GETTING TO YES AND NO

If you come to a negotiation table saying you have the final truth and that it is final, you will get nothing. ~ Ham Holken 

So here we are at the precipice of both the US’s 239th birthday and one of the most confused, potentially-calamitous votes in recent history, the Greek referendum.

Our 4th of July offers much cause for celebration. US unemployment is now as low as it has been – 5.3% - since 2008, although wage growth continues to lag for many people. The Supreme Court said “yes” to re-validating the Affordable Care Act with the Chief Justice’s strong support, and to making same-sex marriage legal throughout the US. Finally, the US women’s team said “yes we can” and will play in the World Cup championship game against Japan on Sunday.

Unfortunately, Greek citizens are worlds away from celebrating; they are confronting "no." And they are suffering in the midst of an on-going economic tragedy of the first-order. Why; because the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF) [aka, the “Troika”] and the Greek government are getting to “no” in their mystifying negotiations regarding Greece’s outsized debt. Greece’s total public debt is 173% of its GDP; ranked 2nd in the world, behind Japan.

As many now know, Greece is a small nation of 11 million people (roughly the size of Paris, France), its GDP is ranked 53rd largest, $284 billion (PPP; which is about the same size as Missouri’s GDP), and its per capita income is ranked 67th, $25,800 (PPP) – a bit less than one-half of the US. Last year its GDP shrank by 25%, unemployment is 25.9% due in part to the economic policies mandated by Greece’s creditors. Simply put, Greece is a “demerging” nation.

Understandably, the Greeks aren’t at all interested in suffering any more or any longer, especially because of mistakes and misdeeds done by past governments. This reasonable reluctance was magnified after the “radical leftist” Syriza political party won the Greek national “snap” election in January and promised to end the imposition of “unilateral austerity” on Greece.

Greece owes its international creditors a great deal of money. Confusingly, there is a fairly broad range of estimates for what Greece owes the Troika; from €243 billion (B) to €323B. I’ve talked before about Greece’s dire problems and the possibility of Greece’s leaving the euro-zone, called the “Grexit.” Over the past 6 months, nothing positive has happened for Greece and there haven’t been any “happy trails” for its citizens to travel. Grexit now seems as real as ever.

Since January, the Greek government and the Troika have held endless and unproductive meetings where they’ve basically continued to talk past each other in an attempt to score political points. Greece’s Prime Minister, Alexis Tsipras, has managed to alienate virtually everyone at the bargaining table with his inconsistent, disparaging tactics. At the same time, Europe’s de-facto majordomo, Angela Merkel, the empress of austerity, and her EU cohorts seems incapable of appreciating the actual pain being suffered by Greek citizens (and in the recent past, of Spain, Portugal and Ireland) in the name of balanced budgets and illusory growth. Austerity hasn’t worked in Greece. It’s only provided pain and despair, not recovery or growth. But the Troika refuses to consider any other economic approach.

Unfortunately, the Greeks have been ill-served so far by their Prime Minister and his Finance Minister in their failed efforts to change the Troika’s unequivocal bargaining position – that more austerity is the only answer for the spend-thrift Greeks.

At this point, with Greece not paying the IMF its $1.7 billion that was due on June 30, negotiations broken off, and Greek banks and stock markets closed until further notice, the Greeks are attempting to live without cash or money. Unsurprisingly, it’s going badly, and will get worse. And it’s 2 days before a public referendum called by Mr Tsipras whose purpose is unclear, no matter whether a “yes” or “no” vote prevails. As one Athenian voter said, “No one is telling us about what it [the referendum] means.” More concerning, no public figure among the dozens involved with the negotiations seems to know how to resolve this crisis. As they say, “mistakes have been made by everyone.”

It’s a fantasy that politics won’t overwhelm economics here, but from an economic perspective several realities need to be acknowledged and addressed in order to get from “no” to “hopefully yes.” Both sides of the negotiations will need to modify their current truculent positions; they both need to blink when they come back to negotiating.

First, it’s practically impossible to imagine how Greece could effectively leave the euro and switch back to the lamented-but-not-really-missed drachma. The highly-devalued, new drachma would only increase the debt costs that Greece will be facing. The EC took more than 3 years to create and implement the euro in 1999. If Greece exits the euro, the government will have the nearly-impractical task of re-introducing the drachma as their currency ASAP, certainly within a month or so, and plunge into fiscal never-neverland. The EC knows this, as does Greece. This is a very pragmatic motivation for why Mr Tsipras hasn’t openly called for withdrawal from the euro-zone.

Second, Greece will not be able to pay off the entire €283B (splitting the sizeable difference between €243B and €323B) debt it now owes. Only the IMF seems to understand this now. The Troika will need to restructure their Greek debt, probably taking a “haircut,” as international financial institutions have done before – like in Argentina (2001), Greece (2012) and Cyprus (2013). I’d propose as much as a 25% haircut, where creditors eventually receive only 75% of what they’re owed – together with a 33% time extension for the reduced payments.

Third, in return for having the EU, ECB and IMF restructure its debts (say “thank you” Mr Tsipras), Greece must bite the structural reform bullets it’s been avoiding for too long and provide an explicit and unalterable implementation schedule.

Public sector employment should be cut 10% within the next 6 months, by privatizing publicly-owned businesses and reducing Greece’s notoriously-inefficient and distended bureaucracy. Greece has a somewhat high percentage of public workers in their total labor force; between 23% and 28% depending on who’s counting. But, according to some calculations Greece’s percentage is not as high as Italy’s, Germany’s or France’s; oh well. Pensions must be reduced 10%, except for those being provided to the lowest quintile of income recipients; the retirement age should be raised. Tax revenues must increase by 20% over the next 12 months by nabbing tax avoiders, drastically improving the porous tax collection system and raising taxes on the top 50% of income-earners. According to The Economist, 2 out of 3 Greek workers either understate their earnings or fail to disclose them. The “shadow/black economy” in Greece represents 24% of its GDP, the highest in Europe. This must change. If the agreed-to implementation reform schedule is missed by Greece, the debt restructuring is voided.

