Regulatory Takings: Law, Economics, and Politics.

• Author: Epstein, Richard A.

Moderation, Aristotle assures us, is a cardinal virtue that allows individuals to organize their lives for happiness and self-sufficiency.(1) Thus when "proper pride" is the mean, "empty vanity" and "undue humility" are Aristotle's two extremes to be avoided; and when liberality is the mean, prodigality and meanness become his extremes.(2) In a more modern vein we prefer enterprise to both greed or indifference. So sensible. Yet it is far from clear that Aristotle's steady middle-course plan for personal character development supplies an accurate guide to the soundness of academic or legal positions, especially on matters so controversial as the proper role for government in the regulation of private property. Here the ostensible security of the middle position may be an illusion. Some corner solution may, but need not, be preferable to a compromise position that has all the sounds of sweet reasonableness about it, but nonetheless fails to achieve a set of optimal social results.

It is just that "vice of moderation" that leads me to part company with many of the key substantive conclusions in William Fischel's(3) excellent recent book Regulatory Takings. Fischel journeys far and wide over one of the pivotal questions of our time: What are the permissible limitations on government regulation of private property? I shall devote this review to that question. But in approaching Fischel's work, I shall proceed by indirection, so as not to confront a highly theoretical question solely as an abstract matter. Fischel's great forte is his ability to combine the insights of a trained economist with the nose of a superb investigative reporter. To highlight my disagreement with his conclusions, I want to pay my respects to Fischel by using his illustrations to make my points, while adding to the mix a few pointed anecdotes of my own. Accordingly, I have divided this review into two parts. Part I deals with Fischel's various historical and sociological researches, both to give the reader some flavor for his book and also to set the stage for my evaluation of his overview of constitutional law. Part II addresses the perennial question of how far the courts should intervene question to protect property owners from government regulation. To get into that question Fischel uses Frank Michelman's 1967 "undying classic" just-compensation article(4) and my own book, Takings,(5) as his foils. The examples outlined in Part I become the basis for an examination of our three positions. I conclude, unsurprisingly perhaps, that the new evidence only fortifies the soundness of my original, if extreme, position -- unrepentant to the end!

1. ANECDOTES WITH A PURPOSE

   All too often today, economists become mired in abstract theory or trapped by detailed econometric demonstrations. Fischel's readable book avoids both of these unfortunate extremes and concentrates with intelligence and balance on the institutional arrangements at stake in particular cases, with an eye to explaining long-standing practices by sensible, mid-level economic theory. Even readers who might reject all of his speculations will be reminded of how institutional texture can help shape our understanding of complex legal and social arrangements just by reading how he works the phones and walks the landscape.

   In the first chapter, Fischel gathers the true scoop of Pennsylvania Coal Co. v. Mahon,(6) the granddaddy of modern takings cases. That case concerned the constitutionality of the Kohler Act,(7) which required mineowners to provide subjacent support for surface owners even when their deeds unambiguously required surface owners to bear the risk of subsidence. Doctrinally, Pennsylvania Coal arose because the legislation retransferred the surface owners' surrendered "support estates" from the mineowners to the surface owners, without compensation. Justice Holmes struck down the statutory transfer on the ground that the regulation went "too far" to be a valid exercise of the police power.(8) Holmes thus announced a takings standard that, from that time forward, has confounded friend and foe alike.

   Although many academics have attempted to decipher the precise meaning of Holmes's delphic language, Fischel here follows a different tack. He has pieced together the entire story behind Pennsylvania Coal by indefatigable investigation: tirelessly making phone calls to the surviving relatives of the original principals; reading the texts of George E. Stevenson, a consulting mechanical engineer knowledgeable in the construction and operation of mines in the Scranton area between 1897 and 1930;(9) sifting through Scranton newspapers published in the 1920s; unearthing the anthracite coal production techniques in Pennsylvania in use from the late 1890s to 1950; and uncovering the political machinations that led to the passage of the Kohler Act.

