Why the Left and the Right Should Join Forces against Eminent Domain

The destruction of inner cities at the hands of bureaucrats wielding eminent domain has been well documented by urban theorists from Jane Jacobs to Richard Epstein. As Ilya Somin points out, eminent domain has played an important role in destroying property in Detroit, contributing to its population losses. Dating back to the implementation of Title 1 of the Housing Act of 1949, urban policymakers began using federal funds for slum clearance. Unsurprisingly, destruction of housing units correlated with the population decline in Detroit and other cities.

While one would think that the horrors of slum clearance under Title 1 have been adequately demonstrated to prevent planners from pursuing neighborhood destruction as an economic growth strategy, cities across the country continue using eminent domain to clear “blighted” neighborhoods. Last year Denver declared an area of its Five Points neighborhood, including 246 homes, blighted, meaning that now developers interested in building in the area can request the city to use eminent domain to grant them the properties that they want. While the Atlantic Yards project received extensive press coverage, policymakers often employ eminent domain more quietly on behalf of stadium builders, benefiting sports fans at a dear cost to neighborhood residents and business owners. Like urban renewal projects dating back to the 1950s, Forest City Ratner has failed to deliver the promised housing that was part of the Atlantic Yards agreement when the city agreed to condemn the neighborhood.

Perhaps Robert Caro provides the most poignant description of the horrors of eminent domain in The Power Broker, explaining the losses of neighborhood cohesion when the tool is used to demolish private housing to be replaced by public housing or in some cases vacant lots  when promised public works are not delivered. One would think that the well-documented failures of urban renewal would lead policymakers to be very cautious when employing eminent domain for corporatism, or “public benefit.” However, even in the Kelo case in which the Supreme Court established that cities can legally use eminent domain in an attempt to provide public benefit through economic development, the Pfizer project for which homes were condemned fell through. Not only did New London policymakers fail to incite economic development by demolishing houses, they shrunk their tax base and created the blight of vacant lots where there was no blight before.

Today, policymakers in California are leading the charge to use eminent domain in a creative new way: using its power to confiscate underwater mortgages from banks, write them down to current market values, and refinance homeowners’ loans with more favorable terms. While the policy has yet to be implemented, unintended consequences are easy to foresee. Once city policymakers employ this policy, mortgage bankers will be much more reticent to make loans to people there, ultimately limiting the city’s housing supply. Furthermore, this policy will be yet another example of policymakers attempting to raise homeownership rates when its unclear that homeownership is beneficial, especially for those who can’t afford it comfortably. The policy will doubtless have other unintended consequences yet unknown. Eminent domain often results in the opposite of what policymakers say it will; slum clearance creates slums and giving individuals’ property to corporations to create jobs ultimately results in decreased economic growth. In this case, using eminent domain to increase affordability for homeowners will likely lead to lower homeownership rates and more expensive housing in cities that employ this strategy.

Polls demonstrate that a large majority of people oppose eminent domain for economic development. Despite this stated support, all but a handful of states permit eminent domain based on the subjective and easily manipulated designation of “blight.” Despite eminent domain’s long history of being used for racist ends and ongoing use to eliminate low-cost housing, eminent domain fails to spark the widespread liberal outrage it deserves. The liberal bastion of The New York Times editorial page not only stayed silent when its business side used eminent domain to clear away existing businesses for its new headquarters, Matt Welch of Reason points out it was one of few neighborhoods across the country to throw its support behind the Kelo decision. The corporatism inherent in using eminent domain for economic development is an area where those on the left and free marketeers should be able to find plenty of common ground to support state-level reforms. Unlike many areas where public choice incentives make policy reform unlikely, eminent domain has not only concentrated benefits, but also concentrated harms. In turn, this makes it an area of land use policy where reform should be possible.

Q&A with David Schleicher

I recently spoke with George Mason University Law Professor David Schleicher about his research on land use law and economics. Here is our conversation including links to some of his academic articles that have earned a lot of attention in the land use blogosphere.