That’s my plan for having the Troika and Greece both blink to get past their deadlocked discussions, and I’m sticking to it until I hear from Alexis and Angela. This plan can provide a better chance for Greece’s economic improvement and keep it using the euro, no matter how its citizenry votes this Sunday. 

7/5/15 Postscript. Today the Greek polls are open and much of Europe and beyond is anxiously awaiting the results. Yesterday, the Greek finance minister was quoted as saying, “Europe won’t let Greece go under,” continuing Syriza’s unbending – and probably fictitious – expectation that Greece actually has quite a bit of leverage in its now-ended discussions with the Troika. Provocative to the core, he called the people supporting a Yes vote “terrorists.” A Greek citizen echoed this feeling by saying that today’s referendum vote is actually about “dignity,” not economics. If only. How much dignity, and IOUs, will buy your next plate of souvlaki in Athens? The polls quoted in this article say that the Yes vote holds a small (but not statistically significant) lead over the No vote being pushed by the government. Don’t believe any of these polls, given their recently dreadful predictive performance. Wait until tomorrow to find out what Greek voters actually decided in this ill-inspired referendum. 

7/6/15 Post-vote postscript.  What a difference a day or 2 might make.

The Greeks have decisively voted No in the July 5 referendum regarding their interest in accepting the European Commission’s (EC’s) now-withdrawn proposal to provide more austerity-based funding for Greece, in concert with the European Central Bank (ECB) and the International Monetary Fund (IMF). Greek voters followed Prime Minister Alexis Tsipras’s endorsement of the No vote. This result wasn’t a surprise, despite media stories – probably planted by more conservative Greek or European organizations – about pre-vote polls showing the Yes vote was growing. It didn’t.

What will happen next is anyone’s guess.

Greece is barely keeping afloat in unknown financial seas. No Euro-zone nation has been in this situation before where its banks have no reserves or cash (it’s far worse than the 2013 Cyprus situation). So far, there have been no rescue offers from the ECB and there is barely any trust between the Mr Tsipras and his EC, ECB or IMF counterparts. Today’s announcement that Greek finance minister, Yanis Varoufakis, has resigned is a potentially-positive sign at least in terms of how future negotiations can proceed. No more snide remarks about fiscal ‘terrorists” are expected now from the anxious Greek side of the table.  

But when the new, post-vote negotiations actually begin is an open and vital question. If they start after Wednesday July 8, the austerians remain firmly in control.

The more conservative, austerity-minded EC negotiators – including Germany and Finland – could simply decide to not meet with Greece until next week under the guise of having to formulate a new, unified, revised plan by the Troika after they receive a revised proposal from Greece. This would put huge, additional pressure on Greece and the ECB because it’s been the ECB that’s allowed the Greek banking system to stay in business, even with fairly stringent capital controls on customer withdraws and deposit transfers. The Greek banks said they would not open today – as they previously promised – and will remain closed through Wednesday. Without immediate new emergency funding from the ECB, Greek banks will be high and dry without cash. Bankruptcy would soon follow. More conciliatory members of the EC, like France, are urging negotiations to start tout suite, probably Tuesday.

Thus, the Troika’s announcement of when actual negotiations will again start will be a clear indicator of how serious it is in keeping Greece in the euro-zone. Mr Tsipras now has 61% of his citizens’ votes to back up his new proposals, but no money to keep Greece afloat. The Troika has this desperately-needed money. Hence the start date for the negotiations is critically important, both economically and politically.

If Ms Merkel and her fellow austerity-advocates refuse to revise their strategy, and not offer at least some sort of debt restructuring (that includes at least a “trim” if not a real haircut, as I suggested above), then they can simply have this happen by postponing the negotiations and telling the ECB not to provide any new financial support. Delaying the start of these negotiations and/or stringing them out will put Greece in the fiscal morgue outside of the euro-zone and possibly the EU.

I expect Ms Merkel’s being labeled the perpetrator of a Grexit is sufficiently ignominious for her that she’ll offer a small blink with a financial trim for Greece and propose to start new negotiations on Thursday, without providing new ECB funding until then. Mr Tsipras will also blink – he has every incentive to do so – and accept the fiscal trim (that he could claim as a small victory for being less than the Troika’s previous “haircut” offers) along with the provision of convincing, inviolable dates for needed reforms. Here’s hoping… 

HUNDREDTHS OF A GOAL AND FAR-OUT FORECASTING

Fast is fine, but accuracy is everything. ~ Wyatt Earp 

Here are 2 examples of published numbers that for me cross an important line of credulity (in the mental sand of my mind). These examples illustrate a bothersome and unfounded inflation of perceived accuracy in printed statistics.

Hundredths of a Goal.  First, I’ve enjoyed watching the Women’s World Cup soccer matches being played in Canada, and remain hopeful that the US team will again capture the Cup. There’s been much to enjoy as favorites like the US and Germany, as well as “Cinderella” teams like Canada, have navigated FIFA’s very strangely-composed brackets towards the July 5 championship game. One thing that’s distressed me, however, is related to one of my eccentric pet peeves, unwarranted and misplaced accuracy.

Throughout this tournament, the media has highlighted the lack of goals scored in the games. This isn’t surprising because the US has scored a total of just 7 goals through its first 5 winning games. So much for being an offensive powerhouse (so far). The latest example is the US 1-0 victory over China on June 26.

However, media stories about this lack of scoring have routinely transgressed my trust. A piece in The Guardian said, “The average goals per game at the end of the group stage was 2.97…” A New York Times article stated, “The tournament was averaging 3.08 goals a game entering Monday (June 15)… The first-round scoring average was only 2.24 goals a game entering Monday. The 2011 event finished with an average of 2.69 goals a game.”

