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Property Rights Initiatives, Round II

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11 Responses

  1. Andrew Carlon says:

    Forcing government to pay for all of the effects of regulation on property values without simultaneously creating a (politically feasible) mechanism whereby government can recoup unevenly spread spillover benefits of its regulations appears to be a gambit designed to deter property regulation, plain and simple.

    It is telling that these laws create a downside to regulation without creating any sort of corresponding upside. One wonders how many I-933 supporters would agree to add a provision to raise the money required to compensate disadvantaged landowners through a tax imposed on benefited landowners, in proportion to the appreciation on their property due to the regulation. This would remedy both the fairness and the inefficiency/”fiscal illusion” concerns.

    Of course, the transaction costs for such a system would be huge. It would also cause a tremendous amount of disruption to the “advantaged” landowners, who would have to pay a current tax–in cash–on a benefit they have not yet realized. (Perhaps allow the deferral of the tax–and require deferral of the government compensation–until the property’s sale or disposition?)

    But such a dilemma provides no conflict whatsoever for the libertarian, for whom regulation a priori has no upside.

  2. Mark Seecof says:

    You say that compensation for regulatory takings is improper because it’s asymmetrical–landowners are not required to compensate the gov’t for the “benefits of government action.”

    You give the example of a nearby freeway offramp–built by the government, its presence may increase the value of adjacent property. However, you miss the key distinction between the type of cost addressed by Measure 37 and the type of benefit you wish to consider: your type of “benefit” to the landowner is entirely fortuitous. The landowner has not forced the government to bestow this benefit and has no way to prevent it. Indeed, this benefit is not really distinct from any other increase or decrease in property values due to external conditions (as opposed to improving the property itself)–for example, someone might build a factory nearby, attract workers to new jobs, and incidentally promote an increase in the value of some nearby property for housing, while causing a decrease in the value of other nearby property (say, by obscuring pretty views). Neither change would be compensable.

    On the other hand, government regulations diminish property values precisely by forcing the landowner to behave differently. For example, the government may forbid a landowner to improve his property (that’s the main complaint driving things like Measure 37–so-called growth controls which represent the worst kind of rent-seeking by existing homeowners–driving up housing prices for new market entrants, and destroying the value of yet-undeveloped property).

    Measure 37 doesn’t ask the government to pay for diminutions in property values which are mere externalities of the government’s use of land it owns (e.g., building freeway offramps which diminish nearby property values by being noisy and unsightly). There’s no reason it should ask a landowner to pay for positive externalities of gov’t use of gov’t land.

    As for Mr. Carlon’s view (for which I thank him), let’s note that regulations of the sort contemplated by Measure 37 basically cannot do better than zero-sum. That is, virtually any land-use regulation that increases the value of A’s property does so by diminishing the value of B’s. Once again the example of “growth controls” may properly stand for all such. Growth controls diminish the value of property outside the “urban growth boundary” in order to increase the value of property within it. When you add transaction costs to the changes in property value, you’re into negative-sum territory.

    Since regulations are nearly always negative-sum, it is quite proper to discourage them with something like Measure 37. (We don’t have to worry about encouraging regulations that offer any benefits (to some class of landowner)– rent-seeking takes care of that.)

    (You can make an argument that some regulations–like laws forbidding landowners to keep visible trashpiles on their properties–are positive sum, that they increase the value of everyone’s property. Even if you neglect the value a few landowners place on their convenient trash piles (even just the avoidance of hauling and tipping fees to get rid of them), this sort of argument is very tough to prove empirically (and only seems appealing for really benign regulations). By contrast, empirical demonstrations abound of the destructive impact of the kind of regulations Measure 37 seeks to mitigate.)

    Measure 37 quite properly addresses the cost (not an externality, but a direct cost) that a government regulation imposes on a landowner. It’s true that forcing governments to consider these costs may not really be enough to avert their imposition–after all, politicians are playing with “other people’s money.” But there’s no reason we have to forego a partial solution because we can’t figure out a complete one.

