Affordable Housing Institute : US

[Continued from the previous Part 1, Part 2, Part 3, Part 4, Part 5, and Part 6.]

 

As we’ve seen so far in this extended series on the economics of water taking off from Duke law professor Jim Salzman’s article Thirst: A Short History of Drinking Water, since housing is what makes cities, infrastructure – at its most basic, water and sanitation – is necessary for cities to scale upward.  The quintessential expanding city, New York, had to reinvent its water infrastructure repeatedly.

 

5.         Infrastructure is vulnerable to man-made calamity

 

As with Rome, urbanization and infrastructure spur innovations in technology.  Aqueducts could flow water only downhill, but James Watt’s steam engine meant water would be pumped uphill too.

 

In 1774 the city approved an ambitious plan for a steam engine-powered waterworks that would pump water throughout the city in aqueducts similar to those of Rome. 

 

Technological networks, be they paved roads, canyon-spanning aqueducts, or steam-powered pumps, take capital.

 

To fund the public works, the city issued “Water Works Money,” the first paper money issued by an American city. 

 

Finance and infrastructure go hand in hand.

 

Construction commenced but the timing could not have been worse.  As the colonies descended into the Revolutionary War, the British occupied the city and destroyed the waterworks construction. 

 

I hope you’re not expecting your wells to survive

 

Following the Revolutionary War, water supply plans in the city stumbled along for over 15 years.  Plans were proposed for public waterworks and carefully studied, but none funded. 

 

6.         Growth creates crisis; crisis creates political change

 

New York kept growing, and the urban water supply (like Rome’s before it) became overloaded:

 

Water from the Tea Water Pump was of increasingly poor quality, nor did the public wells provide an attractive option. 

 

By the Enlightenment, the connection between hygiene and disease had been scientifically established, which meant that epidemics also created political pressure – which, in this as in so many other cases, translated into a political commitment to spend tax money.

 

A yellow fever epidemic struck New York in 1795 and many blamed the disease on the city’s foul water and fouler streets.  Tea Water price was also a major concern.  As a letter to the New York Gazette decried in 1798, “I pay for Tea Water Only About Six Pounds Per Annum; which, I think a great tax for one small opinion.” 

 

Now that the taxation did imply representation, those paying the taxes were quite reasonably demanding municipal service for it.

 

With citizens and business leaders demanding action, the city turned to privatization. 

 

In an alliance that would seem unthinkable years later, Aaron Burr joined with Alexander Hamilton and other prominent politicians of the day to drive through a public/private solution. 

 

As I’ve written in many contexts, government makes an excellent funder and regulator, but a less effective service provider.

 

In an argument that would echo 200 years later in privatization debates, “Hamilton used his considerable influence to persuade the City Council that the municipality should not build its own water works because it could not raise sufficient capital through loans and taxes.” 

 

Smart enough for a very fat biography

 

As the terrific recent Ron Chernow biography shows, Hamilton was an organizational and financial genius – there’s a reason your ten-dollar bill shows the portrait of the first Secretary of the treasury, the man who more than any other set the United States government’s finances on a proper course.  Though not above making a buck on his own, Hamilton’s logic was very likely sound, especially given the challenges and complexity of municipal finance.

 

If a buck can be made, why can’t I be the one to make it?

 

Burr then hurried a bill through the state legislature in three days.  Authorized by the New York state legislature and the New York City Council, the Manhattan Company, as the new organization would be called, was mandated in its corporate charter to provide New York City with clean drinking water. 

 

The assumption seems to have been that water would be piped in from the Bronx River, since the water sources on Manhattan Island were now regarded as undrinkable. 

 

While this summary’s sketchy, it suggests that Hamilton had in mind what we would now recognize as the municipal water company, a public utility.

 

Burr, however, was financially more ambitious.

 

[Burr] directed only 10% of the Manhattan Company’s $2 million assets toward investments in water works, relying on the Collect as the water source. 

 

I guess this means we’re not partners any more?

 

This is more or less stealing, or to use the more polite term, ‘conversion of public moneys to private profit,’ the more reprehensible since the Collect had been overused.

 

It’s also dangerously unhealthy, as I saw when in Kenya.

 

Water vendor siphoning paper plant runoff into his tanks

 

The remainder was invested more profitably in local businesses.   The company did the bare minimum to maintain its charter, laying only 23 miles of pipe in its first 32 years. 

 

Here’s a classic regulatory problem: how do you keep a chartered private money within its remit?  It’s problem we haven’t solved yet, 225 years later.

 

Over time, this drinking water company gave up all pretence and developed into the powerful Chase Manhattan Bank.

 

It all started with a water franchise

 

From water to money, now that’s liquidity!

 

Although the company wasn’t improving the water quality, its legal status was a valuable asset:

 

While few people actually received Manhattan Company water, the company defended its monopoly power over water provision and, as the Manhattan Company’s portfolio grew, Tea Water pumps were driven out of business.  New Yorkers were thus forced to rely on the increasingly-revolting Collect Pond and local wells.  People with money turned to imported soda water and well water mixed with liquor.  As a historian of the era has described,

 

As for New Yorkers, drinking no more Tea Water and scant Manhattan, it was once again back to street wells and carted spring water. New York had entered the first American century with less good water than the Dutch had bequeathed to the English.

