Wall Street's thirst for water: a market for water will drive up food prices

http://www.nature.com/nature/journal/v490/n7421/full/490469a.html

by ananyob • 14 years ago

31 53 14 years ago

rayiner5• 14 years ago

Market allocation of water has to be the dumbest idea since god knows what. Doesn't it occur to any egg-head economists that a resource as necessary as water is going to invoke market failure? It's the healthcare problem writ large.

jacques_chester7• 14 years ago

Just before this particular parade gets rolling, let's all take a moment to reflect that "market failure" has a particular meaning to the dismal scientists.

And it's not "I don't like the outcomes".

There are some cases where a market in water is absolutely the best way to balance usages. It's important to understand that we are not just talking about the construction of infrastructure for municipal supply -- that's an example of a public good where market failure can occur.

We're talking about balancing the demand of different uses for water. Municipal supply vs agriculture vs industry vs environmental flows. This is the kind of hyper-distributed problem that markets are very good at solving.

rayiner5• 14 years ago

I'm well aware what market failure means. And I'm referring to it in the technical sense. The economist response to water privitization is not uniform, and the consequences of market failure in the area would be catestrophic.

tgrass• 14 years ago

Cities like Vegas, Tucson, and Phoenix were created because of federally subsidized water. Allowing water prices to 'float' to the market value might keep these areas from growing beyond their resources.

rayiner5• 14 years ago

Or we could just stop federally subsidizing water. The whole southwest was a mistake to begin with--the government never should have irrigated it.

codehotter• 14 years ago

I'm not an economist - can you explain why a resource being necessary makes it involve market failure?

EvilTerran2• 14 years ago

I'm not the poster you're replying to, but I'd guess (given "It's the healthcare problem writ large") s/he is thinking of the notion that the demand for products genuinely essential to life (such as life-saving medicine, or water) will be very price-inelastic, and as such, allowing a free market to determine the price may lead to a price that is cripplingly high for consumers at the low end.

In my mind, it's nowhere near as simple as that in this case (although I'd say it is nearly that simple for, say, the life-saving medicine case (but I'm getting side-tracked here)) -- there's a lot of non-essential uses of water, and those sources of demand would be price-elastic, which may be enough to prevent that sort of market failure. I suppose it would depend on what proportion of the demand for water is "essential".

arethuza2• 14 years ago

Makes me glad that I live somewhere which has absolutely no shortage of clean water and where water supply and sewer systems are handled by what appears to be a reasonably efficient state owned company.

brianbreslin• 14 years ago

Does anyone know if this has any tangential relationship to the fact that billionaires like t.boone pickens are buying up water rights across the country?

chrisaycock• 14 years ago

From the article:

  In 1996, [California] introduced an electronic bulletin board for
  farmers to buy and sell their rights to Westlands' water from their
  home computers.

This has had municipal support for 16 years now.

pmorici• 14 years ago

Isn't this more or less the plot of the 2008 James Bond film "Quantum of Solace"?

tokenadult• 14 years ago

Veteran HN participant jacques_chester already has the definitive comment here,

http://news.ycombinator.com/item?id=4701930

but because his comment is not a top-level comment, I had better chime in with agreement. The submitted article read like something out of the hard-left 1960s when I was growing up and a lot of people thought that countries with centrally planned economies were doing better than countries with free markets. They never have. Markets in water are crucial for figuring out how different users of water really value water, and how to monetize improving the quality and distribution of water. I live high upstream of most of the United States (near a continental divide), in the well watered state of Minnesota ("the land of 10,000 lakes"). This year is a drought year (although it was rainy the last two days), and even at that, we have adequate water. A controversial issue here is sale of water from the upper Midwest to arid places in the Great Plains or even the Southwest through pipelines. Banning the sale of water across state lines is not going to stop the Mississippi River or Red River (of the north) from flowing, and all the arid places in the United States have elaborately developed legal systems (unlike the riparian common law system in Minnesota and other states with abundant water) for allocating water rights. If big interstate trade in water through unit trains on railroads or through pipelines develops, the law will be able to keep up, and water will be better used in the United States.

If similar trade develops internationally, or domestically in formerly poor countries, again the crucial thing to do is to develop laws so that people can trade according to their needs. When people trade, they all become richer. Water is generally cleaner and more available today, serving a larger and healthier world population, than it was in my childhood. That came about BECAUSE of market economics, while the stifling poverty that resulted in famine in China in the 1960s came about from anti-market policies. I'll stick with the market when allocating important resources.

