Archives For zoning

  1. Background: The Murr v. Wisconsin Case

On June 23, in a 5-3 decision by Justice Anthony Kennedy (Justice Ruth Bader Ginsburg, Stephen Breyer, Sonia Sotomayor, and Elena Kagan joined; Justice Neil Gorsuch did not participate), the U.S. Supreme Court upheld  the Wisconsin State Court of Appeals’ ruling that two waterfront lots should be treated as a single unit in a “regulatory takings” case.  The Murrs are siblings who inherited two adjacent waterfront properties from their parents, and they wanted to sell one of the lots and develop the other.  Unfortunately for the Murrs, the lots had been merged under local zoning regulations, and the local county board of assessments denied the Murrs’ request for a zoning variance to allow their plan to proceed.

The Murrs challenged this in state court, arguing that the state had effectively taken their second property by depriving them of practically all use without paying just compensation, as required by the Takings Clause of the Fifth Amendment.  Affirming a lower state court, the Wisconsin Appeals Court held that the takings analysis properly focused on the two lots together and that, using that framework, the merger regulations did not effectuate a taking.

The U.S. Supreme Court granted the Murrs’ writ of certiorari.  The Supreme Court found that in determining what the relevant unit of property is, courts must ask whether the owner would have a reasonable expectation to believe the property would be treated as a single or separate units.  The Court held that in regulatory takings assessments courts must give substantial weight to how state and local law treat the property, evaluate the property’s physical characteristics, and assess the property’s value under the challenged regulation.  The majority concluded that with regard to the Murrs’ property, there was a valid merger under state law, the terrain and shape of the lots made it clear that the merged lot’s use might be limited, and the second lot brought prospective value to the first. Thus, the lots should be treated as one parcel and they did not suffer a compensable taking, since the Murrs were not deprived of all economically beneficial use of the property.

Chief Justice John Roberts dissented (joined by Justices Clarence Thomas and Samuel Alito), noting that the Takings Clause protects private property rights “as state law created and defines them” and the majority’s “malleable definition of ‘private property’…undermines that protection.”  Thus, “[s]tate law defines the boundaries of distinct parcels of land, and those boundaries should determine the ‘private property’ at issue in regulatory takings cases.  Whether a regulation effects a taking of that property is a separate question, one in which common ownership of adjacent property may be taken into account.”

The always thoughtful Justice Thomas penned a separate dissent, suggesting that the Court should reconsider its regulatory takings jurisprudence to see “whether it can be grounded in the original public meaning” of the relevant constitutional provisions.

  1. The Supreme Court Should Reject the Confusing Dichotomy Between Physical and Regulatory Takings and Apply a Simpler Uniform Standard, One that Better Protects the Property Interests Safeguarded by the Fifth Amendment’s Takings Clause

Unfortunately, far from clarifying regulatory takings analysis, the Murr decision further muddies the doctrinal waters in this area.  Justice Kennedy’s majority decision creates a new inherently ambiguous balancing test that gives substantial leeway to localities to adjust regulatory demarcations and property line divisions without paying compensation to harmed property owners.

Although the three-Justice dissent sets forth a more full-throated paean to property rights, it does little to clarify how to determine when a regulatory taking occurs.  Instead, it approvingly cites prior less than helpful Supreme Court pronouncements on the topic:

Governments can infringe private property interests for public use not only through   [direct] appropriations, but through regulations as well. . . .  Our regulatory takings decisions . . .  have recognized that, “while property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking.”  This rule strikes a balance between property owners’ rights and the government’s authority to advance the common good. Owners can rest assured that they will be compensated for particularly onerous regulatory actions, while governments maintain the freedom to adjust the benefits and burdens of property ownership without incurring crippling costs from each alteration. . . .  For the vast array of regulations that [do not deny all economically beneficial or productive use of land and thus automatically constitute a taking,] . . . a flexible approach is more fitting.  The factors to consider are wide ranging, and include the economic impact of the regulation, the owner’s investment-backed expectations, and the character of the government action.  The ultimate question is whether the government’s imposition on a property has forced the owner “to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.” 

Such a weighing of “wide-ranging factors” to determine whether or not a taking has occurred is inherently subjective and prone to manipulation by local authorities.  It enables them to marshal a list of Court-approved phrases to explain why a regulation does not go “too far” and take property – even though it may substantially destroy property value.