Let’s take a minute of stoppage time to think about these stated averages. Soccer goals only come in whole numbers e.g., 1, 2, (or 10 if you’re Germany). Thus there’s only 1 or at most 2 significant digits in a soccer team’s goal total for a game. To display the average number of goals in hundredths of a goal with 3 digits (e.g., 3.08) is absurd and actually no more accurate than stating the average in tenths of a goal (e.g., 3.1). Come on; can Abby Wambauch score a hundredth of a goal? Never; so why add 2 decimal places to this average? It’s done so these averages appear to be more precise and accurate than simply saying “about 3” or “3.1.” But they’re not more accurate. With only 1 or at most 2 significant digits as inputs, the quotient’s average cannot meaningfully include more than 1 or 2 numbers. This escalation of false “precision” is readily-obtainable to anyone – including a reporter – who has a calculator in their smartphone; where you are shown 1.66666667 as the result of dividing 5 by 3.

Will this trend continue; so the average number of goals scored in the 2016 Olympic soccer tournament be presented with 3 decimal places – 3.141? I hope not.  False precision is more widespread than just reporting soccer scores.But the next time you read any news article that offers numerical results, see if the number of decimals printed exceed the number of significant digits being referred to. My bet is the resultant’s decimals will exceed the relevant input digits, illustrating unfounded accuracy. That’s bad numerical form.

Bridges to the Future.  Second, precision is an issue that forecasters constantly face. It’s the unstated underpinning for the apocryphal quote, “if you have to forecast, forecast often.” The longer the forecast period, the more likely the prediction is going to be erroneous. We economists have difficulty accurately forecasting economic changes over the next 12 months, let alone several years. Weather forecasters feel lucky when they get their 5-day forecasts right.

In The Signal and the Noise, Nate Silver states that despite the challenges, short-term weather forecasts are overall more reliable than other types of predictions, including economic and financial forecasts. Yet complex environmental models are being used to somehow predict impacts during the next 85 years. That’s right, forecasts over 85-years.

A recent New York Times story cited an EPA report that provides long-term quantitative measures of the consequences of not abating fossil-fuel consumption. The report states that by 2100 (85 years in the future), there will be 12,000 deaths from extreme heat and cold, and 720 to 2,200 bridges would become structural vulnerable and cost $1.1 billion (B) to $1.6B to fix. Forecasting deaths, bridge collapses and costs 85 years in the future? Really?

As many people do, I believe global climate change (né global warming) has been underway for a considerable time increasingly due to humanity’s actions. These induced and detrimental effects need to be mitigated now by a series of specific public policies, such as imposing a meaningful tax on all carbon use.

Ironically, justification for implementing such policies does not require forecasting at all. Environmental policies can be rationalized based on measured changes in what’s already happened to our environment, and continues to happen. Nevertheless, I find it highly doubtful that predicted really long-term effects of climate change have much quantitative credence. Yet I haven’t seen much discussion about these far-out forecasts’ precision. I consider these multi-decade predicted deaths and costs to be decent examples of imaginary numbers.

Think about it; who in 1930 (85 years ago) could have foreseen key details of our present economy such as its size, the composition of our economic output, let alone the number of bridges that are now in operation, and how many may now need repair. For some perspective, the US real GDP last year was more than 16 times as large as it was in 1930. In 1930, 21% of our labor force worked on farms (10 times what it is now).

The use of such far-out forecasts to substantiate needed environmental policies unfortunately gives climate change deniers an opportunity to be listened to. I don’t understand how any scientist – environmentalist, climatologist, economist or engineer – can place much credibility in such truly long-term forecasts. And yet, these far-out forecasts are presented and discussed as if they accurately represent what will actually be happening nearly 100 years in the future. It’s all quite puzzling, and unfortunate. 

4% GROWTH AND OTHER FANTASIES

Economic growth doesn’t mean anything if it leaves people out. ~ Jack Kemp 

There’s now a 16-ring circus of candidates performing for the 2016 US presidential election. Four Democrats and a dozen Republicans have thrown their collective hats into the 24/7 blazing media spectacle. As the New York Times recently pointed out, each of these men and women are searching for economists to dance with them in their efforts to formulate economic positions, distinguish themselves from the other 15 hopefuls, and ultimately win the nomination and presidential election that’s now a mere 504 days away, OMG.  

Even at this prematurely early date, several candidates are running up economic policies on their flag poles to see which way the political winds blow them. Given the clear need to attract media attention, the candidates’ economic proposals can be quite fantastic, including re-treads from long-ago campaigns.

For example, Rand Paul has revived the flat tax concept from a 20-year slumber that was last seen on its death bed after being proclaimed by presidential candidate Steve Forbes; you remember him don’t you? Mr Paul’s one-more-time-with-feeling flat tax includes eliminating the federal corporate income tax (hats off to corporate lobbyists) and replacing it with what’s commonly called a value-added tax (VAT), although Mr Paul pointedly calls his proposed 14.5% tax a “business activity tax.” His tax scheme is a combination of a 14.5% personal income tax together with the 14.5% VAT, which is a type of sales tax that virtually every person and every organization would have to pay directly or indirectly. What’s the likelihood of such a regressive, federal VAT replacing the dearly-unloved corporate income tax? Slim to none, once you multiply the chance that Mr Paul will be elected president (currently he’s given an 8% likelihood of capturing the nomination at fivethirtyeight.com) by the even smaller chance that Congress – even a Republican one – would actually produce such a fundamental change in tax policy.

A more interesting economic policy objective was proclaimed by Jeb Bush last week. Namely, that if elected president he would usher in increased real (inflation-adjusted) economic growth of at least 4% per year for a decade.

The US has indeed carried on without historically-strong macroeconomic growth for some time. Our GDP growth this year is expected to be a miserly 1.9%. Since 1975, the average yearly GDP growth has been 2.8%, which is nearly 2% less than it was from 1945 to 1975. As our economy has grown and developed, if for no other reason than its impressive size, it has become more challenging to sustain previously-attained annual growth rates. As they say, quickly turning a very large ship, like the Titanic (or the US economy), is next to impossible.