Emily: What are some the costs of land use restrictions? Talk about agglomeration economies and how these relate to development restrictions.

David: This is a huge area of research that spans back to Alfred Marshall looking at why cities exist in the first place. It comes up with explanations for why people are willing to pay increased rents to live downtown. These include lower transportation costs for goods, which was a major driver of urbanization for much of American history. Today this is a small driver of urbanization because the costs of internal shipping have fallen so dramatically. Now an important advantage of urbanization is market size. You can see this in all different markets. Restaurant rows are a great example of this. When you go to one of these rows where there are a lot of restaurants and bars, you have insurance that if one place you go is bad, you know you have other options nearby. The last category of agglomeration benefits is learning, or information spillovers. We see this in cluster economies like Silicon Valley where people at different firms learn from each other. As Marshall explained, “The mysteries of the trade become no mysteries, but are as it were in the air.” Wage growth is faster in urban areas than in rural areas, and this comes from this learning process. In the aggregate, if you keep people out of dense cities, you will decrease national productivity.

Emily: In your paper City Unplanning, you propose a tool called Tax Increment Local Transfers (TILTs) that would compensate property owners for allowing more development in their neighborhoods. How would these work?

David: The idea of TILTs is that new development increases the city’s property tax base. By multiplying the increase in the base by the tax rate, we get what is known as the tax increment. If we give some of this increment to neighbors of a project automatically, they may oppose projects less. It’s effectively an institutionalized bribe, but it would have some really neat effects. Currently we use Community Benefit Agreements, in which the developer bribes — “bribes” is so negative sounding — neighborhood opposition. But, CBA’s increase the cost of development. They act as a tax on development, so they are not as effective at lowering real estate costs. TILTs get money from a growing property tax base instead, so they have the neat effect of reducing the incentives to complain about new developments. So if you know you’re going to get paid through a TILT, your incentive to hold up the project goes down whereas with CBAs you have an incentive to make yourself a fierce opponent to development in the hopes of attaining a larger community benefit. Secondly, it has an information component. If residents know that they will receive monetary benefit from a development but they still oppose it, this provides the planning office with the information that residents would rather not have the building than have the cash.

It’s an idea to help overcome NIMBYist opposition to development in their neighborhoods and to help address the problem that we see very little housing and office growth in our largest cities. One source of this low rate of development comes from aldermanic privilege. The idea of this is that because most cities don’t have competitive political parties, we see that every councilman gets to decide on land use issues in his own district. The effect of this inside big cities is to turn a city like New York into something that politically looks like a lot of suburbs. All of the things that we’ve talked about with suburbs  using political influence to prevent new development in their town can happen inside a city legislature. The TILTs proposal is designed to make it attractive for individual councilmen who are going to control land use decisions in their districts to allow development. It’s acknowledging that the only way we might get more development is to pay off NIMBYs.

Emily: Transferable development rights share some similarities with TILTs in that both create incentives to build support for development. Do you see potential for TDRs?

David: I think of these as more similar to zoning budgets, another policy idea I’ve written about. Basically these are an announcement by cities that they want to allow more building, but they’re unsure of where they want to put it. TDRs are basically a market mechanism for setting the amount of building that the city wants to allow. They’re also traditionally a method of building coalitions, because they get preservationists in favor of new development near landmarked buildings because it’s going to channel cash to them. So the theaters of the 42nd Street theaters were able to sell their TDRs to nearby developers, and then the theater community got in favor of the redevelopment of Times Square. I think it’s a relatively attractive idea, and its a procedural solution like the ones I propose. Whether you could imagine it happening at the citywide level has never been done, but I think they’re very attractive.

Emily: I have previously considered a role for states in setting limits for how much municipalities can restrict land use because it seems that homeowner interest groups would not be as organized at the state level. What are your thoughts on that?

