Property Rights

netneutralityOn September 9, 2013, the United States Court of Appeals for the D.C. Circuit will hear oral arguments in Verizon’s challenge of the Federal Communications Commission’s (FCC) December 2010 Order on “Preserving the Free and Open Internet.” (That day, you’ll be able to stream a TechFreedom/International Center for Law & Economics luncheon panel discussing the proceedings.)

The arguments mark the critical culmination of a longstanding effort by FCC to expand power over speech and infrastructure in America in violation not merely of the Constitution and the rule of law (as plaintiffs and allies certainly allege; my organization took part in an amici curiae brief), but of common sense, economic efficiency, and consumer welfare.

The Order, the prior 2009 Notice of Proposed Rulemaking (see CEI filing to FCC) and the even earlier Notice of Inquiry on Broadband Industry Practices (see CEI filing) asserts national government authority over the Internet’s future with respect to broadband access and pricing.

Unelected FCC commissioners contemplate this action without authority from Congress, and even with such authority, it should have and would have been challenged.

Net neutrality contends that the government should oversee the Internet rather than the private productive sector. It contends that Washington should decree that Internet service providers treat online traffic the same, in “non-discriminatory” fashion as to be decreed by regulators rather than defer to consumer demand, market and technological realities, and competitive pressures. Those competitive pressures already greatly militate against unreasonable blockage of traffic flow and easy access to content.

No credible case exists for universal neutrality rules in contrast to a potential rifle shot to deal with legacy (clearly diminishing) market power owing to past exclusive franchises and other legacy government-created monopoly power. And even here, unfavorable press generally does the trick. I don’t think antitrust is the solution as some do, but the industry does not require sweeping regulation because somebody might misbehave.

Fundamentally, banning or de-legitimizing entire proprietary business models is the opposite of “openness.” Legitimizing proprietary approaches to network access, strategies and pricing (and enjoying the infrastructure wealth creation that such property rights foster) is the crucial challenge for policymakers.

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Washington, D.C., has some of the highest living costs in the country. Its metro area contains six of the nation’s ten wealthiest counties, making it the sixth most expensive city for renters. Yet one in five of the city’s residents live on or below the poverty line. For children, the poverty rate exceeds 30 percent. It is very expensive to be poor in the District.

Given the area’s high costs and low incomes, it came as surprise to many when the Council of the District of Columbia ruled to keep Walmart out of the reach of its residents. In an eight to five ruling, lawmakers passed the Large Retailer Accountability Act. It was largely drafted and heavily lobbied for by “Respect DC,” an astroturf front group of the United Food and Commercial Workers union. This bill requires non-unionized retail outlets with 75,000 square feet or more indoor space that are part of a parent company with $1 billion or more in annual revenue to pay employees $12.50 an hour, a 50 percent premium over the city’s legal minimum wage. Guess who meets that description?

This decision comes as Walmart is in the process of building three stores in the city and is considering breaking ground for an additional three. Once completed, these stores will employ 1,800 workers. Walmart’s low prices would surely lower living costs and the indirect effect of driving other retailers to lower their own prices would be even more beneficial. On average, the arrival of a Walmart causes a 13 percent drop in competitor’s prices. When measured nationally, Walmart customers nationally save $200 billion every year.

Supporters of the bill insist that this legislation was not about keeping Walmart out, but raising workers’ wages. Councilman Vincent Orange explained, “The question here is a living wage; it’s not whether Wal-Mart comes or stays… We’re at a point where we don’t need retailers. Retailers need us. Trust me. We don’t have to beg people to come to the District anymore.”

The idea that living standards can be raised but somehow retailers are not “needed” is absurd. The purchasing power of one’s wages is solely determined by the goods and service they can be exchanged for. Walmart’s entire business model is built around providing more products at lower prices than its competitors. But opponents of Walmart have come to the conclusion that it is better to raise the living standards of the big-box retailer’s workers than to raise the living standards of Walmart’s far more numerous shoppers.

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Post image for Zoning, Property Rights, and the Myth of Benevolent Planners

Dartmouth economics professor Bill Fischel has posted “Fiscal Zoning and Economists’ Views of the Property Tax,” which will be a chapter in a revised edition of Fischel’s classic The Economics of Zoning Laws. Fischel provides a great overview of zoning, development, and property taxes, highlighting the important fact that zoning is fiscal in nature — that is to say, local governments use zoning to “preserve and possibly enhance the local property tax base.”