The US nominal GDP is now $17,665 billion. Four percent of our GDP is thus $706.6 billion, which is the about same size as the Philippines’ GDP (PPP), the world’s 30th largest economy. That’s a lot of economic activity (and money) to add each year. The figure below shows the annual economic growth attained by each of our 5 most recent presidents. The average growth rate attained by the 3 Republicans is 20% less than that achieved by Presidents Clinton and Obama. Other economic studies have also shown that growth under Democratic presidents since Truman has been greater than under Republicans.

Even though accelerating economic growth is a worthy goal that has many benefits, it’s highly unlikely Mr Bush could achieve 4% real annual growth. Although his statement provided a good media soundbite, it’s more fantasy than eventual fact.

Increasing economic growth requires changes in several factors. First, a noteworthy increase in the working-age population is needed, as well as in the proportion of this demographic group who are actually employed. Second, a substantial change in federal fiscal policy has to occur (e.g., policies that promote investment and spending); third, productivity must be amplified; and last, macroeconomic growth rarely increases suddenly, it takes time.

Given that Republicans generally want to lock the US’s borders to all immigrants (and deport all 11 million “illegals”), it’s hard to imagine our working-age population increasing – especially when the US fertility rate now is 1.9 births per woman, less than the 2.1 births per woman “replacement” rate needed to keep the population stable. In addition, the labor-force participation rate, measuring the percentage of the work force who’s actually working or looking for a job, is as low as it’s been since 1978 – not a good sign for increased growth. Federal spending on research and development (R&D) has declined over 30% between 1995 and 2015. Finally, due to Republican intransience, Congress has rebuffed its responsibilities to complement the Federal Reserve’s efforts in improving our economic performance by passing fiscal policies that promote private investment, R&D and other growth-oriented spending like on infrastructure. Thus, Republican candidates like Mr Bush call for increased growth, but have refused to create policies that can produce it.

The Republican candidates are instead espousing policies that pander to the insular, right-wing Republican base that demands smaller government and ever-lower taxes. This base includes many older citizens whose economic and financial literacy is chillingly deficient. Here’s a sad indicator of this basic lack of understanding. A decade ago, the University of Michigan added 3 questions to its Health and Retirement Study, a biennial survey of Americans over 50:

■ If $100 earns 2% per year, in five years will you have more than $102, less than $102 or $102?

■ If the interest rate on your savings is 1% per year and annual inflation 2%, could you buy more, less or the same with your money in a year’s time?

■ Is it true or false that buying a single company stock usually provides a safer return than the stock of a mutual fund?

Woefully, only about 33% of all respondents answered all 3 questions correctly. Here[1] are the answers.

My bet is that the two-thirds of respondents who answered incorrectly have little or no sense of how to assess the future for themselves or the nation. In economic terms, they maintain an infinite discount rate. For a variety of reasons, they’re only concerned about the present moment. Such typical older households have only $110,000 saved for their retirement.

This broad-based financial illiteracy provides a basis for the fantasy that Republican members of Congress are willing to create policies that stimulate longer-term macroeconomic growth, something they haven't done in over 6 years, and despite pronouncements by their presidential hopefuls.

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[1] Answer to Question 1: more than $102. Q2: you would be able to buy less. Q3: it’s false. 

A DAMMED WATER CONSERVATION POLICY

Water is the driving force of all nature. ~ Leonardo da Vinci

Californians hopefully now know Governor Jerry Brown mandated on April Fool's day that the state's urban water users reduce their water consumption by 25%. His mandate has produced a fair amount of media attention, which is a good thing, since most of us are blithely unaware of how much freshwater we actually use or why we should care, especially the multitudes of customers whose usage isn't metered at all.

But the governor's new water policy is fundamentally flawed; dammed to failure. It mandates a 25% reduction in urban water usage without requiring increases in the all too low price of water or creating incentives for water-efficiency. The governor's mandate completely sidesteps imposing any limitations for the state's biggest water users – farmers, agricultural (ag) growers and irrigators. And we are not conserving much water at all, despite the governor's recommendations and mandate. On Apr 7, state officials announced that California’s water conservation efforts slowed markedly in February, with water use declining by a miniscule 2.8%, which they correctly called "dismal."

I urge the governor to immediately amend his Apr 1 mandate so it's more comprehensive and far more effective. He can do this by adding 4 important actions:

1.       The state will create a "conservation fee" administered through water districts for all users' water consumption, including ag irrigators that will supplement the customer's local water district prices. The more water you use, the higher the fee will be. Virtually all water rates now don't change no matter how much water is consumed. The conservation fee will employ a 3-part "inverted block" structure. There will be no fee on the "baseline" amount of water consumed. This baseline amount will equal 75% of the state's average customer monthly usage in 2013. Average customer usage will be separately calculated for each group of customers (e.g., residential, commercial, ag). The second block of the fee will be charged on water used – between 75% and 135% of average monthly usage in 2013 will be charged at 140% of the baseline price. Any water usage greater than 135% of 2013 average monthly usage will be charged at 175% of the baseline price. These new water conservation fees should be put into effect by year-end.[1]

2.       The state will provide rebates of up to 30% for residential, non-residential and ag customers who purchase approved water-conservation equipment during the next 12 months, starting on Jul 1. The rebate will be reduced to 20% for purchases of such equipment that occur for 12 months, starting Jul 1, 2016. Examples would include low-water use washers, "grey water" systems and low-pressure, drip irrigation systems.

3.       The more than 250,000 California water users who are not now metered – a dispiritingly large number, reflecting those bygone days of "too cheap to meter" – will have meters installed by their water district/provider within the next 9 months and be subject to the above supplemental conservation fees.

