Property Rights Initiatives, Round II
posted by Eduardo Penalver
One of the interesting aspects of blogging is that you can toss off a little ditty on half a cup of coffee, and before lunch, there will be a treatise posted on some blog somewhere dissecting your argument. My (how should I put this) less than fully developed case against Washington State’s property rights initiative came in for such treatment at the less than gentle hands of Geoffrey Manne at “Truth on the Market.” Because I continue to disagree with these sorts of laws, notwithstanding his post (and Prof. Bainbridge’s apparent verdict that I am soundly beaten), I thought I’d try to defend some of my initial points.
Before I begin, I want to note several distinctions that I think Manne (and other defenders of laws like Measure 37) ignore or blur. (This is not really a criticism, as my original post was hardly a model of theoretical clarity. But I do think distinguishing among these various strands of pro-Measure 37 sentiment is helpful.) Measure 37 and laws like it have been defended on libertarian, economic, and fairness grounds. The problem is that it doesn’t quite fit any of them, though it seems to fit the libertarian explanation most closely.
The libertarian case is based on the assumption that regulation intrudes on property rights and should be prevented or at least minimized. Manne, and others, sometimes suggest that Measure 37 is not anti-regulatory as a general matter, because it permits regulation as long as government pays for it. (I will address this point shortly.) Moreover, Measure 37 is selective in its defense of property rights, as I observed in my original post. Despite all of this, I think the libertarian explanation is really the best theoretical fit for laws like this. Their defenders, however, hate to admit this. (It’s tough to find someone in the legal academy who will call him or herself a “libertarian.” Even Richard Epstein prefers to be called a “classical liberal.”)
The economic case for these laws focuses on the desire to get government to take into account the economic costs of regulation. This is the so-called “fiscal illusion” argument for broad regulatory takings compensation. As several scholars have noted, the economic justifications for Measure 37 type laws assume that, if government could only be forced to pay the costs of its regulations, it would limit regulations to those that generate more net benefits than costs, an assumption that — in light of regulators’ diverse incentives — is questionable at best. Moreover, these arguments are subject to the myriad objections that have been raised against the usefulness of cost benefit analysis when dealing with the incommensurable values implicated by land use regulation. (I won’t get into or rely on those arguments in this post.) In any event, by ignoring transaction costs and by only creating a mechanism for internalizing the costs of regulation (and not its benefits), Measure 37 creates an unbalanced set of incentives, a (probably intentional) lack of balance that seems rooted in libertarian, anti-regulatory motives that have little to do with efficiency.
Finally, the fairness case focuses on regulation’s tendency to spread its costs unevenly. Measure 37, however, creates a remedy for any decline in property value due to regulation, no matter trivially small and no matter how widely (and fairly) distributed. 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. Measure 37 would require the city to compensate every property owner. Of course, if the city chose to proceed with the regulation, it would have to compensate owners out of tax revenue that is (probably) collected from the same property owners. So Measure 37 simply requires the government to go through a few extra steps to accomplish the same regulatory goal, with roughly the same distributive consequences. The problem, as everyone knows, is that none of these steps is free, and not all of them are equally politically feasible. So forcing government down this path seems designed to rig the system against regulation, no matter how fairly it spreads its costs.
Throughout his response to my original post, Manne mixes and matches these defenses in a way that, while perhaps at times rhetorically compelling, makes it very hard to craft a clear response. Nevertheless, bloodied but unbowed, I’ll try to offer a rebuttal case.
First, Manne takes issue with my characterization of the law as a disaster for Oregon land use planning. He says:
True enough, if by “land use planning” you mean “that which the planners want to do without any regard for such trivialities as economic effect, distribution of costs or even social welfare.”
