American Economic Association

A Desirable National Water Policy

Author(s): W. W. Horner
Source: The American Economic Review, Vol. 41, No. 2, Papers and Proceedings of the
Sixty-third Annual Meeting of the American Economic Association (May, 1951), pp. 280-
288
Published by: American Economic Association
Stable URL: http://www.jstor.org/stable/1910802
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GOVERNMENT ACTION OR PRIVATE ENTERPRISE
IN RIVER VALLEY DEVELOPMENT

A DESIRABLE NATIONAL WATER POLICY

By W. W. HORNER
Horner & Shifrin

At the instance of the American Society of Civil Engineers, the En-

gineers Joint Council, which is the co-ordinating body for the five na-
tional engineering societies, in August, 1947, "took steps to institute
the creation of a National Water Policy Commission charged with the
investigation and reporting-among other things-upon the several
elements affecting the orderly and economical development of the water
resources of the country."
In 1948 the National Water Conservation Conference presented a
memorandum to the Hoover Commission which stated in part:
The necessity for comprehensive, basin-wide development of the water resource is now
fully recognized. This objective, however, cannot be attained in all cases without the
gu'idance of clearly defined policies, principles and procedures, established by the Congress.
There is today no clearly defined National water policy. This situation is recognized
in Congress, and is fully understood by those who have occasion to deal with the subject.
Water conservation, utilization and control is carried on today by various Federal
agencies, under regulations and laws adopted at various times, which are not adequately
integrated. Often action by Congress has been prompted by expediency, and by unrelated
public demand from various parts of the country. The body of law regulating the activities
of Federal agencies in the water field has grown up like "Topsy." The nation in this im-
portant endeavor has in the past proceeded, and at the present time continues to proceed
in a haphazard way.

In 1948 the report of the Policy Committee of the American Water

Works Association used similar language, and added:
There are competitive interests involved in the development of water resources, there
are variable plans for development, conflicting financial methods which might be applied,
and in some very important areas insufficient water to go around. There are great net-
works of interstate streams, representing in their watershed interests a very large part
of the entire United States.
When to these complications are added the competitive interests and jealousies of indi-
vidual states-and, at times, of parts of the same state-and of various Federal agencies,
the result is a situation of conflict which has been brewing for well over a century.
Some anomalous conditions are created by the participation of distinguished Senators and
members of the House of Representatives in certain powerful voluntary groups. It is
one of the few instances, in the determination of the national policy, where members of
Congress sit on both sides of the fence.

During several years past, the Bureau of the Budget has been at-
tempting to review the economic justification of water resources proj-
ects proposed for appropriation. Apparently- it was finding increasing
difficulty in discerning any well-defined policy which might guide its

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 RIVER VALLEY DEVELOPMENT 281

action. It is possible that the public expressions such as I have quoted

above may have been a factor in strengthening the Bureau's convic-
tion that a complete revision of national water policy was needed. It
is understood to have been at instance of the Bureau that President
Truman, by Executive Order of January 3, 1950, set up a temporary
Water Resources Policy Commission. In his letter to the chairman of
that Commission occur the following statements:
On several occasions, during the recent session of Congress, I called attention to the
need for developing a consistent and comprehensive policy with regard to our whole
water resources program. In many cases, piece-meal or partial approaches to a problem as
broad as water resources development tend to confuse, rather than clarify, many of the
basic, underlying issues. It is essential in my judgment that a comprehensive study and
review be made of all existing water resources legislation and policies, and that recom-
mendations be made in the full knowledge of national needs and objectives.
The Federal Government already has a substantial investment in existing water resources
improvements; in recent years we have been adding to this investment at a rate of more
than $1 billion annually. These facts alone make it imperative that individual projects be
properly related to the total water resources program, that they be undertaken in logical
and orderly sequence and that they be scheduled to conform to fiscal and other national
considerations. It is even more important, however, that the policies underlying these
programs be soundly conceived in terms of national needs and objectives, and that they
are adopted in the light of our goal of a stable and expanding national economy.

