Tuesday, August 29, 2006

Property Rights initiatives

In Washington State this election season there is a property-rights ballot initiative, I-933. Like a similar failed initiative from last decade, it seeks compensation for property owners when regulations impact them in a negative way.

You can read the pro-933 and anti-933 arguments yourself, if you’d like. As usual for any politically charged debate, there is a lot of hyperbole, half-truths, and talking past each other from this; hence my take below.

The motivation for this initiative certainly makes sense:

  • Governments can be heavy handed with regulations, often neglecting the unintended consequences of their impact on the community.
  • Many governments are certainly guilty of rushing to regulation where other methods may work better.
  • If something is in the interests of the broad public but comes at the expense of a few, fairness dictates that the public probably should compensate the few.
  • Broad anger over last year’s US Supreme Court ruling in New London CT is a frightening reminder of the power of government to take your property for questionable uses.
These are legitimate problems. However, I think that this is a case where the medicine is worse than the disease, and the law of unintended consequences will strike this as much as unintended consequences strike when bad regulations are passed.

There are two reasons why I think this would be a bad law if passed:
  • It is based on the premise that regulations that impact property owners constitute a “taking” in the eminent domain sense of the word. I think this is a bogus argument and creates a bad precedent that is ripe for abuse and unintended consequences.
  • It automates the legislative process, which is something that strikes me as an inherently bad idea.
The basic premise of I-933 and similar property-rights laws is that regulations that impede use or value of property is a form of takings. The 5th Amendment to the US consitution says this about compensation "...nor shall private property be taken for public use, without just compensation." The Washington state constitution is somewhat more verbose, and adds the condition “or damaged for public or private use,” but essentially says the same thing.

Both of these use the word "taken," and the Washington State text also uses "damaged." Certainly a strict/literal reading of "taken" means it is no longer in the possession of the same owner as before, while a similar point of view of "damaged" implies that the property in question is no longer in quite the same shape as before. I.e., if they need my land to build a road and I can no longer use it as my own private property, that’s pretty clearly “taken.” And if they dig a retaining pond on my property, it’s “damaged” compared to its prior state. However, I think that a considerably more expansive interpretation of these words is required in order to apply them to restrictions on potential uses of the property. After all, passage of a restriction does nothing to alter my title to the land (it’s still mine to sell) so it hasn’t been taken from me, and it does nothing to the land itself (it doesn’t cause trees to fall) so it hasn’t been damaged.

No, the sorts of regulations targeted by I-933 do not actually take or damage a property itself. Instead, what they “take” or “damage” is potential economic opportunity. Even the text of the initiative admits as much, using phrases like “destroying reasonable expectations of being able to make reasonable beneficial use of property.” Is the expectation of economic opportunity the same thing as private property? I don’t think it is. Private property can be sold; economic opportunity cannot. Private property has a clear notion of ownership, which economic opportunity does not. And, most importantly, every economic opportunity by definition carries with it risks and require execution to become realized, whereas private property is already “owned.”

Consider for example a decision to buy shares in a drug company with a promising new cancer drug. I certainly have a reasonable expectation of future profit from this company. And the shares are certainly my own private property. Now suppose the FDA decides to deny certification to the new drug, causing the share price to plummet. Not what I or the company reasonably expected, but it’s certainly the FDA’s mandate to make those decisions as independently as possible. By the arguments of I-933 (and similar initiatives), I would have a legitimate claim that the FDA “damaged” my property (my shares’ value).

One might argue that the FDA example is different than 933 because 933 distinguishes regulations that affect everyone from ones that affect a select few, but I think that argument fails because I could easily argue that only shareholders in this particular drug company were affected, not everyone who owned stock.

Recognizing that I-933 confuses private property with economic opportunity, there are several problems with that follow any attempt to compensate for “damage” or “takings” of economic opportunity:

  • There are potentially an infinite number of economic opportunities that an owner could contemplate, even if only one of them could actually be pursued. Imagine a property owner who buys a lot of land thinking they could farm it, build a housing development on it, or strip mine it. Obviously, once they go to do one of these, the other two become excluded. Now suppose the land is zoned for farming or housing only. The property owner could claim a loss on the strip mining opportunity. Now suppose it is zoned for farming – the owner could claim a loss for the housing opportunity (which still existed because the lot had not been strip mined). Now suppose in a final insult it is zoned for retail. Now
    the property owner can make a third claim for compensation. All without ever having executed on any of these opportunities. Sightline.org has cited a study that shows that restrictions may have actually helped property values. (I’m personally a bit skeptical of this study because it doesn’t seem to me to be enough to prove cause/effect. However, it certainly provides good strong evidence that the regulations have not actually hurt.)
  • We have a pretty long history of figuring out how much we should compensate someone for actually taking their property – we have actual sales to compare to, assessments, tax records, etc. But evaluating an economic opportunity is notoriously difficult. After all, more than 90% of all startups fail – yet each of them saw an economic opportunity worth going after. And in the other direction, sometimes the opportunity lost is not as great as one might think. In the example of the property owner above, what if after being zoned for retail the owner sells to a retail development company for a tidy profit? It would be hard then to say that the regulations actually hurt him, yet he could have been compensated multiple times.
  • This also potentially means that any attempt to raise property taxes (or even to assess property at a higher value) could trigger a claim for compensation, since a higher tax rate can diminish the value of the property.
The second broad problem I have with regulations like I-933 is that it essentially automates the legislative process, in several key ways. It’s been said that the legislative process is like watching sausage being made, but I also believe Churchill was right when he said that it’s the worst possible form of government with the exception of all the others. In particular, leadership and legislation requires tradeoffs, creativity, and conscious sentient beings lobbying for their interests. One-size-fits-all approaches almost never work well in practice.

The first “automation” problem is that I-933 does not distinguish between good and bad regulations, nor does it allow the legislature to make such a determination. While the initiative does distinguish regulations that effect everyone (not subject to compensation) from regulations that effect only a few, the distinction is not well defined – actually, the only definition is a set of examples which are explicitly exempted or included from requiring compensation.

I-933 is also a forced spending bill: for government to do its job (which in my opinion includes making hard or unpopular decisions), this requires money to be spent to “buy off” the people most directly impacted. (Since this also raises the cost of any regulation, this reinforces my suspicions that an ulterior motive for I-933 is fewer regulations overall).

Ultimately, it appears to me that this initiative in particular (and similar ones in general) are not about “property fairness” but rather about relief from regulations. After all, by putting on a strait jacket that automates spending in order to enact regulations, and makes the cost high
or else guts the regulation by requiring that it be waived, it becomes very hard for governments to enact regulations that they decide (rightly or wrongly) are needed. Nobody likes regulations and restrictions, but regulations rarely appear where voluntary methods (such as those explicitly contemplated by I-933) are working. After all, people make economic tradeoffs based on what’s best for them personally, not what’s best for the community. Nothing wrong with that, but it’s why we have government and why we have regulations.

I think that it is entirely reasonable to compensate property owners for burdens that the public asks them to bear. Governments do this all the time with tax breaks and other methods. I just do not believe that this should be automatic; a decision whether to do this (and if so, for how much) should be one of the many factors that go into the legislative sausage. Making such compensation mandatory (or else requiring a waiver from the regulation) strikes me as a form of extortion, and hence as bad law.

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