David: You have a problem here that the interest of the state is not necessarily maximizing land value. And of course states do get involved in land use. For example, Massachusetts’ anti-snob law created a work-around for local zoning. But in general, states don’t get involved because people get really angry when they do. I’m not opposed to states getting more involved in land use — I think I would probably be in favor of it — but there are problems. You can tell stories about how states get around land use inefficiencies because they are a higher level of government. People make the same types of arguments for regional governments. One of the problems with this is that states can end up behaving with the same aldermanic privilege that we see in cities, where legislators are allowed to make decisions for their districts. In states where there is not a lot of partisan competition, we see that legislators have a lot more power over bills that affect only their districts. So state land use policies might work better in states like Ohio or Michigan where there is more partisan competition, but in somewhere like Wyoming less so. You can imagine it going either direction.

Emily: What’s your opinion on the relationship between Smart Growth advocates and market urbanists?

David: The conflict between market urbanists and Smart Growth advocates is real, but it can be overstated. Their critiques of current zoning are roughly similar. They both think that we’ve separated land uses too much and that we’ve limited density too much. The modern regime governing land use is bad for the environment and its bad for economic productivity because it splits things up too much and it reduces entry to our richest cities. The answers that market urbanists and Smart Growth people give for how to fix this are different. So Smart Growth activists generally have a vision of what a city should look like. They’re prescriptive. Market urbanists are more demand driven. They say we have no idea what the optimal city should look like, we just think that unless there is a clear case of negative externalities, development shouldn’t be restricted. So the question of whether Smart Growth types and market urbanists are allies or enemies is an interesting one.  For the most part they are allies against the baseline position of modern American policy. That said, there are situations in which we disagree.  So take the never ending debate over the Height Act. Some, though not all prescriptive urbanists like the height limit because they have an idea of what a city should look like, and maybe a mid-rise city like Washington fits that pretty closely, whereas market urbanists think that’s ridiculous. If people want to build taller buildings on K Street, we can’t really see any reason why they shouldn’t. But in a lot of other arguments they agree.

Emily: Do you think that institutions like DC’s Advisory Neighborhood Commissions play a role in limiting development?

David: ANCs are effectively a mechanism through which neighborhoods are able to mobilize and organize opposition to projects. Their decisions are usually not fully binding, but they are able to make recommendations, and they usually win. They are designed to be a step in the process where the opinions of the neighbors can be heard. They are conceived of in opposition to Robert Moses-style trampling of neighborhoods, but their effect is by-intent to give neighborhood opposition to development more sway. And the way they do it is both by formally including them in the process and by providing a mechanism by which they can overcome the ordinary Olsonian limits on collective action. You have a hearing where everyone in the neighborhood gets together, and this allows them to coordinate opposition.

Emily: Some land use writers have focused on the importance of writing about the losses of zoning to educate people and changing public opinion. Do you think this is an important strategy along with advocating for procedural changes?

David: This is an area where the lawyers and the journalists approach the problem from a different method. I think it’s very well and good to educate people about the costs of excessive land use controls. The very use of the word NIMBY or BANANA is an effort to educate people and shame people for their preferences to stop development in their neighborhoods. To the extent this is effective I think that’s great. However, I think that opposition to building is rooted in something that you can’t talk people out of. People have made investment decisions to buy their homes and then have lots of incentives to stop building in their area. Procedural solutions are more likely to be fruitful, whether they’re mine or someone else’s, in changing the manner in which policymakers make decisions. These are differences in emphasis only. I think that educating people about the costs of zoning is great, but because people put so many of their assets into homes, I don’t think that telling people their decisions are economically unattractive is going to be very efficacious in changing their mind.

Emily: When upzoning is considered for broad areas rather than individual parcels, it seems that there could be a lobby among some homeowners who support upzoning for the chance to sell their home for redevelopment. Do you see less opposition to upzoning when the change applies to a larger area?

David: Absolutely. A project that I’m currently working on is that city’s master plans produce less-restrictive results than amendment-by-amendment zoning changes because you’re able to get deals across neighborhoods. So if you’re upzoning all of Washington you would have neighborhoods saying we’ll take a tower here if you’ll take a tower there, and you perhaps get something closer to expressing the city’s preferences. Whereas if you do this project-by-project, there is no reason to believe that if you allow a tower in your neighborhood that the next time the next neighborhood will be willing to take one. So you see cities where this happens. For example Philadelphia’s rezoning was consciously an effort to overcome the slow limitation on building and density created by amendment after amendment of downzoning.