In response to the invitation by the President's Temporary Com-

mission, the Engineers Joint Council prepared and, in June, 1950, filed
with it a "Statement of Desirable Policy with Respect to the Conserva-
tion, Development and Use of the National Water Resources."
Throughout this statement, desirable policy is closely related to eco-
nomic considerations. My presentation herein generally follows the
findings of the statement.
Within the policy field there are at least four major economic ques-
tions as follows: economic considerations involved in the justification
of individual projects of programs; those involved in the matter of
priority of undertakings; the economic equity between the interest of
the nation's taxpayers and those of the direct or discernible bene-
ficiaries; the relation of the rate of investment of the national income
in water resources development to other factors of the national econ-
omy. We will find these and other economic questions involved in the
material which follows and which is quoted from the Engineers Council
document:
Certain fundamental axioms, simple in character but profound in impact, provide gen-
eral criteria for considering national water policy. These axioms may be reduced to two
statements: (1) that public money is limited in availability and (2) that many public
needs, such as water, highways, schools, hospitals, etc., compete for public money.
In the last 20 years, national, state and local water development has reached a level
where it represents billions of dollars of expenditure annually instead of the millions per
year of the period prior to 1930. With the advent of multiple purpose development, and
other fundamental changes in national policy, undertakings have increased in size, com-
plexity, geographic distribution and functional competition.
Today no single part of the country is in such undeveloped or overdeveloped state.

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282 AMERICAN ECONOMIC ASSOCIATION

from the water resources standpoint, as to require neither thoughtful preparation and
planning, nor equally thoughtful translation into action. If water functions have increased
in numbers and in geographical distribution, the number of Federal agencies necessarily
involved historically in these developments likewise have grown. As these have risen in
stature, their overlapping functions have become increasingly striking, and their compe-
titions have become impressively expensive.
It is well to state at the outset that placing the responsibility for the chaotic situation
in which the country now finds itself is neither simple nor fruitful. This is particularly
true in view of the fact that no inconsiderable part of the difficulty which the country
now faces is largely due to Congressional action and directive, by which Federal agencies
are both bound and involved. It is likewise true that animadversions against one or
another of the two principal political parties bear equally little fruit. When authorization
and appropriations for major water resources development, good and bad, leave the Federal
Congress, it is striking to note, as recently as 1950, that both political parties respond
almost unanimously to pressure and trading.
Conservation and control of the waters of the United States are in the national interest,
but not necessarily a function of the Federal Government. On the contrary, that which
can be done by the individual should be done by him, and that which requires collective
action should be done at the lowest governmental level practicable. The Federal Govern-
ment should engage in the conservation and control of waters only when the collective
action of all of the people of the nation is necessary for accomplishment of the objectives.
Such collective action, through the medium of the Federal Government, is justified for
only two purposes.
First, to do those things which are essential to the national defense or otherwise of
substantial benefit to all of the people throughout the nation; and
Second, to aid in the financing of the cost of construction of works for the benefit of
a limited number of people, on terms equitable to all other citizens of the nation.
In the discharge of the first function the Federal Government is acting as trustee in
the disbursement of tax revenues on a non-reimbursable basis for the general benefit. It
follows that such expenditures should be made for those purposes which will produce the
greatest benefits to the nation as a whole. This responsibility goes far beyond any deter-
mination of feasibility; it requires a determination of what is best, not merely what is
good.
In its performance of the second function the Federal Government is basically acting
as a banker responsible for the soundness of his loans. It is fundamental to this function
that such loans should be repaid with interest.
It is also fundamental to this function that those who benefit directly from the con-
struction of such works for the conservation and control of water should repay all costs
properly allocable to the production of such benefits; furthermore, where indirect benefits
will accrue to a region in greater degree than to the nation as a whole, the people in
that region should repay a like proportion of all costs not allocable to production of
direct benefits.
All non-reimbursable expenditures and all subsidies, regardless of the source of pay-
ment, should be considered as being for the general benefit, and should be compared
with the benefits which could be derived from the expenditure of like sums for any other
purpose and at any other location. Only such portions of the total cost as will actually be
repaid with interest by beneficiaries can properly be excluded from the test of comparison.
In computing the costs of Federal water developments for determining economic justifi-
cations or for any other purpose, there should be included amounts equivalent to the
taxes which would have to be paid were the lands, physical improvements and business,
if any, not exempt from taxation, whether Federal,,State or local.
There is pressing need for ascertaining the costs of fulfilling the respective functions of
a Federal multi-purpose water development. Distribution of costs in proportion to benefits
is improper for the purpose. For application generally and uniformly among Federal
agencies, in apportioning the costs of jointly-used facilities, the Proportionate-Use-of-
Capacity Method is recommended.
For determining project justification, there should be established criteria which are
applicable to all functions of such development and to all Federal agencies concerned.
So far as practicable, Federal water projects should be self-supporting.
The present rate of planning and Congressionally authorizing water resources develop-
ments is excessive and economically unsound.
As to new projects, in general there should be no further authorization until uniform
national policy has been adopted.

