/ Modified jun 7, 2024 4:44 p.m.

The Buzz: Arizona's Economy and Water

We speak with economic experts about Arizona's economy, with attention paid to how water plays a role.

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The Buzz

The Buzz for June 7, 2024

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Arizona's economy has been booming since the COVID-19 pandemic began to slow.

Low unemployment, growing wages and increasing population have persisted for years, but so have less positive indicators like inflation and skyrocketing housing prices.

With that backdrop, The Buzz headed to the University of Arizona's Eller Economic and Business Research Center's Breakfast With the Economists event to talk with the featured speakers about recent economic conditions and what they see in the state's future.

The EBRC's director, Dr. George Hammond, said Tucson's job market is following wider trends.

"For Tucson, job growth is a little bit slower, but still solid, a little bit slower than the nation and Arizona. But overall, the labor market, really across the board is in pretty good shape, we are seeing a few signs of weakening around the edges of the labor market."

The state's inflation numbers have decreased even though the state is still in a crisis with a key measurement that goes into inflation indexes.

"Housing is the biggest single component of the overall inflation measure. So when you have shelter prices, both rents and the owner's equivalent version of rents, rising at double digit rates, almost 20% over the year, that really drives overall inflation," he said.

Hammond said that housing is not the only necessity where people are spending more money. Non-taxed goods like groceries and health care are up, and that's affecting sales tax collection.

"We think it's the level of prices is putting off consumers a bit that everybody's feeling sticker shock every time they go to buy anything nowadays, and that's got something to do with it. But overall, we think that consumer spending is going to be okay, going forward, back to its roughly 2% growth rate as we look forward."

While Arizona's economic conditions appear strong, the state's water issues dim those prospects slightly. Head of the University of Arizona Water Resources Research Center Dr. Sharon Megdal, whose PhD. is in economics, said water is a good that does not follow typical conventions about pricing. She explained using what is known as the water/diamond paradox.

"Why are diamonds so expensive and water is so cheap when water is essential for life and diamonds are not? And they explain the paradox in terms of supply and demand, that the supply of diamonds is very limited, it takes a lot to extract the diamonds. And you pay a lot because of that. And water was viewed as more plentiful. But water isn't necessarily plentiful. It's certainly not plentiful for us here in the Sonoran Desert. And yet, its pricing is strange. You know, we price it based on the cost of extraction, the cost of delivery, the cost of administration, but not the water scarcity itself. We don't pay for the water molecules. So we have a very strange good."

Megdal said the state's top issues are ones that she refers to as its "wicked problems."

"Wicked problems are problems that are big, and they're not easy to resolve, and they may change over time. And so one of the examples I use, the first example I'll typically use is the imbalance of some supply and demand on the Colorado River looking at the whole basin. The river's over-allocated it has been and the river's shrinking in terms of the water it's producing on an average annual basis."

72% of the state's water usage goes toward producing agricultural goods. But the answer is not as simple as reducing the state's agriculture industry.

"You could answer it from the gross numbers of state, domestic product or you could say, well, we wouldn't feel anything very much about that in Tucson. But what about the families and the communities that depend on that agriculture? They will feel it severely. And so this, again, relates to economics in that we typically don't have ways of compensating people when we're taking something away from them."

On top of that, reducing agriculture's water use is not a simple task, as many of the state's farms hold senior rights to Colorado River water, meaning they hold priority over other users.

With water issues in mind, Dr. Megdal said it is important to consider the state's growth. Arizona's population has grown by around 100,000 or more each year for more than a decade.

"We live in the desert, we should not be selling properties and lands if they're not, if there's not the water to serve them. But then, again, things are nuanced. What do you mean by limiting factor? Do you mean it's going to limit and it's not going to happen? And we're going to put gates around communities limiting growth? Or is it that we're going to have to plan for that, acknowledge that, make plans and take actions to address that."

Megdal said she remains optimistic about the state's ability to overcome its water issues so it can continue to thrive.

The WRRC is in the old Boy Scouts building. I didn't do that this morning, because I was short on time. But what's the motto of the Boy Scouts? Be prepared. And that's a good motto for building a water center because I think we have to be prepared. And I think that our water managers are working very hard for us to be prepared, but it is going to take all of us and that's why it's all hands on deck. It's everyone of us."

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