 

New York, 1842, expanding north

 

It took a series of disasters for the government to finally address water supply head on. 

 

7.         Public infrastructure arrived only after full-blown privatized infrastructure failed

 

Networks are vulnerable to the tragedy of the commons:

 

We could use some public water about now

 

In 1828 a large fire caused extensive property damage and a severe cholera epidemic in 1832 killed 3,500 people in New York but only 900 in Philadelphia, which enjoyed reliable public water supply and streets washed down daily.  Mounting concerns over disease and inadequate water sources to fight fires forced the city’s Common Council to revisit the challenge of providing reliable supplies of clean drinking water. 

 

Following the recommendations of a state-appointed commission, a permanent Board of Water Commissioners was created and authorized [x] to raise infrastructure capital and [y] to condemn land in order to supply water to the city. 

 

Those are significant powers, especially the latter. 

 

New York, 1856, still growing, needing more water

 

Not only is this eminent domain for economic development, it’s acquisitive eminent domain, with the city over-reaching its boundaries.  A hundred years hence, the Commonwealth of Massachusetts would dam the Swift River to create the Quabbin Reservoir, in the process drowning several towns.

 

House being trucked out of the soon-to-be-flooded Swift River Valley

 

Surprising even today, the condemnation authority extended beyond the boundaries of the city, for the water source lay upstream of New York in Croton.  By 1838, condemnation of 35 acres of land in the Croton watershed had been completed.  The Croton Reservoir was a massive project, supplying 95 million gallons daily, yet only satisfied the city’s water needs for a decade. 

 

Croton, still used today

 

The city then looked even farther north, to the Catskills and Delaware watersheds. 

 

More echoes of Rome: the city kept growing, and its network reached ever farther afield.

 

 

Construction of the reservoir in Croton marked the end for significant private provision of drinking water for New Yorkers, since it displaced the Manhattan Company. 

 

Which, as we’ve seen, happily became a bank.

 

Interestingly, however, it did not mark the end of water as an unpriced good, for with construction of the Croton Reservoir and the Croton Aqueduct came installation in New York of so-called “Croton Hydrants.”  These fire and street hydrants provided water free of charge and proved very popular. 

 

Echoes of the lacus.

 

As a history of Croton water relates, “Two years after it opened, Croton was primarily a public amenity of great fountains and thousands of fire and free street hydrants; most homeowners and landlords had little inclination to install the costly service pipe.” 

 

As in Rome, we have legalize and tax replacing the informal settlement; or, said in capital terms, the massive public investment in non-recoverable infrastructure costs (the Basic Model) created a valuable network whose incremental hookup costs were small enough that everybody wanted to join.

 

Formalization, meet municipal utility.

 

This changed over the next 25 years as private pipes became more common, but the net result bore a fascinatingly strong resemblance to the Roman system of cross-subsidization from private pipes to lacus at the time of Caesar.

 

8.         The law of economic gravity applies to water

 

New York makes a great case for studying the economics of municipal infrastructure finance because it recapitulated most of human experience in just two hundred years.  As Professor Salzman says,

 

How we think of water, whether as a sacred gift or a good for sale, both influences and is influenced by how we manage access to drinking water. 

 

Or, as I say it – urbanization required technology and networks, which in turn require government and capital, which in turn requires large-scale public and private finance. 

 

Urbanization is thus, among other things, a phenomenon of money.

 

New York, the epitome of capitalism, demonstrates how rapidly money power can transform environments. 

 

That vertical line is a wall …

 

… which became synonymous with capital markets

 

Between 1650 and 1850, New York went through three or four different phases.

 

We had the pre-urban communal use (”always ask, always give”) model:

 

From its early days, New York’s drinking water came from private wells, public wells, and the Collect. 

 

When that was over-stressed – a consequence of urbanization – water vendors emerged:

 

Faced with declining water quality, water became commodified with the rise of Tea Water. 

 

The limited neighborhood infrastructure was destroyed by a man-made catastrophe (war):

 

Following the failure to provide public infrastructure after the Revolutionary War, the private supply of drinking water reached its logical next step with responsibility for management of New York’s entire drinking water supply system granted to the Manhattan Company. 

 

New York granted a fully private monopoly, but that failed for want of regulation and violation of the Basic Model (that government pays the non-recoverable cost):

 

Only when the company notably failed to provide even the most basic services for drinking water or fire protection did the city step in and occupy the field. 

 

Rome got to the Basic Model through imperialism; New York got there through desperate necessity.  Two diverse environments converged on the Basic Model.  Is the Basic Model the Holy Grail of infrastructure finance?

 

I have seen the Holy Grail of water infrastructure!

 

[Stay tuned for the summation post to come in a few days.]

 

 

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