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 RIVER VALLEY DEVELOPMENT 283

Domestic and Industrial Water Supply:

The use of water resources for domestic and industrial purposes is believed to be the
highest and best use. Without adequate water supply properly safeguarded against pollu-
tion, urban life cannot exist.
Although nation-wide in development, domestic and industrial water supply present
essentially local community problems. Of the 13,000 public water supply systems serving
85,000,000 people in the United States with approximately 15,000,000,000 gallons of
water per day, nearly all are intra-state. Only a few have interstate problems, and a very
limited number are concerned with more than two states.
Urban or private industrial water supplies should accordingly be built and paid for
by those using the service. The cost of water from public supplies, which is usually less
than 2? per capita per day, is within the economic reach of all.

I want to interpolate here that we have seen proposals by Federal

agencies for projects which are 90 per cent domestic and industrial
water supply. The present theory seems to be that they are properly
federal projects if they contain 2 or 3 per cent of flood control or
reclamation benefits. Quoting again:

Contrary to general public belief, there is no experience basis for the fear that the
availability of water resources, surface or underground, is declining. Shortage of water
is neither universal nor increasing. Synchronization of development of and use, on occa-
sion, has been inadequate. Declining, underground water levels prevail in some areas,
with excessive ground water rises in others. On a national scale, however, there is little
evidence to support the prophets of doom in the water resources field. Intelligent hus-
banding and allocation are the keys to the future.

Flood Control:
Flood Control is of vital concern both to Federal and local interests. It should be
effected by cooperative efforts between them. It should not be the sole concern of the
Federal government.
The policy of Federal participation in flood control should be based on the equitable
principle that the cost of providing flood control should be borne proportionally by those
benefited therefrom. Therefore, Federal interests should contribute, the same as others,
and no more than their share of such cost commensurate with the benefits they rceive.
The Federal government, wherever necessary or expedient, might make loans to local
interests for development by them of an entire flood control project or for that portion
of the cost thereof which Federal interests are not justified in assuming; or it might
construct such projects in their entirety on a prorated reimbursable basis, with Federal
aid commensurate with the national benefit.
The development of means for holding soil in place on watersheds and particularly on
agricultural lands is of vital concern not only to the Federal government, but more par-
ticularly to local interests represented by soil conservation districts organized under state
laws.

On tillable land of such topography that soil is likely to be carried

away through erosion by wind and rain, the benefits of withholding
the soil, to the owner, are so obvious as to require no proof; hence
there can be no justification for "incentive payments" to landowners
for such soil conservation measures.
The emphasis for all soil conservation measures should be sustained utilitarian usage,
and not for the primary purpose of flood flow retardation. Flow retardation should be
regarded as a by-product of national value, and as such might justify federal aid (but
on the basis of relative benefits, such aid would be a small part of the cost).

In my opinion the broad language of the 1936 Flood Control Act

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284 AMERICAN ECONOMIC ASSOCIATION

and the resulting interpretations of it appear to be one of the principal

causes of the present policy confusion.
The Act declared flood control to be a national responsibility; that
projects under it are justified whenever the benefits to whomsoever
they may accrue exceed the cost; and they require due consideration
of hydroelectric power, water supply, fish and wildlife, and recrea-
tional uses.
Out of consideration of hydroelectric power we have come to have
flood control and navigation projects which are 90 per cent or more
power projects.
Out of "benefits to whomsoever they may accrue" which exceed the
cost there are examples of proposals for which as much as 40 per cent
of the accounted for benefits consist of alleged recreational and wild-
life values, generally of local or regional significance, or of accounted
for "enhancement of value" of private property, over and above the
value of flood damages abated.
The language of the Act is open to such interpretations, and Con-
gress in its project authorization approvals has given some of them
tacit endorsement.
I, for one, doubt that the Congress which passed this Act realized
that it was providing for local recreation at federal cost or was justify-
ing the expenditure of the federal taxpayers' dollars to enhance the
value of private property.

