Benjamin Hale
  Associate Professor, Philosophy and Environmental Studies
Center for Science and Technology Policy Research
Campus Box 488
University of Colorado at Boulder
Boulder, Colorado 80309-0488
Endorsement

 

Compensating Victims of Public Policy:
Regulatory Takings

A Policy Analysis from 1997, resurrected from my policy days and included here because the policies advocated by the Bush Administration mirror such proposals.

The Problem

Environmental regulations throughout the United States prohibit property owners from activities which will be detrimental to local ecosystems or to endangered species. Many private investors complain that the value of their investment has been severely diminished by the forceful imposition of federal and state regulations. Citing the Constitution, some policy makers would like to establish environmental regulations as government "takings," thereby requiring that government compensate property owners for the potential value of their land.

Current Policy Proposals

One bill, Proposition 300, demands that the state of Arizona look into compensating victims of 'unfair' state environmental policy before it enact legislation. Proposition 300 was passed four years ago in Arizona's legislature. Two years later, in November 1994, it was overturned by public referendum. Bills similar to Proposition 300 have been passed in Mississippi, Utah, Florida, Delaware, Missouri, Virginia, Idaho, North Carolina, Washington, Indiana, Tennessee, and West Virginia (Lund 1995). This past March, a minor 'takings' bill was introduced and passed at the Federal level. But this is only the beginning of a trend in public policy. Dubbed the 'Polluter Protection Act' by President Clinton, a pending version of 'takings' legislation attempts to eschew the Endangered Species Act, the Wilderness Protection Act, and Superfund, by mandating compensation for decreased land values.

Orrin Hatch (R-Utah),  in a recent attempt to rebut accusations of "polluter protection," claimed that the government need not compensate if the regulation prohibits 'nuisances.' According to Hatch and his supporters, "pollution is a nuisance" and should therefore not be considered a regulatory taking. It seems, then, that legislators would like to redefine negative externalities to be, simply, 'nuisances.' This way, they might differentiate between, say, positive nuisances (those that float downstream and directly affect others) and negative nuisances (those that strictly change the landscape of property and only indirectly deprive greater society of certain benefits). Yet such distinctions are extremely tenuous at best, and falsely concrete dichotomies that redefine the meaning of 'externality' at worst. Polluting one's own land as long as it does not affect others would seem to be considered a negative nuisance, and thus, if prevented by federal or state regulation, would warrant compensation.

Varieties of Proposals

There are at least two classic versions of 'Takings' bills. The weaker of the two versions, dubbed "Look Before You Leap" legislation, mandates cost-benefit analysis of all government regulation and zoning laws before they are implemented. This version attempts to mandate the fulfillment of the Kaldor-Hicks criterion, which states that policy intrusions should proceed if and only if they can be shown to have the potential for compensating victims. The harsher version, mandating "Compensatory Measures," redefines such regulations to be considered regulatory 'Takings,' which demand compensation under the 5th Amendment to the Constitution. Both of these versions address regulation of not just land owners, but also land renters or users. 'Takings' proponents argue that there is little difference between losing money on leased property and losing money on owned property.

Criticism of Logic and Supporting Evidence

Referring to clauses in the Endangered Species Act and to the Clean Air Act which prohibit cost-benefit analysis, Harvey Rosen (1995) writes, "such laws are unfortunate...Forbidding cost-benefit analysis amounts to outlawing sensible decision making." Rosen, and many economists like him we can assume, would be a proponent of "Look Before You Leap" legislation. But cost-benefit analysis, though theoretically enticing and ostensibly unbiased, cannot be implemented effectively or without prejudice when confronting biodiversity and the environment. Put simply, it relies on a value schedule that has been called into question by many environmental ethicists. Many habitats and ecosystems, they argue, are irreplaceable and bear benefits that are extremely unclear. Research has shown, time and again, that even the certain social costs of negated habitats and biodiversity are staggering and profoundly complex (Appendix A). Further, there is significant reason to suspect that, when dealing with the environment, discount rates are simply too high. Mandating research and cost-benefit analysis requires scientists to place an economic value on the health of our ecosystems now, on the health of our ecosystems well into the future, and most of all, generates mounds of red tape which make implementation of environmental regulation considerably more difficult. Notwithstanding these ethical concerns, mandating compensatory measures compounds this problem with a matter of strict economic inefficiency.