Fischel goes into much detail and posits that zoning makes the property tax more efficient. But the notion of fiscal zoning is an interesting one, something that is rarely discussed by the public or even members of the real estate press. Contrary the great myth of benevolent city planners getting together and using the best available evidence to scientifically apply land-use regulations that will maximize social welfare, land-use regulations are developed like most government “goods”: through competing self-interested special interest groups fighting over benefits in the political arena.

For example, suppose a property owner believes he will preserve his property value by demanding that his neighbors be similar to him in income and aesthetic preferences. Conscious of this and not wishing upset residents so they flee to other jurisdictions that will honor their political demands, city officials separate uses, issue design standards, and employ a whole host of controls over private property in an attempt to maximize their tax revenue. With impassioned pleas against variances, planned unit development approval, etc., vocal local interests with trivial objections often prevail over correct interpretations, common sense, and good old fashioned deference to property rights. Anyone who has attended a zoning board meeting will confirm this account.

But even supposedly learned scholars reject this fact of life. Take, for instance, this New York Times op-ed from eco-lawyer and Vermont law professor John Echeverria regarding the Supreme Court’s important takings decision in Koontz v. St. John’s River Water Management District. “As Justice Kagan correctly explains in her dissent, the decision will very likely encourage local government officials to avoid any discussion with developers related to permit conditions that, in the end, might have let both sides find common ground on building projects that are good for the community and environmentally sound,” complains Echeverria. “Rather than risk a lawsuit through an attempt at compromise, many municipalities will simply reject development applications outright — or, worse, accept development plans they shouldn’t.”

To left-wing environmentalists like Echeverria, all building projects are harmful and all private property should be subject to the whims of people like him. Cato’s Randal O’Toole responds here, noting:

The danger behind Echeverria’s view is not just that it arbitrarily takes away people’s property rights and makes development more expensive, but that it gives cities and other municipalities incentives to claim a development is harmful simply to get as much as they can out of developers and property owners. After all, when the district wasn’t satisfied that Koontz was willing to give up 75 percent of his property, and demanded 95 percent instead, it seems likely that the district was simply being greedy.

The Echeverrias of the world would have you believe that municipalities are staffed by benevolent social planners who selflessly protect the community from evil developers looking to spew externalities all over their unsuspecting neighbors and ecosystems.

This is wrong. In reality, land-use regulation is conducted by highly politicized star chambers frequently captured by powerful, self-interested special interests seeking to maximize their private benefits at the public’s expense. Now, being one of those self-interested special interests, Echeverria certainly sees it differently. But that doesn’t mean we need to believe his implicit claim that “elected officials and technical experts on issues of regulatory policy” ought to be accorded broad deference on matters related to land-use regulation because they supposedly have our best interests at heart. They don’t.

Post image for Border Security Doesn’t Require “Invading” the Border

When President Bush left office in January 2009, there were about 30,000 U.S. troops in Afghanistan. If the Senate immigration bill (S. 744) passes, this military-style mobilization will come to the U.S.-Mexico border — and then some.

Under the Hoeven-Corker border security amendment, approved Monday, the bill would now pour in at least 38,405 Border Patrol personnel along America’s Southern border — more than double the original amount. At the same time, it would increase total border security funding more than five-fold — from $8.3 billion to $46.3 billion.

These funds will go to finish a 700-mile border fence and add hundreds of new surveillance towers, thousands of camera systems, and tens of thousands of ground sensors — not to mention fiber-optic tank inspection scopes, thermal imaging systems, and “portable contraband detectors.” It will send 17 UH-1n helicopters, five Blackhawk helicopters, eight AS-350 light enforcement helicopters, and enough drones to log 130,000 hours of flight time each year.

This is not simple “border security” — personnel-wise, it’s a mobilization proportional to the one in Afghanistan (it’s already being called “the surge“). But unlike that adventure, it was not provoked by any foreign aggression. Instead, this offensive is a response to hundreds of thousands of peaceful people moving to the United States to work — such a reaction is without even the slightest rationale.

