Tuesday, December 1, 2009

Wave district proposal is bad economics

Badger Meter CEO Richard Meeusen recently proposed that the city offer water free to firms that relocate to the area. The concept has been endorsed by the Milwaukee Journal Sentinel editorial board and Milwaukee Mayor Tom Barrett. According to the Wall Street Journal the city is preparing an application for the Wisconsin Public Service Commission that would offer reduced water rates for up to five years to businesses that bring in at least 25 jobs.

This is very bad idea based on a fundamental misunderstanding of economic principles.

Proponents of “wave districts” are right that Milwaukee has a competitive advantage in reliable water. It’s the result of the city’s location and years of public investment. Climate change is making Milwaukee’s water even more valuable as UWM economics professor and department chair, William L. Holahan, has documented in his paper, "Reliable Water Supply: Milwaukee's Comparative Advantage."

Milwaukee’s competitive advantage in water makes it attractive to businesses that need reliable sources of water such as bottling plants that are relocating from cities in the southeast and southwest that are plagued by water shortages.

But if Milwaukee truly has a competitive advantage in water reliability, there is no reason to reduce its price or give it away. No business firm would cut its price in response to increased competitive advantage. In fact, it is standard for business firms to raise their prices, not reduce them, when their competition is "drying up." Badger Meter certainly wouldn’t cut its prices if a major competitor went under. So why should the city of Milwaukee?

Rather than providing water hungry-firms with windfall profits by cutting the city’s nationally low water rates to zero, Milwaukee should use its competitive advantage in reliable water to attract water hungry-firms and invest the revenue generated through increased sales of water in other public goods that benefit all of the city’s citizens and businesses, like our schools, employment and training programs, parks, transportation and communications infrastructure, or in property tax relief.

The economic attractiveness of the city depends on its quality of life, its schools, parks, streets, public health, safety and tax rates among other things. Milwaukee badly needs revenue to invest in these attractors in no small part because shared revenue from the state has declined by almost 25% over the past decade.

The Milwaukee Water Works is an asset of the city, paid for by rate-payers, and its value must be maximized for the benefit of the city, its residents and employers. Proper pricing and investment of water revenue is a key to maximizing the value of the city’s competitive advantage in water reliability. Establishing “wave districts” will not contribute to this objective or enhance the city’s competitiveness.


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