Assume, for a moment, that all environmental properties and future costs are quantifiable and knowable. By suggesting that the government compensate the "victims of public policy," proponents of such legislation demand, in essence, that the government pay property owners for social costs that might never exist in the first place. Such compensation includes compensating loggers, mineral extractors, ranchers, developers, and investors for potentially lucrative personal gain without regard to external social costs. By so doing, the government would be subsidizing industry and investment, granting insurance to land investors. Such a subsidy would not decrease industry and investment to more accurately reflect social costs, but would, instead, keep industry and investment consuming according to inaccurate supply schedules. Further, the government would be forced to pay the cost of the land at a price determined by a market oblivious to these environmental externalities. Such a policy shifts the burden of costs from the private producer or land owner to other parts of the economy. In the case of environmental compensation in particular, many of the affected industries are likely to be "sunset" industries which, because of reduced resources, changing social preferences, and increasing marginal costs, are being replaced by more sustainable industries or by lower cost industries in other countries. Protecting sunset industries from the harsh impacts of regulations established to correct for their negative externalities completely reverses the intended impact of such regulation.

Effectiveness of Current Approach

The current approach (standard regulation) is not without its faults. Property investors must well understand the law and the intricacies of complicated legislation like the Endangered Species Act before they purchase land—a costly endeavor. As it is now, many land rights disputes evolve post facto: legislation is already in place, an investor purchases the land, intends to build (cut, ranch, extract), and then discovers that her land is an important watershed. Undoubtedly, this is the root of much environmental animosity, as investors feel slighted by Government and not those who sold or leased them the land. Uncertainty plays a large role in this process, as some purchasers do not know, necessarily, what they will be doing with the land when they buy it; and do not think to look into restrictions on the land. In this case, a severe information asymmetry makes land investment higher risk. But it is a reduction to think that all land disputes evolve post facto. Indeed, there are cases where an investor buys the land and is later burdened with new environmental regulations, new endangered species declarations, or new zoning laws. The resulting loss of land value can be devastating to small-time investors, and extremely painful to larger investors. In this case, the regulations work as a sort of tax, charging the land owner for social costs that will be incurred if the owner destroys the resource, but allowing the owner to maintain the land for other purposes.

Recommendation 1—Information Provision

Many land investment losses are due to information asymmetries in which an investor simply does not know the regulations that pertain to her investment. The taxpayer should not bear the burden for an investor's mistakes, but must be sensitive, instead, to small-time investors who have made uninformed purchases. A market for property zoning information generates an adverse selection process, prohibiting small-time, less wary, investors from making informed land purchases. The government should establish a free information system which will indicate those areas that are potential regulation 'hot-spots' and thus riskier investments. While this may create unpleasant bureaucracy for the potential purchaser, it will greatly reduce post facto discovery and unwise investment. Doing so will internalize risk into the price of the land, making such investments explicitly risky, and land very cheap.

Problem with information provision: This will likely invoke a common pool resource problem, producing perverse incentives for loggers or mineral extractors to buy cheap land and to pillage it before regulations set in.

Recommendation 2—A Demand-Side Tax

The government could impose a more direct user fee on investors for the protected resources that they extract. This user fee would help inject personal accountability into investment choices, and would be particularly useful for those who lease subsidized land from federal and state governments, but demand compensation for resources they cannot extract. Also, this would help dispel the illusion that the Government was regulating simply because of its environmentalist preferences. Populist politics has become such a large component of recent social backlash, that it is quickly becoming politically unfeasible to correct for severe market failures through standard regulation. Market failures involving environmentally related common pool resources (trees and minerals), marketable public goods (National wetlands and forests), and ambient public goods (endangered species), are particularly difficult to regulate because externalities may not be immediately apparent. (Negative externalities directly affecting people will, if transaction costs are not too high, be easier to justify.) If the government were to levy an expensive user fee for extracting resources, this might more accurately reflect market tendencies and quell 'takings' advocates' concern that the Government is pandering to 'faddish' environmentalists.

