Tuesday, August 20, 2019

Takings and Efficiency: Incoherence Meets Incoherence

by Neil H. Buchanan

The search for a neutral, non-ideological, apolitical answer to policy questions is both admirable and doomed to fail.  It is admirable because we should all want to live in a world in which there is a way to say with confidence, "This is simply true, not as a matter of political preference but as a matter of logic and evidence."  It is doomed to fail because, in the end, policy questions are political, and there is no natural baseline against which we can measure any and all policy alternatives.

That is not to say, of course, that there are no objective facts or even that there are no reliable conclusions that can be drawn from facts.  There are no facts, for example, supporting the claim that Barack Obama bugged Donald Trump's offices (nor are there facts supporting much of anything that Trump says).  There are, however, facts that so strongly support the conclusions that species evolve and that the climate is changing -- just to choose two leading examples-- that one can readily conclude that anyone who denies those scientific conclusions is acting in bad faith.

Even so, it is a fool's errand to try to describe a method by which policy choices can be compared against a neutral baseline to deem them efficient or inefficient.  I have run through various versions of that argument in columns here on Dorf on Law over the past few months (here, here, here, here, and here).

Today, I want to extend that argument to the legal doctrine known as takings, demonstrating that the problems with the efficiency notion carry over to the takings doctrine, rendering it just as subjective as every other attempt to apply orthodox economic theory to real-world problems.

To briefly recap the argument underlying my previous columns (an argument that has also appeared in my academic writings over the years), the only way that we can call something inefficient is if we know what is efficient (or, equivalently, that we have a way to say that one thing is more or less efficient than another thing).  Saying that something constitutes the baseline against which efficiency is measured, however, is inherently a judgment call.

Why?  What is the purpose of a baseline?  In orthodox (also known as neoclassical) economics, the welfarist analysis starts by saying that we must take "preferences and technology" as given.  Then, we build demand and supply functions to tell us what price and quantity a "perfectly competitive" market will reach.  But preferences and technology are much broader categories than one might think, and the endless number of legal rules that allow markets even to exist are all equally deserving of baseline status.

For example, is a market whose actors know that courts will only enforce written contracts more or less efficient than a market whose actors know that courts will enforce all contracts?  In the latter case, what can we say about the legal rules determining what kind of evidence would be required to establish that a contract had been formed?  Videos of the negotiations?  Photos of the shaking of hands?  Oral testimony (from the parties themselves, or only from disinterested observers)?

Further, can legal disputes be handled through arbitration?  Must they be?  The point is that the positions of supply and demand curves -- and thus the determination of the supposedly efficient market equilibrium -- are determined by a zillion such background rules, none of which is more obviously natural and right than any other.

And one cannot simply say that "the rules as they are today" are the baseline, because even people who claim to be engaged in neutral efficiency analysis do so explicitly because they are worried about whether at least one of those rules should be changed.

To take a classic example of pseudo-scientific certitude, the people who say that minimum wages are inefficient are saying that changing that rule would increase efficiency.  But why are we looking at that rule alone?  What about the rules of inheritance, which determine in part how many people will be in the market for lower-wage work?  Or the existence or non-existence of health insurance, and whether it is tied to employment (and further, whether part-time workers are not given access to health insurance through their employers)?

It does not help matters to say that the baseline would include none of those things, because there must be rules of inheritance of some sort, and there will be medical events that require care, and the legal rules will determine whether people can buy such insurance through group discounts and so on.  The conclusion, therefore, that A is more efficient than B can be turned around simply by choosing a different set of rules that make B more efficient than A.

How does that logic apply to regulatory takings -- and, for that matter, to takings more generally?  There, political conservatives have attempted to harness neoclassical economic illogic to prove that the government has essentially stolen something from a property owner by making and enforcing legal rules that make that property owner poorer.  I own a coal mine; the government changes the rules about how I can and cannot mine the coal; and if I am thus poorer than I otherwise would have been, I have suffered a taking.  Under the Fifth Amendment, I am thus owed "just compensation" from the government.

But of course, this presumes that the world without the new coal-mining regulation was the true and right state of the world against which justice can be measured.  Is the government also subsidizing the use of coal?  Is it suppressing alternative energy sources?  Are coal mine owners required to clean up the messes that they inflict on others through air pollution and environmental harms from mining operations (such as blowing the tops off of mountains and allowing the resulting mess to pollute and clog waterways and valleys)?  Or, to return to one of the background facts noted above, do I own the coal mine in the first place because I inherited it?  If so, why do I deserve compensation at all for something that I did not purchase at fair-market value?

