How takings legislation could improve environmental regulation.

• Author: Elliott, E. Donald
• Position: Defining Takings: Private Property and the Future of Government Regulation

The conventional wisdom is wrong: Takings law and environmental regulation are not necessarily mortal adversaries. Clarifying and expanding the rights to compensation for property owners could actually improve environmental regulation, not "gut" it, as many commentators assume.(1)

Strengthening rights of financial compensation for owners of property adversely affected by environmental regulation can improve the quality of environmental regulation by "regulating the regulators"--essentially creating incentives for government to design rules more carefully and maximize the environmental benefits of regulatory investments.(2)

The second thesis is even more striking and counterintuitive: Stronger protection for property rights also may result in stronger environmental laws and regulations. By spreading the costs of environmental regulation over a larger segment of the population, takings legislation not only could increase distributional fairness but also may reduce political opposition to stronger environmental protection measures.(3)

The conclusion that greater attention and sensitivity to the effects of environmental regulation on the rights of property owners could improve environmental protection efforts is based not only on theory(4) and preliminary findings in the empirical literature(5) but also on my experience as General Counsel of the United States Environmental Protection Agency (EPA) from 1989 to 1991.(6) During that period, an Executive Order(7) and the rising political power of the property rights movement(8) forced the EPA to pay more attention to takings considerations. Greater sensitivity to avoiding regulatory takings of private property, however, did not prevent us from pursuing any regulatory targets; rather, greater sensitivity to the effect that our regulations might have on property owners probably improved those regulations, both from an environmental standpoint and in terms of minimizing unnecessary burdens on property owners.

Of course, much depends on how particular takings legislation is drafted; I would not support everything in the bills introduced in the 105th Congress.(9) Conceptually, however, legislation would be useful: (1) to require agencies to assess the consequences of their proposed regulatory actions on private property, (2) to clarify the "trigger" for what constitutes a compensable regulatory burden, and (3) to provide at least partial compensation for property owners burdened disproportionately by government regulation, even if the government action falls short of a constitutional taking.(10)

The central issue in takings law is distributive justice: To what extent should society impose disproportionate burdens on particular members?(11) The resolution of this issue depends fundamentally on the level of burden that society expects others to bear, but that inquiry is a matter of legislative rather than adjudicative fact;(12) a central reason that the "takings muddle"(13) has proved so intractable in regulatory takings cases is that such questions of comprehensive social accounting cannot be answered well in the context of a single adjudication.(14) It is impossible, for example, for a court to determine as a matter of adjudicative fact whether the burden imposed by prohibiting farming in order to preserve a wetland is disproportionate to that imposed by drafting an eighteen year old into the army.

The only immediate way out of the "takings muddle" is for the legislature to establish a compensation "trigger" that defines, at least implicitly, the level of burden that society expects its members to bear without being compensated.(15) Although legislation obviously would not bind the courts in constitutional adjudication, legislative findings as to what level of social burden is expected to be borne without compensation would be relevant to the constitutional inquiry, particularly if the legislative determination were grounded in empirical evidence of the burdens assumed routinely by other members of the community without compensation.

Environmentalists should put aside their unjustified fears that environmental regulation cannot survive unless the government takes property without compensation.(16) Instead, we should welcome legislation that clarifies the extent to which society can regulate the obligations of property ownership without providing compensation. Garrett Hardin's watershed article The Tragedy of the Commons still offers sage advice: Private property is not the enemy but, rather, is part of the solution to environmental problems.(17)

I.

Takings law is a regulatory system. The constitutional principle that the government must compensate owners if it "takes" private property through regulation that "goes too far"(18) is not only a matter of distributional fairness but also a way to regulate government regulators.(19) If government must pay for the cost of property made valueless by regulation, it has an incentive to regulate more efficiently by looking for regulatory investments that create benefits greater than the costs they incur.(20)

Takings law regulates government regulation at a metalevel through the general style of regulation that Calabresi has called "general deterrence": Government is not prohibited from taking any particular regulatory action but is subject to an incentive to consider carefully the costs and benefits of measures that may "go too far" in regulating private property because of the threat of paying compensation.(21) Although most judgments come out of a government-wide "judgment fund,"(22) proposed takings legislation would require payment of takings judgments from the budget of the agency proposing the regulation in order to encourage efficient regulation.

Like other forms of regulation, takings law does not necessarily harm the activity being regulated.(23) The effect of regulation on the underlying activity depends upon the nature of the incentives generated by the regulatory structure and on how well the regulation is designed and administered.(24) In some instances, regulation actually may improve the underlying activity by contributing more to improving the activity's efficiency than the regulation itself costs.(25)

The idea that, in theory, regulation may improve the activity being regulated is well understood for forms of government regulation other than takings law.(26) For example, Professors Porter and van der Linde have argued that environmental regulation may encourage enterprises to become more efficient in their use of raw materials.(27)

An analogous point can be made with regard to takings law that regulates government regulators: Takings law may result in improvements in government regulation by giving government an incentive to weigh the costs as well as the benefits of proposed regulations.(28) Put into the language of economics and public choice theory, the point is a simple one: Any activity that is costless to the user--whether using the air as a global waste dump or confiscating other people's property as a wetlands preserve--will tend to be overconsumed because the user will be able to appropriate a portion of the benefits from the activity while externalizing most of the costs.(29) This principle underlies the modern economic theory of environmental pollution (as well as tort law); regulation ultimately attempts to counteract overconsumption by internalizing externalities where the market fails to do so because of transaction costs.(30)

Many environmentalists, however, have been slow to recognize that the same economic argument applies, at a metalevel, to the regulation of government regulation itself For instance, if government regulators can appropriate the political credit for their regulatory actions(31) but are able to externalize most of the costs as uncompensated losses to property owners, they will have incentives to overconsume regulation in the same way that polluters have an incentive to overconsume the air or the water.(32)

The empirical literature on uncompensated governmental takings has begun to confirm the point predicted by economic theory. For example, an army that obtains "free" labor through the draft tends to oversubstitute human capital for technology; an army that pays market rates for human labor is a different army, but it is not necessarily an inferior one-it may even be cheaper and more efficient.(33) This counterintuitive point is the same one made by Professors Porter and van der Linde about environmental regulation: The discipline engendered by having to pay market rates for inputs, rather than obtaining some of them as "subsidies" (because the legal system protects them inadequately), can improve government regulation.

The discipline engendered by paying market rates for inputs can improve the quality, as well as affect the quantity, of government regulation. This distinction is important because the consensus is that our problem is not one of too much regulation but rather improving the quality of regulation by making sure that regulatory investments produce benefits commensurate with their costs.(34) For example, the United States continues to lose approximately 70,000 acres of wetlands per year.(35) Appropriately designed incentives(36) would not necessarily cut back on the total acreage of wetlands being preserved by government regulation. Rather, appropriate incentives can help influence government regulation to focus more effectively on preserving those wetlands that produce the greatest benefits in terms of wetlands values (where the government would be presumably most willing to pay compensation, if necessary). Moreover, as discussed below,(37) it is wrong to assume that government has to pay for property that is "taken."

To be sure, thinking about takings law as a system for regulating government regulation is not the whole story behind takings law (as the other contributions to this Symposium make clear). Nor is it true to say that everything that has been...