    (P.S. I don’t think you should accuse the “libertarian” supporters of laws like Measure 37 of unprincipled willingness to impose regulatory costs on other people because of the p()rn thing. Leaving some folk to suffer regulation without compensation reveals nothing more about Measure 37 supporters than their need to compromise politically with much-less-libertarian voters. Those who support Measure 37 would rather have half a loaf than one; is that so evil? Perhaps they can expand Measure 37 later to those who it leaves out now.)

  3. Mark Seecof says:

    Eek! That’s half a loaf or none!

  4. eduardo penalver says:

    Mark — That’s an interesting distinction, but I think it sounds completely in libertarian preoccupations with autonomy/rights and not at all in economic concerns about costs/benefits. Am I missing something?

  5. Chris says:

    You seem to dismiss, out of hand, that wanting to impose hurdles for regulation is without merit. I know of many people, from across the political spectrum (liberal to conservative), that feel that government regulates too much.

    Adding costs where there are currently none does not seem to be an absurd proposition.

  6. Mark Seecof says:

    eduardo penalver wrote:

    Mark — That’s an interesting distinction, but I think it sounds completely in libertarian preoccupations with autonomy/rights and not at all in economic concerns about costs/benefits. Am I missing something?

    Thank you kindly, but I think you are missing something. I take some interest in autonomy, but rather more in public policy that minimizes economic distortions from rent seeking. Or to put that another way, I think equality before the law is good economics.

    I’m quite in favor of cost-benefit analysis. That’s why I favor Measure 37. All it does is ask government to weigh regulatory costs (at least the portion to be borne by afflicted landowners) against benefits. If the benefits are great, government may easily use a portion of them (collected by taxation, if necessary) to defray any attendant costs. If the costs (including transaction costs) exceed the benefits, then how can the regulation be good public policy?

    (I don’t wish to neglect your observation that there are problems with the way Measure 37 allows government to simply exempt squeaky wheels from regulation. It would be better if government had always to pay for harm done, or to mitigate an offending regulation for everyone. To the extent that some people get exemptions and others get shafted, that aspect of Measure 37 will demand further reform. I would not sacrifice the whole thing to cure this partial fault, though.)

    To my observation, rent-seeking behaviour by citizens and politicians tends to tip government regulation increasingly toward one faction or another. For example, current homeowners will support politicians who restrict the supply of new housing–that drives up the value of existing houses. That’s bad for young people, and for folks who want to move into the jurisdiction from somewhere else. If these things just seesawed back and forth, they wouldn’t be any threat to our democracy. But they don’t, because of positive feedback–once preferential regulations enrich some group, its members spend some of their gains to purchase even more preferential regulation, and so-forth. Whoever loses in the first round has a much steeper hill to climb in the second, and third, and so-on.

    When regulations burden some to benefit others the question of fairness comes up. It should come up! Our society functions on the perception of relative fairness in public administration. Yet land-use regulations are often grossly unfair.

    One might compare, say, the tax-funded Medicaid system to, say, urban growth boundaries. Everyone who pays income taxes pays for Medicaid. Anyone whose income drops below the poverty level can get Medicaid benefits. While it is true that many people never leave one of those groups for the other, the possibility is always there (especially with age). By contrast, when an urban growth boundary is first laid down, everyone who had invested in land outside of the line loses most of the value of that investment. Everyone who had invested in land on the inside gets an huge windfall. The windfall to the second group comes at great expense to the first[1], and there is no practical possibility of ever changing places.

    As I mentioned before, in our society there’s no difficulty getting people to work for a regulation which produces benefits to them(!). And of course, anyone who expects a cost from a regulation will oppose it.

    But it is the rare regulation which benefits all alike. It is much more common for a regulation to benefit some and burden others. In our political system, in fact, the usual pattern is for a new regulation to benefit a fairly large group by a modest amount, and to burden a fairly small group by a large amount. Most land use regulations are like that. In order for many people in a built-up area to enjoy a boost in the value of their homes and the perpetual pleasure of driving occasionally along green-bordered lanes through empty lands just beyond the present city limits, the owners of those verdant acres–who had originally planned to subdivide them for housing when the time was ripe–must be dispossessed.

    Since the urban voters outnumber the suburban… well, we know what will happen.

    It is this hopefully-curable illness of democracy, the positive feedback of rent-seeking and regulation, which we must seek to minimize by laws such as Measure 37.