An Early Defense of Zoning

At Discovering Urbanism, Daniel Nairn offers an interesting summary of Edward Murray Bassett’s 1922 defense of zoning (available as a free e-book). Bassett faced opponents who were against a new type of land use regulation, many arguing that zoning was unconstitutional. In retrospect, some of his arguments defending zoning are comical. He asserts that zoning would never go so far as to direct aesthetics because the courts would protect us from the overreach. It would be interesting to hear what he’d have to say about a planning commission meeting today. Nairn’s entire analysis is interesting, but I was particularly intrigued by Bassett’s assertion that zoning fosters cooperation. As Nairn summarizes:

Cooperation yields overall larger return on investment for all property owners. This was Bassett’s primary concern, one that he underscored with a number of prisoners’ dilemma scenarios. For example, “In some of the larger cities a landowner in the business district is almost compelled to put up a skyscraper because if he put up a low building, his next neighbor would put up a higher one that would take advantage of his light and air.” He asserted that skyscrapers were probably not a sound investment in their own right, but they were built anyway in a virtual arms race for public goods of light, air, privacy, and scenery. Zoning was the truce that made everyone better off.

I’m not sure that I follow Bassett’s logic here. If light and air are only available on floors that are higher than the floors of the neighboring buildings, then only the top few floors of any building would typically have this asset. It’s almost as if he’s talking about a race to the highest roof deck here. Aside from the problems with how he makes this argument, it is worth a look to determine whether or not zoning takes a positive step toward cooperation in the land market. Whether or not an institution fosters cooperation is a key factor in determining its success or failure. With cooperation, trade becomes a positive sum game rather than a negative sum game. For example, property rights is an institution that clearly fosters cooperation; when they are not well-defined, as in black markets, trade is often accompanied with violence.

Restrictions on land use, whether they come from public sources (zoning, height limits) or private sources (deed restrictions, HOAs) face trade offs between providing clear expectations of future development and permitting flexibility as land’s highest-value use evolves over time. On the far end, deed restrictions make it difficult to impossible to change land use restrictions, while HOAs and BIDs can often change restrictions with super majority votes from their members. Of course HOA rules often veer toward the draconian, but they are easier to overturn than other types of regulations. HOAs and BIDs also lack the stability of government entities. Since they are not likely to be around as long as cities, the time horizon of their rules may be indeterminate in some cases.

According to Bassett, zoning represents the best of both worlds, a compromise between permanent deed restrictions and rules that can be overturned too easily. On the one hand, it allows a landowner not to worry about his neighbor “taking advantage of his light and air” by prohibiting buildings taller than what zoning permits. Bassett writes from the perspective of developers and suggests that building skyscrapers is much like an arms race. He asserts that because elevators take up square footage that cannot be leased, skyscrapers are less profitable than lower buildings. He suggests that the only reason for building skyscrapers is to prevent the next door building from casting a shadow on a wasted setback. Of course it is the case now, as then, that when developers build tall buildings is because they think the net present value is greater than that of a shorter building. Only the exceedingly rare developer who doesn’t want to make money would pick a building design for the purpose of not allowing his neighbor to take advantage of light.

Many people have made the argument that tall buildings produce externalities, but he doesn’t quite identify these externalities correctly; they do not fall on the developer who wants to prevent his neighbor from taking free light and air, but rather on the owners of shorter buildings and their tenants. Bassett’s argument is instead more reminiscent of the fallacious Marxist argument that competition among firms hurts welfare. So, in my estimation, he does not make a strong argument that zoning produces cooperation by preventing a race to the bottom, or top, as the case may be. Collusion among building owners to restrict building supply may be a form of cooperation, but it’s not the type that benefits society.