Not to be misunderstood, border “security” is a legitimate and necessary function of government—border “invasions” are not. Border security would require immigrants and travelers to enter within legal avenues through which they could be processed and checked. Security’s role is to protect and aid movement between countries, which allows free markets to extend beyond legal jurisdictions.

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Last week I testified in the Water and Power Subcommittee in the House of Representatives (hearing linked here). The concern was water availability and federal funding for for research and development in desalinating (de-salting) seawater and brackish water for human consumption or use in irrigation or industry.

I argued against the funding and pointed out that water shortages are almost always rooted in poor pricing for water. Without market pricing, scarcities and havoc will rule. I call for the separation of water and state. My long-form written testimony is linked here, and my oral comment appears below.

I am Wayne Crews, VP for Policy at the Competitive Enterprise Institute and I thank the committee for the invitation to speak on federal desalination efforts that, while they won’t break the fiscal bank, distract from the infrastructure and regulatory liberalization actually needed, and embrace principles at odds with an adaptable and lightly regulated water sector.

Desalination does boast impressive working applications, but it is an energy-intensive, by-product-laden way to make expensive potable water.

Happily, water is not getting more scarce overall; it’s an earthly constant.

But pricing and allocation of that constant water supply do matter. We should avoid having Government Steer While the Market Merely Rows.

When linking any research to human needs, private investors can test low-probability projects, counting on the rare success to offset multiple failures. We have to be good at killing bad projects. That requires market processes.

Federal funding, further, fosters needless conflict: over the merits of basic vs. applied research, over government vs. industry science; over assignment of intellectual property, and here, even over coping with environmental harm associated with the sourcing and externalities of desalination itself.

Politics has trouble with tradeoffs: Why brackish groundwater desalination instead of seawater, or smaller scale solar still-type projects, or why not countless alternative water investments and strategies? The dilemma affects all policy areas; Why not nanotech? Or biotech? Or methane hydrates? Or Robotics?

Fortunately, taxpayer subsidies appear not to alter the ratio of GDP spent on R&D.

So we should avoid fostering any “Declaration of Dependence” on federal dollars in any sector.

Also, all innovations bring risks. Government funding can magnify risks and environmental problems by propelling technologies ahead of the free market’s ability to properly assimilate them. In genuine markets, disciplines like liability, insurance, waste stream recapture and environmental stewardship must evolve alongside frontier technologies.

Rather than the National Research Council’s recommendations and the National Labs “roadmap,” I advocate the separation of water and state.

Water resources and environmental amenities should be better integrated into the property-rights, wealth-creating sector, an evolution derailed in the progressive era.

First, better pricing of existing supplies can make shortages vanish. Despite everything, gallons cost less than a penny, but they fill swimming pools and quench lush lawns in arid areas.

Second, improving water infrastructure can reduce the waste that now depletes some 17 percent of the annual supply, as noted in a Competitive Enterprise Institute report by Bonner Cohen.

Third, better transport, including pipelines and canals, trucking, and crude oil carriers can secure supply more cheaply than desaliniation.

Fourth, improved trades between cities, farmers and private conservation campaigns can be essential to pricing and value.

All these can supplement direct sourcing alternatives including gray and wastewater treatment and reclamation, stormwater harvesting and surface storage.

And obviously, we should address onerous permitting regulations that inflate desalination’s costs and defy the good in the process.

A couple quick general observations:

First, as CEI’s founder Fred Smith puts it, instead of trying to improve speeds by picking the particular R&D horses to run on the economic racetrack, we should improve the business and regulatory track so everyone can go faster, and let jockeys keep more of their earnings.

That means tax and regulatory reform. In my written testimony, I cover options to liberalize and enable a private sector flush with research cash.

Second, this is the water and power subcommittee, and I think it’s vital to step back and explore dismantling regulatory silos that artificially separate our great network industries like water, rail, electricity, transportation and telecommunications. Investment in desalination while leaving antique 19th and 20th century infrastructure regulation intact is curious policy.

As a free society becomes wealthier, cross-industry creation of infrastructure should become easier, not harder. The vastly poorer America of 100 years ago built overlapping, redundant tangled infrastructure; we might have had eyesores, but never a natural monopoly problem.

