbey – required expensive alterations to incorporate these new standards of modern living. Just when Lord Grantham's wallet was less full, he had to pay a lot to keep up with the Lord Joneses.

Finally, there's World War 1, the "Great War". This 4-year conflict began in 1914 and killed about 15 million soldiers and civilians, including over 700,000 British soldiers. No one was spared its devastating effects, as we have already seen in DA. Beyond the horrific deaths and injuries, WW1 transformed the social order in Britain. The influence and power of the landed gentry were reduced. Not only were lords, prospective heirs and downstairs staff of the estates harmed and killed, but large numbers of those who provided service to the manors and abbeys never returned even if they survived the war. Instead, they cast their fates to new lives working in the cities.

Thus, by the 1920s the economics of many British country estates like DA had been inexorably altered. Very few were roaring at all; many were teetering on unstable fiscal ground. They needed an influx of income and capital as their traditional business model had been forever fractured.

After conducting contents auctions to raise funds, numerous estates were demolished. Indigent lords, like the 9th Duke of Marlborough (the first cousin of Winston Churchill), cast a wider eye and married wealthy American heiresses to finance and save their life style. In the TV show, Lady Mary's foreboding, nouveau riche marriage would have had a similar remunerative purpose; praise be for small emotional favors that it wasn't consummated. Fortunately, Matthew's unexpected inheritance from a far-away, forgotten uncle served the same, much-needed compensatory objective for DA.

With this backdrop, what will happen to DA in its 4th season? Will Tom take up the "modernist" scepter that Matthew held as necessary to insure DA's financial security? Will Tom thus consolidate the farms, dismiss many cottagers and ox-herds and watch Lady Edith operate one of the new tractors? Will Lord Grantham lie down across his driveway (but only after Mr Carlson has hurriedly placed a drop-cloth underneath him) to stop the dastardly tractors? Will Shirley MacClaine reappear having a change of fiscal heart and save the abbey with her foreign largesse? Does Lord Grantham head to London for a much-needed executive MBA at the London School of Economics? Will he pass the courses? And/or will the grieving Lady Mary toss aside her damp hankies and get her fingernails a bit dirty to revive her portion of the great, green English countryside as her dearly-departed husband championed? Tune in and find out starting on January 5. Onward to the past...

AN ECONOMIC TOUR OF THE ENGLISH COUNTRYSIDE, STARRING DOWNTON ABBEY

Home wasn't built in a day. ~ Jane Sherwood Ace

Ah, the English countryside, I guess there's nothing really like it. Many Americans have gotten to know this form of greenery because of Downton Abbey, the successful BBC TV show that will commence its 4th season in the US 3 weeks from today.

I've been fascinated with the show not only because of the story and personalities, but because of the times in which it takes place – before and after the First World War. For the "great English country houses" the late 19th and early 20th century was a period of significant economic change and challenge.

Here's my 2-act tour of the life and times of English country houses (aka, estates), and the people who lived in them, like Downton Abbey, from an economic vantage point.

Act I starts with the house itself. Its name, Downton Abbey, implies that at one time in the distant past it was an abbey – a religious monastery, convent or priory. Henry VIII's Dissolution of the Monasteries in the early 16th century disbanded such Catholic land-holdings and appropriated their income and assets. As you may remember from a long-ago history class, he did this after Parliament made him the Supreme Head of the Church of England in 1534, thus separating the English church from the Catholic church and Papal authority. Many of these ecclesiastical properties were provided to friends of the King and converted into private homes. Downton Abbey may have been one of these places.

In real life, TV's Downton Abbey is actually Highclere Castle which is part of a 1,000 acre estate in the north-central part of Hampshire, in southern England. According to Lady Carnarvon, the mistress of the home, Highclere Castle has probably 200 or 300 rooms, 50 to 80 bedrooms and costs $1.5 million a year to maintain. She's also mentioned that if you know exactly how many rooms are in your home, you probably don't have a large house. Love the British, don't you?  

