Tag: property rights

Another Bleak Day for Property Owners

Property owners have long suffered under the Supreme Court’s erratic rulings. It got worse today. In Murr v. Wisconsin, the Court ruled against the owners, 5-3, with Justice Kennedy writing for the majority, Chief Justice Roberts writing a dissent, joined by Justices Thomas and Alito, Thomas writing a separate dissent, and Justice Gorsuch taking no part. The problem isn’t simply with the majority’s holding and opinion, it’s with the dissent as well. Only Thomas points in the right direction.

This was a regulatory takings case arising under the Fifth Amendment’s Takings Clause, which prohibits government from taking private property for public use without just compensation. In separate conveyances in 1994 and 1995, the Murrs, four siblings, inherited two contiguous lots on the St. Croix River that their parents had purchased in 1960 and 1963. The parents had built an ancestral home on the first lot. They bought the second for investment purposes.

The trouble began in 2004 when the Murrs sought to sell the second lot, valued at $410,000, and use the proceeds to upgrade the ancestral home. But they were blocked by a 1975 local zoning ordinance that treated the two lots as one, even though they had long been deeded and taxed separately. Under the ordinance they had to sell the lots together or not at all. Out $410,000, the Murrs sued, claiming that the ordinance had deprived them of their right to sell their property.

The Economics of the Saudis’ “Take-the-Money-and-Run” Strategy

As the Financial Times reported on 12 July, Saudi Arabia’s oil-output reached record highs in June 2016. Increasing production 280,000 barrels/day to 10.6m b/d, Saudi Arabia has once again waved off OPEC’s request not to glut the market with oil. 

As it turns out, economic principles explain why the Saudis began, in late 2014, to pump crude as fast as they could – or close to as fast as possible. In fact, there is a good reason why the Saudi princes are panicked and pumping. 

Let’s take a look at the simple analytics of production. The economic production rate for oil is determined by the following equation: P – V = MC, where P is the current market price of a barrel of oil, V is the present value of a barrel of reserves, and MC is the marginal recovery cost of a barrel of oil.

To understand the economics that drive the Saudis to increase their production, we must understand the forces that tend to raise the Saudis’ discount rates. To determine the present value of a barrel of reserves (V in our production equation), we must forecast the price that would be received from liquidating a barrel of reserves at some future date and then discount this price to present value. In consequence, when the discount rate is raised, the value of reserves (V) falls, the gross value of current production (P – V) rises, and increased rates of current production are justified.

When it comes to the political instability in the Middle East, the popular view is that increased tensions in the region will reduce oil production. However, economic analysis suggests that political instability and tensions (read: less certain property rights) will work to increase oil production.

Let’s suppose that the real risk-adjusted rate of discount, without any prospect of property expropriation, is 20% for the Saudis. Now, consider what happens to the discount rate if there is a 50-50 chance that a belligerent will overthrow the House of Saud within the next 10 years. In this case, in any given year, there would be a 6.7% chance of an overthrow. This risk to the Saudis would cause them to compute a new real risk-adjusted rate of discount, with the prospect of having their oil reserves expropriated. In this example, the relevant discount rate would increase to 28.6% from 20% (see the accompanying table for alternative scenarios). This increase in the discount rate will cause the present value of reserves to decrease dramatically. For example, the present value of $1 in 10 years at 20% is $0.16, while it is worth only $0.08 at 28.6%. The reduction in the present value of reserves will make increased current production more attractive because the gross value of current production (P – V) will be higher.

 

So, the Saudi princes are panicked and pumping oil today – a take the money and run strategy – because they know the oil reserves might not be theirs tomorrow. As they say, the neighborhood is unstable. In consequence, property rights are problematic. This state of affairs results in the rapid exploitation of oil reserves.

The Constitution Protects Against NIMBYism

It should surprise no one that the government isn’t particularly good at respecting property rights. Still, the Constitution requires that property owners be provided with “due process of law” against arbitrary and unjustified deprivation of their right to put their property to beneficial use. According to several federal appellate courts, however, landowners lack such protections unless they show that they have a statutory “entitlement” to use their land.

This is circular Humpty Dumpty logic. Indeed, that approach impermissibly presumes the legitimacy of restrictions, without considering whether they are lawfully applied.

Most recently, the New York-based U.S. Court of Appeals for the Second Circuit employed the “entitlement” theory to deprive a small developer of its right to upgrade run-down apartment buildings. The NYC Landmarks Commission deprived Stahl York Avenue Company of its property rights by designating these nondescript buildings as landmarks—this despite a previous ruling that these exact buildings lacked any architectural or cultural merit worth preserving.

Respecting Property Rights Means Paying Just Compensation for Takings

There’s no such thing as a free lunch. Or as the Fifth Amendment puts it, “nor shall private property be taken for public use, without just compensation.” Despite the clarity with which the Takings Clause proclaims that government must respect property rights, state and local governments have long been contriving ways to obtain private property without paying the constitutionally required just compensation.