With any of these factors taken into account, it is just as easy to argue that the mine owner was making more money than would have been justified by the Invisible Hand.  To take another example, the buildings that line the outer boundaries of New York's Central Park -- Fifth Avenue, Central Park North, Central Park West, and 59th Street -- are much pricier than they would be if the City decided to change the rules and allow commercial and residential development inside of Olmsted's masterpiece.  Are those property owners due just compensation if the City does so, or would they merely be whining about the discontinuation of a gravy train that they never deserved to ride in the first place?

Does this mean that there is no such thing as a taking?  As an economic matter, yes; but that need not settle the issue as a legal matter.  The Constitution specifically mentions takings, which means that the Framers thought that takings was "a thing" requiring special attention.  It is possible, of course, that whatever that thing was is no longer relevant, along the lines of those of us who believe that the Commerce Clause's distinction between interstate and intrastate trade has been rendered meaningless by the realities of modern commerce.

With takings, however, one could still argue that a founding-era understanding is relevant, because (unlike the Commerce Clause, which simply gives Congress the power to regulate essentially everything that we might recognize as commerce today) it is still possible for a government to seize people's property outright.  If that happens, then the Fifth Amendment would reasonably require that the government determine the fair-market value of the property and cut a check in that amount, paid to the order of the dispossessed owners.  Economics does not require doing so as an objective matter, but we might choose to do so as a legal (and thus ultimately political) choice.

The logic of regulatory takings is, however, persuasive in one important regard, which is that it is possible for a government to inflict the same kind of harm that an outright taking inflicts without actually seizing the property.  Making a property non-marketable ("You can't sell property with these characteristics") or in some other way making the property worthless -- or worth less -- can feel like a taking, too.

All of that may be true, but the answer is the same as it is in the context of the Commerce Clause.   During the debate prior to the Supreme Court's ruling in NFIB v. Sebelius (the first Affordable Care Act challenge), people on my side of the divide argued that the parade of horribles exemplified in the so-called Broccoli Example -- "If government can order me to buy health insurance, it can order me to eat broccoli!" -- was best handled through small-p politics.  That is, if anyone in Congress proposed a government program to force people to eat broccoli, that proposal would lose badly (and the proposer would probably lose his or her next election).  Similarly, the political process is there to stop the government from seizing property and from devaluing it for no good reason or without reasonable recompense.

The point is that the logic of neoclassical economics can be drawn into fields of law with the promise of providing scientific clarity, only to end up serving the role of an ideological fig leaf.  If we want to limit what kinds of property seizures and value-altering legal changes can be enacted, we can do so.  Pretending that orthodox economic analysis is anything but a boundless and completely manipulable standard for doing so is, however, politics masquerading as objective truth.


Michael C. Dorf said...

To my mind, the best effort to reconcile the text of the Takings Clause -- which seems to pre-suppose a neutral baseline -- and reality, is Jed Rubenfeld's 1993 article "Usings." In Rubenfeld's view, regulatory takings are not takings (except in special circumstances), because the government when it regulates is not generally "using" the property. I don't think this approach works perfectly, but it does better than the alternatives. https://digitalcommons.law.yale.edu/cgi/viewcontent.cgi?article=2566&context=fss_papers

Eric Charles said...

Is there anything unique in the Takings example compared to something like drug legalization? In other words, is this just a rights vs utilitarian argument?

The utilitarian would say Takings can be inefficient if it discourages the building of new housing (higher prices for the poor), leads to inequality, or something along those lines. Drug legalization may be inefficient since more people would be potentially be using drugs, which is a social harm.

Non utilitarians would accept the social loses and argument in favor of ownership principles over social utility.

Joe said...

the buildings that line the outer boundaries of New York's Central Park

or a certain one, perhaps ...

Anyway, as to regulatory takings or takings in general, the basic issue arose back in the day too. Legal histories will note that the government regulated property in a range of ways in the 18th and 19th Centuries. There arose (debated and variable) rules on when these were proper or not, including in respect to matters involving takings.

The Commerce Clause and so forth is seen by many as something to be decided by politics because it is an enumerated power that is given to Congress which is restrained within that system (two branches, veto etc.). The Takings Clause is in the Bill of Rights, which appears to be somewhat different.

This is not to refute the point as to orthodox economic analysis any more than some other flexible system allegedly by itself can guide us regarding another provision.

Hashim said...

As justice black famously explained, "The Fifth Amendment's guarantee that private property shall not be taken for a public use without just compensation was designed to bar Government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole." So your idea that "the political process" is the safeguard doesn't make much sense, for the same reason as the other individual rights in the bill of rights - those provisions are designed to protect against the tyranny of the majority.