4.       Water districts will be required to reduce water losses due to leaks by at least 50% over the next 12 months, and by 90% over the next 24 months. Customers who use wells for their water will be subject to groundwater withdrawal regulation.

The water conservation fees will incent water users to reduce their consumption. With the fees farmers will curtail growing crops like low-value, water-thirsty alfalfa and cotton. With these higher fees and incentives, ag and other customers will finally have a clear economic incentive to switch from water-inefficient irrigation techniques like flooding and high-pressure sprinklers to those that reduce water usage, like low-pressure and drip technologies.

The New York Times has provided an informative, interactive map , based on work by the Pacific Institute, that shows what the average residential customer's winter and summary use is for many water districts in the state. The map states that an average residential customer uses 57 gallons per customer per day (gpcd) in the winter and 110 gpcd in the summer at the East Bay Municipal Utility District (EBMUD) my provider and one of the largest non-agricultural water distributors in the state. EBMUD's residential customers reduced their water consumption between 2014 and 2015 by only 3%. Clearly, even in the SF Bay Area – one of California's more "water aware" areas – there's a lot more water conservation that is both possible and needed.

The 4 above-mentioned actions are needed because even if ALL residential, commercial and industrial water consumers drop their usage by the mandated 25% (as the governor stated), how much water will be "saved" in California? Very little, at most only 6%. Because Gov. Brown's conservation mandate says absolutely nothing about agricultural irrigators, who consume 75% to 80% of the state's freshwater. Ag users are the giant, water-leaden elephant in the room of California water users that the governor somehow didn't mention in last week's announcement.

Should we be surprised at this egregious omission? No. Ag water users – which include virtually every farmer and grower in the state – have always exercised disproportionate power in California, including when Gov. Brown's father, Pat Brown, was governor. The first Gov. Brown approved the construction of the State Water Project (SWP) in 1960, a massive series of dams, aqueducts and power plants that principally move water from Northern California to farmers and to people in parched Southern California. The SWP's construction cost over $2.2 billion in the 1960s and early 1970s.

In 2013, California's ag sector produced $46.4 billion in sales, which although larger than any other state's ag output represents only 2.3% of this state's GDP. Think about this; 80% of our water usage accounts for just 2.3% of economic output. A sterling example of how water power has flowed uphill from the Central Valley to the state capitol in Sacramento.

It's true, a number of ag users have recently been cut off from state and federal water allocations, but as these cuts have occurred, growers have deeply expanded the overdrawing-depletion of the state's groundwater aquifers, at a rate far greater than they have for decades. This switch to groundwater has allowed farmers to idle only 5% of irrigated ag land because of the drought. At this point, well water heights in the southern San Joaquin Valley have dropped more than 100ft, mainly due to huge withdrawals for irrigation. The governor's plan for regulating and limiting groundwater usage so it's "sustainable" won't be finalized until the 2040s. Come on!

The only real solution to our latest (but not likely to be last) drought is to align water's cost with its true value, for all users, including farmers and growers, as I've mentioned above. Stop providing huge subsidies to ag irrigators that allow them to grow and export low-value "surplus crops" like alfalfa to Chinese feedlots. Holy cow!

For more than half a century, through intense ag sector lobbying and significant government subsidies, federal and state water policy has been established in California to keep irrigators' water prices very, very low. As Marc Reisner states in Cadillac Desert, his classic book about water policies in the mostly arid West, ''What federal water development has amounted to, in the end, is a uniquely productive, creative vandalism." This vandalism references the large difference between what irrigators and other large-scale water users have paid for using water (the private, regulated price) compared to its social value (which, as a common resource, is much higher).

Here's a prime example of preposterously low ag water prices, taken from Reisner's book. Through the 1980s the Westlands Water District, one of the largest in California and therefore in the US^[2], charged its ag customers between $7.50 and $11.80 per acre-foot of water. Economists estimated the actual cost of delivering this water at the time was $97 per acre-foot. Thus, these customers were paying only 8% to 12% of the cost of providing this resource. This degree of public financial support is at the very deep end of the subsidy pool. Who paid (and continues to pay) the remaining 90% of the cost? Us taxpayers. Adding more water to this vandalism conflagration caused by super-low prices, the dominant planted crop at the time in Westlands was cotton – a very water-thirsty, "surplus crop" whose price is itself heavily subsidized by the federal government. Talk about going from worse to terrible.

With its all too slight cost, California ag irrigators (and virtually every other water user) have had no economic incentive to conserve or efficiently use water. They have continued to greedily guzzle as the rivers, reservoirs and wells are drying up during this latest drought. Unsurprisingly, this unsustainable water gluttony itself has also created significant environmental damage in the Central Valley.

California's appropriate use of our water supply requires that all 38.8 million Californians face water costs that actually reflect its true value. These conservation fees, together with incentives to induce customers to install more water-efficient techniques and repair water pipe leaks, will reduce wasteful usage and hopefully allow us to live sustainably with our available and limited water supply.

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[1] These conservation fees are necessary to comply with Calif. Prop 218, which states that water districts cannot charge prices that cross-subsidize water customers' prices. Some readers will recognize the first 2 actions as consistent with how California electric utilities – under considerable pressure from the CPUC and other parties – changed their electricity rates to encourage customers to use less kWh and install more energy-efficient appliances and equipment. These price changes and rebate programs have been very successful in promoting energy efficiency. The same will happen for water users with my recommendations.

[2] Reisner states that in the 1980s, just 1/4^th of Westlands Water District's annual available water would completely accommodate New York City's total annual water needs.

IS IT DRY ENOUGH TO RAISE THE PRICE OF WATER? Apparently Not.

Years of drought and famine come and years of flood and famine come, and the climate is not changed with dance, libation or prayer. ~John Wesley Powell


Let's consider water, perhaps the most precious resource that sustains our lives, next to oxygen in the atmosphere. Fresh water is a finite resource needed by every living organism on a daily basis. Despite occasional droughts, we have taken its availability for granted for a long, long time. Our assumption that water will be accessible for everyone's unlimited uses at near benthic prices needs refreshing.