What is missing from the opinions in Murr is the recognition that any substantial net reduction in the value of a piece of property (subdivided or not) takes a certain property interest.  It is black letter law that there is not a single undivided property right inhering in an item of property, but, rather, multiple property interests – a “bundle of sticks” – that can be taken in whole or in part.  Under current Supreme Court jurisprudence, if the government directly seizes (or physically occupies) a particular stick, compensation is owed for the reduction in overall property value stemming from that stick’s loss.  This is the case of a physical “per se” taking.  But if the government instead enacts a rule preventing that stick from being sold or embellished by the bundle’s owner (think of the Murrs’ plan to sell one plot and develop the other), the owner likewise suffers similar reduced overall property value due to restrictions on the stick.  Under existing Supreme Court case law, however, the loss in value in the second case, unlike the first case, may well not be compensable, because the owner has not been deprived “of all beneficial use” of the overall property.  Supreme Court case law indicates that a taking may exist in the second case, depending upon a regulation’s impact, its interference in investment-backed expectations, and the character of its actions.  As a practical matter, this infelicitous, indeterminate balancing test very seldom results in a taking being found.  As a result, government is incentivized to invade property rights by using regulations, rather than physical appropriations, thereby undermining the Taking Clause’s requirement that “private property [not] be taken for public use, without just compensation.”

There is a far better way to deal with the problem of government regulatory intrusions on private property rights, one that recognizes that regulatory deprivation of any stick in the bundle should be compensable.  Professor Richard Epstein, distinguished property law scholar extraordinaire, points the way in his very recent article posted at the NYU Journal of Law and Liberty blog 18 days before Murr was handed down.  While Professor Epstein’s brilliant essay merits a close read, his key points are as follows:

I have used the occasion of yet another takings case before the Supreme Court, Murr v. Wisconsin, to comment on the structure of the takings law as it is, and as it ought to be.  On the former count, it is quite clear that the entire structure of the modern law of physical and regulatory takings tends to fixate on the ratio of the value of property rights taken to the value of the full bundle of rights before the regulation was put into place.  But there is no explanation as to why this ratio has any significance in light of the standard rule in physical-takings cases that the fair market value of the rights taken affords the correct measure of compensation so long as the taking is for a public use when no police-power justification is available.  Within this peculiar framework, it is a mistake to make the right of compensation for the loss of development rights under the Wisconsin ordinance turn on the technicalities of the chain of title to a particular plot.  This seems a uniquely inappropriate reason to deny compensation for the loss of development rights.

Any analysis of Murr is inherently messy, and it leaves open the endless challenge of reconciling this case with a wide range of other cases that cannot decide whether two contiguous parcels held by different titles can be a collective denominator in takings cases.  [But] . . . the muddle and confusion of the current law is largely obviated by the simple proposition that, prima facie, the more the government takes, the more it pays.  That rule applies to the outright taking of any given parcel of land or to the taking of a divided interest in property. In all of these cases, the shifts in what is taken do not create odd and indefensible discontinuities, but only raise valuation questions as to the size of the loss, taking into account any return benefits that a property owner may receive when the taking is part of some comprehensive scheme. But those issues are routinely encountered in all physical-takings cases. In all instances, police-power justifications, tied closely to the law of nuisance, may be invoked, and in cases of comprehensive regulation, courts must be alert to determine whether the scheme that takes rights away also affords compensation in-kind from the parallel restrictions on others in the scheme. Under this view, the full range of divided interests, be they air rights, mineral rights, liens, covenants, or easements, are fully compensable. The untenable discontinuities under current doctrine disappear.

Let us hope that in the future, the Supreme Court will take to heart Justice Thomas’s recommendation that the Court return to first principles, and, in so doing, seriously consider the economically and jurisprudentially sophisticated analysis adumbrated in Professor Epstein’s inspired essay.                  

Ronald Coase on regulation

Geoffrey Manne —  2 September 2013

As Gus said, there will be much more to say, and much more said by others, on Coase’s passing. For now, I offer this excerpt from a 1997 Reason interview he gave with Tom Hazlett:

Hazlett: You said you’re not a libertarian. What do you consider your politics to be?

