Sunday, March 8, 2020

Economic Impacts of Potential Water Reductions in the San Joaquin Valley: Reaction to the Blueprint Report

The Water Blueprint for the San Joaquin Valley released a report (hereafter referred to as the Blueprint Report) on the economic impacts of the Sustainable Groundwater Management Act (SGMA) and additional potential water supply reductions in the San Joaquin Valley.  The Blueprint is a group advocating a plan to replace up to 2.4 million acre feet of groundwater overdraft through increasing water exported from the Delta and a variety of government subsidized water supply infrastructure.

My assessment is that the Blueprint Report substantially overestimates the total economic loss to the San Joaquin Valley from sustainable groundwater and environmental policies, and provides misleading analysis of the distributional impacts of the costs between landowners and laborers. Specifically, the Blueprint Report
  • Overestimates the economic impacts of reduced water supplies with estimates that are 3 times higher than other, more credible, reports,
  • Hides the finding that farm land owners are the biggest beneficiary of its agenda, inaccurately suggesting that the Blueprint's primary impact will be to help disadvantaged communities,
  • Fails to acknowledge the limitations in its economic model or place its results in the context of current and future labor market conditions in the Valley, and
  • Fails to recommend strategies to help disadvantaged communities other than the old failed approaches of more subsidized water and weaker environmental regulation.

1. The economic impacts are inflated, about three times higher than PPIC estimated for SGMA impacts from a similar amount of farmland fallowing or retirement.

Comparing the Blueprint Report to recent PPIC analysis of similar issues show that both estimate similar acreage of farmland fallowing or retirement due to SGMA, 798,000 vs 749,000.  However, the Blueprint Report estimates that the decrease in crop production due to SGMA will have roughly the same distribution of crops as current crops grown in the region, whereas PPIC uses an economic model to estimate that the decrease in production will be concentrated in lower revenue crops.  Unlike PPIC, the Blueprint Report does not explain the model used to translate water reductions into crop reductions, but does state that "future restrictions on ground and surface water use in the region may reduce the scale of farming in the Valley by roughly one-fifth. Farm revenues and net income fall by similar percentages."

Specifically, the Blueprint Report estimates about 60% of the decreased crop acres are in trees/vines, compared to about 20% in the PPIC report.  The Blueprint Report forecasts that just over 20% of the acreage losses are to field/hay/pasture crops, whereas PPIC projects about 2/3 of the decrease in acreage is in field/hay/pasture crops.  As a result, the Blueprint Report estimates farm revenue and employment losses about three times higher than the PPIC for a similar decrease in water supplies and acres taken out of agricultural production.  Past experience with water shortages, economic theory and common sense suggest the PPICs estimates are likely to be more accurate than the Blueprint Report.

As shown above, the Blueprint Report is a strong repudiation of the economic findings in the 2019 PPIC report, and yet it doesn't even mention them.  This is another way that the Blueprint Report is highly misleading.  A credible report would cite other estimates and explain why they believe their approach is better.  I wonder if the PPIC researchers will have anything to say about these estimates that are three times higher than their own, or follow the Blueprint Report's lead and pretend each others work doesn't exist.

2.  The analysis obscures and ignores the implications of its most significant result, that direct losses to farm owner income total $1.9 billion per year in its main scenario - almost double the direct change to farm employee compensation.  

For the SGMA + scenario, the BluePrint Report estimates a whopping $1.9 billion income loss to owners of farms on a gross crop revenue loss of just over $7 billion.  This result, which is ignored in the Blueprint Report's summary, reflects an average 27% operating margin for these farm owners, a profit margin that would make the most profitable tech companies and Wall Street CEOs envious.  It certainly would have been interesting to see the report trace the calculations and geography of the $1.9 billion income change to farm owners in the same detail as it traces the estimated $1.1 billion loss to farm labor compensation.  How much of the $1.9 billion annual loss to owner income accrues outside the Valley in non-disadvantaged communities like Beverly Hills, Pebble Beach, or Manhattan?