Problem with a user fee: Establishing a user fee would require significant benefit-cost analysis. Because of 'uncertainty' reasons discussed above, an arbitrary user fee will more likely result from legislation. Such a user fee will initia lly act like regulation and civil fines. But arbitrary pricing mechanisms, unlike strict regulation, are subject to reevaluation, and will likely result in reductions over time.

Conclusion

There are no great answers to the 'takings' debate. Regulation of resources was, and still is, the easiest way to monitor behavior. But such regulation can result in a heated outcry. To best avoid this outcry, government should keep the public informed of its intentions and actions. Further, government might try levying a demand-side tax to equalize the resource supply schedule, and thereby facilitate the resource free market without appearing overly intrusive.

Appendix A

Recent articles pertaining to the complexity of estimating land values and cost-benefit analysis. By no means comprehensive, this list is the result of a cursory perusal of the journal "Land Economics."

  • Barbier, Edward B. "Valuing Environmental Functions: Tropical Wetlands." Land Economics. Volume 70. Number 2. May 1994.
  • Gregory, Robit et al. "How Precise are Monetary Representatives of Environmental Improvements." Land Economics. Volume 71. Number 4. November 1995.
  • Johansson, Per-Olav. "Cost-Benefit Analysis of Environmental Change." Cambridge: Cambridge University Press. 1993.
  • Jordan, Jeffery and Abdelnaniema H. Elnagheeb. "Consequences of Using Different Question Formats in Contingent Valuation: a Monte Carlo Study." Land Economics. Volume 70. Number 1. February 1994.
  • Kiel, Katherine A. "Measuring the Impact of the Discovery and Cleaning of Identified Hazardous Waste Sites and House Values." Land Economics. Volume 71. Number 4. November 1995.
  • Neill, Helen R. et al. "Hypothetical Surveys & Real Economic Commitments." Land Economics. Volume 70. Number 2. May 1994.
  • Laughland, Andrew S. et al. "Construct Validity of Averting Cost Measures of Environmental Benefits." Land Economics. Volume 72. Number 1. February 1996.
  • Layman, Craig et al. "Economic Valuation of the Chinook Salmon Sport Fishery of the Gulkan River, Alaska, Under Current and Alternate Management Plans." Land Economics. Volume 72. Number 1. February 1996.
  • Loehman, Edward et al. "Willingness to Pay for Gains and Losses in Visibility and Health." Land Economics. Volume 70. Number 1. February 1994.
  • Randall, Alan. "A Difficulty with the Travel Cost Method." Land Economics. Volume 70. Number 1. February 1994.
  • Stevens, Thomas H. et al. "Interpretation and Temporal Stability of CV Bids for Wildlife Existence: a Panel Study." Land Economics. Volume 70. Number 3. August 1994.
Bibliography
  • Congressional Quarterly. Senate - November 27, 1995. Page S17520. Comments by Senator Orrin Hatch.
  • Emerson, Kirk and Charles R. Wise. "Statutory Approaches to Regulatory Takings." 1995 National Conference of The American Political Science Association. August 31, 1995.
  • Emerson, Kirk. "Taking the Land Rights Movement Seriously." Administration and Society. November 1994.
  • Kuipers, Dean. "Wise Guise." The Tucson Weekly. Page 12. September 16-22, 1992.
  • Lund, Hertha L. "Property Rights Legislation in the States: A Review." Political Economy Research Center (PERC) Policy Series. Issue Number PS-1. Bozeman, Montana. January 1995.
  • The Congressional Quarterly. "'Taking' it too far — Hon. George Miller." Page E823. Extension of Remarks - April 07, 1995.
  • Ohmart, Robert D. "Southwest Riparian Habitat — Then and Now." Inner Voice. July/August 1993.
  • Rosen, Harvey S. Public Finance. 4th Edition. Richard D. Irwin, INC. 1995.
  • Stroup, Richard L. "The Endangered Species Act: Making Innocent Species the Enemy." Political Economy Research Center (PERC) Policy Series. Issue Number PS-3. Bozeman, Montana. April 1995.
  • Williams, Florence. "Landowners turn the Fifth into sharp-pointed sword." High Country News. Page 1. Vol. 25 No. 2. February 8, 1993