Reforming the 1872 Mining Law

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I am pleased for the opportunity to address this subcommittee. Iam professor emeritus of Mineral Economics at the PennsylvaniaState University and an adjunct scholar with the Cato Institute. Iam speaking subject to the usual proviso that these are personalviews, not those of any organization.

Since early in my career at Penn State when I was brieflyinvolved with the Public Land Law Review Commission, I have oftenworked on public land issues, primarily but not exclusively in workfor the Department of Interior. This included serving as one of thefive members of the Commission on Fair Market Value for FederalCoal Leases and on a National Research Council Committee on knowngeological structures for oil and natural gas.

An Overview of Charging for Public Land

Since the early years of the Republic, a critical aspect of thepublic lands debate is a largely pernicious preoccupation withpayments to the Treasury. The federal government, for example,vigorously promoted the imposition of fees for grants of farmlandbut eventually abandoned the effort in the face of massiveopposition. Even when fees are levied, complaints that actualpayments are unsatisfactory are never far from the politicalsurface. Those complaints are particularly strong in connectionwith the 1872 Mining Law because the extraction of valuableminerals on federal land takes place with minimal payments to theTreasury.

The debate is really about the distribution of wealth. Criticsof the 1872 Mining Law contend that the profits generated by miningfederal lands are huge and that they belong to the taxpayers, notthe private mining industry. The evidence is largely anecdotesabout how little is paid to the federal government for land thatyields tremendous mineral revenue.

Even the most casual analysis, however, finds that the quest totransfer natural resource rents from mining companies to taxpayersis not worth the populist attention given the issue by the media.The mining profits generated from that land to the extent that theyexist are absolutely trivial.

Beyond Charges: Speculation, Fraud, andAbuse?

Although the sale of federal mining land for $2.50 per acre isthe main criticism of the 1872 Mining Law, other matters haveangered would-be reformers. Critics decry private speculation thatoften occurs when claims are made. They worry that, to thedetriment of consumers, resources are being "hoarded" and notexploited quickly enough because only $100 a year must be spent ona site for a claim to remain valid. A related criticism is thatland is being claimed under the 1872 Mining Law and diverted toother uses, primarily real estate development. While bothobservations are accurate, nothing necessarily is wrong withcurrent practices, and little economic reason exists to control howmineral lands are used.

Moreover, some critics have maintained that federal ownership ofmineral reserves is necessary to ameliorate the negative economicand social ramifications of resource depletion. Shortages arecoming, they maintain, and governments would be less likely torecklessly draw down dwindling reserves and would distribute thoseresources more fairly than would private markets. The 1872 MiningLaw, in their view, makes more difficult government'sresponsibility to manage scarce mineral resources. Not only is thatargument incompatible with the criticism that resources are beinghoarded; the charge that governments are better able to deal withresource shortages than are market actors is intellectuallythreadbare.

Speculating about Speculation

Many restrictions are imposed on the timing of mining activitieson federal land. Diligence requirements limit how long a lease canbe held without any development and how long it can be held afterproduction is shut down. Moreover, regular expenditures arerequired. Critics, however, often complain that those restrictionsare not rigorous enough to constrain speculation andcounterproductive hoarding. Others think that restrictions are agood idea but that existing restrictions are more thanadequate.

The issue of control of the timing of operation proves achimera. This is another area in which markets are best. Astraightforward implication of efficient markets is that you cannever transfer too soon, but you can transfer too late. If mineralor any other land rights are transferred before the optimal time toextract, the recipient will wait until the right moment. The onlypossible danger is that legal barriers will delay a transfer untilafter the optimum starting date. My full analysis of this pointdemonstrates that no plausible inefficiency restores the argumentfor government control.

This criticism, moreover, applies to postgrant as well aspregrant policy. For the same reasons that grants should beunrestricted, it makes no sense for the federal government toimpose any requirements on when and how leased properties areused.

Lawbreaking Reconsidered

Other incendiary critiques of the Mining Law of 1872 arecentrally concerned with fraud. The most common example is thepatenting of land for a mining purpose followed by a quick sale(usually accompanied by large capital gains) and transformationinto a ski resort or real estate development. Those who complainabout lawbreaking, however, should realize that the purpose ofresource law is to encourage the efficient use of resources.Assertions about land frauds implicitly assume, contrary to thevast evidence in the literature on public land management, that thestatute satisfactorily promotes the efficient use of land resourcesand, therefore, should be enforced.

