Brock W. Howell

November 2, 2006

Recently a number of property rights initiatives have popped up among the states.[1] The initiatives either limit the exercise of eminent domain or establish a pay-or-waive regulatory structure. These latter initiatives define regulatory takings more broadly than jurisprudence has provided under the Fifth Amendment, providing compensation for any diminution in property value. In some cases, the property rights initiative is limited to land use regulations (Oregon),[2] and in others, to all regulations affecting private property (Washington).[3] Washington State voters vetoed its legislature's property rights law in 1995,[4] but Oregon voters decided that its growth management law was not fair enough to property owners in 2004. The Reason Foundation has since provided materials for other state-based groups to use to push their own property rights initiatives,[5] and Americans for Limited Government has provided political and financial resources this fall to organizations in Arizona, California, Idaho, Michigan, Missouri, Montana, Nevada, and Washington.[6]

The movement is supported by two camps that often overlap under the category of libertarianism: those who believe in minimalist government and those who believe in strong private property rights.[7] Reasons for joining these camps include fear of elitist government, self-interest in maximizing personal welfare through current ownership or hope for future ownership, belief in a tie between democracy and property, and belief in a tie between personhood and property. Those in the property rights movement reference Thomas Jefferson's utopian agrarian democracy,[8] John Locke's scholarship,[9] and Ronald Coase's calculus of property assignment;[10] three brilliant minds who I respect and to whose philosophy I adhere. The present property rights movement is a radical digression from these intellectuals' work and dreams. This editorial has not the room to cover the work of Jefferson, Locke, and Coase, but instead presents the terrific problems raised by the new property rights movement.

This latest property rights movement is the last of a conservative movement that started with the founding of conservative think tanks in the 1950s through 1970s, the presidency and ideology of Ronald Reagan, and conservatives' frustration with the perceived judicial liberalization of the takings doctrine. It also is a reaction to the 20th Century rise of government involvement in environmental protection, workplace safety, health care, competition preservation, insurance, etc., which have made the face, and in some instances fist, of government more noticeable.

The current property rights promoters declare that the governments of today are eroding the long-held U.S. tradition of the right to own property without government interference. This declaration is erroneous. The Federalists, who dominated intellectual thought surrounding the framing of the Constitution, desired a strong, central government that would unify the states in regulation, currency, and defense.[11] Those who promoted more deference to property rights and state-based government, while not entirely supportive of a strong unifying government, still desired strong state governments. James Madison, the author of the Bill of Rights, was almost singular in the desire for any constitutional protection of property rights.[12] Others thought Congress, in its exercise of democracy, would be reasonable in its seizures of physical property and rational in its regulations.[13] At best, the Bill-signing states were ambivalent when it came to the takings clause.[14]

The original interpretation of the takings clause was that it only applied to physical invasions of private property.[15] The Fifth Amendment did not compensate property owners for regulatory takings. In Pennsylvania Coal v. Mahon, Justice Oliver Wendell Holmes set the stage for erosion of this doctrine, writing that "if regulation goes too far," it can amount to physical invasion, triggering the takings clause.[16] This precipitated a string of cases to define when a regulation goes too far and determine the necessary compensation.[17] The merits of the extension of the physical takings doctrine to regulation and the creation of an appropriate test for regulatory takings are not within the ambit of this editorial. Within the ambit of this editorial, however, are why not all diminutions of property value merit compensation and why the current property rights movement is wrong-headed.

Of the arguments for providing complete compensation for diminution of property value, the economic theory of Ronald Coase provides perhaps the best support for the proponents.[18] Coase demonstrated, theoretically, that the optimal social welfare will be achieved if all property interests are assigned to some (any) individual.[19] For example, if the right to pollute carbon dioxide is assigned to the automobile companies, private citizens who are adversely affected by carbon dioxide emissions will buy rights from the auto companies, ceteris paribus. In so doing, the marketplace will achieve optimal social welfare. Thus, present property rights proponents argue that society and government will act more rationally and achieve optimal social welfare if property owners enjoy untethered utilization of their property. The only tethers of a complete property rights world would be contract, tort, and criminal law (although maybe even tort and criminal law would be unnecessary). In the absolute private property world, government is rendered to a mere business, amassing and collectivizing small interests of numerous individuals which otherwise would not be represented in the marketplace due to transaction costs.