If their report is accurate and the Blueprint would protect nearly $2 billion in annual income to farm owners, then perhaps these landowners should be willing to pay for most or all of the Blueprint projects themselves instead of asking for federal and state taxpayers to cover the bill.  If the Blueprint is really about helping farm workers as Blueprint PR suggests, then it seems reasonable to ask the farm owners to pay up to a billion dollars per year (just over half of their self-estimate of protected income) to implement the Blueprint's agenda and keep more farm workers employed.

Of course, I do not expect that the farm owners are either willing or able to pay for their multi-billion dollar water infrastructure agenda.  As discussed in Point #1 above, more credible assessments show that both the $1.9 billion farm owner loss and $1.1 billion loss to employee compensation are about three times too large.  The public should interpret the failure of the farm owners to offer substantial funding to implement the Blueprint as strong evidence that the economic impacts in this report are overblown, and that much of the Blueprint agenda is not cost-effective.

3.  The Report does not recognize the limitations of its employment model, and fails to put its findings in the context of the broader demographic and economic changes that will occur in the Valley over the 20 year SGMA implementation horizon.

I am an IMPLAN user myself, so I am not going to criticize the model choice, but the report should reveal more about its shortcomings in this application.  IMPLAN is best used for descriptive analysis of the current economy and its linkages, and short-run analysis of relatively small changes to output or demand.  It is not designed for long-run analysis, or for analyzing labor-markets that do not fit the underlying assumptions of the model.  The assumptions include no input price effects or supply constraints.  This implies a perfectly elastic labor supply curve where jobs shift proportionately with a change in production and labor demand, whereas the evidence shows farm labor markets have some characteristics of monopsony where a labor demand shift has a smaller than proportional effect on employment.   IMPLAN does not model labor supply or unemployment.  Even without getting into the econ weeds to explain why, long-time observers of the Valley economy will recall that these IMPLAN based studies have a history of overestimating employment losses in California during water supply and agricultural production declines events such as droughts.

It is also important to put the resulting changes into the context of change phased in over 2 decades when there will be significant demographic and economic changes in the Valley that have large effects on the farm labor force and agriculture in general.  The IMPLAN model assumes no supply constraints, meaning that the current data it uses to calibrate the model assumes farms currently have all the labor they want. 

This 2019 report from the California Farm Bureau Federation provides much needed context and background on labor market conditions.  Below is a summary from UC-Davis' Rural Migration News.
A California Farm Bureau Federation-UCD survey of growers in Spring 2019 found that 56 percent of the 1,071 respondents could not hire as many workers as they wanted at some point during the previous five years, rising to 70 percent in 2017-18. As a result, more than a third delayed activities such as weeding or pruning, or did less of these activities than in the past.
In response to fewer workers and rising wages, over half of respondents are using mechanization where available, a third are changing crops, often switching from crops harvested by hand to tree nuts, and some are raising wages to attract and retain employees.
Every economic and demographic projection of the Valley and its farm economy project that farm workers are only going to become more scarce.  Crops already go unpicked due to labor scarcity.  The Valley's population is growing, but fewer and fewer of its residents want to be farm laborers.  In this context, there is no reason to expect that a decline in farm output or acres cultivated will lead to a directly proportional shift in farm employment or rising unemployment as this report suggests.  In fact, since the majority of farmers actually want to hire more labor under current conditions, it is certainly plausible that farmed acreage can contract to some degree without any decrease in employment.

Final Thoughts

I know several people involved in the Blueprint initiative who are very sincere and have good intentions.  I listened to their presentation in Fresno at the California Economic Summit.  The focus seemed to be on finding a message to give the Blueprint appeal to a broader political audience, but it seemed more focused on environmental impacts - not a plan to pitch the agenda as a benefit to the poor.  My suggestion to a few people at the meeting who were involved in the rather fuzzy Blueprint organization is that they add stronger emphasis on new technologies and consider reducing water shipped out of the Valley to coastal urban areas as a better way to keep more water in the Valley than squeezing more out of the over-tapped Delta.  I also reminded them that most of the Delta is in the San Joaquin Valley, and that perhaps they should call it Blueprint for the Tulare Basin.