I believe that California's current drought is caused in large part by market failure in the water market. This failure is a fine example of a liquid "Tragedy of the Commons" in the making, coupled with misguided government policies. These policies have allowed the price of water to be too low for way too long. Simply put, the price of water that's charged to users everywhere – including you and me– usually does not cover the private or social-environmental costs of providing it. For example, analysts have estimated that over the years farmers have paid just 15% of the capital costs of the federal system that delivers much of their irrigation water.

At such prices the quantity demanded exceeds the available supply, primarily in (but not limited to) recurring drought conditions. Federal government subsidies for agricultural water use in the US – which accounts for over 75% of all freshwater use in California – reach a staggering $4.2 billion to landowners since 1997.

The market for freshwater in California and elsewhere is highly regulated by public agencies. But the regulated price of water has never reflected the actual private cost of using it. Public regulation and sizeable subsidies have kept water prices very low, so there has long been over-consumption and inefficient usage. Generations of residential and non-residential water users have benefited from these continuing subsidies, which we are barely aware of. That is, until they disappear.

The Irish are rebelling at having to actually pay for the water they use for the first time. A growing number of Irish citizens have assembled in large protests against their government's plan to begin charging many of them a flat $285/year fee for their water consumption. That works out to less than $24/month. In the face of stiff and vocal resistance, the government rapidly abandoned their initial plan to install water meters to determine how much to charge each customer. The flat-rate $285/year price was recently sweetened when the Irish government provided households with a €100 (~$109) payment as an inducement for households to register for the water fee. Despite the offer, few households have registered.

Meanwhile back in parched California where our now 4-year old drought continues, the idea of a residential customer paying a mere $24 a month for whatever amount of water you use seems downright cheap, especially for folks whose water use is actually metered. Over 250,000 water users in California do not even have meters to determine their actual water usage. These unmetered customers are charged a flat fee, sometimes as low as $20/month. Cities and areas where unmetered water usage is significant include South Lake Tahoe (62% unmetered), Merced (52%) and Sacramento (47%).

Today (Apr 1st) marks the end of the "water-year" in terms of measuring seasonal rain and snowfall in California. This past year has been as dry as previous years in our continuing drought. How bad is our current drought? California has 12 major reservoirs from which water is distributed to all users. These reservoirs are no more than 45% filled; versus an average of 65% over the pre-drought past. As of yesterday, the California snowfall is an all-time low of 6% of normal. Last month the California's State Water Resources Control Board (SWRCB) renewed its restrictions on water use because of the continuing drought. Residents of California have had to restrict their water usage as a way to conserve the limited amount of water available. People have been advised to reduce watering plants, grass and washing cars, and be mindful of water usage in daily tasks (brushing teeth, taking showers, and doing laundry). In the face of the severe drought, these restrictions are so feeble that Felicia Marcus, chairwoman of the SWRCB stated, "We are not seeing the level of stepping up and ringing the alarm bells that the [drought] situation warrants." Few if any residential, commercial or industrial consumers are now paying more for their water.

Thus, it's no surprise that we haven't reduced our water consumption much, in spite of Gov. Jerry Brown's declaration to cut water use by 20%. Last summer, statewide water usage was cut 7.5%, compared to a year ago. Southern California consumers reduced their usage a trifling 1.7%. Is it time also to raise non-irrigator water prices as well as that of irrigators? Yes, but it's also time to further incentivize water conservation by giving bill credits to customers who have reduced their usage more than 15% to 20% and/or installed water-saving methods that will reduce future usage. Surprisingly, very few local water districts that set local prices have created such conservation credit or rebate programs.^[1]  Are they waiting for the major reservoirs to be completely bone dry before initiating such programs? Seems so.

Water policy economists are not at all popular when they support such needed price increases. Every water user is completely comfortable with their long-time, subsidized, all too miniscule water prices. But water pricing policy must change from a subsidy-based system for 2 reasons: (1) if we are to avoid a true liquid Tragedy of the Commons; and (2) if existing water resources can ever sustainably accommodate both the arid West's significant population growth and increasing agriculture needs. Appropriately set market-based, subsidy-free prices can make every user recognize that water is indeed a precious, common and limited resource that must always be used wisely.

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[1] Only 21 water districts or water utilities were listed – out of the 600 operating in California – as having a water conservation rebate program for their customers.

GETTING TO GREXIT…Turning left at Athens

Happy trails to you, until we meet again. ~ Dale Evans

The Greek economy is in serious trouble. Of the 19 Euro-zone (EZ) nations, Greece now claims the most precarious fiscal position. This is not a new situation. Ever since we found out almost 5 years ago that previous Greek governments had been cooking their national books with far worse than grape leaves and lamb, the nation's finances have been at best "fragile."

From the fiscal fallout of these mega-errors Greece received a huge bailout from its 3 primary creditors – nicknamed "the troika" – the European Central Bank (ECB), the 19 Euro-zone finance ministers (the Eurogroup), and the International Monetary Fund (IMF). This bailout allowed the Greek government to stay functioning, but required Greece to seriously reform its wayward approach to doing the public's business and its fiscal accounting. Since 2012 Greece has received total bailout loans of more than €270 billion (B). At the current euro/dollar exchange rate, that's $310B which Greece owes to 7 different groups of international creditors.

Despite being the larger-than-life birthplace of public democracy, Greece is a fairly small nation. Its 2013 GDP was $267.1B, which represents only 2% of the EZ GDP and makes the country's economic output worth about the same as that of the state of Tennessee. Greece has almost twice as many people as Tennessee, offering a perspective on Greek citizens' overall productivity. Greece's GDP has fallen 25% since it initiated the austerity requirements imposed by the troika as a condition of receiving its fiscal bailout. Greek unemployment hovers around 25%, youth unemployment exceeds 50%.