The proponents of an absolute private property world fail to consider several realities and democratic foundations: asymmetry of market power, prospectivity of regulation, transaction costs of contractual regulation, fraud, the right to not be harmed, and the right to self-governance and democratic institutions.[20] The Oregon Supreme Court's upholding in 2006 of the State's 2004 property rights initiative, Measure 37,[21] and the rise of broader initiatives in other states necessitates a discussion of these problems and why citizens and courts should not permit such initiatives.

Requiring compensation for any diminution in private property value results in what is best termed "contractual regulation." In other words, in order for the government to regulate harm, the government must pay the harmer, reducing the public economic gain of regulation to the amount of public benefit minus the cost of paying the harmer. Many times there are asymmetries between the harmers and the harmed. One asymmetry occurs when there are many harmed by a private action, but each is harmed only a little. Another asymmetry happens when individuals lack information concerning the type, degree, or effect of a harm caused by private action and lack the resources to gain the necessary information. In these situations, the government is the optimal tool to amass the political power of the individuals, to gain information, and to establish a regulation. However, if the government must pay for any diminution of property value, the net economic benefit of stopping the harm is substantially reduced. Thus, the number of protections against harm that are politically possible will be reduced, resulting in the continuance of many externalities which are unpaid by the harmers.

The elimination of many regulations will result in the increasing necessary reliance on tort and criminal law to remedy harms. Tort and criminal law are primarily retrospective legal doctrines remedying past harms, although they also act as deterrents. But the deterrent effect of tort and criminal law is imperfect. Additionally, tort and criminal law do not remedy all harms, only those recognized by common law for torts or by statute for crimes. Furthermore, tort and criminal law cannot procure public and private benefits like regulation, such as residential design requirements which procure a reciprocity of advantage.[22]

Governments will also not be able to complete many contractual regulations because the transaction cost will be too great in identifying the affected property owners and calculating the diminution of property value. This will leave many more harms unremedied. Additionally, for contractual regulations which are passed by the legislature, it is quite likely that many property owners will not be completely compensated. For example, intellectuals of the takings clause, including Frank Michelman and William Treanor, quarrel with the current calculation of "just compensation."[23] A property owner always values his property beyond the going market value, otherwise he would sell it. However, courts limit compensation to the market value. Thus, contractual regulation will not remedy even the most basic of error of regulatory takings.

An ironic result of contractual regulation is that Coase-based regulation will become impracticable, and likely impossible. Recently governments have employed cap-and-trade pollution markets, as discussed above, as an innovative and quite successful technique to remedy or reduce environmental problems. Cap-and-trade markets exist for sulfur dioxide, carbon dioxide, fish and wildlife industries, water quality, water quantity, rangeland, etc. The markets rely on establishing a quota to limit the use of a resource, then requiring individuals to by a permit to use a set amount of the resource. Under contractual regulation, this scheme is impossible. The government must compensate an individual each time the individual buys a permit. The radical result occurs because the individual's financial loss caused by the regulation is the cost of the permit. Additionally, the government may also need to compensate individuals who did not buy the permit as they also suffer an economic loss from not owning a permit. Thus, contractual regulation eliminates any social gain of Coase-based markets.

Contractual regulation will also result in fraud on a number of levels. Property owners are likely to dream up a number of more harms that need contractual regulation to fix. Property owners may make false claims over their expectations for future business activities. Government may attempt to undervalue the diminution of property value caused by regulation. Property owners, fresh of an influx of government payments, may lobby legislatures harder for tax-breaks and pork-barrel projects.