Again our primary challenge is to integrate modern water resources further into the market process and the sophisticated property rights and capital market systems of the modern world. We need competitive markets to discover, not merely desalination’s value relative to sourcing alternatives, but to discover the true value of water itself.

In The Washington Post, Allan Sloan points out that while President Obama wants to cap American citizens’ IRAs at $3 million or substantially less—discouraging saving and investment in the process—Obama’s own-taxpayer-subsidized retirement benefits are worth more than twice as much, a generous $6.6 million. A sweet pension for me, but not for thee, seems to be Obama’s thinking.  Discussing the president’s “proposal to limit the value of 401(k)s, pensions and other tax-favored retirement accounts to about $3.4 million” (or much less, as interest rates rise), Sloan notes that Obama want “to limit savers’ tax-favored accounts to only about half the value of what he stands to get from his post-presidential package. Based on numbers from Vanguard Annuity Access, I value his package at more than $6.6 million. . . .And that doesn’t include [his] IRA  . . . Or the $18,000 (plus cost of living) a year he will get at age 62 for his service in the Illinois Senate.”

He also notes that “the point at which Obama wants to eliminate the ability of you and your employer to deduct contributions to your retirement account isn’t actually the $3.4 million in his budget proposal—that’s just an estimate. The real number is how much a couple age 62 would have to pay for an annuity that yields $205,000 a year. That $3.4 million—which applies to the combined values of your pension and retirement accounts—is subject to a sharp downward change in the future because annuity issuers charge significantly less for an annuity when interest rates are higher than they do today, with rates at rock-bottom levels.”

Obama has discouraged saving in other ways, such as raising taxes on capital gains and dividends, imposing a new Obamacare tax on investment income, and by giving costly bailouts to irresponsible people who, despite ample incomes, saved so little money that they could not “afford” more than a tiny downpayment, and thus ended up with negative equity on their home later on due to declines in the value of their home, qualifying them for the bailouts that certain favored underwater mortgage borrowers have received.

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Post image for Virginia’s Uranium Mining Moratorium Should Be Buried, But What About Property Rights?

The earth below the United States contains 5 percent of the world’s known recoverable uranium deposits. More than a quarter of U.S. uranium is found in southern Virginia at Coles Hill near Chatham in Pittsylvania County. The two uranium deposits at Coles Hill are valued at $7 billion and together constitute the seventh largest deposit in the world.

Yet all of it is still in the ground. Over 30 years ago, Virginia placed a moratorium on uranium mining in the state. This prohibition was to be lifted once the state went through the arduous process of drafting uranium mining regulations. Unfortunately, Virginia never got around to writing the rules and the “temporary” ban is still in place. The property owners at Coles Hill and some outside investors formed a company in order to mine uranium once the moratorium is lifted and the onerous regulations recommended by the Uranium Working Group [PDF] are promulgated, but still face stiff opposition from the sadly typical alliance of anti-development environmentalists and ignorant NIMBYs.

This underscores the problem with relying on unreliable and arbitrary regulatory regimes for the ostensible purpose of protecting residents and the environment. Few dispute that responsible, safe uranium mining is possible and indeed practiced throughout the world, especially in major uranium-producing countries such as Australia and Canada. Instead of increasing regulation on mining, however, a more thoughtful approach would focus on strengthening property rights so that those doing the mining face incentives to extract natural resources without harming adjacent property owners.

Robust private property rights — those which are well defined, well defended, and voluntarily transferable — are the most critical underpinning of any free society. It should not be surprising that they are also the best tools to protect others and the environment from potential hazards. (For a brief discussion and defense of free-market environmentalism, see “Liberty, Markets, and Environmental Values” by Mark Pennington.) Pollution in this context constitutes a trespass against those rights and the injured owner can file suit to halt harmful activity and collect damages. But relying on the regulatory state in an attempt to protect the environment essentially grants polluters additional rights while preventing property owners from exercising their rights to defend their own property from pollution. This false commons is forced upon society by government and the predictable tragedies result again and again. Unfortunately, these state-caused disasters often only embolden far-left environmentalists in their calls for doubling down on failed regulations.