    Now, perhaps you are about to reiterate your question: what about cost-benefit analysis? After all, if a regulation produces some balance of benefits and costs, what’s the problem? I don’t want you to think I’m just blowing smoke to cover some “libertarian” concern you despise! Honestly, I don’t see any conflict between fairness analysis and cost-benefit analysis, because costs and benefits tend to become unbalanced when some people can obtain benefits by inflicting costs on others. History shows that people will cheerfully impose even large costs on others to obtain just a small benefit for themselves! If you would prefer that social benefits balance or exceed costs, you must keep a close eye on fairness.

    If you won’t take my word for it, go to the economics textbooks. Virtually always, successful rent-seeking destroys more value than it creates.[2]

    Look, the right measure of a regulation isn’t whether the benefits to the immediate winners exceed the costs borne by the immediate losers (although by that yardstick alone, many land-use regulations would come up short). The right measure is whether the benefits to society exceed the costs. On the cost side, we need to count the cost of destroying our social compact along with the instantaneous costs of a particular regulation. Once we countenance regulations, driven by rent-seeking, that dispossess some for the benefit of others, we can confidently expect more and more of the same, summoned and paid-for by the Devil’s positive-feedback loop, until a modest group of cronies around a small group of crooked politicians keeps the whole country in peonage. We’ve seen it elsewhere–Indonesia, Mexico, Khazakstan–we don’t need to try that here.

    (Actually, I think Measure 37 is best seen as a flowering of democracy–and the last stand of the civic-minded people of Oregon. It may be hard for people on on the Eastern seaboard to comprehend, but Measure 37 was really a referendum on Oregon’s experiment– largely driven by its one big metropolis of Portland– with land-use regulation strict enough to be called confiscatory, which has had the side effect of greatly enriching homeowners in Portland at the expense of everyone else in the State.

    (Since the regulations in question have always been touted as “protecting the environment,” the rearguard of honest citizens in Oregon has demanded that their government put some money where its mouth is… to pay for truly necessary regulations, and, hopefully, to forego those which are merely corrupt.)

    [1] Of course, gains to landowners inside a new urban-growth-boundary come out of many wallets. The value of land outside the boundary is transferred to land inside it. Then more comes from people who don’t own any land–but who must pay higher rents to live in the area, or who pay more to relocate into the area from far away.

    [2] Look, one objection often heard to proposals like Measure 37 is that they would “make desirable regulation too costly.” How could it be “too costly” to pay for a regulation, unless it would cost more than it is worth? If the cost does exceed the expected benefit, how can the regulation be good public policy? When politicians may neglect costs (by foisting them off uncompensated on minorities of voters), then they can reward rent-seeking supporters with narrow benefits from regulations which lack real public policy justification.

  7. I posted a similar point in the comment thread to your earlier post on this subject, but I wanted to reiterate it here: you keep trying to point out the problems with the Measure 37 type laws by focusing on situations where the costs are “trivial.” But if the costs are trivial, why isn’t the issue trivial? Compensate landowners for the “trivial” damages they’ve suffered, and move on.

    You further argue that because Measure 37 would require raising taxes, governments are more likely to “throw in the towel” and decline to regulate, which would prevent even regulations which are “socially beneficial.” Now, leaving aside the issue I raise above about the “trivial” costs, your point seems to me to be not only illibertarian but also fundamentally anti-democratic. If government can’t convince the public that the regulations are “socially beneficial” enough to justify the increased taxes, then why should government be enacting/enforcing these regulations? If the taxes are more unpopular than the socially benefits of the regulations are popular, isn’t that an argument against the regulations, not against the compensation provisions?

    Incidentally, in your discussion about transaction costs, you say “For example, imagine a small town that imposed an across-the-board regulation that caused every property owner to suffer a uniform 1% decline in property values. ” In response, I say “Imagine a small town whose government is immediately voted out of office.” Governments do not ordinarily impose regulations that cause across the board declines in property values; that would be irrational, economically and politically. (Who’s the constituency in favor of that? Masochists?) They impose regulations that benefit some at the expense of others.

