Is this North Carolina or Zimbabwe? How property rights in North Carolina deteriorated to the level of a third-world country.

Author:Richardson, Craig J.
Position:Essay
 
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Numerous studies have shown a clear positive link between strong property rights and economic development (North and Thomas 1973; Rosenberg and Birdzell 1987; Torstensson 2007). Countries with weak property rights also have low foreign investment, more political coups, and higher economic volatility (Goldsmith 1995). Moreover, as I have shown elsewhere (Richardson 2004), Zimbabwe's sudden abandonment of property rights in the early 2000s led to its rapid economic collapse and hyperinflation; Nicaragua went through a similar journey during the 1980s.

The impact of a sudden change in property rights is certainly easier to measure than a slow one. Nevertheless, small changes over time can lead to large consequences. As one can see in table 1, the United States has been on a general downward trend over the past decade, as shown by the drop in its score in the Heritage Foundation Property Rights Index from 90 to 80 (Heritage Foundation 2015).

For the world as a whole, property-rights protection is also falling, and the net change in its score is a negative four points over the same time period. Zimbabwe's drop in score from 50 to 10 in the Property Rights Index makes it among the worst in the world in terms of property-rights protection, along with Cuba, Haiti, and Sierra Leone.

It might seem a far stretch to compare the United States to countries with such low property-rights protection. However, it is useful to examine how the Heritage Foundation arrives at its index ratings, as shown in table 2. A country's rating reflects an average score, and, as noted, the United States currently scores an 80. This means that in general in the United States property is "highly unlikely" to be expropriated; there is "minimal" corruption in government; and there generally are efficiencies "but with delays" in court enforcement of contracts (table 2). This assessment is arrived at in comparison to a hypothetical country with a score of 100, which has no likelihood of expropriation, no corruption, and no delays in processing. However, there is substantial variation in property-rights protection across the United States due to variation in state laws (Ruger and Sorens 2013).

In general, a nation-based property-rights index may miss subtler trends that lead to weaker protection of property rights, although it is very useful in identifying an overall direction for a given country. An average rating will tend to mask the best and worst cases in a large country such as the United States, and thus the general populace may be unaware of more extreme cases that can serve as precedents for future legislation and court cases.

As a prime example, in the United States a form of legislation has moved across the country that is substantially weakening property rights, but only for some groups of people. It happens when the states plan for future roads by designating what are known as "transportation corridors." In many cases, the proposed roads go through rural and urban areas, making it difficult for the state to budget when there is a volatile real estate market. As a result, thirteen states have passed regulations known as "Map Acts." The goal of a Map Act is to control the costs of property acquisition for the state by forbidding new construction or land development during road development in the designated corridors.

Map Acts enable this control by limiting building and subdivision permits, and the result is weakened property rights for those individuals within these designated corridors. During the period when homes fall under a Map Act, owners will have a difficult time either renovating or selling their homes. In effect, their ownership rights devolve to something closer to renting a property, but with the added burdens that the property is nearly impossible to sell and owners still have to pay at least a portion of their property taxes. There is generally a time limit that the state can delay owners' petitioning for a building permit, and after this period the state must act or release the property from the corridor, as seen in table 3. If the state does not act in time, property owners are allowed to go ahead and continue with their plans. Table 3 shows that of the thirteen Map Act states, eleven limit the delays in obtaining building permits to 365 days or less. (Although Utah does not have a time limit on permit delays, the owners have the right to petition for acquisition by the governing body, which then must acquire or release the property from the restrictions placed by the state's Map Act [Younts 2014, 5]).

Until recently, North Carolina stood far apart from the other states. Its state government could delay acting upon a building permit request by up to 1,095 days, or three years, which was far longer than any other state. In addition, each subsequent building permit could be delayed for another three years. In practice, under this legislation there was no deadline for the North Carolina Department of Transportation (NCDOT) either to build the road or to cancel the project or to buy out the property owners (Younts 2014, 5). A key point is that unlike with eminent domain, property owners who fell under Map Act-designated corridors lost a portion of their property rights without compensation because they were typically forbidden to upgrade or develop their property, which made their property virtually unsaleable.

However, in June 2016 the North Carolina Supreme Court ruled that map designations and building restrictions were a taking of property. It ordered the NCDOT to compensate affected landowners. In July, Governor Pat McCrory signed legislation revoking the Map Act entirely (Young 2016b). Now the state begins the long process of figuring out what the appropriate losses are for the landowners, many whom have been in property limbo for decades.

The long-term damages and perverse incentives caused by the North Carolina Map Act deserve study as a warning to other states considering using similar legislation to save taxpayers money. As this article shows, the unintended outcome in North Carolina was a quagmire of frozen real estate markets, lawsuits, and sliding property values. The payouts and appropriate compensation continue to be in dispute, and the consequences are not easily reversed.

Hernando De Soto (2000) aptly uses the term dead capital to refer to the wealth in property that is inaccessible due to a lack of property rights. He argues that without the ability to use property as collateral or to transfer it to another individual who will put the resource to better use, the end result is that individuals are locked out of economic growth and development. Indeed, like the commercial farmers in Zimbabwe who lost the titles to their land but were still allowed to farm, North Carolina homeowners in these protected corridors found that their wealth was suddenly transformed from live to (nearly) dead capital.

Prior to mid-2016, twenty-four North Carolina Map Act projects spanned eighteen counties. They affected thousands of property owners in Wake, Johnston, Forsyth, Cumberland, and other counties ("NC Map Act Is Unfair" 2014). This article focuses in particular on the longest-delayed project in the state: the Northern Beltway project around Winston-Salem, which at the time had 236,000 residents. More than two thousand homes lay within the Winston-Salem NCDOT "protected road corridor." The uncertainty created by the repercussions of the North Carolina Map Act has essentially shut down all interest from prospective buyers and real estate agents, freezing sixteen square miles of real estate over several decades. As this article demonstrates, if this area of Forsyth County, North Carolina, were representative of the United States as a whole, the United States would probably merit a score between 10 and 30 on the Heritage Foundation's Property Rights Index, whose scoring system is shown in table 2. Property rights were "weakly protected" and "highly inefficient" (due to a virtual shutdown of the real estate market), and most property owners avoided the court system to settle their grievances. Expropriation was certainly "possible," with the state government offering far below market value, although corruption is difficult to measure. This article therefore argues that the Winston-Salem highway project represents one of the true lower bounds for property-rights protection within the United States.

A case involving a relatively small group of U.S. citizens in one state might seem inconsequential for understanding the relative strength of property rights in the United States as a whole. However, it can be argued that a country's protection of property rights can be better understood not by its median level but by the most extreme cases that have been allowed to stand legally. The latter cases, after all, may set precedents for future legislation across the country regarding individual protection of property rights and foretell a future path. Studying how the North Carolina government arrived at this point may prove helpful for state policy makers around the country who are thinking of making short-term trade-offs between weakening property rights and lowering state budgets. The hidden costs of Map Acts are far more substantial than is commonly understood.

The first section gives more background on the history of the Northern Beltway as well as on the legal cases that have made their way through the North Carolina court system. In the second section, I show how the Map Act weakened property rights and detail five perverse economic incentives that arose as a result of the act. These incentives served to counter economic development and reward road-building delays. Three case studies are provided. The final section sums up the...

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