I don't remember hearing any mention of an economic impact report focused on disadvantaged communities.  Perhaps they walked away from that conference and all the discussion of inclusive economic growth with a strategy to market their agenda as a benefit to disadvantaged communities.  Unfortunately, the Blueprint agenda doesn't do much to lift up the poor in the Central Valley.  It is a status quo agenda about preserving the current Valley economy with its persistent outcomes of poverty, inequality, pollution and high prosperity for most of the Valley's landowners.  The new Blueprint Report misleadingly suggests that the biggest beneficiaries of their agenda are disadvantaged communities, when the main beneficiaries would be the land owners and water agency management and consultants behind the Blueprint.

Is it possible to advance a water agenda that supports inclusive economic growth in the Valley?  Yes, but it is going to take political courage from the Newsom administration and some folks within the Blueprint organization as it continues to develop its proposal.  The Newsom administration wants inclusive economic growth in the Valley, and the farmers behind the Blueprint want more government investment in their priorities and relaxed environmental regulations.  The State has some leverage, and the Governor should use it to demand better outcomes from any public investment and changes to future management.

Thus, I suggest that future government actions to support the water user agenda (including the voluntary agreements) be conditioned on significant changes that improve equity in the San Joaquin Valley agricultural economy and ensure more of the economic benefits accrue to farm workers and the communities in which they live. Here are my initial suggestions for a progressive Governor to consider in a "Blueprint for an Inclusive Economic Development Agenda for San Joaquin Valley Water."
  • ban the sale or transfer of related water supplies from Valley agriculture to urban areas outside the Valley;
  • require farms receiving water from the government financed projects to pay a higher prevailing wage, similar to the requirements on affordable housing developers who receive public funds.
  • impose a modest fee on agricultural water supplies to match state investments in safe drinking water for Central Valley disadvantaged communities.
  • require increased regional self-sufficiency and reduced imports from the Delta in coastal urban areas, freeing up Delta water supplies for the benefit of the environment and agriculture.
  • support increased R&D and early implementation of new water technologies, especially those that could be produced and developed in the Valley and marketed to solve solve growing water challenges across the globe.  
  • require landowners to live on or near (within 30 miles) their property that receives water from the government projects.
  • orchard planting permits.
If Valley water users are not willing to consider anything other than unconditional subsidies and lower environmental protection, the Newsom administration should not be afraid to walk away.  Walking away from the Blueprint agenda doesn't mean walking away from the San Joaquin Valley.  The Valley economy is capable of adapting to a smaller agricultural footprint over the next two decades, and public investment towards inclusive economic development in the Valley can focus on building the non-agricultural economy through initiatives like Fresno Drive.

P.S.  After posting this, I saw Lois Henry's article about the Water Blueprint presentation at the Kern County Water Summit, and took a look at the Scott Hamilton powerpoint she described.  I am intrigued by the concept of diverting from the Delta with low-velocity perforated pipes under gravel that he presented even if I am skeptical it can yield an additional 2 million acre feet per year from the Delta (one wonders if that estimate is as exaggerated as the doom predictions in their economic impact report).  The concept is somewhat reminiscent of Bob Pyke's idea of permeable levees in his West Delta Intakes proposal and I encourage creative thinking like this.  Importantly, it illustrates the need of agricultural water users for Delta proposals that are substantially less expensive than the tunnel vision promoted by the Department of Water Resources and Metropolitan Water District.  And it shows the foolishness of DWR's approach with the Delta tunnels to postpone economic and financial analysis until after the EIR for the tunnel is done.  I also noticed that Hamilton's Powerpoint did not hide the farm owner income effect or focus predominantly on disadvantaged communities when referring to the economic report, so that is encouraging too.

Thank you to Lois for posting this.