In 2012, San Juan County, Washington—the islands in the Salish Sea between Seattle and Victoria—enacted a rule that conditions shoreline owners’ proposed land uses on dedicating a portion of their property as on-site conservation areas. This isn’t a new tactic. In Nollan v. California Coastal Commission (1987), for example, the Supreme Court rejected the government’s conditioning of a building permit on the landowners’ granting a public easement across their property to access a beach. The Court acknowledged that conditioning a benefit on the property owners’ giving up their Fifth Amendment right to just compensation is “an out-and-out plan of extortion.” The Court elaborated seven years later in Dolan v. City of Tigard (1994), ruling that courts must apply a high level of scrutiny to conditions attached to land-use permits to prevent government “gimmickry.”

Alexander Hamilton: Defender of Property Rights

Treasury Secretary Jack Lew’s proposed degradation of the ten-dollar bill (read: the removal of Alexander Hamilton as the featured figure on the ten-spot) is wrongheaded. In addition to being the first and most distinguished U.S. Treasury Secretary and a renowned journalist, Hamilton also excelled as a lawyer and defender of property rights.

Yes, Alexander Hamilton was a distinguished lawyer. He took on many famous cases out of principle. After the Revolutionary War, the state of New York enacted harsh measures against Loyalists and British subjects. These included the Confiscation Act (1779), the Citation Act (1782), and the Trespass Act (1783). All involved the taking of property. In Hamilton’s view, these acts illustrated the inherent difference between democracy and the law. Even though the acts were widely popular, they flouted fundamental principles of property law. Hamilton carried his views into action and successfully defended — in the face of enormous public hostility — those who had property taken under the three New York state statutes.

Hamilton’s influence on creating a respected national judiciary and shaping American jurisprudence was significant and widely recognized during his lifetime. For example, the Chief Justice of the U.S. Supreme Court John Marshall was known to have said that he was a mere schoolboy next to Hamilton. Indeed, in three of Marshall’s landmark decisions – Marbury v. Madison (1803), Fletcher v. Peck (1810), and McCulloch v. Maryland (1819) – he turned to Hamilton’s legal writings for guidance.

Alexander Hamilton is one of America’s most acclaimed Founding Fathers. He should remain as-is on the ten-dollar bill. Anything else would be an insult, the kind of thing that once engendered a duel.

The Grapes of Wrath: California Raisins Are Back at the Supreme Court

When Marvin Horne told the United States Raisin Administrative Committee (yes, there’s a raisin administrative committee) that he wasn’t going to turn over nearly 30 percent of his crop to the government in exchange for nothing, he probably didn’t expect his case would go to the Supreme Court—twice. That little act of civil disobedience was thirteen years ago, and the Hornes now stand on the precipice of vindicating an important constitutional right—the Fifth Amendment right not to have your property taken without just compensation—as well as putting a wrench in the gears of what Justice Elena Kagan called “the world’s most outdated law.”

Like much of our agricultural policy, the Raisin Administrative Committee (RAC) is a relic of New Deal-era cartelization schemes. Trying to understand the logic behind American agricultural policy is like trying to find the logic in a Marx Brothers movie—it can’t be done and you’re better off just sitting back and laughing at the antics. Yet our agricultural policy has real-world effects on farmers like the Hornes, who are subject to the whims of the RAC as it tries to stabilize the price and supply of raisins. Sometimes the RAC pays for the raisins it takes, and sometimes not. In 2002-2003, the RAC offered far less than the cost of production for 47 percent of the Hornes’ raisins, and in 2003-2004 they offered nothing for 30 percent of the raisins. The Hornes had had enough, and they refused the order, arguing the seemingly simple point that the confiscation would be a taking without just compensation under the Fifth Amendment.

An Innovative Way to Title Property in Poor Countries

Over the past couple of decades, a consensus has emerged among development practitioners and over a broad ideological spectrum about the need to legally recognize and protect the property rights of the world’s poor. Yet land tenure and the holding of other forms of property of billions of poor people remains informal.

As Peter Schaefer and Clay Schaefer explain in a Cato study released yesterday, one reason there has been little progress in titling or registering the property of the poor is that powerful interests in developing countries block reform. And in countries that have particularly predatory governments, there may be little actual demand to title property. Why would you publically register your property if the result will be confiscatory taxation, political persecution, or the need to pay bribes to avoid complying with prohibitively expensive regulations?

The authors propose a novel, bottom-up approach to registering property that gets around those problems: using a simple, hand-held GPS device, individuals in poor communities can inexpensively map their property claims in an informal community registry that is publically accessible on the internet. In the vast majority of cases, there is already a consensus about what informal property belongs to whom, so disputes on boundary issues that might arise are typically not significant and are readily solved. This community mapping approach is already partly being employed in parts of Africa and India. Because such registration is voluntary, it would only take place where people actually demand it; and because it is informal, it need not rely on unreliable government bureaucracies to make it happen.

Were communities to create “live” documents of their registries on the internet, as the authors propose, they would increase tenure security by providing useful information to investors, neighbors, multinational corporations and even governments. As Peter and Clay Schaefer note, “When a community achieves a critical mass of registered users, it will be very difficult for their governments to ignore the claims that have been recorded.” That approach will also make it more politically feasible for poor people to negotiate with the authorities and gain formal title to their property.

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