Fraudulent uses of patented land are simply the result of unwiserestrictions on uses of land that are more profitable than mining.Why should the government "decide" that land should be used formining rather than for hotels or ski resorts? Seeking to preventsubterfuge without determining its cause is never good policy.Every example presented of the "misuse" of the mining laws (mostare real estate examples) involves diversion of the land to usesthat would be considered desirable if undertaken in other contexts.Restrictions on the disposal of public land should be dismantled.Until they are, laws allowing some disposal are preferable tofurther restrictions on access.

Do Shortages Justify Government Ownership ofResources?

A frequent objection to the transfer of mineral lands to theprivate sector is that mineral reserves are scarce, dwindling, andimminently depletable. Private owners, critics sometimes argue,will inadequately provide for future generations that might demandthose resources. This is based on the incredible notion thatentities as transitory and fickle as politicians in office are moreforesighted than private investors. The global financial communityis more imaginative and flexible than any government. Nothing aboutnatural resources justifies a different conclusion about who ismore farsighted.

Prescriptions for Reform: A Second Opinion

The change proposals introduced in Congress involve significantchanges in how mining companies would gain access to minerals onpublic lands and how much they would pay for that access. Anydiscussion of charges associated with the transfer and use ofpublicly owned assets must recognize that landowners have differentways of charging. Three basic legal systems are available:

  • charges associated with grant of ownership,
  • charges associated with ceding a lease, and
  • conventional taxation.

In principle, all possible methods of charging could be employedunder any of the legal systems. Charges associated with the grantof ownership or lease are the only efficient method of transferringwealth from buyers to sellers. All three legal systems could belimited to such charges at the time of transfer (and all couldimpose undesirable obligations for post-transfer charges). However,ownership grants are less likely to impose future levies.

Curiously, none of the proposed reforms of the Mining Law of1872 advocates the use of one-time charges at the time of transferof lease or ownership. But one-time charges collected at the timeof transfer from public to private ownership are the most efficientmethod of collecting any natural resource rents for thetaxpayers.

Do Not Worry about Past Giveaways

The most important advice to those who would reform the mininglaw is not to enact any reforms that affect current claim holdersor those who have already privatized their claims under the 1872law. A maxim in public finance is that an old tax or law is a goodtax or law. Once markets recognize the existence of the burdencreated by a new tax or law, the market prices of land, labor, andcapital change to reflect the change. Once that occurs, wealtheffects do not occur again as long as the tax or law remain stable.New taxes or laws may and usually do create ongoing efficiencyeffects, but changes in wealth occur only once.

That central insight of public finance is important because itprovides lessons about any policy reform. Just as the initialenactment of policies or taxes causes changes in the distributionof wealth, so do reforms of existing taxes or policies. Thosewealth effects are usually the basis for organized support of andopposition to the policy changes. As a result, the efficiency gainsfrom policy reform, for which no one is organized, get lost in thepolitical controversy.

Since the 1872 Mining Law is so old, it is extremely unlikelythat any subsidies continue. In the ongoing secondary market inwhich people trade claims made under the law, all the advantagesand disadvantages of those property rights are embedded in theprices that people pay for them, in the same way land pricescontain all the advantages and disadvantages created by arbitraryproperty taxes.

The mischief created by the 1872 Mining Law involves efficiency,not equity. The existence of a below-market price for mining claims(if in fact the current price is below the market price) sets upnonmarket processes by which the benefits are dissipated much asare those associated with finding an apartment in New York City.The resources used in such nonmarket activities are pure waste fromsociety's view.

Unlike the distortions created by the property tax on newinvestment, however, the "free access" claim system under the 1872Mining Law has no additional efficiency effects on decisions aboutthe timing or level of extraction from a claim. Moreover, the eraof massive claiming is long past. The main wastes have alreadyoccurred.

Any changes to the 1872 law should affect only future and notcurrent mining claims. Because the law is so old, all actors inmining markets have operated for some time with expectations basedon the property rights regime created by the 1872 law. To rearrangethose expectations now for the 300,000 current mining claim ownerswould cause arbitrary wealth transfers that would activatepolitical opposition and doom any possibility of reform and theefficiency gains that might go with it.

Public Ownership with Leasing

One possible reform would alter the policy governing metalmining on public lands to be like the policy that governs offshoreoil and gas drilling: public ownership with a leasing system. Intheory, public ownership with an auction leasing system iseconomically similar to transfer of ownership to the private sectorat auction. If the market value of the land remains constant, aseries of periodic leases will have the same (risk-adjusted)present value as a one-time sale bid. In reality, however, publicownership is a menace to the purported goal of ensuring thatlessees contribute to the Treasury.

First, Congress often undertakes public works to assist thoseusing the public lands. Second, government usually cannot resistthe imposition of post-transfer charges. Such charges reduce thevalue of the output from the land and, thus, reduce contributionsto the Treasury.