A firm engaged in uranium mining under state and federal regulations has the incentive to follow the regulations to the letter, regardless of how arbitrary or counterproductive they may be. In contrast, robust property rights would incent miners to allocate resources efficiently (after all, pollution is just a form of waste), take immediate risks into account, and prevent expensive trespasses against neighbors.

While this vision of a free society is far different from our current reality — meaning a complex regulatory regime will be practically necessary for uranium mining to take place in Virginia anytime soon — it is important to remember that it is an absence of liberty, rather than an excess, that increases harm done to people and the environment in the first place.

The progressive Georgetown University constitutional law professor Louis Michael Seidman argued Monday in The New York Times that we should just ignore the Constitution and its limits, since it led to the “fiscal cliff” (a combination of painful tax increases and long-overdue spending cuts that would have cut the federal budget deficit in half). “As the nation teeters at the edge of fiscal chaos, observers are reaching the conclusion that the American system of government is broken. But almost no one blames the culprit: our insistence on obedience to the Constitution, with all its archaic, idiosyncratic and downright evil provisions,” Seidman wrote in an op-ed entitled, “Let’s Give Up on the Constitution.” Congress and the President averted the so-called “fiscal cliff” by extending the Bush tax cuts for all but high-income households, and delaying for two months the automatic budget cuts that it contained. Many economists view this “cure” for the fiscal cliff as being worse than the disease.

But the comically left-wing and irresponsible Seidman thought that gutting the entire constitution (including its separation of powers and the requirement “that revenue measures originate in the” House of Representatives), would have been worth it to eliminate the measures contained in the fiscal cliff. In my opinion, the so-called “fiscal cliff” contained too many tax increases, and not enough budget cuts (although those cuts were extremely valuable and helpful), but it still reflected thoughtful attempts to get the deficit under control (the cuts were adopted in the 2011 deal between Congress and the president to allow the national debt ceiling to increase in exchange for budget cuts later on), not a systemic government failure that justified shredding the Constitution. And as the Congressional Budget Office and the GAO noted earlier, while the fiscal cliff’s painful medicine would have shrunk the economy in the short-run, it would have increased the size of the economy in the medium and long run, since, by reducing the size of the national debt, it would have reduced mushrooming debt service costs, costs that crowd out productive private investment.

(Sadly, in law school, I was forced to buy a constitutional law textbook co-authored by Seidman, a cartoonish caricature of the Constitution that celebrated court rulings twisting the Constitution into a pretzel, and ignored many of its politically incorrect structural safeguards on government power. Seidman’s contempt for the Constitution is not new, but now, as he approaches retirement, he no longer bothers to cloak it in disingenuous progressive “living constitution” claptrap.)

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Today, the Federal Trade Commission (FTC) cleared Google of accusations of “Search Bias,” and inappropriately harming rivals.

The investigation lasted nearly two years. CEI released a statement today, “Web Users Dodge Bullet as FTC Closes Google Probe.”

Google rivals naturally object, but those protests are revolts against the objective reality that people like Google.

The FTC did secure certain concessions from Google, which will alter how it presents bits of information, such as that from review sites such as Yelp (a criticized practice it was already modifying in some areas); and Google will make it easier for firms to advertise across other search engines when they have an arrangement with Google.

Antitrust purports to address consumer harm, or compulsion. The FTC got it right; there is no harm created by Google reasonably address with top-down force. Options abound for consumers. If only the investigation had been avoided at the outset.

As my colleague Ryan Radia noted:

Today’s ruling…affirms that every company is free to compete by serving its users, no matter how high its market share or how much its rivals suffer as a result. America’s antitrust laws are designed not to punish companies for growing too big…but to ensure no company stifles competition itself. The thriving Internet sector — a bright spot in America’s otherwise lackluster economy — shows no signs of suffering from too little competition.

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The first Thanksgiving didn’t usher in a time of plenty for the Pilgrims. The Pilgrims continued to confront the specter of starvation until they ditched their collective farming practices in favor of individual property rights, which finally brought them prosperity by increasing incentives to produce and manage farms wisely. Property rights were also a feature of many Native American cultures, contrary to later claims that Native Americans had no concept of property rights (claims first invented by those who dispossessed them, and later repeated by radical environmentalists who sought to depict property rights as an institution peculiar to white settlers). I debunk some of these myths at this link.