Q&A with Todd Zywicki on Takings Law and Public Choice

PERC's latest visiting fellow is Todd Zywicki, the Foundation Professor of Law at George Mason University and senior scholar at the Mercatus Center. He teaches is the area of contracts, bankruptcy, and law and economics. He is the co-editor of the Supreme Court Economic Review and a frequent commentator on legal issues in print and broadcast media. He blogs at The Volokh Conspiracy.

Todd is a 2011 PERC Lone Mountain Fellow researching the political economy of Takings law. We thank him for taking the time to answer our questions. See more of PERC's ongoing Q&A series here.

Q: You work is heavily influenced by Gordon Tullock and his contributions to the study of spontaneous orders and methodological individualism. How might Tullock’s work be applied to environmental policy and law?

A:  Tullock’s central insight is that the cost of government policy is not just the misallocation of resources—using resources for lower rather than higher-valued uses. There is an additional cost—the resources that people use seeking preferential treatment from the government. He refers to these as “rent-seeking” costs and they can be quite large. The lessons for environmental policy and law are important: whenever decisions about resource use are moved from the world of private property and contract to the public domain, there will inevitably be rent-seeking costs as well. Thus, even if government makes wise decisions in the end (which it often does not), there will still be the costs of operating the system. And those costs can be large.

Q: While you are at PERC you have been working on a project exploring the political economy of the “Takings” law. Can you offer a brief overview of the government’s eminent domain or Takings power?

A:  The Takings power permits the government to seize private property for public use so long as it pays “just compensation” for the property taken. This enables the government to seize property to build roads, schools, etc.

Q: You have pointed out that law and economic analysis has been invoked to justify increased discretionary power for the government to take private property for public use such as in the case of Kelo v. New London. What is missing from this analysis?

A:  In Kelo many law and economics scholars have posited that the challenges confronting a private developer seeking to assemble many parcels of land in order to build an office building are identical to those of the government when it wants to build a school or post office. The underlying problem, it is claimed, is a hold out problem that landowners might try to hold out for a premium price, thereby killing the project. I argue that the situations are not analogous. In particular, when building an office building there are many similar alternative sites where the building might be constructed and so as a result the developer can shop among many different parcels of land, thereby eliminating the hold out problem.  Governments might have less ability to do that (or perhaps not). So I argue that even if one supports allowing the government to use the Takings power to overcome hold out problems, that does not support using the power for private developers in a case like Kelo. Moreover, there is a second point—to the extent that there are not comparable substitutes in Kelo it is only because the City of New London, in that case, gave Pfizer a bunch of subsidies and benefits to encourage development there. As a result, Pfizer felt compelled to build in New London. But that is merely an artificial distinction among different parcels of land that should not justify using the Takings power to later overcome the hold out problem that prior intervention creates.

Q: When it comes to Takings law, there is a question over whether holdouts are strategic or a reflection of subjective value. Could you explain this distinction and how it relates to Kelo?

A:  Subjective value is the case when I have some property that is worth more to me than the market value. For example, I have an autographed picture by Franco Harris of the “Immaculate Reception” that I received as a gift. The fact that I received it as a gift means that one is more important to me than a different, otherwise identical picture. Strategic holdout occurs when I claim that I have subjective value in something and so I won’t sell it for a premium. But it could be that I am simply holding out for a higher price. This might occur, say, if a developer needs 20 parcels of land to build a shopping mall. If I own one of those parcels, I might refuse to sell unless the developer pays me a premium for my land. In that case I might be acting strategically.

It is impossible to tell in any given case whether I have sincere subjective value or strategic hold out power. I argue that we solve this problem indirectly by determining whether or not a hold out power is actually a credible threat in any given case, which relates to the question of whether there are market substitutes. If so, then we needn’t worry about the question of whether hold out is sincere or strategic. In Kelo, as I noted, I don’t think there really was a hold out problem.

Q: If not through the Takings powers, how should the government deal with strategic holdouts?

A:  If there truly are strategic holdouts then as a last resort the government may need to use the Takings power to address that. But it is important not to simply assume a holdout power where one does not exist.

Q: The Fifth Amendment requires that if property is taken for public use, the government must pay “just compensation” for the seized property. Judge Richard Posner has argued that, under certain assumptions, the justification for compensation is incomplete. You claim public choice theory provides a justification for this requirement. What’s your argument?

A:  Posner argues that the requirement to pay “just compensation” is not necessary to induce governments not to take land inefficiently because landholders can take steps to stop the taking—litigation, PR firms, political activity, etc. In theory, if the land is more valuable to the owner than the government, the landowner would be willing to outspend the government to keep it from taking the land. This should prevent inefficient takings.

But while that argument may be correct on its terms, it ignores a central public choice point: the cost of litigation, PR firms, etc., are costs diverted from productive activity to merely preventing this inefficient result. That is thus a loss to society as a whole. As a result, I argue that the purpose of the just compensation requirement is to reduce the stakes and thus provide incentives for people not to waste so much money on these activities.