Inland Water Transportation:

The inland water ways of the United States, if converted to one continuous channel,
would extend around the world and would include 480 locks and dams and 270 harbors
along the way.
A number of inland water ways projects are in existence today that are completely
devoid of any justification. Certain of these have virtually been abandoned, while others
have never generated the traffic anticipated.
We believe that no new artificial toll-free canals should be constructed and that study
should be given to the practicability of levying charges upon the users of other types of
navigational improvements. This study should be undertaken as part of a program of
general discontinuance of public subsidies.
The use of inland waterways, as a regulatory agency, to force reductions in rates on
land carriers should be abandoned.

Land Drainage and Irrigation:

Irrigated lands now amount to about 22,000,000 acres. Projects now under way or
under consideration involve more than 13,000,000 acres of reclamation and nearly
8,000,000 acres of supplemental irrigation. The most economical projects have already
been undertaken.
There is a progressive trend toward shifting the entire burden onto those who bear
the expense of government through taxation. Unless the development of the water re-
sources of the United States is to be permitted to degenerate into the diversion of the
national income for the benefit of particular regions or classes of people, and for political
expediency, there must be a reversal of the present trend
Reliable sources indicate there are 97 million acres of wet swampy and overflowed
lands in the United States, not in organized drainage districts, of which 20 million acres
could be drained at a reasonable cost.

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 RIVER VALLEY DEVELOPMENT 285

Although an extension of Federal participation to this field is not considered desirable,

nevertheless, when the direct benefits can readily amortize the project, there is no reason
why such participation is not a sound national policy in those cases where the indirect
benefit greatly exceeds the Federal contribution necessary to the execution of this project,
but, in no case, should a drainage project be approved if the cost per acre is greater than
the value of productive land similarly situated.
The expected continuation of present trends toward higher productivity of land now
under cultivation can provide food and fibre for the expected population growth, and
improvement in national diet. Demonstration of need should be the first step in the deter-
mination of the economic justification of national expenditures to put new land under
cultivation.
No future projects for the reclamation of land for agriculture, by drainage or otherwise,
should be deemed economically feasible unless and until such needs shall have been clearly
demonstrated.
Lands awaiting reclamation through drainage and irrigation are not deteriorating and
should be regarded as a useful reserve for future needs.

Hydroelectric Power. After reviewing Engineers Council's state-

ment on hydroelectric power, I am offering my personal summary.
Congress has never stated a national power policy. Present programs
rest largely on implications and interpretations of the Flood Control
and Reclamation Acts and on confirmation implied in Congressional
approval of projects under these Acts. Few citizens realize that the
power programs under these Acts have reached a magnitude of many
times that under the TVA development.
There is unquestionably a real need for the expansion of power pro-
duction. Many feasible hydroelectric projects are of such magnitude
as to probably preclude their development under private financing.
Probably many of the power projects complete or under construc-
tion under the Flood Control and Reclamation Acts are economically
justified and could readily be made self-liquidating. One possible ap-
proach to a sound economic policy in this field might be the statement
by Congress of an outright policy for federal power production, the
setting up of an agency to direct the program, with the financing based
on prospective revenue, through federal credit outside the federal
budget. Such a direct approach would avoid some of the present queer
practices, as, for example, where a part of the revenue from sound
power projects may, under multipurpose conditions, be diverted to the
reclamation fund and used to provide for irrigation features not other-
wise financially feasible; or where power income may be evaluated on
one basis by one federal agency for project justification purposes and
may later be marketed by another federal agency at a materially
lower rate.
In recent years Congress has come to a new procedure of approving
water resources development by "basin plans." The principle of plan-
ning for water resources development on the drainage basin unit is
definitely desirable and sound, but for some of these plans there has
been an accounting showing an economic justification for the individual

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286 AMERICAN ECONOMIC ASSOCIATION

projects included and for others, justification for the plan as a whole
with the possibility of uneconomic elements being obscured in the sum-
mation. With respect to some of these basin plans there has been no
clear-cut presentation from which economic justification could be
determined. When the desirable principle of drainage basin planning
is reduced to this situation, water policy and economic considerations
appear to be at the point of parting company.
A by-product of the basin plan device is an interpretation that all
projects entering into an approved plan are thereby approved for con-
struction by the federal government. The interpretation has been car-
ried further by one federal agency which has argued that the Federal
Power Commission is precluded from licensing construction of any of
such projects by private capital.
The Engineers Joint Council statement is a document of 150 pages.
I have held my synopsis of it to twenty minutes, to have time for a
comment on the report of the President's Temporary Commission.
This report, carrying the title, "A Water Policy for the American
People," was released on December 17. My copy became available on
December 21. The report runs to 400 pages and will require very care-
ful study for a full understanding of its implications. Engineers Joint
Council has instructed its ninety-man task force to review the findings
and to prepare a public statement with respect to them. Such a review
may require a period of sixty days or more. It has been possible for
me only to give the report a first reading, and I can give you here only
may personal first reactions.
The report confirms the original Engineers Council statement in
many respects. For example:
There is today no single, uniform Federal Policy governing comprehensive development
of water and land resources.
This is a time for action based on sober consideration of objectives and methods. Con-
tinuation of present policies, or lack of them, will mean a continuing waste of money and
effort in the pursuit of conflicting goals.

