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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

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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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