Epstein Analyzes Takings and Compensation

Look at damages first
Richard A. Epstein
National Law Journal
September 27, 2004

The endless struggles over the proper scope and purposes of the takings law neatly break into two halves. The first asks: What sort of activities count as takings? That's an easy one when the government removes the landowner from his property, say, as part of a large urban renewal program; it is much harder when the government simply regulates in some manner its use. But nowadays, the forcible dispossession of individual landowners for urban renewal raises two more questions in combination. Is the government takeover stopped in its tracks by the "public use" requirement of the takings clause [in the federal and state constitutions]? If not, how much compensation must be paid? Logic suggests that the public-use issue should be tackled first, but the relationship between these two is illuminated by considering the two matters in reverse order.

Why do we want to see that just compensation is paid to dispossessed property owners? Partly as a matter of simple fairness-one doesn't want a coercive government program to impose disproportionate burdens on those individuals whose property stands in the path of progress. The state should not gain from the hide of a single owner but should spread the pain across all taxpayers. That same point has an efficiency parallel. In economic terms, the just-compensation requirement introduces a price system into government actions. Rather than taking at face value the bland public pronouncements as to how individuals must make sacrifices to advance the public good, government must put its money where its mouth is.

If government can raise taxes to pay the freight, then there is a reason to believe that the project has the peculiar mix of tangible and intangible benefits that exceed its tangible and intangible costs. But if the tax dollars aren't there, then we can dismiss their words as hot air.

Unfortunately, this analogy to the price system breaks down because there are no willing sellers in condemnation proceedings. Hence the need for some legal standard to decide how much compensation should be paid. The defenders of urban renewal, with the implicit blessing of the courts, tend systematically to lowball this figure, and concentrate strictly on the physical assets that have been taken, usually calculated as its market value. That skinflint standard is, however, a disaster from an economic and social point of view. In a market transaction, no seller will part with his property unless the compensation he receives makes him, not his property, at least as well off as he was before. These lowball figures don't come close.

I just received a copy of a complaint filed by property owners and tenants in Washington to resist the wholesale takeover of their property by the National Capital Revitalization Corp. [NCRC], which is determined to give the property away at below-market prices to some lucky private supplicant. The NCRC will provide up to $10,000 for relocation, even if actual costs are far greater. It will offer nothing for the loss of good will, appraisals, legal fees or the gap [often substantial] between the subjective value the owner attaches to the property [which is, after all, not for sale] and the highest bid an outsider might make. This eminent-domain-law price system plainly misses key elements of value.

Must we go back to basics?

This mispricing of eminent domain has deleterious consequences in all public acquisitions, including those that meet the narrowest definition of public use. In line with the law of supply and demand, cheap rates bring forth excessive levels of public activity. For a remedy, we'd have to return to Blackstone's view that the eminent domain power can be exercised only if the state covers the full amount of consequential damages to the owner. Once owners' confidence is restored, the level of resistance to takeovers will subside; owners will be encouraged to improve their land, knowing that it will not be snatched away at bargain prices.

In the absence of sensible compensation rules, a tough public-use requirement narrows the scope of government activities. Unfortunately, the mindset that sees urban development as a social panacea treats cheap prices and unlimited public use as part of a single package. But suppose that the pricing issue is fully and fairly addressed, is there any remaining need for a public-use requirement at all? In pra