POLITICAL ECONOMY AND THE EFFICIENCY OF COMPENSATION FOR TAKINGS

I. CONTEXT: CASES AND EXAMPLES Over the last decade or so, a number of Supreme Court decisions have brought to the forefront of policy debates a longstanding legal controversy over when and whether the government should compensate property owners when regulation reduces the value of their property. This "takings" jurisprudence begins with the last clause of the Fifth Amendment in the Bill of Rights to the U.S. Constitution, which, among other limits on the powers of government, includes the phrase "... nor shall private property be taken for public use without just compensation." The standard context in which the takings clause applies is when the government actually becomes the possessor of a piece of property, e.g., condemning farmland in order to build a highway. In such a case, the government has a clear obligation to compensate the former owner of the property for his or her losses. Parties may argue about what the compensation should be, including disputing the market value of the property and how much weight should be given to the owners' particular valuation of the property as opposed to the market value. (1) There is also some dispute about whether and how the term "public use" imposes requirements on the government beyond the obligation to compensate (Eagle, 2001 at 11-12). The underlying obligation to compensate, however, is clear when the government seizes private property outright, for whatever purpose. (2) Much less clear in Supreme Court jurisprudence is whether a "taking" has occurred when a property owner suffers a loss not from the government owning his property, but as a consequence of regulations that create losses. Table 1 summarizes findings from a dozen of the leading Supreme Court takings cases. (3) Amid the ambiguity and controversy, it is difficult to detect a consistent, normative strain in the jurisprudence. It would be generous to say that takings compensation is being used as an instrument to encourage good regulation and discourage bad regulation. But from an economic perspective, judicial review of takings compensation can and should be viewed as a tool to motivate efficient regulation. The way in which compensation interacts with the political process to produce regulatory outcomes is the subject of this analysis. In its essentially ad hoc, factual inquiries, the Court's decisions have identified several factors that have particular significance, most prominently in the Penn Central case. (4) The economic impact of the regulation on the claimant and, particularly, the extent to which the regulation has interfered with distinct investment-backed expectations are, of course, relevant considerations. So, too, is the character of the governmental action. A "taking" may more readily be found when the interference with property can be characterized as a physical invasion by government, than when interference arises from some public program adjusting the benefits and burdens of economic life to promote the common good. (5) That the courts have issued nine major decisions on regulatory takings in the last twenty-five years indicates the ambiguity with which these factors are applied. There remains tension and lack of clarity in attempting to decide when regulation merits compensation. No historical trend is apparent; sometimes "total deprivation" is necessary; other times one needs some association between the regulation and a credible public purpose. Coincident with this legal ambiguity is an ongoing political controversy. Property rights advocates argue for compensation for regulatory takings as a way to protect defenseless property owners against an encroaching state. Those in favor of land use regulations, e.g., environmentalists, take the position that compensation is little more than a device to impede regulations that would thwart their interests. The remainder of the article proceeds as follows. Section II describes prior economic approaches to regulatory takings and how the authors' analysis differs, noting empirical support for their findings. …