Coase: I really don’t know. I don’t reject any policy without considering what its results are. If someone says there’s going to be regulation, I don’t say that regulation will be bad. Let’s see. What we discover is that most regulation does produce, or has produced in recent times, a worse result. But I wouldn’t like to say that all regulation would have this effect because one can think of circumstances in which it doesn’t.

Hazlett: Can you give us an example of what you consider to be a good regulation and then an example of what you consider to be a not-so-good regulation?

Coase: This is a very interesting question because one can’t give an answer to it. When I was editor of The Journal of Law and Economics, we published a whole series of studies of regulation and its effects. Almost all the studies–perhaps all the studies–suggested that the results of regulation had been bad, that the prices were higher, that the product was worse adapted to the needs of consumers, than it otherwise would have been. I was not willing to accept the view that all regulation was bound to produce these results. Therefore, what was my explanation for the results we had? I argued that the most probable explanation was that the government now operates on such a massive scale that it had reached the stage of what economists call negative marginal returns. Anything additional it does, it messes up. But that doesn’t mean that if we reduce the size of government considerably, we wouldn’t find then that there were some activities it did well. Until we reduce the size of government, we won’t know what they are.

Hazlett: What’s an example of bad regulation?

Coase: I can’t remember one that’s good. Regulation of transport, regulation of agriculture– agriculture is a, zoning is z. You know, you go from a to z, they are all bad. There were so many studies, and the result was quite universal: The effects were bad.

Forbes interviews my colleague and office neighbor David Schleicher on his new and very interesting paper, City Unplanning.  This paper continues Schleicher’s interesting line of research on the law and economics of cities with a creative and powerful analysis of the political economy of zoning in big cites.

Here’s a brief snippet from the start of the interview:

For starters, how about a brief rundown of your story of why housing in major cities is so expensive.

Generations of scholars assumed that, while exclusive suburbs use zoning rules to limit development to keep people out and to increase the average value of housing, big cities don’t do that kind of thing because they are run by “growth machines” or ever more powerful coalitions of developers and the politicians who love them.

But in fact for most of the Twentieth Century, when urban housing prices went up, people starting building housing and prices went down. But, at some point, this broke down.

In a number of big cities, new housing starts seem uncorrelated or only weakly correlated with housing prices and the result of increasing demand while holding supply steady is that price went up fast. The average cost of a Manhattan apartment is now over $1.4 million and the average monthly rent is over $3,300.

The only explanation is that zoning rules stop supply from increasing in the face of rising demand. (In case you are wondering, this not a bubble phenomenon—this happened in many cities before the housing bubble, and the behavior of housing markets during and after the crisis is completely consistent with a story about big city housing supply constraints.)  And it’s not like real estate developers suddenly became political weaklings. What gives?

The key to my story is that urban legislatures don’t have competitive local parties—we don’t see big city legislatures divided between Republicans and Democrats, each trying to create a localized brand for competence on local issues. Instead, most local legislatures are either non-partisan or dominated by one party.

As a result, there is no one with the power and incentives to strike deals between legislators in order to promote things that are good for people across the city. And there is no one to decide the order in which issues are decides, which matters when legislative preferences “cycle,” or there are majorities that prefer a to b, b to c, and c to a.

The result of the lack of competitive local parties is that procedural rules matter a lot—they set the voting order, which can determine the outcome.

Part II of the interview is available here.  The abstract is here:

Generations of scholarship on the political economy of zoning have tried to explain a world in which tony suburbs run by effective homeowner lobbies use zoning to keep out development, but big cities allow relatively untrammeled growth because of the political influence of developers. Further, this literature has assumed that, while zoning restrictions can cause “micro-misallocations” inside a metropolitan region, they cannot increase housing prices throughout a region because some of the many local governments in a region will allow development. But these theories have been overtaken by events. Over the past few decades, land use restrictions have driven up housing prices in the nation’s richest and most productive regions, resulting in massive changes in where in America people live and reducing the growth rate of the economy. Further, as demand to live in them has increased, many of the nation’s biggest cities have become responsible for substantial limits on development. Although developers are, in fact, among the most important players in city politics, we have not seen enough growth in the housing supply in many cities to keep prices from skyrocketing.