The underlying economics of Downton Abbey (DA) is historically founded on feudalism first begun in ancient times (probably by the 9th Century). This system continued for centuries in Europe and what is now the UK. Like other landed gentry, DA's Lord Grantham owned all the estate's land, including its villages and towns; a relatively small portion was his demesne. By the turn of the 11th century, an agricultural estate – which referred to virtually all estates in England since about 90% of the population lived and worked on the land at the time (the same percentage that lived on the land in the 18th and early 19th centuries) – depended on slave labor (aka, indentured servants and farmers).

In a very real sense, the landed gentry depended on slavery - for centuries. Estates were built around the authority of the lord of the manor/estate.^[1] The Old English word "Weallas", or Welshman, was one of the English words for slave. The indentured farmers provided a portion of their produce as payment in kind and/or of their time to the lord. In return for these payments, the indentured, common folk received room and board from the lord. These indentured people included: the cottager, someone who farmed at least 5 acres of the lord's land, and paid for this by working for his lord every Monday in the year, as well as for 3 days a week in August, as the harvest approached; the shepherd, who could use 12 nights' dung (the invaluable natural fertilizer) at Christmas and also could keep the milk of his flock for the first 7 days after the equinox; and the ox-herd (the man who operated the ox that powered the plow – probably the most important person working the land), if he had his own cow he could pasture it with his lord's oxen and cows.

In more recent times such people have been called "tenant farmers." In 19th century England 90% of the land was tenanted; by the mid-20th century 60% remained tenanted.[2]

This formidable agriculturally-based economic system began to splinter in the late 18th and 19th centuries, when the Industrial Revolution was structurally altering England and subsequently the world. This revolution changed English (and most other western nations') agriculture, not just industry. My blog, The Agricultural Revolution, discuses how this revolution actually facilitated the Industrial Revolution. The movement of agricultural workers (aka, peasants) off the farms into the cities - and new factories - wasn't necessarily a disaster for agricultural estates or their owners because of increased farm productivity. Productivity gains were realized through mechanization. These benefits more than made up for the reduction in the mostly low-skilled agricultural work force.

By the early 20th century - when we are viewing DA - the technical scale of agricultural production had significantly grown. Smaller farms, presumably like those at DA, were increasingly inefficient, mainly due to their size and inability or unwillingness to utilize modern methods. In my mind, this is the principal source of tension between Lord Grantham and Matthew (RIP). Matthew knew that farms based on centuries-old tenancies and techniques that had existed at DA seemingly forever were no longer going to work because the farms were not large enough to support WWI-era agricultural methods and technology, like the then-new internal combustion engine tractor and its yield-improving accouterments.

Revenue that Lord Grantham received from the townspeople – probably a portion of each merchant's sales – was not likely to be sufficient to make up for the fiscal challenges he faced from his farms. Retail sales in England, including DA, were indirectly and adversely affected by the Bank Panic of 1907. This panic was principally a US calamity, due in no small part to the 1906 San Francisco earthquake. But the Bank of England had to raise its interest rates, partly in response to English insurance companies paying out so much to US policyholders, which landed financial blows to the British economy. Lastly, the British government began to change its fiscal policies to focus on generating more tax revenues from the considerable wealth accumulated in estates like DA. Taxes steadily increased during the 20th century and included land, income and probate taxes as well as death duties. Given his situation, it is likely that Lord Grantham would feel in complete accord with George Harrison's final lyric in Taxman, "And you're working for no one but me."

Coming soon, Act II will delve into events during the 19th and 20th centuries that further undermined the foundations of the tried-and-true British upper class, including Lord Grantham and Downton Abbey. No wonder he has such an enduring dour expression.

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[1] See The Year 1000, What Life Was Like at the Turn of the First Millennium, Robert Lacey and Danny Danziger; Little, Brown & Co.,1999.

[2] According to the recently-published Global Slavery Index, 4,200 people remain in modern slavery in the UK today.

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.