Although not permitted under the President's order to make recom-

mendations for over-all administration of water resources, it proposes
that planning procedure be through drainage basin commissions made
up of federal agency representatives under an independent chairman
and with advisory boards representing the interested states. Except for
the independent chairman, this is identical with the procedure set up by
Congress in 1950 for the Arkansas Basin and for New England.
The report agrees with the Hoover Commission and with the Engi-
neers Council statement in setting up a board of review. The duties
of this board would be to develop improved evaluation techniques and
standards and to review and co-ordinate the plans of the various drain-
age basin commissions.

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 RIVER VALLEY DEVELOPMENT 287

All federal agencies in co-operation with the states are to review all
existing plans and programs. No new projects are to be put under con-
struction until confirmed by such review. The board of review is to
develop a six-year program of confirmed projects, with the annual pro-
gram to be adjusted somehow to national economic levels.
Many of the recommendations closely parallel those of the Engineers
Council, as for example that public water supply remain a local respon-
sibility and that ascertainable direct dollar benefits become reimbursa-
ble to the federal government. It is suggested that this may be done by
agreement with the states through the levying of taxes or assessments.
Tolls are to be levied on inland waterways, but only as a part of a new
national transportation policy.
Evaluation procedure and principles are to be the same for all func-
tional features of programs.
It is proposed that irrigation and public power be divorced, and that
a pre-essential to irrigation undertakings be a finding by the Depart-
ment of Agriculture of a need for additional productive land, after a
full consideration of the increase in rate of production on existing
lands. However, when undertaken, such irrigation projects are assumed
to be justified by a national benefit, the cost-less reimbursement from
the farmers on an ability-to-pay basis-being chargeable to the federal
taxpayers. While weight is to be given to the comparative cost of alter-
nate projects for new lands, other safeguards would seem to be
needed against uneconomic undertakings. In the fields of hydroelectric
power and of project evaluation, the Engineers Council and the Tem-
porary Commission are far apart.
With relation to hydroelectric power, the report proposes to clarify
the situation with a flat statement for the first time of a specific policy.
The recommended policy would make full development of the remaining
hydroelectric power potential a major responsibility of the federal gov-
ernment, and in the future licenses for nonfederal development would
be issued only with the joint consent of the federal agencies.
With respect to the evaluation of projects, the report makes a strong
recommendation for clear-cut accounting of costs and of those benefits
which can be appraised in dollar values, this appraisal to include sec-
ondary benefits so as to provide an approximation of the total result-
ing increase in national income. This seems to provide for a material
judgment factor, but in addition, if on this showing the benefits are
less than the cost, the basin commissions may make a statement indicat-
ing that essential benefits important to the general welfare are of suffi-
cient additional value to warrant construction. The political economic
philosophy of the Commission may be indicated in the following state-
ments:

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288 AMERICAN ECONOMIC ASSOCIATION

The Commission is convinced that the measurement of direct benefits and costs in
dollars is a basically useful tool in program evaluation and project selection, but that it
must be supplemented by other measures if sound decisions are to be reached in the public
interest.
The assured permanence of our resources base would strengthen the foundations of our
culture, institutions, and way of life. Improved productivity could relieve poverty, mal-
nutrition, and insecurity among low-income groups. A widespread sense of well-being,
hopefulness, confidence in the essential soundness of existing institutions could be achieved,
along with a sense of responsible participation. These are social values of the highest order.
Enough is known to support the judgment that the social values inherent in our water
resources are immense and vital to the well-being of the nation.
Increasingly, as the Government has undertaken large investments for public purposes
rather than simply to serve private purposes not fulfilled by private capital, the principle
of full reimbursement has ceased to be useful or necessary. The Government has come to
be recognized as an agency for social and economic action which need not follow the
rules of the private capital market in order to obtain the necessary capital or to make
investment decisions.

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