Feed on

I promised last week that we’d have an interesting post on the “problem” of rent. Not sure about the interesting part, but here is the post nonetheless.

First, a generic observation about property rights. For any economy to operate, we must have some institution of property rights that is reasonably well functioning. “Well-functioning” actually has some meaning. There are typically three things required for a property rights institution to be well functioning. In whose absence of any one you’d expect attempts at cooperation to break down. I have said quite aggressively that every single economics problem (particularly environmental problems) is a property rights problem. 

  1. Property rights must be well defined. Now this sounds easier than it is in practice. But what we generally mean is that all things of value have a clear owner. Note of course how “thing of value” means that even when we are talking about a “private” property right, the “value” is determined by a public evaluation of the resource in question. Furthermore, to say that we can clearly recognize an owner does not mean ownership cannot be shared. Finally, to suggest that the rights are well-defined assumes a well-developed system for a public understanding of these ownership claims (e.g. a system of title, deed registry and so forth – these can be private or government institutions for the time being).
  2. While it’s certainly nice to recognize that someone has a title to something, we need far more than that for such a title to be meaningful. Owners of resources must have a “reasonable” way to exclude non-parties to voluntary transactions from accessing the resource. To put it more simply, ownership rights must be defendable. What good, for instance, would it do to give Wintercow “ownership rights” to the entire landmass of Mars right at this very moment? There would be absolutely nothing I could do to prevent your spaceship from landing there and mining for minerals. What good would it do me to even agree to allow you to go up there? Would you pay me lots of money right now for the right to mine for rocks up there tomorrow? 
  3. The property must be transferable. In fancy terms you’ll hear it said that property must be divestible. This requires a lot more writing, but generally the way to think of this is that people who have title to property should be able to obtain the value from such property, and suffer the loss of value from such property, when they make decisions regarding that property. 

Together what these attributes redound to is that a well-defined property right is the exclusive authority for an agent to determine how a resource is used.  Given these well-defined property rights, the only way a piece of property can be used, legitimately, is by the owner herself, or by parties to which the owner agrees to share the property with. There can be no other legitimate use. If it turns out that one’s property has been used illegitimately, then the owner of the property would have standing in a tort case and be eligible for compensation. This simple idea is the origin behind the “Takings Clause” in the 5th Amendment to the Constitution. For various reasons, “we” have allowed governments to seize the private property of others. But since we are a semblance of a decent society, to the extent that these takings are necessary to promote broader “public” goals, we require that the governments provide fair and just compensation to the former property owner. The idea would be to imagine what such property would have sold for should the owner been willing to engage in a transaction (by the way, I found this to be one of the best EconTalks of all-time relating to Locke’s idea for what a just-price would be … especially the anchor story). 

I don’t know of very many people who object to the spirit of the takings clause. Note I am not saying the takings part, I am saying the compensation part. Indeed, when we see private parties imposing uncompensated costs on others we wholly expect compensation to be paid even when it has nothing to do with takings – direct, regulatory or otherwise. For example, if a pig farm decided to locate next to my home, and were I to demonstrate actual harms due to this location, a court would likely recognize my claim against the farm. Indeed, since this is expected, any pig farm that wanted to locate near me would find itself negotiating with me prior to any such court case became necessary. 

However, what if a pig farm locates a few miles from my house – not close enough to pollute my air and water, but close enough so that the business of the pig farm causes extra road congestion. Or what if an airport locates in a place that does not require the taking of my house, but close enough so that the flight path causes some noisy distractions to me. Do courts generally recognize a compensable “intrusion” in each case? I believe not. And the reason is that should any person who is inconvenienced in any way by others have a claim to compensation, then no development would happen anywhere, ever. Furthermore, while the existing property owners would seem to be suffering from the increased traffic, this is a one time “transfer” from them to the customers and workers and owners of the new enterprises. In the future, since places with high traffic are, all else equal, less desirable, prices of homes would be lower in those places, and wages of workers will be higher in those places, so indeed the people who live near airports, today, are already being compensated for the inconvenience.

This brings me to my thought for today. Ardent property rights “advocates” (seems weird to have to advocate for that, but I am not really using the correct language here) surely circle the wagons when they see brutal violations of private property rights, and demand that compensation be paid when actions by others, through no fault of the existing property owner and with no accession of the property owner, cause the value of existing properties to fall. It seems almost entirely uncontroversial.