As Nairn summarizes, Bassett also support zoning because:

Zoning stabilizes building and property values, by signaling to investors what they can expect from a certain district. Markets work when people know what they are buying, and zoning creates some assurance that the product will not change fundamentally. This reason is why housing developers were among the most ardent supporters of zoning in the early stages.

For much of the history of Euclidean zoning, this may have been its most important quality. Once cities introduced comprehensive plans, it was clear what types of buildings could be built on each land parcel, providing rule of law in the land market so that buyers and sellers both knew land’s potential uses, and all buyers and sellers were equal before the law.

Today, one of the biggest problems with zoning is that this rule of law has been eroded in some major cities. Rather than introducing broad changes, such as widespread upzoning, to meet cities’ evolving needs, planners in cities such as New York and DC have taken the approach of relying on variances and Planned Unit Developments as well as requiring projects to achieve neighborhood approval. Going into the approval process, developers often don’t know whether their plan will be approved or denied, and this makes buying and selling properties highly speculative. These tools permit flexibility in land use, but at the great expense of losing the rule of law that is key to allowing market participants to form expectations for the future. Without the rule of law, planning approval processes that don’t rely on  as-of-right development are the worst of all worlds; they limit potential opportunities for trade while introducing uncertainty into the market.

Street art: violation of property rights or positive emergent order?

Among Egypt’s pro-democracy protesters, graffiti has played an important role in the communication, providing a
platform for free speech under military rule. The Associated Press reports:

Graffiti has turned into perhaps the most fertile artistic expression of Egypt’s uprising, shifting rapidly to keep up with events. Faces of protesters killed or arrested in crackdowns are common subjects — and as soon as a new one falls, his face is ubiquitous nearly the next day.

The face of Khaled Said, a young man whose beating death at the hands of police officers in 2010 helped fuel the anti-Mubarak uprising, even appeared briefly on the walls of the Interior Ministry, the daunting security headquarters that few would dare even approach in the past.

Other pieces mock members of the Supreme Council of the Armed Forces, the council of generals that is now in power, or figures from Mubarak’s regime.

While this artistic movement in the Arab Spring puts the importance of freedom of expression in sharp relief, we of course more typically see graffiti and street art in freer societies where the act is often seen not as political uprising but as mindless vandalism. As a big believer in the power of property rights, I feel like I should be against street art as clear violations of building owners’ rights. However, it’s hard to argue that illegal street art doesn’t add something valuable to cities both visually and culturally, in times of peace as well as times of civil uprising.

It would be nice to suggest that a signalling mechanism could show artists on which buildings their work is permissible, but, not knowing much about the culture of street art or graffiti, I imagine that decriminalizing this art form would destroy it. What do you all think of unsanctioned street art? Does it make a difference if the building is industrial, retail, office, or residential?

Does it make a difference if it’s high brow street art like this?

(Who wouldn’t want a Banksy original on their wall?)

As opposed to more chaotic graffiti like this?

What do you all think is the appropriate response to graffiti from law enforcement and communities?

P.S. On the subject of city streets, thank you to Charlie Gardner and Flickr user hazer2006 for adding some great photos to the Market Urbanism Flickr Group.

The Coase Theorem in Land Use

On a recent post about property rights in the land market, commenter David Sucher brought up the issue of transaction costs. He commented here and at his blog City Comforts:

The “least intrusive means” should be always kept in mind. The only issue for me is the huge transaction costs which, I believe, make private agreements for land use quite impossible. The very reason we have government is because “voluntary private contracts” are too complex. We got rid of tort law (as to land use) because it was much easier to have uniform area-wide regulations.

While David brings up very valid points, I think that economist Ronald Coase offered a persuasive argument against these area-wide regulations. The Coase Theorem, which interestingly, I don’t think we’ve written about in depth here, addresses this issue of transaction costs. In 1960, Coase published his most famous paper, “The Problem of Social Cost,” exploring a common problem for city dwellers: annoyance at their neighbors’ behavior.

