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GOVERNMENT ACTION OR PRIVATE ENTERPRISE
IN RIVER VALLEY DEVELOPMENT
By W. W. HORNER
Horner & Shifrin
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
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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
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.
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284 AMERICAN ECONOMIC ASSOCIATION
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RIVER VALLEY DEVELOPMENT 285
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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.
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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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