Actually, I think my point makes sense even if you consider “land use planning” to mean just the ability to implement a coherent regulatory scheme. Measure 37 could plausibly be described as a disaster for land use regulation as it has played out in practice because it pushes government to accomplish its regulatory goals through a tax-and-spend mechanism that makes it far more likely that government will simply throw in the towel and decline to enforce its regulations against Measure 37 claimants at all (resulting in a patchwork of regulatory enforcement), and that, going forward, makes government loath to enact new regulations, even when they might be socially beneficial.
Moreover, the fact that 100% of the successful claims resolved to date have resulted in waivers is a disaster in the sense that the waivers make the regulations less, not more, fair to those who remain subject to the regulation due to their inability to bring a Measure 37 claim. The Oregon law does not apply to property that changes hands after regulations go into effect. On one level, this makes sense, because the cost of regulation is likely to be factored into purchase price of the property. But the Oregon law measures damages at the time the claim is brought, not when the regulation is imposed. Because it applies retroactively to regulations imposed prior to its enactment, in many cases the loss placed on the property owner when the regulation was first imposed (and, therefore, the cost adjustment factored into the purchase price) will have been far lower than the cost to government, once the claim is brought, of continuing to enforce the regulation. (Consider two parcels of farm- land subjected to development restrictions pursuant to an urban growth boundary when the city’s edge is 15 miles away. One of the parcels then changes hands. Twenty years later, once the city’s edge has spread within striking distance of the parcels, Measure 37 is enacted, permitting the owner of the unsold parcel to bring a claim for substantially more money than he would have obtained 20 years earlier, when the development value of the land was far less certain.) This measure of damages seems to put a thumb on the scale in favor of waivers. Admittedly, this is a problem that will diminish with time, because of the two-year statute of limitations for the law. In the meantime, the waivers undermine political support for enforcing regulations even against those who do not have Measure 37 claims.
This takes me to Manne’s second point:
In what way does the fact that waivers were given instead of damages amount to disaster? I would think that any such claim would require some consideration of the costs of the regulations at issue, their benefits to society, and the appropriateness of waivers versus compensation in particular instances. In one important respect, the granting of waivers instead of compensation demonstrates the success of the law — success in highlighting that the social cost of land use planning regulations may exceed the benefit, a fact conveniently masked when only a tiny fraction of society actually pays the costs.
I do agree with Manne that the question cannot be definitively answered without exploring the details of the cases that have been brought to date. I suppose it is possible that the fact that 100% of the successful claims have led to waivers suggests that the regulations in question were all socially wasteful. But somehow I doubt it. My doubts stem from the poor fit between the goal of picking out socially wasteful regulation, and Measure 37′s actual design.
It seems more likely to me that the absence of any compensation payments is the result of governments taking the path of least (budgetary) resistance in a political climate where it is politically difficult to raise taxes. From a generalized anti-regulatory point of view, this is a desirable result. But if the goal is the more balanced one of picking out and deterring those land use regulations that are socially wasteful, it’s hard to defend.
Manne also takes issue with my claim that these laws are based on the premise that property owners should not be expected to bear any burden in their use and enjoyment of property, no matter how trivial. He says:
I guess this might be true if people didn’t pay taxes (including property taxes, which would tend to increase with any increases in property value attributable to the non-application of the land use planner’s Utopian vision). But they do, generally, pay taxes. Why bearing the burden of our use and enjoyment of property also should entail the application of disparate, politically-motivated and/or socially-costly use restrictions is not clear to me.