Coase uses as an example a confectioner whose business is adjacent to a doctors office. The confectioner uses loud machinery which causes vibrations next door and bothers the doctor. We can imagine a variety of solutions to this problem: the doctor could sound proof his office, the confectioner could upgrade to quieter machinery, one of them could move his business, the confectioner could compensate the doctor for the bother, or the doctor could pay the confectioner to stop making noise during his business hours. Assigning property rights would help any of these solutions emerge; if the confectioner has a right to make noise, the responsibility lies with the doctor to remedy the situation (or learn to live with the noise) or the reverse if the doctor has a right to quiet.

In a standard Micro 101 class, in my experience, the Coase Theorem is taught as follows. In a world of zero transactions costs, the efficient outcome will prevail regardless of which way the property rights are assigned. If the confectioner would stop making noise (by any of the above methods) for $20,000 and the doctor values his quiet at $30,000, the two will work out a contract to stop the noise. This is often followed by the conclusion 1) it doesn’t matter how we assign property rights, or 2) we don’t live in a world of zero transaction costs, so the Coase Theorem is merely theoretical, not relevant to the real world.

I learned a more nuanced version from Russ Roberts who emphasizes that transaction costs are never zero because people are not all-knowing robots. He also explains that “it takes two to have an externality.” In other words, a skyscraper with no setback and no parking doesn’t create any externalities if its nearnest neighbors are miles away. This is a silly example but gets to the issue of why externalities don’t exist without at least two conflicting parties. In a city with millions of people, though, we can clearly see that transaction costs for a skyscraper developer to negotiate with each person individually for the views that his building blocks would be ridiculous.

David Friedman writes about the Coase Theorem in a similar vein. His whole paper is informative, but I quote at length here the sections that I think are most relevant to land use:

The Coasian answer to this set of problems is that the law should define property in such a way as to minimize the costs associated with the sorts of incompatible uses we have been discussing–factories and recording studios, or steel mills and resorts. The first step in doing so is to try to define rights in such a way that, if right A is of most value to someone who also holds right B, they come in the same bundle. The right to decide what happens two feet above a piece of land is of most value to the person who also holds the right to use the land itself, so it is sensible to include both of the them in the bundle of rights we call “ownership of land.” [Blogger's Note: Couldn't be more different than the way property rights assigned through zoning.] On the other hand, the right to decide who flies a mile above a piece of land is of no special value to the owner of the land, hence there is no good reason to include it in the bundle.

If, when general legal rules were established, we somehow knew, for all cases, what rights belonged together, the argument of the previous paragraph would be sufficient to tell us how property rights ought to be defined. But that is very unlikely to be the case. In many situations a right, such as the right not to have noises of more than X decibels made over a particular piece of property, may be of substantial value to two or more parties–the owner of the property and the owner of the adjacent factory in my earlier example, for instance. There is no general legal rule that will always assign the right one.

In this case, the argument underlying the Coase Theorem comes into play. If we assign the right initially to the wrong person, the right person, the one to whom it is of most value, can still buy it. So one of the considerations in the initial definition of property rights is doing it in such a way as to minimize the transaction costs associated with fixing, via private contracts, any initially inefficient definition.

[....]

Part of what Coase showed was that, for some problems, there is no legal rule that will generate a fully efficient solution. He thus anticipated public choice economists, such as James Buchanan (another Nobel winner), in arguing that the real choice was not between an inefficient market and an efficient government solution, but rather among a variety of inefficient alternatives, private and governmental. In Coase’s words: “All solutions have costs and there is no reason to suppose that government regulation is called for simply because the problem is not well handled by the market or the firm.”

David Sucher is certainly right that all voluntary contracts have transactions costs, but if we are seeking a system to minimize transaction costs in land use, it’s not clear to me that zoning achieves this. In DC, for example, where almost all development requires a variance, developers must spend huge sums of money on legal fees to earn the right to build. Furthermore, as Friedman explains we should seek property rights that allow for improvements toward efficiency over time, and zoning essentially prevents this in many cases.