We might be running a Ponzi Scheme for groundwater extraction

This blog is compiled and edited by Shashank Kumar Anand (Associate Editor, Highwire Earth; Graduate Student, Department of Civil and Environmental Engineering, Princeton University). It is based on the work of Sara Cerasoli and Amilcare Porporato that appeared in the Journal of Hydrology early this year (See the peer-reviewed article here)

In the 1920s, Charles Ponzi gained notoriety for running a fraudulent scheme that now bears his name. Imagine a magic trick where someone promises to turn a small amount of money into a fortune in no time. This sounds amazing, right? Well, that is the trick a Ponzi scheme plays – except it is not magic; it is deception. 

Here is how it works: Imagine you meet someone who says they have a fantastic investment opportunity. They say that if you give them $100, they will double it in just a few weeks. That sounds like an incredible deal, doesn’t it? You might think, “Why not? I will get back $200 so quickly!” 

Now, to make this trick seem real, the person might even show you some “proof” by giving you $200 after a few weeks. But here is the trick – that $200 did not come from any real investment or profit. Instead, they used money from new people who joined the scheme after you. So, when new folks give them $100 each, they use that money to pay you back. It looks like you made a profit, but they just used someone else’s money to do it. 

This is where the trick gets tricky. People who got paid back tell their friends and family about this amazing investment. More people join, each giving their money, and they are also paid with money from the newcomers. This cycle continues, with the person at the center collecting money from new members to pay off the earlier ones. It creates an illusion of profit and success, and more people become attracted, hoping to get rich quickly. 

Now, if one starts thinking about this cycle of the Ponzi scheme, it is unsustainable as it relies on an ever-growing number of new members to keep paying off the earlier ones. But as more people join, there comes a point where it is impossible to find enough new members to cover the payments. When that happens, the scheme collapses. The person running the scheme might disappear with whatever money is left, leaving many people who invested with nothing but empty pockets. This can be seen as “an example of market failure with an unsustainable economic trajectory”. 

Cerasoli & Porporato draw a parallel to this investment fraud with groundwater extraction, in which over-exploiters of groundwater from past generations play the role of the early investors, profiting from excessive overdraft and gaining in terms of higher agricultural productivity simply because more water input results in more agricultural output. But if one thinks about the next generation, this over-extraction of water will eventually leave more and more depleted aquifers for the next generation (the late investors). This means that if we only focus on the short-term benefits of maximizing agricultural output for a few years, in the long term, we might be on an unsustainable path that can only end with the exhaustion of the water resource. Using the case study of Kern County in California, the authors suggest that we might be in a Ponzi scheme of groundwater extraction. This finding resonates with the news that we have been hearing regarding the Central Valley groundwater depletion crisis (1,2). Just imagine how many more Kern County we might have around the world that we may not know of! 

The original Ponzi scheme collapsed after nine months. In that sense, we are fortunate that aquifer dynamics operate on much longer time scales, giving us time to take timely action. The question hence arises: what can be done to ensure that we get out of this dangerous path? The authors suggest that there can be two different policy approaches based on their optimality framework of groundwater extraction. 

The hard policy scenario assumes that state/federal regulations immediately reduce pumping rates to a value lower than the natural recharge. On the environmental side, the plus is a speedy recovery of water tables. The cumulative profit over several decades from the hard policy path is the highest. Still, the challenges are obviously human adaptation, which does not seem plausible, and at the same time, the investment to make that change now may not be very practical.  

The soft policy option is a more realistic approach to tackle the Ponzi scheme of groundwater extraction. Pumping rates are gradually decreased by some percentage, say 5% of current values each year until they reach the long-term sustainable pumping rate by some year, say 2040 so that we reach the long-term sustainable path slowly but eventually. 

Whether we will manage to escape this scheme is a question that can only be addressed if we first realize that the short-term gain can hurt in the long term. The challenge also arises because the best, or rather, the long-term optimal way of extracting groundwater will result in initial lower gains. To safeguard the interests of future generations, it will require us, to avoid being our own Ponzi

Authors of the scientific publication:

Sara Cerasoli is graduate student from the Department of Civil and Environmental Engineering at Princeton University

Prof. Amilcare Porporato is affiliated with the Department of Civil and Environmental Engineering and High Meadows Environmental Institute at Princeton University.

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