In large part, these austerity reforms spurred Greek voters to elect a new government last month lead by the left-wing Syriza party. Syriza pledged to unilaterally dismiss the loathed "reforms" that increased taxes, forced government agencies and businesses to dismiss workers and generally made economic life worse for many citizens, all in the name of improving Greece's economic productivity and becoming more worthy of the loans. The Eurogroup ministers and Greece have been negotiating before Mar 5, the first of Greece's many days of fiscal reckoning, when Greece will need to repay €1.7B. Because Greece's economy has taken a nosedive – in part due to the imposed reforms – everyone realizes, but is unwilling to publicly state now, the country will not be able to repay all of the loans on time without additional loans.

The first round of these negotiations has been as much public posturing as private negotiations. If all goes badly, it's possible that Greece will exit the Euro Zone, which is termed the "Grexit." Nevertheless, on Feb 20 the Eurogroup announced that despite big, bad Germany's vocal trepidations, the Eurogroup offered a conditional 4-month extension of the Greek fiscal bailout. On Feb 24 the Eurogroup accepted the Greek government's latest bailout (extension) plan. The clamor surrounding these negotiations has heightened because of the size of the debts owed, the political divergence between the new, anti-austerity Greek government and the powerful EZ austerians (primarily the Germans, with strong support from Finland and the Netherlands) and the symbolism surrounding the euro currency's viability.

Unlike America's 2007-08 credit crisis that was initially founded on real-estate speculation, the troika cannot just foreclose on Greece's delinquent bankers (including the government's central bank) and, in effect, put the nation up for sale. Given the intricate rules and procedures involved with all euro-zone policies, the Greek negotiations weigh euro-zone credit regulations against Greek accountability. On principle, every European politician, including even Germany's Chancellor Angela Merkel the queen of austerity, has stated Greece should not abandon the euro. And, after admitting to excess fiscal expenditures, Spain, Portugal and Ireland have each swallowed the bitter austerity policy pills administered to them by the Eurogroup. Really, why should Greece get special treatment just because the Olympics began there?

Ironically, Germany may particularly benefit from Greece's travails because the euro has depreciated more than 13% in the last 5 months relative to the dollar, in part because of this latest "euro crisis." So travelling to Europe for Americans will be much less expensive this summer than it has been in years; and the cheaper euro will mean more German-made and exported Porsches, BMWs and Mercedes (as well as exports from other euro nations) will continue to grow. When they think about it, having Germany's net exports rise on the shoulders of still-unemployed Greeks will not likely sit too well with Athenians. Interestingly, there is no other major economy that can top Germany's exports as a share of GDP, at 46.6%. China's is 26.4%; the US's is 13.5%.

Although this latest 4-month extension agreement seems to offer some timely political expediency, it really just kicks the fiscal can down the viaduct. At some point the Eurogroup ministers and Greece will have to acknowledge and face three fearsome, related realities. First, significant structural reforms will need to be quickly and irrevocably implemented in Athens and the rest of Greece – and not merely discussed. Given their electoral platform, how the leftists of Syriza can get their political compatriots – and citizen-voters – to swallow these changes is very uncertain. If Syriza sticks to its perceived mandate, a Grexit won't be so far away. Second, even with such reforms, it's very hard to imagine Greece's creditors not eventually getting a haircut (not receiving all of their loans due to be paid back). No one wants to be first in the fiscal haircut line. And third, austerity policies even if they could improve public efficiency (which is not at all a given), have created such wide-spread wreckage that it's not clear the pain is worth the possible gain.  

The trails ahead for Greece and the rest of the Eurogroup are unlikely to be happy ones in the next year, no matter how many times they meet again.

THE MIDDLE CLASS. WHY VIRTUALLY EVERYONE'S IN IT.

Upper classes are a nation's past, the middle class its future. ~ Ayn Rand

President Obama's January 20th State of the Union speech (since every action in Washington seems to require an acronym, his speech is the SOTUS) was characterized by the White House and then the media as addressing "middle-class economics." It's a politically smart focus, especially because there have been lots said about the denouement of the middle class, its "hollowing-out" and its on-going struggles. Even Republicans are extolling "middle class economics," since they (mistakenly) believe they've been vaccinated against shameless duplicity – endemic to GOPers.

Because it's once again a focus of our political nobility, being middle class is in the news. So how does one qualify as a "middle-class" American? Alas, there is no single definition of "middle class," a social, cultural, economic, and of late, political concept that has been central to American's self-image for a long time. A recent survey by the Pew Research Center indicates that nearly 90% of respondents judge themselves to be some version of "middle class," which defies math and statistics, but is a truly-held belief for lots and lots of folks. This survey result echoes Garrison Keillor's Lake Wobegon residents who are all "above-average." It also reflects the ever-broadening characterization of who is middle class, especially at the top end. At this point, almost everyone's middle class, which suits politicians just fine.

One traditional foundation of our middle class is to define it by one's annual income. By calculating what the median income^[1] is for the US we can determine a central point of the middle-class. So what is the median income in the US? Excellent question; unfortunately there are multiple answers, depending on how you measure income, as shown in the following table that shows 3 different median income calculations.

Table 1:  US Median Income

Measure of Median Income	Amount	Year	Source
Household income	$52,250	2013	US Census
Annualized real weekly earnings	$40,768*	2014Q1	Dept. of Labor
Adjusted gross income	$36,055	2012	Tax Foundation

* In 2013 dollars.

Median household income is the most often used way to gauge middle-class income, and provides the highest measure of median income, $52,250. But weekly earnings for full-time workers (there now are 104.3 million full-time workers according to the Department of Labor) and adjusted gross income (AGI) from your Federal income tax form 1040 are well-known and -regarded alternative measures of income. As Table 1 illustrates, even determining a mid-point of middle class income is perplexing as there's a 40% difference between $36,055 (AGI) and $52,250 (Household Income).

