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Drought in California Part 10: How Drought May Affect California’s Economy

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This is the 10th post in my series on Drought in California. The previous posts have all focused on the physical reality: how much water will it have in the future, what is the projected deficit, what are California’s options for obtaining additional new water, and what are California’s options for using its water more efficiently. This post will start to focus on what the economic and social consequences might be. In the introduction to the series, I noted that my motivation for writing the series came from a family member who was considering moving to California. I love California and the California lifestyle, but was this a smart move, I wondered, or was it like moving to Oklahoma at the opening of the Dust Bowl? So my analysis will be focused around that issue: what is likely to happen to the employment situation in California, what is likely to happen to property values, and what is going to happen to the vaunted California lifestyle? This post will provide some of the background that will be necessary to try to answer those questions.

I could find no studies that projected the economic consequences if drought became the “new normal” in California. Most economic forecasts I found didn’t mention the drought at all. Those that did tended to consider the drought as a temporary phenomenon – they forecast economic consequences of the drought for 2015. Thus, I will have to construct my own analysis. In this post, I will focus on some background that will be needed.

At the beginning of each post, I have noted some of the problems in conducting an analysis of the kind I am attempting. I wrote about them in the introduction to this series, and I recommend you read that discussion. The problems are even magnified in discussing how California might manage its water problem and what the consequences might be. One reason is that it introduces future economic conditions into the discussion. Another is that if studies of the physical situation were hard to find, studies analyzing the economic situation are even harder to find. A third is that it involves trying to track how changes will ripple out from the sector of their direct impact to affect other aspects of life in California. But most importantly, it involves trying to anticipate what people will or won’t do, and people are highly unpredictable.

Drought may affect California in many ways:

  •  Farms. Production may be reduced and expenses increased. Farm employment may be reduced. Reduced operating income may force farmers to sell or abandon assets. Farms may fail, with the accompanying social dislocation for the farm family living there. Farmers or farm workers may migrate away from the droughts.
  • Farming Communities. Many rural communities depend on farming for their economic base. Reduced farm income may result in reduced income and increased unemployment that ripples through the community via suppliers, retailers, service providers, and financial institutions. Community members may migrate to regions with better economies.
  • Other Rural Communities. Many rural communities derive their water supply from wells. Drought may cause a lowering of the water table, causing a decline in potable water quality plus a complete loss of water supply to some homes and communities. These problems with the water supply may cause a reduction in all kinds of economic activity, plus an increase in waterborne illness. There may also be an increase in illnesses related to dust.
  • Fire. Dry conditions may lead to an increase in fires. In forest land, this may lead to reduced economic activity in the timber industry, and to declines in the recreation industry. In populated areas, it may lead to loss of businesses or homes.
  • Electric Power. Utilities may see reduced hydroelectric generation due to low reservoir levels and/or curtailed water releases. Utilities may also be forced to curtail generation at thermal electric plants that use water for cooling (coal, nuclear), as water supplies decline or become too warm to keep the plant operating at full capacity. Power prices may increase.
  • Wildlife. Habitat for fish, plants, and animals may be destroyed, leading to loss of the fish, plants, and animals. Some of the fish, plants, and animals are themselves the basis of economic development, which would also be lost.
  • Water Bodies. Water levels in reservoirs, lakes, ponds, rivers, and streams may be lower. This would have direct effects for the area adjacent to the water body, but it would also have effects on species that depend on the water body, including humans that use it for water supply and recreation.
  • Soil. Drought may lead to increased erosion, leading to loss of soil quality. Many desert areas have become completely denuded of soil.
  • Construction. Drought may cause restrictions on new housing or commercial construction, which would ripple outward through reduced employment in the construction industry. It may make housing less attractive to potential buyers, or it may cause shifts in the attractiveness of regions depending on their access to water. Asset values may decline, and the effects would ripple outward through the financial services industry.
  • Increased Expenses. Prices may rise for food and other items, as production declines as a result of the drought. Costs may increase via attempts to supplement declining water supplies and via attempts to conserve water. These effects would be felt throughout all sectors of the economy.
  • Reduced economic activity and declining asset values may result in declining tax revenues for state and local governments, including schools. Yet government expenditures may need to increase due to effects of the drought. The result may be a reallocation of funding from current programs or higher taxes.
  • Life Style. Increased expenses for basics may leave less income surplus for amenities and recreation. Water conservation strategies may alter amenities and recreational opportunities, or cause their loss altogether. Water conservation strategies may make multiple aspects of life more complex or more difficult.
  • Mental Status. Drought may cause anxiety or depression about the future and about economic losses.
Is this what's in store for California? Dust Bowl, Dallas, South Dakota. Work found at https://en.wikipedia.org/wiki/File:Dust_Bowl_-_Dallas,_South_Dakota_1936.jpg .

Is this what’s in store for California? Dust Bowl, Dallas, South Dakota. Work found at https://en.wikipedia.org/wiki/File:Dust_Bowl_-_Dallas,_South_Dakota_1936.jpg .

The above list comes from a variety of sources, but the principle one is from the National Drought Mitigation Center (2015). A few of the items on the list are localized. Most of them, however, would be widespread effects that would affect entire regions, if not the entire state. While it may be argued that each individual effect is small, they add together and interact in ways that can make the cumulative effect devastating. Lest anyone doubt that truth, I repeat at right a photograph of the Dust Bowl that I ran in the Introduction to this series. During the Dust Bowl, 500,000 Americans were left homeless, 3.5 million people migrated out of the Plains states. In some regions 75% of the top soil was blown away, the value of farmland declined by up to 28%, and in heavily affected regions the economic losses were never recovered (Wikipedia 2015).

In the next post I will discuss how the effects might play out in California.

Sources:

National Drought Mitigation Center. 2015. Types of Drought Impacts. Downloaded 8/26/2015 from http://drought.unl.edu/DroughtforKids/HowDoesDroughtAffectOurLives/TypesofDroughtImpacts.aspx.

Wikipedia. 2015. Dust Bowl. Accessed online 8/27/2015 at https://en.wikipedia.org/wiki/Dust_Bowl#Human_displacement.

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