What is most untenable about contractual regulation is the alteration of the foundations on which the United States and its Constitution rest. Contractual regulation creates a new right within the property bundle: the right to cause harm. While harm would still be subject to tort and criminal law, harm would be free from prospective (un-contracted) regulation and many harms would remain unremedied. This obtuse arrangement establishes a de facto right to cause harm. In the history of civilization, never has any individual property owner had the right to cause harm to another person (except in narrow circumstances such as self-defense, but even this is a balancing of bad activity, favoring the individual with less guilt). The Torah, or Old Testament, punishes harm with an eye-for-an-eye.[24] The New Testament provides that although everyone is ultimately judged by God, Jesus tells his challengers, "Give to Caesar what is Caesar's, and to God what is God's," implying that everyone's rights are subject both to one's personal discretion in light of God's will and the government's control to sustain society.[25] Property rights under the feudal system were also subject to the absolute control of the governing class–in fact real property was owned by the government. Even under the present parliamentarian democracies of Europe, the government retains the absolute discretion over property, although self-imposed statutes and democracy itself curtails discretion. Harming another individual violates a moral and ethical norm of society and civilization. The legalization of harm should be viewed as the un-civilizing and decline of mankind; a slave-like submittal with property standing master and king above the subjects of personal liberty, self-governance, and democracy.

Left remaining in this discussion is what we will lose in terms of quality of life because of contractual regulation. In the alternative of enforcing regulations and paying compensation, most governments will simply waive the laws as applied to the property owner.[26] Locally, where much regulation is land use law aimed at reducing public and private torts, sprawl, loss of farmland, enhancing community character, and protecting environmental resources, the result will be less enjoyable communities with more sensory nuisances, food produced farther away, increased reliance on the automobile, more flooding and mud-slides, more uncontrolled fires, etc. More state budgets will be allocated to funding everything from transportation services to remedy sprawl-caused congestion to compensating disbarred lawyers.[27] Nationally, environmental, public health, and employment laws will be eviscerated. On a personal level, taxpayers will pay to not be harmed.

The effect is the concern that Justice Holmes stated in Pennsylvania Coal v. Mahon: "Government hardly could go on if to some extent values incident to property could not be diminished without paying for every such change in the general law."[28] While property rights should certainly exist and be protected, giving absolute rights to property owners is untenable.[29]

* Howell is a 2007 J.D. candidate at the Vermont Law School and serves as the Web Editor and Economics Editor for the Vermont Journal of Environmental Law. He graduated from Washington State University with a B.S. in Agricultural Economics.

[1] See William Yardley, Anger Drives Property Rights Initiatives, N.Y. Times, Oct. 8, 2006, at A-34 (noting "the backlash against the [Kelo] ruling has made property rights one of the most closely watched ballot issues nationwide").

[2] Oregon Measure 37 (2004), available at http://www.sos.state.or.us/elections/nov22004/guide/meas/m37_text.html.

[3] Washington Initiative 933 (2006), available at http://www.propertyfairness.com/files/I933.pdf. For another excellent assessment of the property rights movement, see Donovan D. Rypkema, Property Rights and Public Values, Smart Growth Speaker Series (Jun. 13, 2001), available at http://www.smartgrowth.org/audio/Prpv613-061301.doc.

[4] David Postman, Voters Turn Down Property-Rights Measure: Not Much Sign of a Grass-Roots Movement, Seattle Times, Nov. 8, 1995, at A-17.

[5] Leonard Gilroy, Reason Found., Statewide Regulatory Takings Reform: Exporting Oregon's Measure 37 to Other States 2 (2006), available at http://www.reason.org/ps343.pdf.

[6] Americans for Limited Government, Property Rights Campaign, http://www.getliberty.org/campaigns/propertyrights/index.php (last visited Oct. 27, 2006).

[7] See Pacific Legal Foundation, About Us, http://www.pacificlegal.org/?mvcTask=about (last visited Oct. 27, 2006)(describing fear of over-bearing government); see also Competitive Enterprise Institute, About CEI, http://www.cei.org/pages/about.cfm (last visited Oct. 27, 2006) (describing desire for individual determinism).