This paper seeks to explain these changes with a story about big city land use that places the legal regime governing land use decisions at its center. Using the tools of positive political theory, I argue that, in the absence of strong local political parties, land use law sets the voting order in local legislatures, determining policy from potentially cycling preferences. Specifically, these laws create a peculiar procedure, a form of seriatim decision-making in which the intense preferences of local residents opposed to re-zonings are privileged against more weakly-held citywide preferences for an increased housing supply. Without a party leadership to organize deals and whip votes, legislatures cannot easily make deals for generally-beneficial legislation stick. Legislators, who may have preferences for building everywhere to not building anywhere, but stronger preferences for stopping construction in their districts, “defect” as a matter of course and building is restricted everywhere. Further, the seriatim nature of local land use procedure results in a large number of “downzonings,” or reductions in the ability of landowners to build “as of right”, as big developers do not have an incentive to fight these changes. The cost of moving amendments through the land use process means that small developers cannot overcome the burdens imposed by downzonings, thus limiting incremental growth in the housing stock.

Finally, the paper argues that, as land use procedure is the problem, procedural reform may provide a solution. Land use and international trade have similarly situated interest groups. Trade policy was radically changed, from a highly protectionist regime to a largely free trade one, by the introduction of procedural reforms like the Reciprocal Trade Agreements Act, adjustment assistance, and “safeguards” measures. The paper proposes changes to land use procedures that mimic these reforms. These changes would structure voting order and deal-making in local legislatures in a way that would create support for increases in the urban housing supply.

Last week I posted about the regulatory barriers facing an ice cream shop in San Francisco.  A student passes along a story that hits a bit closer to home: the sale of beer right here in Arlington County.  Apparently, the owner of the Westover Beer Garden has had enough:

It’s been a contentious couple of weeks for the Westover Market and Beer Garden. Upon receiving a warning from Arlington County, it suddenly declared the beer garden would shut down until April 1. Today, the saga continues as management has decided to re-open the beer gardenagainst the County’s wishes.

Owner Devin Hicks said he’s tried working with the county on the matter but his efforts have not been successful. Now he’s going to do what he believes Westover Market is entitled to do by law — operate a year-round patio area.

Arlington County has a website devoted the Westover Beer Garden and its regulation thereof.  The heart of the dispute appears to be whether a parking requirement imposed by the county is optional or mandatory.

On the page, it states that establishments with outdoor patios must have ample parking for the number of people being served, but that parking requirement is reduced if the establishment is near a Metro stop. The County allows establishments to get around the parking rule by becoming “seasonal” and closing for three or more months each year.

Because the Westover beer garden isn’t deemed as having enough parking, it’s supposed to be seasonal. However, Hicks points out the rule is technically a “guideline” and not an actual “ordinance.” He believes the county has been enforcing a measure that was never officially put in the books.

The County’s web page for Westover Market links to another County page, titled “Guidelines for Outdoor Cafes.” On that document it states: “Unless otherwise required by the County Board, outdoor cafes shall be exempt from any parking requirement.” It goes on to say: “There is no explicit requirement in the Zoning Ordinance that requires them to be temporary or seasonal.”

Of his long-running trouble with the county, Hicks said relations have improved over the past year or so, but he believes he’s currently being unfairly targeted with the enforcement of the seasonal rule.

“We’re just going to go ahead and do what’s legally right,” Hicks said. “There’s nothing in the rules that says it has to be seasonal.”

As I mentioned in the post on the bay area ice cream shop, I suspect the pernicious economic effects of local barriers to entry, rather than those at the state or federal level, are much larger than generally presumed.

BY LARRY DOWNES AND GEOFFREY A. MANNE

The FCC published in June its annual report on the state of competition in the mobile services marketplace. Under ordinary circumstances, this 300-plus page tome would sit quietly on the shelf, since, like last year’s report, it ‘‘makes no formal finding as to whether there is, or is not, effective competition in the industry.’’

But these are not ordinary circumstances. Thanks to innovations including new smartphones and tablet computers, application (app) stores and the mania for games such as ‘‘Angry Birds,’’ the mobile industry is perhaps the only sector of the economy where consumer demand is growing explosively.

Meanwhile, the pending merger between AT&T and T-Mobile USA, valued at more than $39 billion, has the potential to accelerate development of the mobile ecosystem. All eyes, including many in Congress, are on the FCC and the Department of Justice. Their review of the deal could take the rest of the year. So the FCC’s refusal to make a definitive finding on the competitive state of the industry has left analysts poring through the report, reading the tea leaves for clues as to how the FCC will evaluate the proposed merger.