Setting aside the fact that property taxes will increase a fractional share the increase in property values resulting from the waiver (or from a socially beneficial regulation of someone else’s property, whether that person is compensated or not), I’m not sure I understand Manne’s point here. On the one hand, the distribution of property taxes is irrelevant because Measure 37 is not about differential costs. It says that costs imposed pursuant to regulation must be compensated, even when they are as widely and evenly shared as taxation. But even just focusing on differential costs, Manne seems to assume that any differential effect (in terms of property values) due to regulation, no matter how trivially small, ought to be spread to all property owners (or all tax-paying citizens). This a very questionable position, for any number of reasons. From a purely economic point of view, it would seem that some consideration of the transaction costs of spreading is appropriate. Once you consider the costs of accomplishing spreading, which Measure 37 ignores, the mandate to spread all costs can be as socially wasteful as any regulation. And, while I can certainly understand the fairness concerns raised by the imposition of dramatically unequal regulatory costs, costs that are just barely unequal (which Measure 37 would nonetheless require to be (re)spread through the tax system) seem far less troubling. Finally, how and when fairness requires us to spread even dramatically unequal costs of regulation is an incredibly complicated question that has confounded courts and scholars for decades. In at least some cases, it seems perfectly fair to impose unequal costs on landowners, such as when the regulated land use, though perhaps not strictly a nuisance, itself generates or exacerbates harms born by the rest of the community that the regulation is designed to forestall. Wetlands regulations might be an example of this. Measure 37 (and all such property rights compensation schemes) sweeps these (substantial) complications under the rug.
Next, Manne takes issue with my criticism of these laws as unbalanced:
I think it is a ridiculous fallacy to assert that land owners are net beneficiaries of government services, who benefit disproportionately from the state action they pay for via taxes.
This is just an attack on straw, conflating the fiscal illusion argument with the fairness argument. Just as some property owners get unfairly shafted by regulation, it seems to me to be beyond dispute that some property owners get unfair benefits. Note, I did not say that this is true of most property owners or property regulation considered as a whole. Does Manne really want to deny that, just as with the costs of regulation, the benefits of government action are not evenly spread? Some property owners do end up clear net beneficiaries of government action — my example of the owner of a commercial property next door to a newly opened freeway exit (or military base or transit stop or park). (UPDATE: or historic landmark, or protected wetland, or endangered species habitat…. it doesn’t stop with the beneficial effects of the government’s decisions with respect to its own property.)
“Two wrongs don’t make a right,” Manne responds. But fixing just one (fairness) wrong without fixing the other certainly rigs the system in one direction in a way that has very little to do with the efficiency considerations on which Manne (sometimes) focuses. 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. Doubtless libertarians think this is a good thing, but then they should make plain their arguments against regulation as a whole, not just trot out the standard arguments against the unfairness of unevenly spread costs or social waste. But Manne never really attempts to defend this anti-regulatory libertarian position.
Finally, Manne takes me to task for criticizing these laws as being the result of interest group politics and for their apparent inconsistency in exempting certain politically unpopular land-uses from their ambit. To be clear, I have no problem with interest group politics. My point was simply to take a little steam out of the argument, frequently asserted by supporters of these laws, that they reflect widespread property-owner outrage against out-of-control land use regulation. As I explained in a previous post, I think that assertion is not merited by the evidence. In the case of the Washington initiative, the measure probably got on the ballot, not because the people as a whole are up in arms about the state’s land use laws, but because its supporters can afford to pay people to go collect signatures (thanks in part to a substantial donation from an out-of-state property rights group). I will be the first to admit that this is not a substantive argument against property rights laws, it’s just an argument against one of the justifications frequently raised by the supporters of these sorts of initiatives. If it’s fair for them to point to broad-based popular outrage as a justification for these laws, it’s fair for me to suggest reasons for doubting the factual accuracy of that justification.
As for the inconsistency of these laws, I’ll admit it was a cheap shot, but it was simply too good to pass up. If Manne thinks that pornographers should be compensated for the harm to their property inflicted by anti-porn regulation, I applaud him for his consistency. The inclusion of these exceptions within laws like this suggests that his erstwhile libertarian fellow travelers are not nearly as principled. They want to be free from the costs of regulation (or from the unevenly distributed costs of regulation) of their property but they feel perfectly fine imposing those costs on those whose land uses offend them. It’s clearly not a big point, but it’s at least a little one. And doesn’t it capture perfectly the contradictions of the modern Republican coalition? “No regulation! Yeah, and no porn either!”