Third, governments tend to deny leaseholders the flexibilityinherent in private property. Land leased under one law can be usedonly for the use specified in that law rather than the use thatwould be most profitable. Currently, the federal government offersgrazing, mineral extraction, and similar single-use rights on theland it owns. Opponents of leasing auctions are often successful inrequiring the search for nonexistent data. Federal valuationguidelines are manipulated to require unattainable certainty. Forexample, the coal-leasing fiasco of the early 1980s graphicallyillustrated the difficulties with such a leasing arrangement. Theproblems of evaluating whether payments were adequate and all otherdifficulties arose because of the intrinsic defects of the leasingprocess imposed by legislation. Too much fuss was then made aboutthe awkward way in which DOI tried to maneuver with the rules.

The political complications involved in public leasingarrangements are reflected in federal guidelines for valuingproperty acquired or sold. There are three possible accountingmethods:

  • comparable worth (obtaining market price data on similarproperties),
  • present value (generating estimates of the profitability ofusing the property), and
  • reproduction cost (inapplicable, of course, to a naturalresource).

The guidelines correctly contend that comparable worth is thepreferable method since it relies on market data that epitomizeinformed judgment of values (i.e., the classic case for reliance onmarket prices is tacitly adopted). Present value is consideredinferior because it relies on governmental second-guessing ofmarket valuation.

Neither method, however, can work well for public land unlesssales are frequent. Not enough private land is traded to establishcomparable worth. Lost in the coal-leasing fiasco, for example, wasthe fact that the Bureau of Land Management had establishedcomparable worth by establishing rules for adjusting the only salevalue report it could obtain. Critics of the BLM generatedextensive (and inconsistent) criticisms of the adjustment rules butignored the more critical point that a single market transaction isno basis for estimation.

Thus, not only is the case against accepting market valuesinvalid, but the evidence shows that the government cannot producesatisfactory counterestimates. The sensible conclusion is thatindependent government estimates of value are an exercise infutility that should be abandoned.

Moreover, if the policy of free exploration access under themining law is ended, government-funded exploration is a possiblebut unlikely unattractive alternative. In a similar situation, anexploration for coal did not emerge.

Severe problems also arise in devising appropriate incentivesfor private exploration. That is illustrated by changes made infederal on-shore oil and gas leasing. The right to secureuncontested leases depended on the absence of evidence that oil orgas reserves were "known" to exist beneath the tract of land inquestion. Unfortunately, the BLM proved incapable of making thatdetermination.

The Case against Royalties

If land rents exist, the most efficient way to identify andtransfer them is to auction the land and transfer ownership inreturn for a one-time payment. Private land transactions areconducted in that manner every day. For reasons that areinexplicable, legislators and bureaucrats believe that the federalgovernment will be short-changed if land auctions are used totransfer mining lands to the private sector. Instead, they preferto require payments to the government set as a fixed percentage ofsales.

Royalties are economically counterproductive because they varywith the production and sales decisions of the firm. Funds thatconsumers were willing to give producers are diverted to whoeverimposes the tax. That revenue transfer discourages production andconsumption and violates the central economic principle that everyexpansion of output should occur as long as the expansion costsless than its value to consumers.

Royalties are an indirect attempt by the federal government touse a populist distrust of accepting bids for privatization tocapture profits. Ironically, the regular tax system probably is atleast as effective in capturing profits as are use charges byfederal land agencies. A special tax system could be and often isdevised specifically to collect profits. The belief that specialmonitoring agencies are better collection agencies than are regulartax collection organizations is as dubious as often-made proposalsthat land managers act to complement the actions of specializedenvironmental agencies in controlling environmental impacts offederal land use.

A further disadvantage of royalties of all types is increasedadministrative cost. First, any attempt by public officials toevaluate the value of land (for bonus bid evaluation) becomes moredifficult. One must calculate a residual (rents minus royalties) ofa residual (incomes minus cost). Moreover, requiring more paymentmeans more compliance efforts by government and land users. Outputlevels must be monitored. In many cases, the appropriate price ishard to measure.

The economic theories that support competitive bidding implythat monitoring is unnecessary because competition ensures maximumpossible payments. However, policymakers suspect that theconditions needed to produce competition do not prevail. Theimposition of output-related charges is then justified by claimingthat the defects of tying the payments to the activity areoutweighed by the income gains. Such blind faith ignores all thedrawbacks we have noted. Ownership (even with charges) probablyproduces losses to the federal government and thus itstaxpayers.