One gloomy finding is that real median weekly earnings have not increased in 10 years; they're now virtually the same as they were in 2004. Adjusted gross income includes not just wages and salary but income from interest, dividends, capital gains (that collectively comprise "investment income"), business and pension/retirement and other sources. Unsurprisingly, personal income from investment is 46% of total 2012 AGI for those with income exceeding $1 million. For people whose total AGI is less than $100k, investment income is 3%. With AGI between 100k to 200k, investment income is almost 4% of their AGI. Why median AGI is so much lower than Household Income is puzzling.

But there is a range of income that encompasses the middle class, not just the mid-point (the median). An often-cited income range for the middle class is $25,000 to $100,000/yr. The lower bound of being "middle class" frequently employs the federal "poverty-level" income (FPL) or a multiple of FPL, which varies by family size. In 2015, the FPL for a 4-person family is $24,250. This poverty-level income is used as a basis to determine eligibility for certain public programs and benefits. For example, the federal Affordable Care Act defines a lower and upper AGI range for people to receive premium savings (e.g., subsidies, discounts or tax credits). If a family of 4 people has an AGI of $23,850 to $95,400, they can qualify for lower premiums at the Health and Human Services' federal marketplace healthcare website.

Defining what the upper-end of middle-class income is far more fraught. Politicians, among others, offer an expansive view. In speeches during his run for his second term, President Obama has said “the rich” are those who make $200,000 or more as individuals and $250,000 or more as households; adeptly implying that those households making less than $250k are not "rich," and thus middle class. Remarkably, this upper-range was also cited by Mitt Romney when he was a presidential candidate. Stretching the middle class to include households whose income is $250k means the middle class includes families within the top 3% of all income earners. It may be good politics, but it's wholly unsound economics and math.

After his election, when President Obama and the Republicans were negotiating how the government would not push itself off the infamous "fiscal cliff," they agreed that "the rich" really made a lot more money and raised the definition of “rich” to $400,000 for single people and $450,000 for couples. Making $450k places a household in the top 1% of all earners, nationally. Whether it's $200k or even $450k, that's a very spacious upper-end definition of middle class.

Culturally, being part of the American middle class is tied to several keystone fixtures beyond income. These fixtures include owning a home and sending one's children to college. Home ownership peaked in 2004, when 65% of Americans were paying mortgages for their domicile. Now, after the housing bust, just 64% own their homes, and a rising 34% of middle-class people say they'd rather rent than own if it were time to move.

However, a college education remains highly-sought after. It is closely intertwined with the American Dream, prominently wished for by all of us perhaps especially by middle middle-class folks. Sending our kids to college to improve their future prospects has become more of a perceived necessity rather than an option, given the lethargic growth in even middle-skilled jobs and wages. Thus, the president's middle-class economics plan included proposals to broaden the affordability of college education.

Any change federal tax policy to strengthen the middle-class' economic situation and make college education more affordable should be a bipartisan slam dunk. Nope. Exhibit A is the response to the president's proposed change to benefit middle-class citizens in their efforts to save for their kids' college expenses. He briefly mentioned this proposal in his SOTUS, which was to reform tax-free higher-education savings (aka, 529) plans so more benefits would be focused on "true" middle-class folks.

The president's proposal was to eliminate the tax-free status of 529 plans and instead broaden an existing educational tax credit – the American Opportunity Tax Credit (AOTC) – that would provide more money than 529 plans for lower- and middle- middle-class families to cover their kids' college costs. The AOTC would be phased out for families with incomes greater than $180,000. The AOTC is used far, far less than 529 accounts. And that's saying something because less than 3% of US households even have a 529 account. Not mentioned at all was that about 70% of all undergraduate college students use loans to finance their educations. Thus, reforming student loan policies – like making the loans' payments depend on the income of the newly-graduated person (so-called Pay-As-You-Earn (PAYE) loans) – would likely have a more pronounced benefit for true middle-class families for lowering the costs of higher education than changing 529 plans. Oh well.

The White House stated that 70% of balances in the college accounts were held by families making at least $200,000 a year. Others stated that more than 70% of the total number of accounts are owned by households with incomes below $150,000. The average 529 account balance in 2013 was $19,584, which as all you tuition-payers know might cover, at best, one year at an in-state public college/university.

This White House proposal was the target of vehement criticism across a broad political spectrum, with lightning-quick disapproval from both John Boehner and Nancy Pelosi. Less direct condemnation was spread by the financial industry, which manages 529 accounts and often receives hefty fees for that service. Why? Because 529 plans are popular, despite their low numbers. There is over $240 billion in 529 accounts, and to listen to the criticism, each and every one of these accounts are held by certified middle-class citizens. Certainly many "middle-class" folks have money in 529 accounts, but as the White House pointed out, the benefits of such accounts disproportionately accrue to people in the upper reaches of the middle-class.

Unfortunately, there is enough of a middle-class patina on 529 plans to ensure the president's proposed 529-plan educational benefit reform entered face down into the political waters without even getting its toes wet.

This episode illustrates several inter-related issues in dealing with the "middle class economics." First, there's the difficulty that I've discussed above: defining who resides (or more to the point, who doesn't reside) in the middle-class. From a political perspective, we're virtually all middle class, even families who make $450,000. Silly me; I thought the middle class was a state of economics, not of mind. Second, paying for tax reform that can assist "middle class" people, a goal virtually all politicians pay at least lip service to achieving, is fiendishly difficult. Because tax reform usually means some folks will be winners (who get the benefits) and some will be losers (who pay more taxes).

If the middle class embraces virtually everyone – each of whom want to be tax reform winners – then it's next to impossible to offer benefits to households whose income is far closer to the $52,250 median income. There are simply not enough families who earn over $250k to provide tax revenue to assist middle-middle-class families, whether it be for college education or any other fiscal benefit to make their lives less fraught.

P.S., If you're interested in seeing where in the middle class your income places you, go here.

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[1] Median income is the numerical value separating the higher half of a distribution of income from the lower half.