Make no mistake: this is some seriously expensive tea. If the deal is rejected, AT&T is reported to have agreed to pay T-Mobile $3 billion in cash for its troubles. Some competitors, notably Sprint, have declared full-scale war, marshaling an army of interest groups and friendly journalists.

But the deal makes good economic sense for consumers. Most important, T-Mobile’s spectrum assets will allow AT&T to roll out a second national 4G LTE (longterm evolution) network to compete with Verizon’s, and expand service to rural customers. (Currently, only 38 percent of rural customers have three or more choices for mobile broadband.)

More to the point, the government has no legal basis for turning down the deal based on its antitrust review. Under the law, the FCC must approve AT&T’s bid to buy T-Mobile USA unless the agency can prove the transaction is not ‘‘in the public interest.’’ While the FCC’s public interest standard is famously undefined, the agency typically balances the benefits of the deal against potential harm to consumers. If the benefits outweigh the harms, the Commission must approve.

The benefits are there, and the harms are few. Though the FCC refuses to acknowledge it explicitly, the report’s impressive detail amply supports what everyone already knows: falling prices, improved quality, dynamic competition and unflagging innovation have led to a golden age of mobile services. Indeed, the three main themes of the report all support AT&T’s contention that competition will thrive and the public’s interests will be well served by combining with T-Mobile.

Continue Reading…

What happens when Wal-Mart comes to town?  One thing is for sure, the line for jobs is long:

In contrast, a new Walmart in Cleveland recently received 6000 applicants for 300 positions, and, not long ago, two Walmart stores in the Chicago area received 25,000 and 15,000 applications. The Cleveland store hired one in twenty applicants. The Chicago hiring rates were far more modest.

HT: (American Thinker).

Meantime, in Washington DC, various groups are protesting the prospect of Wal-Mart coming to town, including picketing the home of a developer.  From the group’s website:

We are not interested in negotiating the terms of Wal-Mart’s arrival. We know the harmful impact that Wal-Mart always has, from thousands of case studies around the country, and around the world. We believe in our hearts, and in our minds, that DC must continue to be Wal-Mart Free.

Other labor-backed anti-Walmart groups are insisting on a community benefits agreement extracting concessions from Walmart, including, apparently, reduced hours of operation (see, e.g. here).

One need not look at the long list of job applicants to figure the social benefits.  But often left out when the policy discussion is framed as unions versus corporations are consumers.  Consider Hausman & Ephraig’s (a version of the paper here) analysis of the impact of Wal-Mart on consumer welfare, finding (looking at the benefits of food prices alone) the following:

We find that an appropriate approach to the analysis is to let the choice to shop at
Wal-Mart be considered as a “new good” to consumers when Wal-Mart enters a
geographic market. Some consumers continue to shop at traditional supermarkets while other consumers choose to shop at Wal-Mart. Many consumers shop at both types of stores. Thus, we specify a utility consistent two level model of choice among types of shopping destinations. We then estimate a fixed effects binomial logit choice model to estimate the parameters of the utility model that differs across households. We use the estimated parameters to calculate the exact compensating variation that arises from the direct variety effect of the entry and expansion of supercenters and find the average estimate to be 20.2% of average food expenditure. We similarly estimate the exact compensating variation from the indirect price effect that arises from the increased competition that supercenters create. We find this average effect to be 4.8%. Thus, we estimate the average effect of the total the compensating variation to be 25% of food expenditure, a sizeable estimate.

Since we find that lower income households tend to shop more at these low priced
outlets and their compensating variation is higher from supercenters than higher income households, a significant decrease in consumer surplus arises from zoning regulations and pressure group tactics that restrict the entry and expansion of supercenters into particular geographic markets.

Note again that these are significant benefits in terms of consumer welfare — and just for food.   Further, these gains are disproportionately enjoyed by low-income households.  Hausman & Ephraig find that household incomes below $10,000 benefit by approximately 50 percent more than average.

Jason Furman (yes, this one) points out that this result is a pretty big deal:

[T]hat’s a huge savings for households in the bottom quintile, which, on average, spend 26 percent of their income on food. In fact, it is equivalent to a 6.5 percent boost in household income—unless the family lives in New York City or one of the other places that have successfully kept Wal-Mart and its ilk away.