Sharing the Wealth: What to Do with MiningRevenues

The populist criticism of "giveaways" created by the Mining Lawof 1872 ignores an issue critical to Congress, how recapturedmining income should be distributed among the people. The rhetoricseems to imply that every citizen will share in the revenuegenerated by royalties and fair-market sales. However, mining feesare presently distributed primarily to residents of sparselypopulated western states because Congress allocates half of grossmining receipts to the state in which the activity occurs. It isnot clear whether those public beneficiaries of present miningpayments are a larger or more needy group than the mining companystockholders who are surrendering the wealth. Moreover, the habitof surrendering half the gross receipts to the states means lossesto the rest of the United States whenever the administrative costsexceed half the gross receipts.

The Road Less Traveled: RobustPrivatization

Governments in the United States do not own supermarkets, gasstations, or car manufacturers, and most citizens would object ifgovernments did own such assets. Governments do own land, however,and not only do most people not object, many favor it. They do sobecause they believe that the federal government owns particularlyprecious land that cannot be trusted to private ownership. Thatbelief implies that land markets and the extractive activities thattake place on land, like mining, do not operate well unless theyare publicly owned and subject to scrutiny very different from thatreceived by supermarkets.

Land markets may not be perfect, but neither are most othermarkets, and we would never accept public ownership as a solutionto whatever market failures existed in the manufacture ofautomobiles. We also should not accept public ownership in landmarkets. However, as part of the general tendency of the supposedcenter of the market economy to avoid privatization, land policystresses continued ownership.

The Mining Law of 1872 reflects the disposal orientation of thelate 19th century, the belief that the government should not ownland. We agree with such an orientation and find the 1872 MiningLaw one of the better federal resource statutes on the books. It isnot, however, ideal.

Its first flaw is that it presumes that, if minerals are foundon otherwise nonrestricted federal land, mining is preferable toalternative development options. That single-use concept reflectedin the 1872 law, under which federal land can be privatized formining but not for ranching, is unwise. It undermines the abilityof those who value vacant land to compete against other possibleusers in the market. While alternative uses of land privatizedunder the mining law are not unheard of (indeed, they are thesource of much concern as we noted earlier), those who wish to use"mining" land for other purposes are confronted with unnecessarilyburdensome transactions costs that impede their efforts.

The second flaw in the 1872 law is the fixed fee charged thosewho wish to lay claim to mining land. As noted earlier, the $2.50per acre charge is probably only marginally below the market price(at least, below the market price if the only bidders are mininginterests), but still, market prices are preferable to politicalprices. However, that flaw is relatively minor. First, it is notaltogether obvious that maximizing federal revenues should be theparamount concern of sensible public policy. Second, the efficiencygains stemming from privatization more than offset any theoreticalrevenue shortfall caused by suboptimal sale prices. The ideal meansof privatizing public assets is probably the process that generatesthe fewest transactions costs.

Our response to current policies is to call for adoption ofcompetitive bidding for federal land rights with payments only atthe time of transfer. Any party with an interest in ownership wouldbe welcome to purchase land at auction and then use it in any waythe new owner desired. Any failure of that process to recover thefull value of the land is better corrected by the general U.S. taxsystem than by a complicated lease and royalty scheme (which, as wenoted above, clearly promotes market inefficiency, politicalgamesmanship, and political unmanageability).

Ideally, future mining claims should be allocated by auction,but that is secondary to ensuring that existing claims remainunaltered and new claims are free from royalties and unrealisticpurchase prices. The new auction system would eliminate the needfor potential claimants to engage in wasteful activities that givethem an "edge" in the game to get "free" mining claims, but noexisting claims would be altered to avoid creating wealthrearrangements that would doom the reform.

In the case of the transfer of public land to private ownership,the auction prices that undeveloped public land would command in acompetitive bidding process for the right of private ownershipwould be an efficient tax like a head tax or pure land tax. Themaximum, anyone would bid in such an auction is the (presentdiscounted) value of the expected rents. Vigorous competition amongbidders would force payments to be the maximum.

The theoretic case for market-oriented reforms of the 1872Mining Act, however, must be conditioned by concern that if achange is made, it might well make the system worse. For instance,it is unclear whether a competitive bidding system would be free ofthe unrealism that marred federal coal leasing. Thus, we cannot becertain that a shift to competitive bidding BLM style would be anet improvement. We might offset the gains from lesser rent seekingby slowing down land sales.

For that reason, it is probably best to leave the 1872 MiningLaw alone and press for public land privatization outside thecontext of this debate. If a consensus is ever reached that thefederal government should divest itself of its vast western landholdings, there will be more than enough time to then repeal the1872 Mining Law as an inferior and obsolete tool of land disposal.Any reform aimed specifically at the law, no matter how wellintentioned or theoretically sound, would probably be corrupted inits execution and prove to be a cure worse than the disease.