Surprise! A Cretinous Idea From Liz Warren And Ro Khanna

We actually want more water trading, not less

Aficionados for truly stupid political interventions into matters economic will already be aware of the idiocies perpetrated by Senator Elizabeth Warren and Representative Ro Khanna. The two seem to end up as if someone rolled together the ideas of Professor Richard J Murhpy and The Guardian opinion page then removed all the insight, subtlety and sensibility. True, not an arduous task removing those three but …..

The basic water problem out in the Western US is that the wrong people currently own the water rights. We would therefore like to see more trade in those rights. Warren and Khanna are insisting upon further limitations upon the trade in those rights. This is rampant idiocy.

To set the scene, as folk moved out there they realised that water was not one of those things in great surplus in the area. So, those who got there first made sure that the property rights to the water were assigned to them. Nothing odd about this and rights to a scarce resource do need to be allocated. Otherwise we just end up with the commons problem and the resource is exhausted.

OK. And, y’know, quite a lot of things have changed in the century, century and a half since that Wild West was properly populated. But the descendants of those original farmers still own near all the water rights. Hmm, bit of a problem.

That’s OK, we’ve Coase to advise us here:

Ronald Coase (1960), “The Problem of Social Cost”

In the absence of transaction costs, if property rights are well-defined and tradable, voluntary negotiations will lead to efficiency.

It doesn’t matter how rights are allocated initially…

…because if they’re allocated inefficiently at first, they can always be sold/traded…

so the allocation will end up efficient anyway

Now, the distribution - who gets the cash from all of that - is dependent upon that first distribution. But that’s a minor problem compared to the efficient use of water.

So, we want lots of buying and selling. The idiots using $300 of irrigation water to grow $100 worth of alfalfa (pretty much my first English-world piece was on exactly this subject, near 30 years back) can instead sell that same acre-foot to a city, where the two households will happily each pay $500 a year for the half an acre-foot they require.

The asset - the water - has moved from a lower valued (actually, value destructive) use to a higher, the world is richer in aggregate. It doesn’t matter that the farmers get the money because Grandpappy shot all the Injuns. Even without the who gets the money we’re all richer - we’re getting $1k not $100 from the same acre-foot of water.

Coolio!

Enter Warren and Khanna:

With private investors poised to profit from water scarcity in the west, US senator Elizabeth Warren and representative Ro Khanna are pursuing a bill to prohibit the trading of water as a commodity.

Idiots. Damn fools. Politicians, but I repeat myself triply.

Now, do note they’re not trying to insist that water cannot be bought and sold - not because they don’t want to, they do, but because as Federal politicians they’ve no power whatever over within state markets. However, as Federal politicians they can claim power over commodity markets - the speculators will come from around the country, over state lines and interstate commerce is Federal.

So, as with onion futures, they want to ban water futures.

The lawmakers will introduce the bill on Thursday afternoon, the Guardian has learned. “Water is not a commodity for the rich and powerful to profit off of,” said Warren, the progressive Democrat from Massachusetts. “Representative Khanna and I are standing up to protect water from Wall Street speculation and ensure one of our most essential resources isn’t auctioned off to the highest bidder.”

Water-futures trading allows investors – including hedge funds, farmers and municipalities – to trade water and water rights as a commodity, similar to oil or gold. The practice is currently limited to California, where the world’s first water futures market was launched.

As you can see from their rhetoric they’re only limiting themselves to futures because they have to. They’d clearly prefer the Coaseian solution to not be available either.

But by looking to ban futures they are being doubly stupid. Futures markets don’t determine physical prices. That futures price, at delivery date, moves toward the physical price, not the other way around. Further, those speculators - the rich and powerful - do not profit off futures. Some do, obviously, but some others don’t. By definition futures markets are zero sum in their profits and losses among the speculators. For everyone who goes long someone else must, by definition, go short. Only one of them can be right, the loss of the one is the profit of the other and vice versa.

Futures markets do do something else though. They remove risk from those real world, physical, participants to those speculators. That risk transference leads to more people being willing to trade in those physical markets - thus speeding up that process, making more efficient that process, of getting to an efficient distribution of the resource from that initial endowment.

Futures trading is a Good Thing. It gets better the larger the error in the initial endowment of the physical thing being traded. Western water is currently appallingly allocated, futures trading in it will make it better.

The morons are agin’ this. Because they’re morons and therefore in politics.

Ho Hum. Have I mentioned before that I think politics is a really bad way to run things?