Russ Roberts

Epstein on Property Rights, Zoning and Kelo

EconTalk Episode with Richard Epstein
Hosted by Russ Roberts
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Richard Epstein, of the University of Chicago and Stanford's Hoover Institution, makes the case that many current zoning restrictions are essentially "takings" and property owners should receive compensation for the lost value of their land. He also discusses the Kelo case and the political economy of the regulation of land.

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0:36Intro. How has our freedom to use our property, particularly land, as we see fit fared in recent Supreme Court decisions? Common confusion between freedom and license. In some cases freedom to use one's property is subject to no limit. No serious defender of laissez faire argues that there are no limitations or obligations, in particular not to use it as a means of aggression as against your neighbor. In the case of land, trespass is occasional and easily controlled; law of nuisance, filth, noise, stench, etc. are more difficult to control but were never included on the list of things you could do. If both sides restrain from the use of these nuisance-like activities, each will gain in freedom more than he loses in the actions he can take. So giant global trade in which everyone turns in their right to pollute everyone else in exchange for which they receive the right to use their property free of pollution. Against that baseline there has been an enormous decline in freedom of land; what can you pile on on top of that. You can move away from your neighbor but your land cannot. Restrictions people would like often go beyond law of nuisance. Houses made of stone give a nice aesthetic in a neighborhood. Difficult problem, two ways to handle it. First, congenial to libertarian thought, you get one owner who owns a large parcel, divides it up, and then imposes a set of restrictions reciprocally; chosen because recipients are willing to pay more. Gives notice and controls these soft externalities. But what if land is already built upon or owned? Much harder. Have to do it through regulation. Anti-competitive stuff comes in especially in urban settings; habitat protection in rural areas. Tendency is to regulate instead of buying the land, and it's those things that have set the land law up on end.
5:54Must be variety across different states. Variation across states is surprisingly small. What's the value of land that's lost by such regulation and zoning? In flat areas like Fresno or Chicago zoning is pretty rational, some anti-competitive zoning but little environmental zoning. In variable areas where some areas are much more valuable than others there can be substantial wipe-outs. The reduction in land value attributable to zoning, improper purposes without compensation, runs as much as 80-90% of the value of the land. Do zoning regulations tend to be global, or are they extremely local--e.g., this particular plot of land should be residential? Complicated. Zoning is fiercely local, unlike wetland controls which can be done at the state level. Spot-zoning rule, can't take a small plot of land and zone it inconsistent with neighbors. Courts usually quick to strike down attempt to ask for a spot property to be designated commercial when surrounded by residential properties to get special competitive advantage; but when all the neighbors pick on the guy on the spot and say we don't want you to build anything, it's trickier. How big does the big circle have to be to count as a "spot"? East and west sides of road: may aim at no competition for one guy but do it by declaring whole other side of road non-commercial. What should compensation be for land owner who loses 80-90% of the value of his land? Should be full value of diminution. There are some special cases. "I think it's fair to say that virtually all the zoning cases that make it through the system into litigation have nothing whatsoever to do with nuisances today. Virtually all of them have to do with loftier environmental goals on the one hand, or with the various questions of anti-competitive and restrictive zoning on the other." Ironically, great cities today could never have developed with all the restrictions that are now in place. Does compensation not take place? Only if there is complete loss of all use of property. Diminution in value is treated as a competitive loss for which no compensation is required. "The great achievement of the United States Supreme Court is to treat regulation and competition as though they are the same for legal purposes on the rather silly assumption that they have the same global economic consequences." It's not considered a taking unless it's 100%. Lucas against the S. Carolina Coastal Council. Just put roadblocks and regulations and leave you a scintilla of value in the land. Game of chicken. Can eat into 90% of the value at no cost. The last 10%, though, can cost you the whole lost value. Funny political equilibrium--regulators will not go that last 10%.