[8] "Being myself a warm zealot for the attainment & enjoyment by all mankind of as much liberty, as each may exercise without injury to the equal liberty of his fellow citizens, I have lamented that . . . the endeavors to obtain this should have been attended with the effusion of so much blood." Letter from Thomas Jefferson to Jean Nicholas Demeunier (Apr. 29, 1795), in 7 The Writings of Thomas Jefferson at 12–15 (Paul L. Ford ed., Knickerbocker Press 1896). "The only orthodox object of the institution of government is to secure the greatest degree of happiness possible to the general mass of those associated under it." Letter from Thomas Jefferson to F. A. van der Kemp (Mar. 22, 1812), in 13 The Writings of Thomas Jefferson at 135–37 (Albert E. Bergh ed., Thomas Jefferson Memorial Ass'n 1907). "Of liberty I would say that, in the whole plenitude of its extent, it is unobstructed action according to our will. But rightful liberty is unobstructed action according to our will within limits drawn around us by the equal rights of others. I do not add 'within the limits of the law,' because law is often but the tyrant's will, and always so when it violates the right of an individual." Letter from Thomas Jefferson to Isaac H. Tiffany (Apr. 4, 1819), in Jefferson: Political Writings at 224–25 (Terence Ball & Joyce Appleby eds., Cambridge Univ. Press 1999).

[9] For a good reference concerning John Locke's philosophy regarding property, see generally James Tully, A Discourse on Property: John Locke and his Adversaries (Cambridge Univ. Press 1980).

[10] Ronald Coase, The Problem of Social Cost, 3 J.L. & Econ. 1–44 (1960), available at http://www.sfu.ca/~allen/CoaseJLE1960.pdf.

[11] For a good reference concerning the philosophy of Federalists during the framing of the Constitution and the varying differences within the party, see generally John E. Ferling, Adams v. Jefferson: The Tumultuous Election of 1800 (Oxford Univ. Press 2005).

[12] See William M. Treanor, The Origins and Original Significance of the just Compensation Clause of the Fifth Amendment, 94 Yale L. J. 694, 710–14 (1985) (explaining Madison's belief that "acquisition of property was a necessary by-product of the freedom of action [that Madison] deemed an essential part of liberty").

[13] See id. at 713–14 ("As republicans, their theory of the polity legitimized uncompensated government takings.")

[14] See id. at 713 ("When it was proposed, Madison's Bill of Rights met an unenthusiastic response. Congressional reaction was mixed, opponents at the state level delayed ratification for two years, and three of the states failed to ratify it.").

[15] See John F. Hart, Land Use Law in the Early Republic and the Original Meaning of the Takings Clause, 94 Nw. U. L. Rev. 1099, 1133 (2000) ("The status quo of land use policy in America was that ‘compensation' . . . had never been paid to private landowners unless physical appropriation of property occurred.") .

[16] Penn. Coal. Co. v. Mahon, 260 U.S. 393, 415 (1922).

[17] Miller v. Schoene, 276 U.S. 272 (1928); Nectow v. City of Cambridge, 277 U.S. 183 (1928); United States v. Causby, 328 U.S. 256 (1946); Armstrong v. United States, 364 U.S. 40 (1960); Goldblatt v. Town of Hempstead, 369 U.S. 590 (1962); Penn Central Transp. Co. v. City of New York, 438 U.S. 104 (1978); Andrus v. Allard, 444 U.S. 51 (1980); Kaiser Aetna v. United States, 444 U.S. 164 (1979); Agins v. City of Tiburon, 447 U.S. 255 (1979); San Diego Gas & Elec. Co. v. City of San Diego, 450 U.S. 621 (1981); Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419 (1982); Ruckelshaus v. Monsanto Co., 467 U.S. 986 (1984); Williamson County Reg'l Planning Comm'n v. Hamilton Bank of Johnson City, 473 U.S. 172 (1985); MacDonald v. Yolo County, 477 U.S. 340 (1986); Keystone Bituminous Coal Ass'n v. DeBenedictis, 480 U.S. 470 (1987); First English Evangelical Lutheran Church of Glendale v. County of Los Angeles, 482 U.S. 304 (1987); Nollan v. Cal. Coastal Comm'n, 483 U.S. 825 (1987); Yee v. City of Escondido, 503 U.S. 519 (1992); Lucas v. S. C. Coastal Council, 505 U.S. 1003 (1992); Concrete Pipe & Products of Cal., Inc. v. Constr. Laborers Pension Trust for S. Cal., 508 U.S. 602 (1993); Dolan v. City of Tigard, 512 U.S. 374 (1994); Suitum v. Tahoe Reg'l Planning Agency, 520 U.S. 725 (1997); E. Enterprises v. Apfel, 524 U.S. 498 (1998); City of Monterey v. Del Monte Dunes at Monterey, Ltd., 526 U.S. 687 (1999); Palazzolo v. Rhode Island, 533 U.S. 606 (2001); Tahoe-Sierra Pres. Council, Inc. v. Tahoe Reg'l Planning Agency, 535 U.S. 302 (2002); Brown v. Legal Found. of Wash., 538 U.S. 216 (2003); Lingle v. Chevron U.S.A. Inc., 544 U.S. 528 (2005); San Remo Hotel, L. P. v. City &County of San Francisco, 545 U.S. 323 (2005).

