FANS of Roman Polanski’s iconic 1974 film Chinatown will remember a scene where the former mayor of Los Angeles reminds the city council of the Faustian pact that keeps the city alive: “We live next door to the ocean but we also live on the edge of a desert. Los Angeles is a desert community; beneath this building, beneath every street there’s a desert and, without water, the dust will rise up and cover us as if this place never existed.”

Although Chinatown was a product of screenwriter Robert Towne’s imagination, its depiction of the violence and corruption surrounding the so-called California “water wars” had the ring of dramatic truth. Los Angeles was transformed from a struggling conurbation into a thriving city by two men: Fred Eaton and William Mulholland, who schemed, tricked and pressured their way into obtaining the water rights of the Owens Valley.

In 1913 they diverted the majestic Owens River into a 233-mile-long aqueduct down to Los Angeles, leaving the valley’s residents to deal with an empty lake and one of the biggest environmental disasters in the country’s history.

A century later the city’s victory in wresting an apparently unlimited water supply from its poorer neighbours in the north is looking more Pyrrhic than Machiavellian. America’s second-largest city is in the grip of a statewide drought so severe that scientists have had to go back 1,200 years to find a comparable event.

California is by no means alone. The drought has spread across six other southwestern states with some — such as Nevada — suffering just as badly. Mountain peaks are brown instead of white, lakes are drying up and hydroelectric dams sit idle.

What makes California different from the others is its role as the nation’s fruit and vegetable garden, as well as the byzantine water laws and regulations that help to sustain this man-made Eden. Nothing about California’s relationship to water makes sense; the whole state is Chinatown.

Consider this: agriculture is a $45bn (£30bn) industry in California, producing more than 300 different crops. Yet somehow, in the midst of a drought, the industry has declined less than 5%. That still amounts to more than 17,000 seasonal and part-time jobs lost and a couple of billion or so in revenue gone, but it’s not commensurate with the extreme crisis at hand.

The reasons why agribusiness hasn’t collapsed entirely go to the heart of California’s water problems. In a properly functioning market a scarce resource ought to cost more than a plentiful one. But the reverse is true in California. The price of water is artificially low due in part to the fact that its supply and transport are subsidised by the taxpayer.

Not only are most farmers largely protected from price shock, but the arcane rules surrounding water rights encourage them to use as much of it as possible so as to protect their allocation. The more they use, the cheaper it becomes, leading to a perverse incentive to grow water-guzzling crops such as alfalfa and using wasteful methods such as flood irrigation (flooding a field with water) because it pays.

Adding to the lack of any real need to conserve water is the cushioning effect of California’s underground aquifers. Farmers have been building ever-deeper wells. As a result the water table is falling. Diggers in the Central Valley, where the majority of the state’s agriculture is produced, used to hit water at 200ft. Now farmers are lucky if they find anything above 1,000ft.

In some areas subsidence is such a problem that bridges have become riddled with cracks and roads look as if they have been hit by a giant sledgehammer.

It may seem as though the countryside is being unfairly singled out for blame when Californian cities such as Los Angeles exist only because of the massive transfer of water from the wetter north to the drier south. But here’s the thing: agriculture represents just 2% of the state’s economy and yet, according to some estimates, it consumes 80% of the available water supply.

One consequence of this crazy imbalance is that the coastal city of San Diego is so desperate for water that it’s spending almost $1bn on the largest desalination plant in the country. Meanwhile, elsewhere in the state the number of almond orchards has risen to just under a million acres, even though it requires 600 gallons of water to produce a pound of nuts as opposed to 26 gallons to produce a pound of tomatoes. Or, to put it another way, California’s almond trees alone consume more water than the cities of Los Angeles and San Francisco combined.

In the past America has responded to similar crises. During the dust bowl of the 1930s, drought and soil erosion across the Great Plains drove 2.5m people off the land. Franklin D Roosevelt’s administration put in place numerous projects, from tree planting to grassland preserves, which rehabilitated 150,000 square miles — about the size of California — by 1941.

Roosevelt’s success depended on trust and consensus, two qualities sadly lacking in American politics today. Some on the left see the drought in California as an environmental problem largely created by greenhouse emissions and perpetuated by the energy business and its Republican cronies.

Others on the right argue that there is no water shortage, just a corruption of the laws of supply and demand by tax-and-spend Democrats. Yet it’s clear that the water crisis has a number of different components, from entrenched political interests to — yes — the weather.

The bigger picture is not about assigning blame for the drought; it’s about whether California (or Washington) can deliver long-term solutions despite the threat of some high short-term costs. Last September the California legislature passed a law that will limit groundwater extraction — but it will not start until the 2020s.

Governor Jerry Brown has recently imposed the first water restrictions in the state’s history, but only on cities and towns, leaving farmers unscathed. If these minor steps are the beginning of more serious measures, California will have a future, however long the drought lasts. If not, the dust will indeed rise up as if the state never existed.