14:16Hodgepodge. Are there cities with no zoning? Houston was, not sure now. Some zoning ordinances enhance value. Building permits are designed to deal with real troublesome issues. Large apartment building next to a small public street. Adding your cars can cause traffic jams. Legitimate government responses to those things. But industrial policy is different. Attractive part of anti-competitive zoning is that at least there is someone on the other side to fight back. Wasteful, but vested interest to fight it. What about anti-sprawl regulations? Can enhance existing land values. Those voting own the land already. Those who don't live there yet but might want to don't get a say. Can't get rid of one set of externalities without creating another. One community's zoning law may affect next community. Low-density uses and restrictions. Developer may represent hundreds of people trying to get out of miserable neighborhoods and they can't find a way to get in. "Where in fact markets always take into account non-territorial preferences, political elections are essentially restricted to the local voters." NIMBY problem. Try to build a new house in Lake Tahoe. Lots of plots, but have to acquire a lot, low density and high tax revenue. New York City driven by inability to expand supply of apartments. If you could change from participatory democracy, a variation on zoning, to you can build as a right unless they condemn you out, you'd see more development. Could still regulate traffic pattern issues. Even conservative justices currently regard zoning as something that has to be a political issue. Look at the mess and assume that any other system would have a bigger mess. Probably just wrong. If you could change one thing, what would you change? The rule on compensation, all diminutions in value are presumptively compensable, except if you can show that you are preventing a bonafide or common law nuisance or controlling a traffic problem. This all started with Penn Central, Breuer tower on Grand Central Station, Justice Brennan said it wasn't taking anybody's land rights and it's not spot zoning. Once that decision took place you could have very aggressive land use plans with lots of discretion in the hands of administrations, and gains from Breuer tower would be ignored because of aesthetic desires of others. Soldier Field, public property, became horrendous, economic giveaway as well.
24:56Kelo. How did it pass? "Takings clause" in the U.S. Constitution is short but not easy to understand: "nor shall private property be taken for public use without just compensation." What is "for public use"? Everyone agrees that schools and roads or military fortress are public use. But what kinds of things are public benefits that are also for public use? Early cases always allow the government to take land if a real standoff, holdout. But with Kelo, once you start with the zoning game, nobody can put together large blocks of land because there will be too many neighbors who object. New London had strong zoning in place, so only by condemning the land could they build. What was being taken was mostly vacant farmland. "Urban blight"--term of art which nobody knows its meaning. Had 90 acres, wanted 92 acres, wanted to lay waste to some homes. By the time it got to the higher courts, it said they could do it so long as you call it "comprehensive" we'll let you do it. So you saw ordinary homes being blown up in order to put nothing up. People thought at least something fancier would get put up; but still haven't put anything up! Land is still vacant. Justice Stevens could never tell you what counted as a private use for which the eminent domain power would be inappropriate. Zoning laws make it impossible to do anything unless the city is on your side, but once they are on your side you can do anything. Used to have to show nuisance problems or traffic problems. "There is little doubt that the towns which are aggressive in both the condemnation side and in the regulation side are the ones which have the greatest difficulties in organizing their real property markets." The common law system was better than what we have today.
29:51How did we get where we are? Strong progressive movement, same guys who are in favor of industrial policy, labor unions, minimum wages, any time you have a private market you have a market failure. But they're progressive? Under one meaning of word. Externalities for zoning are larger, once entrenched becomes difficult to remove. Some communities want to increase tax base and do want developers. Cities like NYC and San Francisco instead roil housing. Have to take an 800 room apartment building and make it suitable to house more people. Political economy line is in zoning you are keeping out someone who is outside your community. In Kelo you are displacing people in your community. More resistance to latter, so more objection to Kelo. Changing the base changes educational base. Local government is a tough nut to crack. Likely to last for a long time to come, constant drag on the American economy. Economic gains would come from free trade, flat tax, coherent market-based employment law, sensible land regulations.
34:34Lior Strahilevitz example on U. of Chicago law blog of a nihilist buying a Frank Lloyd Wright group and burning it down. Is that a good use of eminent domain? Destructive private use is good reason to pay person and buy it for everyone else. But now the government has to run it. Could alternatively give it away to a preservation society. Buildings deteriorate if they have no viable use. Do those buildings drag down dynamism in some cities? If badly maintained. Landmark Preservation Commission can block building permits. Parks: The Constitution is a very bad document in terms of trying to control the way in which the State uses "its own property." One use versus another, compromises and tradeoffs become pitched battles in political realm. Privatizing the whole lot makes more sense. Private land owners do this all the time. Audubon Society makes these decisions. These mixed uses are hard to take out of public land. Public sector different: Forest service will knock down anything if it wants to build a road and won't necessarily take any account of native American concerns. Not much hope for massive improvement in this area. Will our freedom to use our land as we see fit is consistent with the rule of law. Current system puts discretion in the hands of public officials, threat to organized political rights, we don't have rule of law, little recourse in the courts.