AFTER EDIT: The comments kindly made to my comment reminded me of life experience from living in Taiwan when Taiwan was still part of the Third World that I should relate here. For decades, the standards for water treatment of municipal water supplies in Taiwan have been up to world standards for piped water, ensuring that bacteria are reduced in the water before it leaves the water treatment plant. But in the 1980s, the dictatorial government of Taiwan at the time forced local governments to keep city water prices abnormally low, so none of the cities could afford to maintain the network of pipes that delivered water to homes. And that meant that the water flowing out of home taps could NOT be assumed to be safe. Instead, everyone all over urban Taiwan paid out of their own pockets to install filters (possibly ineffective against bacterial or protozoan contamination) on public building drinking fountains, and home dwellers paid for bottled propane gas to boil their home tap water before drinking it. (Boiling water to let it stand and cool was a big chore in those days. Some people bought special electric water-heating machines that automated the process of heating and storing tap water for drinking safety.) After three years in Taiwan, the first thing I did when I reached the home of a relative in Los Angeles upon my return to America was drink a big glass of tap water, a luxury I had been denied all that while. And my wife was HORRIFIED to see me do that. She had never seen anyone drink a glass of tap water straight out of the tap in her life.

As Taiwan democratized in the 1990s, the press began reporting on how ridiculously low the price of tap water was in Taiwan, and it was proposed simply to raise the price of city water, so that the city could maintain the pipe network properly and ensure clean water stayed clean all the way to home taps. I'm not sure how much progress has been made in this project to date in what parts of Taiwan, but my wife (who has been back there more recently than I have) reports that Taiwan in general is cleaner than ever, healthier than ever, and generally thriving well under democracy and a free-market economy. The bureaucrats in Taiwan were always mostly technocrats, rather smart people even in the worst times of dictatorship, but using prices to allocate resources makes more sense than using bureaucratic fiat to allocate resources. Two heads are better than one.

Spooky232• 14 years ago

Creating a system where a complex, active system is required to deliver something as essential for life as water is by its nature a problem.

Also, China is the 60's was more than a failure of central planning economics, it was Maoist political stuff as well.

yock• 14 years ago

Which is the standard human excuse for intervening in everything deemed essential for life. It doesn't even begin to address the real possibility that humans can't actually improve upon the market solution.

spindritf2• 14 years ago

We have an even more complex and active system delivering something as essential for life as food. And no generation before us, at least in the West, was as well fed as we are.

malandrew2• 14 years ago

A lot of the starvation in China was also precipitated by the fact that Mao often gave grains and other foods to communist eastern European countries to curry favor with them to the detriment of the Soviet Union. Many people starved in China so that people in Eastern Europe would not.

rayiner5• 14 years ago

The problem is that the market has all sorts of failure modes, and allocation of something like water is going to hit all of them. Vague analogies to the effectiveness of the market in doing completely different things (allocating steel production to bolts versus screws) is wildly irrelevant.

_delirium3• 14 years ago

There's actually not much agreement among modern economists on whether market-type policies for allocating life-critical resources work well, and in which circumstances. It hardly requires hard-left 1960s views; see, for example, the contemporary debate among generally mainstream market economists in both Europe and the U.S. over how to provision health-care services (I'd hardly consider the German ordoliberals, architects of the post-war West German economy, to be commies!).

There is also a lot of work in the emerging subset of economics based on dynamical systems theory, which looks at markets from the perspective of feedback and stability. There's probably no agreement there, but it's a much more open question than in the old-style equilibrium analysis, where you just assume axiomatically that markets clear and respond smoothly, instantaneously, and with no system-internal dynamics to supply/demand changes. I.e., sort of like analyzing mechanical systems under the assumption that turbulent fluid flow is impossible, and catastrophic resonance doesn't happen. It's at least an open question whether a securitized market in water could increase volatility and failure modes, especially given that it's very time-critical (you can't generally go without water even for temporary periods of allocation shortage, so even a short-lived "financial crisis" in water could be devastating).

jivatmanx2• 14 years ago

The best way to induce conservation of something is to raise it's price. If the price is artificially low, than the existence of a "Market Price" for water will raise it, and result in conservation and the development of more water-efficient technology.

cynicalkane2• 14 years ago

Health care is a bad example. It's a multiple edge case, and a uniquely terrible choice for market solutions. The time when a patient can best make a market decision is the time it's probably too late.

I don't see why a resource being "life-critical" should make something not work for market solutions. Food and housing are already market allocated, and you'll have a hard time finding an economist who wants to centrally plan those things.

"But the poor have poor access to food and housing." I'm not too worried about this as enough water is a lot cheaper, even at a market price. Anyway, it's not like we don't already allocate water when and where it is scarce--just in an unfair, inefficient, and broken way. And it's not like anyone wants to deregulate the pipes to your faucet. And it's not like it's free to use that faucet.

