Tuesday, January 14, 2014

Should there be regulation of economic activity in drought zones?

There is widespread recognition that historical federal policies such as flood insurance have encouraged undesirable development in areas that predictably flood, and have increased the cost of flood disasters.  Public policies are changing to address this issue.  The policy changes and proposals at both federal and state level include:
  • significantly reduced subsidies for flood insurance
  • stronger requirements to purchase insurance
  • limitations on new development in flood plains
  • requiring flood-proofing investments
These changes in flood zone policies are phased in over time and have to be sensitive to historic communities in these areas, and are often opposed in the communities in flood zones that bear an increase in costs.  The overall thrust of policies is change behavior in ways that reduce risk to predictable hazards.

Similarly, high fire hazard areas have seen changes to regulations; including stricter building codes, increased fees, and changes to insurance that add costs to living in fire hazard areas and are unpopular in these areas.

Today, California is facing the prospect of substantial drought impacts on the agriculture economy for the second time in five years.  These severe drought events are predictable, occurring at least once per decade and they have a significant economic and human toll on the areas where drought impacts are most concentrated in California, the west side of the San Joaquin Valley.

And similar to historical policy towards flood zones, historical water policies such as the Central Valley Project have encouraged increased investment and growth of vulnerable populations in areas where the risk of drought are greatest (see chart below).  Similar to the treatment of floodplains, is it time to think of policy changes to reduce the economic risk and suffering from future droughts?  Climate and water experts predict these shortages may become more common with climate change.  Here are a few initial ideas for reducing economic risk in "drought zones":
  • Restrictions on investment in permanent crops that harden demand for water  (I once heard a fisherman call this tree limits, similar to catch limits and regulations governing fisheries)
  • Mandatory contributions of farmers in these areas to social insurance funds that are tapped to help unemployed workers and local communities in drought years.  This would reduce economic risk of drought-induced fallowing in two ways, 1) direct assistance to individuals affected by drought-induced unemployment, and 2) encourage the cultivation of less labor-intensive crops or the introduction of more capital-intensive and less labor-intensive production methods.
  • If not mandatory, policies could reduce subsidies for farms that do not participate in voluntary drought-risk reduction programs, just as the CVP has a higher full cost rate for water for some farms that exceed acreage limits.
Just like changes to flood zones and fire hazard areas, I have no doubt that policies like this would be vociferously opposed by farmers in drought hazard areas like the west side of the San Joaquin Valley.  But when economic disasters repeat themselves in predictable ways, it is time to look for new ideas to reduce risk.  There may be better ideas than my initial suggestions, and I encourage others to develop them.

Postscript:  Unemployment rates on the west-side of the San Joaquin Valley since the Central Valley Project began delivering water to the region in 1968.


  1. I drove through the outer edges of Roseville last week, amazed by the sprawling house construction. Folsom is also playing that game. New construction, new water hookups, at a time when both cities that depend on CVP water from an extremely depleted Folsom Reservoir illustrates how home construction economic decisions also need to be in the list.

  2. I'm from India, and whenever there's a drought or water shortage, which is every year, the government regulates water distribution. The result is always a slow down in the economy because things like agriculture and personal consumption are given priority. The idea that economic activity can't be effected by water shortages is a really strange concept to me. We can't endless pump water.