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Why Economic Losses from the Drought Are Low

If you look at the numbers, the severity of the drought doesn’t match the economic impacts. Despite some areas that were hitter harder than others, as a whole, California weathered the drought well in economic terms. Here’s a look at some of the biggest reasons for the difference.

Written by Isabelle Groc Published on Read time Approx. 5 minutes
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You can’t always get what you want But if you try sometimes you just might find You get what you need – Rolling Stones (1969, Let It Bleed album)

The ongoing California drought has many lessons for water managers and policy-makers. Perhaps the greatest lesson is how unimportant a drought can be if we manage water well.

For the last two years, California lost about 33 percent of its normal water supply due to drought, but from a statewide perspective saw statistically undetectable losses of jobs and economic production, despite often severe local effects. Agricultural production, about 2 percent of California’s economy, was harder hit, fallowing about 6 percent of irrigated land, and reducing net revenues by 3 percent and employment by 10,000 jobs from what it would have been without drought. Yet, high commodity prices and continued shifts to higher valued crops (such as almonds, with more jobs per acre) raised statewide agricultural employment slightly and raised overall revenues for agriculture to record levels in 2014 (the latest year with state statistics).

Cities, responsible for the vast majority of California’s economy, were required to reduce water use by an average of 25 percent in 2015. These conservation targets were generally well achieved on quite short notice. Most remarkably, there has been little discernible statewide economic impact from this 25 percent reduction in urban water use, although many local water districts are suffering financially.

How could such a severe drought cause so little economic damage? Much of the lost water supply from drought was made up for by withdrawals of water from storage, particularly groundwater. But the substantial amount of water shortage that remained was largely well-allocated. Farmers of low-valued crops commonly sold water to farmers of higher-valued crops and to cities, greatly reducing economic losses. Within each sector, moreover, utilities, farmers, and individual water users allocated available water for higher-valued uses and shorted generally lower-valued uses and crops.

If shortages are well-allocated, California has tremendous potential to absorb drought-related shortages with relatively little economic impact. This economic robustness to drought arises from several characteristics of California’s economic structure and its uses of water.

First, the most water-intensive part of California’s economy, agriculture, accounts for about 80 percent of all human water use, but is about 2 percent of California’s economy. So long as water deliveries are preserved for the bulk of the economy, in cities, California’s economy can withstand considerable drought (Harou et al. 2010). And the large strong parts of the economy can aid those more affected by drought.

Second, within agriculture, roughly 80-90 percent of employment and revenues are from higher-valued crops (such as vegetable and tree crops) that occupy about 50 percent of California’s irrigated land and are about 50 percent of California’s agricultural water use. If available water is allocated to these crops, a very large water shortage can be accommodated with a much smaller (but still substantial and unprecedented) economic loss. Water markets have made these allocations flexibly, with some room for improvement.

Global food markets have fundamentally changed the nature of drought for humans. Throughout history, disruptions of regional food production due to drought would lead to famine and pestilence. This is no longer the case for California and other globally connected economies, where food is readily available at more stable global prices. California continued to export high-valued fruits and nuts, even as corn and wheat production decreased, with almost no effects on local or global prices. Food insecurity due to drought is largely eliminated in globalized economies (poverty is another matter). Subsistence agriculture remains more vulnerable from drought.

Third, cities also concentrate much of their water use in lower-valued activities. Roughly half of California’s urban water use is for landscape irrigation. By concentrating water use reductions on such less-productive uses, utilities and individual water users greatly lowered the costs of drought. If cities had shut down 25 percent of businesses to implement 25 percent cuts in water use, the drought and California’s drought management would have been truly catastrophic.

Fourth, although California’s climate is very susceptible to drought, California’s geology provides abundant drought water storage in the form of groundwater, if managed well. The availability of groundwater allowed expanded pumping which made up for over 70 percent of agriculture’s loss of surface water during the drought and provided a buffer for many cities as well. If we replenish groundwater in wetter years, as envisioned in the 2014 groundwater legislation, California’s geologic advantage for withstanding drought should continue.

All of this leads to what we might call a Mick Jagger theory of drought management. Yes, droughts can be terrible in preventing us from getting all that we want, and will cause severe local impacts. But if we manage droughts and water well and responsibly, then we can usually get the water that the economy and society really needs. This overall economic strength also allows for aid to those more severely affected by drought. This is an optimistic and pragmatic lesson for dry drought-prone places with strong globalized economies, such as California.

California’s ecosystems should have similar robustness of ecosystem health with water use, and naturally persisted through substantial droughts long ago. But today, California’s ecosystems entered this drought in an already severely depleted and disrupted state. (The Mick Jagger characterization of California’s ecosystems might be “Gimme Shelter,” from the same album.) If we can sufficiently improve our management of California’s ecosystems before and during droughts, perhaps they will be more robust to drought. Reconciling native ecosystems with land and water development is an important challenge.

“If I don’t get some shelter Oh yeah, I’m gonna fade away” Rolling Stones (1969, Let It Bleed album)

The drought reminds us that California is a dry place where water will always cause controversy and some dissatisfaction. However, despite the many apocalyptic statements on California’s drought, the state has done quite well economically, so far, overall. But, the drought has identified areas needing improvement, so that we can continue to get most of what we really need from water in California, even in future droughts. We should neither panic, nor be complacent, but focus on the real challenges identified by the drought.

This story first appeared on California Water Blog, published by U.C. Davis’ Center for Watershed Sciences. The views expressed in this article belong to the author and do not necessarily reflect those of Water Deeply.

Jay Lund is Director of the Center for Watershed Sciences and Professor of Civil and Environmental Engineering at the University of California – Davis.

Top image: Citrus groves east of Fresno, California: a newly released state report shows California farmers reaping record sales of $53.5 billion in 2014, the same year Gov. Jerry Brown declared the state in a drought emergency and launched what became mandatory conservation for cities and towns. (Scott Smith, Associated Press)

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