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COMMENTS (20 to date)
Person writes:

If it's a "taking" for the government to diminish your property's value, and for which it should compensate you, is it a "giving" for the government to do something that makes your property's value go up significantly, for which you should compensate the government?

I bring this up because I've read libertarian Georgist arguments (such as in Harold_Kyriazi's Libertarian Party at Sea on Land) that suggest it wouldn't be fair to do one but not the other. (And Russ_Roberts suggested I bring this up on this site too.)

Jeff Henderson writes:

I wonder what just compensation can possibly mean in cases of eminent domain. Prices in the marketplace emerge from voluntary exchanges. How could any price the government comes up with be considered just if it was not voluntary?

gator80 writes:

Have you considered having Naomi Klein as a guest? Not that she would accept, and I wonder if it would afford her more credibility than she deserves, but she is getting a lot of attention and it would be interesting to hear her present and defend her views to a real economist.

Sam Grove writes:

If the government builds something that makes you property's value go up significantly, is that a "giving" that justifies higher property taxes? Higher than the current property tax rate would cause?

This isn't how it works in the 'private' sector. There is no prohibition on benefiting others, only on causing them harm.

If a grocery store is built near you and causes your property value to increase, you owe the owners nothing, as it is presumed that they built it for their own reasons for their own benefit. The increase in your property value is not due to the addition of the store, but due to the perception of potential buyers of your property.

Of course, if your property value goes up, that often means your property taxes increase, the reason for the increase of value is irrelevent.

Russ Roberts writes:

After hearing Epstein and I discuss his blog post, Lior Stahilevitz wrote me the following and is happy for me to share it with the group:

"The natural follow-up question, I think, is 'once you have conceded the appropriateness of taking land from someone who wants to destroy it (rendering it valueless) and transferring it to a preservationist who will use it to maintain aesthetic amenities worth $50, is there a logical constraint on transferring land from someone who is generating $50 from it to someone else who can generate $100 from it?'I think the answer is no, but I also think there are institutional considerations that Richard identifies that ought to make us skeptical about the state’s abilities in this regard, as opposed to the market’s.

Do you agree with the logic? I do not, but why don't you, the listeners weigh in first and I'll comment later if it's useful.

JoshK writes:

I think it would just make a lot of sense if preservationist got together and started their own fund so they could buy up these properties. I don't understand why the government should be involved in the first place. Do we really want a government committee deciding what is art?

Paris Lovett writes:

JoshK - your last post wasn't on point. The hypothetical discussed by Epstein and Stahilevitz is what to do if a private owner plans to destroy a Lloyd Wright building s/he owns. One possible solution given by Epstein would be for government to pay the difference between the pre-destruction and post-destruction prices in order to prevent the destruction. This is in line with his idea of paying for the value lost due to regulation - which would likely dissuade regulators from interfering with anything other than true "nuisances" or externalities. However, Stahilevitz raises the problem with Epstein's solution to the Lloyd Wright problem: if it is OK for the government to step in to preserve the value of a piece of beautiful architechture, why is it not OK for government to take steps to INCREASE the value of other private land (a la Kelo).