Jabbles• 14 years ago

Is it possible that the governments of poor countries don't value water enough? If they were willing to pay more, surely they would try to ensure their citizens have access to it. Given that they haven't been able to provide it, I'm not sure how they would be able to operate in a market that does not recognise that the need for water is far greater than a financial need.

debacle• 14 years ago

Is it possible that if you create a capitalist market for water, poor countries without any coveted natural resources will never be able to pay enough for water?

antidoh• 14 years ago

Another possibility, making water artificially expensive and so monetarily valuable creates incentive to corner the market on water, water contracts, water derivatives and other games, pricing the little guy out of the market for water.

Making water artificially expensive and valuable provides incentive for people to regulate and otherwise restrict innovation in water use and reclamation. Bad for business if people can just suck water out of the ground.

Coming soon -- region codes for water.

mcantelon• 14 years ago

>When people trade, they all become richer.

It depends on what's being traded and who's trading. Someone buying meth is engaging in trade, but it not necessarily ending up "richer".

Generalizing that the "market is good" is as much of a mistake as generalizing that "the market is bad". There are lots of ways markets can be gamed and corrupted that, in the end, make the market difficult to distinguish from corrupt/incompetent central planning.

Water is essential to life. If a country's politicians get bribed and broker the sale of a country's water in exchange for some currency they can potentially exchange the long-term health of the country they are stewarding for personal gain.

saalweachter• 14 years ago

I recoil from Wall Street getting involved in water markets not because I'm opposed to putting a fair price on water (I'm OK putting prices on lots of things, like air or light) or water-rich regions selling to water-poor regions. I am terrified of Wall Street getting in on the action because Wall Street means bubbles.

For instance, speculation is frequently blamed for many spikes in food prices: http://www.wired.com/wiredscience/2012/03/speculation-food-p...

The goal of capitalism isn't to allocate resources efficiently, the goal is to make money and good resource allocation is sometimes a nice side effect.

malandrew2• 14 years ago

That's my sentiment as well (as an engineer who formerly worked as an associate analyst on the equivalent of Wall Street in Brazil).

The only way I could get behind the financialization of water is if there is the equivalent of a "Water bill of rights" which guarantees enough free water to meet the needs of humans using that water for drinking and washing up of cooking equipment. I think this is a guarantee that should extend to every single market/country in which Wall Street wants to trade water. Want to trade water in third-world Country X? Fine, but before you can make any profits, you first must set aside a cut of revenue to subsidize the minimum guaranteed amount of water per person in that country and subsidize the infrastructure to get that water to each citizen.

Assuming individuals have a human right to the water they need, the big risk is what trading in water will do to the cost of food. I don't think this is necessarily a bad thing as it will force agriculture to start innovating on how they use water, perhaps moving into mass aquaponics or other solutions that minimize water use and buffer society against volatility in food prices due to droughts and mother nature.

The main risk of the subsequent rising inflation is how many people it could return to poverty. Again this is somewhere, where I think regulation could be used to shield or subsidize markets where rising water prices will cause an increase in the number of people living below the poverty line.

Overall, the right to earn profits should come with the obligation to prevent poverty and improve the human condition at the bottom.

Spooky232• 14 years ago

I'm sure the Wall St types see a great opportunity here.

Thanks to horrific governance, you have water-rich places (like the Northeast of the US) with local governments that operate on the brink of bankruptcy. At the same time, you have fifty years of massive government-subsidized buildout of suburban sprawl and industry in the South and in the desert.

So instead of treating water resources as a public commons, we'll let some financiers borrow cheap money (courtesy of the Feds suppressing the interest rate market), buy up munipical water companies and rape the public for all time.

jcarreiro• 14 years ago

Where exactly in that article does the author make any sort of argument that would support his thesis?

aristidb• 14 years ago

Clearly markets are the problem and not wasteful government programs that e.g. subsidise water given to farmers in desert areas.

jivatmanx2• 14 years ago

As long as water is sold for far less than it's value, there is no incentive to conserve and the future looks grim as our aquifers dry up and rivers run to their maximum.

And no, your low-water appliances aren't helping much, as consumers only use 11% of water in the U.S.

As water prices are set by municipalities, there is little incentive to raise prices, the politicians who control them don't have any interest beyond their next election.

There is likely to develop a semblance of a "Market Price" for water in the U.S. which will inevitably be higher.

As far as selling water rights, the biggest danger here is that the governments that currently own them will sell them for less than they are actually worth, primarily because there isn't yet a true "Market Price" for water. Or, of course, corruption.

Wall Street's thirst for water: a market for water will drive up food prices

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