That’s some pretty low-hanging fruit in terms of policy wouldn’t you say?  Consumers do not have a loud voice in the relevant policy and political debate.   And the anti-Wal-Mart crowd seems to be laboring under the unfortunate assumption that their preferred policy amounts to a mere wealth transfer between Wal-Mart and workers.  Hausman & Ephraig’s results demonstrate the magnitude of the cost to consumers of this economic naivete.  The relative silence of consumer interests should not be confused with the notion that the consumer welfare losses imposed by deterring Wal-Mart entry are not real — or pretending that they are not concentrated precisely on low-income households.

There is an excellent interview of Ronald Coase conducted in honor of Coase’s 100th birthday and the creation of the Coase China Society.  Its an excellent interview (HT: Knowledge Problem).  Peter Klein offers some observations on the interview as well.  One part that caught my attention was Coase’s discussion of the role of the Journal of Law & Economics in advancing the law and economics movement:

RC (Ronald Coase): One way for the [Coase China] Society to advance the right kind of economics to China, and encourage Chinese economists to do the right kind of work, is to have a journal of its own. When I was editor of the Journal of Law and Economics, I was very active. I would attend seminars and conferences and talk to people to see what kind of research they were doing. I would solicit their articles if I thought they were good ones. And frequently, I would talk to people and encourage them to conduct certain studies with the promise to publish their article.

WN (Wang Ning): This is indeed very different from the way journals are run now.

RC: I do not believe any other journal was run the same way then. Most journal editors wait for submitted articles and use external reviewers to select the articles for publication. This was not the way I worked. I knew what kind of articles I would like to publish, and I went around to find people to write them.

I’ll give you an example. Bernard Siegan came to the University of Chicago Law School as a Fellow and proposed to write a paper on the pros and cons of zoning. I told him instead to find a place where zoning did not exist and to see what happened to land use in comparison to places with zoning. He wrote a great paper about land use in Houston which did not have zoning (The paper was published as “Non-Zoning in Houston, Journal of Law and Economics (1970)).

Another example is Steve’s article on bees. I knew there were contracts between beekeepers and orchard owners in Washington. I asked Steve to investigate it. He did a splendid study (The paper was published as “The Fable of Bees, in Journal of Law and Economics (1973)). …

WN: … But the opportunity cost was probably very high. At the prime time of your research, you devoted yourself to the Journal instead of your own research. You might have written another one or two articles as great as “The Nature of the Firm” or “The Problem of Social Cost.”

RC: I do not regret my decision at all. This was the main attraction for me to come to Chicago. I think this was the only way to develop a subject. If it were not for the Journal, many articles would not have been published or even written.

WN: Based on your experience, what should the Society do if it launches a new journal?

RC: You should have a clear view of what you want to accomplish, what articles you want to publish and what kind of research you want to encourage. You shall not worry about how other people think about your views. You cannot control what other people think. You will not monopolize the whole field. If you believe in your view, you have to be strong to defend it and promote it in the market for ideas until you are convinced that it is proved wrong. This is the only way to be independent.

WN: I totally agree. But I don’t think we have got the second Coase yet. When you started editing the Journal of Law and Economics, you were already well established in the profession. Your view, no matter whatever it was, would be considered seriously and readily command agreement.

RC: I do not think that was the case. I always find myself in disagreement with the prevailing view. Even today, my view of the subject is not accepted by the profession. …

Very interesting.  I cannot think of many examples of journals that take this approach, at least to the same degree as Coase’s JLE.  But that sort of focus was probably necessary to get the law and economics movement off the ground.  Are there examples of journals with this kind of agenda, i.e. where the editor “knew what kind of articles [they] would like to publish, and [] went around to find people to write them”?  Do any of the modern law and economics journals operate this way?  I don’t think so.  But maybe I’m wrong.  What about in empirical legal studies?  David Evans’ very successful Competition Policy International journal operates largely through soliciting articles on antitrust topics from specific authors — and so has some of this flavor, but (and I should disclose I am an editor of that journal) I do not think it has a “mission” in the same sense as Coase’s use of the term in describing the role of the JLE.

Check out the entire interview.