Stahilevitz has put his finger on a key problem - when the government has discretionary power, it is likely to go far beyond rare and unique uses of that power such as preserving Lloyd Wright houses. Soon it will be using that power to please special interests, indulging in anti-competitive regulation, etc. etc.

As a libertarian-minded person, I believe that you can always go back to the idea that seduction, persuasion and co-operation are more powerful than force. If people love Lloyd Wright architecture, let them hold non-coercive protests, let them put together a fund to pay off the owner. At some point he would most likely give up on his plans to torch the place, for a 20% or 40% premium above market price. And if he doesn't, he is a very rare case and should be allowed to torch the place. Because the "cure" for that problem (taking away his liberty to make use of his property) is worse than the disease.

nordsieck writes:

Roberts is absolutely correct. The central problem with the government compensating people for their losses due to regulation is that those people, especially in cases where they won't sell - e.g. Kelo or the nihilist, invariably value their property above the market rate.

On the other hand, requiring the government to pay the owner's price would sufficiently neuter the power of Eminent Domain, so as to make it non-existent. As the owner's price is unbounded in the upward direction, a synthesis of the market value and the owner's value is practically impossible.

K writes:

We are trying to apply fairness, economics, and aesthetics to a legal process, ED. That will not work until we straighten out the law about what can be called public use.

ED is with us to stay. It is sometimes needed.
And yet we can't even decide what it allows. When I took law the answer was 'virtually anything". And that is still about right.

I personally feel an owner should be able to tear down a Frank Lloyd Wright house or any other. Don't like that? Too bad!

Suppose you own the protected house. You don't want to raze it but you want to put a wall around the estate or otherwise landscape so the house isn't visible from the street. Suppose you want to paint with a new color.

Is that permitted? Usually the wall will be. The paint probably not.

I have no objections. If the government wants to decide about how I paint my house the solution is simple. Just have them decide how everyone's house is to be painted.

It could be like jury duty. Every year send out notices to a few properties. A color consultant is to inspect your property and choose the right colors, and schedule when the work must be done. You take care of the painting, get paid $3, and are commended for performing a civic duty.

Bob writes:

Nordsieck,

"On the other hand, requiring the government to pay the owner's price would sufficiently neuter the power of Eminent Domain, so as to make it non-existent."

Why do you assume that the government's willingness to pay is insufficient to change the owner's mind? Of course, the government has an incentive to say this to minimize the owner's bargaining power, but why believe it's true?

JoshK writes:

Paris Lovett -

I'm trying to suggest that the government shouldn't interfere in this in the first place.

I think that just getting to the point where we decide which houses are to be preserved is fraught with danger.

-J

Paris Lovett writes:

JoshK-

It looks like we agree. I guess I misunderstood your thrust. The scenario under discussion is one in which the nihilist ALREADY owns the FLW property. Epstein seemed to think it reasonable that local government could estimate the difference between the pre- and post- torching value and then pay that difference to the nihilist, to compensate for regulating away the nihilist's right to torch the place.

Strahilevitz points out that if local government can make discretionary decision to MAINTAIN the esthetic value of the property through regulation, then why is it wrong for them to make decisions about INCREASING the value by use of Eminent Domain. And then you'd opened the floodgates to all sorts of discretionary power in the hands of local political powers.

I thought you were talking about preservationists buying the property while it was still on the market - not part of the scenario, since the nihilist already owns the property. But if I'd read more carefully, I would have seen you were just saying the same thing I went on to say, which is that there is no need for government to step in. The preservationists should pay whatever premium (price above market price) it takes to convince the nihilist not to torch the FLW property. And if they can't meet his price, then the place gets torched. A terrible aesthetic loss, but probably (many intermediate steps omitted here) much less than the aethetic loss that comes with runaway regulation which circumscribes creative use of property. (As an example, consider all the beautiful neighborhoods of Manhattan which could never flourish in the sclerotic modern regulatory environment).