   It proves, moreover, a story with a punchline. Fischel makes the useful observation that technology did not exacerbate the problem of subsidence --in other words, residences falling into the mines below -- but tended to moderate it. Starting around 1891 (p. 27), coal engineers found a way to take the slag and waste from previous production and to insert it into mines to support the surface and the structures on it. This technical innovation made it possible to extract more coal from the mines without precipitating a conflict with surface owners. More importantly, it probably did more good for overall industrial development and community relationships than any legal rule designed to allocate the far greater losses under the older, inferior technology. The lesson, which has doubtless been played out countless times since then, should remind us of an important truth too easily forgotten in this age when economists and lawyers struggle to design contract rules for optimal risk and loss allocation: it is better to prevent the loss practically than to manipulate liability rules to create incentives for optimal care. Improved technology helps reduce the risk levels and the destruction of natural resources by allowing the recycling and reuse of materials previously thought exhausted.

   Fischel's account of Pennsylvania Coal does more than show the beneficial interaction between law and technology; it also captures the legal and social dynamics of the time. The problem of subsidence had been addressed by the voluntary arrangements of most -- the qualification will be important -- coal companies and surface owners before the passage of the Kohler Act. Viewed in isolation from its social context, the conflict between the surface owner and the mineowner could look like a two-party bilateral monopoly extraction game, but clearly much more was at work. The relevant coal deposits were quite literally spread out all over Scranton; the men who worked the mines lived in the houses atop the mines and had, therefore, an interest on both sides of these transactions. Their employers, the mineowners, knew and understood the local social dynamic. So although they secured contractual protection against liability for the repair of the surface from mining subsidence, they routinely fixed the surface premises, no questions asked, once subsidence took place. It was simply a matter of good public relations, as a former chief engineer of Pennsylvania Coal Company -- and one of Fischel's well-placed sources -- told Fischel in 1993 (pp. 38, 43). Sal Nardozzi, a mining engineer for the state of Pennsylvania during the 1960s, duly confirmed this version of history (p. 43). The breakdown in the relationships took place because a single insolvent company, People's Coal, reneged on all its agreements. So the Kohler Act emerged to plug the gap in the earlier social arrangements.

   As Fischel points out, the adopted system proved more complicated than one might expect. This was because the Kohler Act was paired with another statute, The Fowler Act,(10) which imposed a tax on the anthracite coal extracted by companies that sought relief from the obligations of the Kohler Act (p. 33) and whose proceeds were to be devoted to the repair of subsidence. Any firm that complied with the Kohler Act did not have to pay the Fowler tax. Once the Supreme Court struck down the Kohler Act in Pennsylvania Coal, no one needed any relief from it. The situation returned to the status quo ante. Armed with their victory, the coal companies continued to make routine repairs of subsidence damage just as they did before the Kohler Act was passed. The social glue that kept miners and surface owners together was just too strong. The parallels to the informal norms that governed cattle trespass in Shasta County, as outlined in Robert Ellickson's book Order Without Law(11) are evident, and Fischel does not overlook them (pp. 45-47).

   Fischel might have pressed one question further: If the mineowners were resolved to repair surface damage anyhow, then why did they fight the statue? The instinctive answer is, there is no reason at all, since opposition to the statute costs money, but successful legal action will not save any expenditure on repairs. But the pattern of legal opposition and social compliance is a common one, and there are good reasons for it. To explain, let me resort to an anecdote of my own that has strongly influenced my view about legal obligations. When my wife and I moved to Chicago in 1972 we rented a two-bedroom apartment in a new high-rise that was then only partly rented. As a young law professor I did something that I might not do today: I read the lease. In doing so, I discovered that the landlord assumed no obligations for repairs of damage that took place inside the units. But I also noted that the building had a full-time maintenance staff at the beck and call of the tenants. I asked the rental agent to explain the difference between the tough talk in the lease and the prompt service in the building -- even then I knew it was better than the reverse situation of a promise...