[18] Coase, supra note 10, at 2, 42–44.

[19] Id. at 4–6, 44.

[20] See Richard. A. Epstein, Pennsylvania Coal v. Mahon: The Erratic Takings Jurisprudence of Justice Holmes, 86 Geo. L.J. 875 (1998) (providing another analysis of why the absolute private property world is invalid and when regulation without compensation is justified).

[21] MacPherson v. Dep't of Admin. Servs., 340 Or. 117, 130 P.3d 308 (2006).

[22] See Penn. Coal, 260 U.S. at 488–89 (1922) (demonstrating that the Supreme Court has long recognized that doctrine of "reciprocity of advantage" by which similarly situated property owners are burdened by the same regulation and share like and similar benefits of the regulation). Reciprocity of advantage also presents the problem of the "Prisoner's Dilemma." Any one property owner that is affected by a reciprocal regulation would be better off if she could be unencumbered while the neighbors remain encumbered. The law should discourage such behavior that attempts to avoid reciprocal regulation. For more information regarding the study of Game Theory and Prisoner's Dilemma, see Melvin Dresher, The Mathematics of Games of Strategy: Theory and Applications (Prentice-Hall 1961). For first-person, empirical account of Game Theory, see Marek M. Kaminski, Games Prisoners Play: The Tragicomic Worlds of Polish Prison (Princeton Univ. Press 2004).

[23] Frank I. Michaelman, Property, Utility, and Fairness: Comments on the Ethical Foundations of "Just Compensation" Law, 80 Harv. L. Rev. 1165, 1214–24 (1967); William M. Treanor, The Armstrong Principle, the Narratives of Takings, and Compensation, 38 Wm. & Mary L. Rev. 1151 (1997).

[24] Exodus 21:23-27; see also Leviticus 24:18-20; Deuteronomy 19:21.

[25] Matthew 22:21; see also Mark 12:13-17; Luke 20:20-26.

[26] In Oregon, Measure 37 has resulted in 3,451 claims affecting more than 223,517 acres, with less than 10 percent denied as being invalid claims, and all claims resulting in waiver of the regulation instead of enforcement and compensation. Compensation demanded by the property owners surpassed $6 billion. Institute for Portland Metropolitan Studies, Portland State University, Summary of Claims, http://www.oregon.gov/LCD/MEASURE37/summaries_of_claims.shtml#Measure_37_Database_Project__Portland_State_University (last visited Oct. 27, 2006); see also Sheila Martin, Portland State University, Measure 37 in Oregon: A Status Report (Presentation at the Grantmakers of Oregon and Southwest Washington Regional Conference) (Nov. 2, 2006), available at http://www.pdx.edu/media/i/m/ims_M37pptNov06.pdf (providing an analysis of claims, decisions, and impacts of Measure 37 in Oregon).

[27] Tim Trohimovich, Futurewise Planning Director, conducted an in-house analysis of the 2006 Washington Initiative 933, which concluded that the initiative would require compensation to disbarred lawyers who have a property right to expected earnings (personal communication).

[28] Penn. Coal, 260 U.S. at 413 (1922).

[29] See, e.g., Barnett Kaliko, Editorial, Checking the ‘Reality' of I-933, Seattle Post-Intelligencer (Oct. 4, 2006) at B7 (asserting that "our recourse" to a statute or ordinance that is too burdensome on property rights is "to change or repeal [the law]," not redefine regulatory takings).