However, isn’t the strong advocacy of property rights in these cases a bit short-sited and in fact asymmetric? Consider an alternative scenario. I currently live in an ugly split-level ranch that is only of small value. But year by year my neighbors put additions on their homes, landscape their homes, and so on. And at the same time, year by year, my neighbors decide to spend more time reading to their kids, more time teaching their kids virtuous behavior, more time studying and engaging in the life of the mind. And in a few years, the quality of the schools in my area improves. And in a few years the parks become cleaner and more enjoyable places to visit. And in a few years the local library is a humming hive of awesome activities. And in a few years the community center is overflowing with programming. And in a few years, this hive of awesomeness attracts even brighter, more virtuous, more entrepreneurial people. A few internet firms locate here. A few more beautiful amenities get built. Potholes get filled quicker. Street lights and stop signs are less vandalized than before. And so on. 

All the while, me and my ugly split-level ranch have been sitting here enjoying the view for all of this time. And all of this while, the value of the piece of land my ugly split-level ranch increases and increases and increases. What was once a $187,000 home is now worth $774,000. Through no action of my own, my property has been “invaded.” In this case however, the invasion was by benevolent pixies who end up making my property worth $587,000 more. I did not ask for these invasions any more than I did the invasions from the pig farm. I had no part in the other activities that generated this value just as I had no part of the pig farm. But in one case it is obvious to people that I should be compensated while in the other it generally is not. Now I know we have a system of capital gains taxation in place but there are home value exceptions for it,. Are there strong property rights advocates out there who argue consistently that both “forced” harms and benefits should be compensated? 

The unearned benefits from holding a piece of property can be thought of as a “rent” and indeed Henry George wrote extensively that rents should be taxed away. One reason he argued for this is that such taxes would tend not to be distortionary. since land does not disappear and indeed the actions which caused the rents to appear had no origin in your decisions about how to use your particular piece of land (there are good counterarguments). Another reason he favored it is that if we generate revenues from taxes on rents, then we can reduce taxes on things that we really do care about , like productive work. 

The point of today’s post is not at all to debate the merits of such a view. The point of today’s post is not to suggest land taxes are good or bad or otherwise. The point, rather, is a metaphysical one, and it is one that irks me given my own tribal proclivities. Are folks who are strong property rights advocates also out there talking about the symmetric problem of unearned gains? And if folks are arguing that unearned gains ought to be kept because of the administrative, transactions costs, and public choice challenges related to implementing it, are they making the same arguments when it comes to remedying unearned losses and intrusions of property? I am sure any good Law and Economics course covers these questions quite well, and it is not again my intention to dissect the good and bad arguments here, but rather to ask again whether the “armchair arguing” that seems to substitute for a lot of science these days is at least consistent in asking questions like this. I doubt it. It’s another reason I am retired. 

I last addressed issues of rent and land taxation here.

3 Responses to “Rent, Takings and the 5th Amendment”

  1. RIT_Rich says:

    “And if folks are arguing that unearned gains ought to be kept because of the administrative, transactions costs, and public choice challenges related to implementing it, are they making the same arguments when it comes to remedying unearned losses and intrusions of property?”

    Yep. I think this is the key sentence here. When it comes to property rights, you will always have incomplete property rights, because of these problems.

    But I’m not sure that most “strong property rights advocates” acknowledge these problems in the first place. At least, not the ones I’ve had the pleasure of interacting with. A simple wave of the hand seems to be sufficient, for some.

  2. Harry says:

    Thanks for the free class, WC. I hope this is a chapter in one of the textbooks you are writing which may become a Wintercashcow.

    As a good — I would say great — teacher, this lecture raises many more questions than it answers.

    The Fifth Amendment gives the federal government a special exception to appropriate property for public use, after just compensation. Clearly they were thinking of real property here, and building bridges and canals; they were not thinking about the Paul Revere tea set on the sideboard, nor shares in the Hudson Bay company. Nor were they thinking about the distinction between earned or unearned income and redistribution according to how the King or anybody wiser might allocate wealth, and it was not because they were too stupid to anticipate better progressive ideas. They specified one case where the government might fool with people’s property. If a power is not enumerated, it is not there, especially when fooling with private property.

    As WC observes, the notion of property, if it is to have any meaning at all, has to have any meaning at all, has to have protection for society to flourish. Nobody will save or invest anything if they think someone might show up tomorrow and take it or break it. This is what happens when war breaks out, or after wars destroy, inflation causes people to flee to diamonds or gold, neither of which creates new wealth. Gold is portable to some place that respects property, where it can be exchanged for land, a few tractors, seed, fertilizer, cows, other equipment, etc., which is to an accountant, capital. All of this assumes that starting a farm with cows and tractors is a good idea; there is a lot of risk there, of course.

    On a related subject, if all rents should be taxed away and given to more deserving people, should not the rents be adjusted for inflation? As the accountants might say, should one not be able to adjust one’s cost basis? This is not an idle question, given the track records of modern social democratic governments over the past hundred years.

  3. Harry says:

    Sorry for garbling that post. Steve Jobs’ fault, not mine. Damn phones are sinful.

Leave a Reply