    Finally, you talk about interest groups (paying to) put the laws on the ballot as evidence that the outrage isn’t widespread. But (to state the obvious) interest groups only pay to collect signatures; the general public still has to vote. The fact that the public approves the measure is stronger evidence in favor of public outrage than the fact that someone paid to put the measure on the ballot is evidence against public outrage.

  8. PK says:

    Prof. Penalver,

    Part of your argument relies in a misreading of I-933. You claim that a local government must compensate for a generally applicable regulation that reduces property values, but Sec. 2(c) of the intiative specifically exempts such regulations. That section states “‘damaging the use or value’ does not include restrictions that apply equally to all property subject to the agency’s jurisdiction.” Therefore, the generally wasteful (because of transaction costs) recycling of government funds you describe will not occur.

    Also, you seem to have changed the general thrust of your argument from the anti-social cast of I-933 (the gist of your first post) to economic arguments against it (your second). Why? Your first post implicated an important question about government: should it be involved in the business of wealth redistribution? You would obviously say yes, and I-933 is just that, a transfer of wealth from landowners to non-landowners via an inefficient form of taxation, namely land-use regulation.

    For those who do not like government wealth redistribution, you’ve got an intractable disagreement. For those who do, you can then have solely an economic argument about the most efficient way to do it or point out reasons why why we should tolerate some “inefficiency” here, e.g., incommensurable values.

    By ignoring the deeper question of whether government should be in the business of wealth distribution that lies at the heart of this debate, you and your critics seem to be talking past each other.

  9. PK says:

    Mark,

    You state “Look, one objection often heard to proposals like Measure 37 is that they would ‘make desirable regulation too costly.’ How could it be “too costly” to pay for a regulation, unless it would cost more than it is worth?” While this seems entirely sensible, consider the following problem:

    In a town of 100,000, 1 landowner is engaged in a use that negatively impacts 5000 other landowners, but does not rise to the level of a nuisance. Assume that the net benefit to the landowner of the use is $250,000, but the cost to those injured is $500,000. Since the costs outweigh the benefits, regulating the land use is justified. But, if compensation must be paid, will the land use actually be regulated?

  10. Mark Seecof says:

    PK, nice problem. In your example, at first glance, the positive value of regulation would be $250,000–so I presume you’re suggesting that the transaction costs of paying compensation might exceed that amount, making the regulation unattractive after all.

    That seems quite possible to me. To extend your example, it might take a local special election to approve a tax to pay the compensation–and such an election might cost, say, $300,000.

    Since transaction costs are as real as any others, if we would have to spend $550,000 to get benefits worth $500,000, we need a different plan.

    I think your example is one of a collective- action problem. Such problems abound, and I would say often they have no easy solutions(!). In your example, the city government could spend general funds to buy out the 1 landowner in the interests of the 5000, but the other 94,999 people in the city might get upset. (They would have good reason.)

    Perhaps the 5000 landowners should promote a city program to retire a whole list of undesirable land uses. The city could hold a $300,000 special election to raise $5,000,000 in taxes to buy out 20 near-nuisances, producing a net gain of $4,700,000, which would be spread over nearly everyone in the city.

    But wait! That’s what Measure 37 prompts local governments to do!

    I don’t think we should ask government to fix everything, nor burden all citizens with transaction costs to address the problems of a few. If the costs–all the costs, including transaction costs–of some regulation exceed the benefits; okay–let’s drop it. Perhaps things will look different in a few years.

    If some matters seem more urgent, then let those affected work together to set up a solution that doesn’t involve dumping the costs on some impotent minority.

  11. PK says:

    Mark,

    You’re point is well taken. The solution to the problem I posed seems to be comprehensive land use planning by the government that can act as a form of logrolling. But, as to Measure 37 specifically, how does the ability to grant a waiver disrupt these plans? In a logrolling situation, you need to be guaranteed that you’ll get what you bargained for. But Measure 37 allows waivers and, unsurprisingly since it’s the path of least resistance, waivers have been the overwhelmingly (unanimously?) chosen remedy of the Oregon government. Once the possibility the waivers enters the picture, the efficacy of the comprehensive plans you discuss seems to fall apart, since I might be paying to have the near-nuisance across town eliminated by the near-nuisance next to me is given a waiver.

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