Bryce writes:

Agree with Paris and JoshK. Might even take it a step farther- the government should stay completely out of it, besides ensuring commerce takes place in a legal fashion and that the destruction of the property doesn't endanger property of others. If some private entity wants to save it, great, then let them prove they are willing to make the payments to save it, but keep the public sector out of it.

George writes:

I agree with Lior and I think the logic is simple.
Let's cut away the words and distill it down to the facts:

'once you have conceded the appropriateness of taking land from someone" "is there a logical constraint on transferring land from someone"

I think that it is historically obvious that authority views the door as being open or closed. Once the door is open it is open for all.
The first extracted quote opens the door and the second lets in anyone.

Jeff Jean writes:

Government today takes trillions of dollars per year of your wealth not needed to perform its constitutional duties. They call it taxes. In my view, eminent domain is a very minor aspect of government takings.

Frontlinegrunt writes:

I think the ultimate questions are:

"Is or is not private property "allodial"? [An estate held in absolute ownership, without recognizing any superior to whom any duty is due on account thereof.]

If not, why not?


Sheldon Richman of FEE referenced an excellent piece on Rent-Seeking" that contained some valuabale items in the history of our country. You can reaad it, and I highly ecommend that everyone do so at:

URL: http://www.fee.org/in_brief/default.asp?id=1113

Frontlinegrunt writes:

Just compensation. What does it mean?

One can assume it means market price, but when is the market price evaluated? Before the taking? Or after the taking?

Does not market price require a willing buyer and a willing seller in an undistorted (by government intervention) marketplace?

If the owner is unwilling to sell, how can a true market price be determined?

I still think all property should be considered "allodial." (See previous comment.)

Let's think outside the box and push the envelope.

Simon writes:

"If the government builds something that makes you property's value go up significantly, is that a "giving" that justifies higher property taxes? "

There have been interesting cases in this regard in Europe, whereby local municipalities have built airports and then paid low cost airlines to fly to their airports. That is to say, local taxes have been used to subsidise passenger ticket prices in pursuit of the tourists'consumption euros. The biggest impact though is usually on the value of homes, as the tourists invest in vacation property.
Of course, this behavior was declared illegal by the EU.

Schepp writes:

As a professional involved in the building of roads. When emient domain is used the market value is done by appraisors. It is defined by what a willing seller and a willing buyer would pay to make the transaction. Private firms usually do the appraisals using the same methods they use to appraise for their non-government clients. They compare them to similar properties, or income generated on the property and then assign a value based on past property sales with similar characteristics. I agree this not "market value" but the standard means of estimating it. The appraisal is subject to a condemnation hearing and civil court processes with appeals and all.

It is all quite a complex process with quite a significant dead weight loss. Even after acquistion use of the property can be quite restrictive if federal funds are involved in the project. The actual use of the property must match the original intent. Governmental regulations can create the market conditions where the local agency will choose not to work in drainage easement because the indirect cost of getting approval to demonstrate there are no impacts to such things as wetlands can be more costly than the benefit of doing the work.

There are also complex issues such as a 30 year old structure that by standard means would be depreciated to close to zero. (Because a new building built to suite current conditions creates the highest and best use for the land.) But I suggest that depreciation is rarely successfully argued by the government because it is complex and hard to understand.

I'm intrigued by Epstein's suggestion that our great cities would never have arisen under the current zoning regime. The simple lefty response would probably be that large modern cities, victims of their success, are causing new externalities that can't be internalized by private covenants: regional congestion, water drainage trouble, plain old ugliness.

Does anyone have thoughts or responses? I'd love to see the evidence that zoning laws have as deadening an effect as Epstein believes.

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