Disappointed Expectations

Disappointed Expectations:

How the Supreme Court Failed to Clean up Takings Law in Murr v. Wisconsin

Richard A. Epstein*

Abstract: This article examines the recently decided case Murr v. Wisconsin, demonstrating how the Supreme Court’s decision dodged the hard questions latent in applying the “parcel-as-a-whole” test of Penn Central Transportation Co. v. City of New York to two contiguous parcels that for some limited period of time came under common ownership by different routes. The first part examines how the case should have been decided under Penn Central and concludes that Chief Justice John Roberts, the primary dissenter, had by far the better of the argument in insisting that state property lines should govern in preference to the complex facts-and-circumstances test championed by Justice Anthony Kennedy, who wrote for the Court. A simple mistake in conveyancing, easily avoided, should not wipe out development rights that any other owner could possess over the undeveloped parcel.

The second part of this article attacks the dominant Penn Central test that makes the availability of any compensation turn on the ratio of the value taken to the full value of the parcel. The same political considerations that justify a per se compensation rule (subject to a police-power exception) in physical cases apply equally in the regulatory context, given that both circumstances present opportunities for majoritarian abuses. The article then examines many of the cases cited in Penn Central, and some decided after it, in relation to the taking of partial interests in land, be they air rights, mineral rights, liens, or covenants and concludes that a simple rule that sets compensation equal to the fair market value of the property lost outperforms on administrative and welfare grounds the Penn Central test. That test fails because it ignores huge private losses created by takings so long those losses do not result in a sufficient diminution of the property’s value, a standard that is nowhere either articulated or defended. As such, Penn Central should be overruled or cut down in size.

Introduction

One telltale sign of intellectual disarray in any area of law is the extent to which existing doctrine finds itself unable to resolve simple and recurring cases. That problem is evident in spades in dealing with the Constitution’s takings clause, which states: “nor shall private property be taken for public use, without just compensation.”[1] In an effort to interpret and apply this clause, the Supreme Court commonly hears at most one or two takings cases a year. But with each new doctrinal tweak, the level of gloom and confusion only increases as the Justices struggle to fit each new piece of the puzzle into a framework that has become less tidy and less satisfactory with each new iteration. But any effort at harmonization will necessarily fail if the initial conceptual framework is unsound.[2] And so takings law remains a disorderly jumble precisely because the Supreme Court, and hence all lower courts, are utterly adamant in their refusal to think hard about first principles.

This pattern held all too firm in Murr v. Wisconsin.[3] The Supreme Court granted certiorari in Murr on this question:

In a regulatory taking case, does the “parcel as a whole” concept as described in Penn Central Transportation Company v. City of New York, 438 U.S. 104, 130–31 (1978), establish a rule that two legally distinct, but commonly owned contiguous parcels, must be combined for takings analysis purposes?[4]

The majority opinion by Justice Kennedy, joined by the four liberal justices—Ginsburg, Breyer, Sotomayor and Kagan—held that a complex facts-and-circumstances test required the integration of the two plots into one, from which it followed that there was an insufficient diminution in value to trigger the government obligation to compensate the Murrs for the loss of their development rights on one of the two parcels. Throughout that analysis, the majority relied heavily on two key Supreme Court precedents. The first of these was the “too far” test announced by Justice Oliver Wendell Holmes in Pennsylvania Coal v. Mahon.[5] The second was the three-part balancing test for regulatory takings developed by Justice William Brennan in Penn Central Transportation Co. v. City of New York.[6] The bottom line was that the majority opted for the ingrained Supreme Court approach that “has been character­ized by ad hoc, factual inquiries, designed to allow careful examination and weighing of all the relevant circumstances.”[7] In his view that type of multi-factored test had to be used to determine the “denominator” in a regulatory-takings test. The dissent by Chief Justice Roberts, joined by Justices Thomas and Alito, did not at any point question the soundness of this particular framework, but only disagreed about its application to the parcel-as-a-whole test. In the dissenters’ view, “[s]tate laws define the boundaries of distinct units of land, and those boundaries should, in all but the most exceptional circumstances, determine the parcel at issue.”[8]

In this Article, I shall engage the justices on two fronts. The first of these is to analyze the way in which Murr should come out within the current law, where I agree that the clearer rules of the Chief Justice offer a better roadmap for dealing with this question. I thus begin with a review of the record in Murr, followed by a discussion of the case law that developed the Supreme Court’s denominator case. It concludes with a discussion of the evolution of the reasonable investment-backed expectations test from Penn Central to Murr.

In the second portion of the paper, I offer an analysis of the transformation of the reasonable-expectations test from its origins in Penn Central to Justice Kennedy’s explication of the test in Murr. The Court’s analytic claim is that it is not possible to develop a coherent set of rules that goes beyond the general facts-and-circumstances standard (this does not sit well with someone who wrote a book entitled Simple Rules for a Complex World.[9])

In order to reject this analytic claim, however, it is not sufficient, in my view, to point out the idiosyncrasies of the current law. It is also necessary to offer an alternative analytical framework that eliminates these oddities and produces substantive results that lead to superior social outcomes. Accordingly, the second half of this Article goes back to first principles. It insists that any correct analysis has to rebuild takings law from the ground up, at which point the distinction between physical and regulatory takings disappears as a failed intellectual experiment. In its place, it is necessary to develop a simpler test that only asks the government prima facie to compensate the private owner for the value of the property taken, whether attributable to physical occupation, restrictions on land use and development, or restrictions on the right of an owner to dispose of property to a third person by way of any voluntary transaction, be it a sale, lease, gift, or mortgage.[10]

Qualifying this basic rule, there are of course the police-power justifications for the protection of health and safety, all of which get lost or misunderstood in the modern analysis. But even if no such justification is found, in many complex cases an implicit-in-kind compensation, arising out of a set of reciprocal benefits and burdens, may either reduce or eliminate the obligation to provide any compensation. I believe that this alternative approach yields a better mix of public and private values, so that the correct division between compensable and noncompensable takings provides desirable incentives for both public and private actors alike.

I.      Murr Under Current Law

A.     The Record

Murr involved a challenge brought in Wisconsin state court to an ordinance of St. Croix County,[11] which had been in effect since the 1970s. Murr had its inception when Congress passed the Wild and Scenic Rivers Act (Act) in 1968[12] with the purpose of preserving certain wild and scenic rivers for their enjoyment by present and future generations.[13] One such protected waterway was the lower portion of the St. Croix River, which was found to meet the statutory standard of “wild, scenic, or recreational.”[14] The federal statute then led Wisconsin to pass its own statute in order to comply with the federal mandates dealing with wild and scenic rivers.[15]

The relevant county ordinance implemented the federal and state mandates by imposing restrictions on the development of land abutting the St. Croix River. In effect, the ordinance provided that building could take place only on plots of land with a sufficient “net project area” of at least one acre.[16] This measurement encompassed the total area of “developable land area minus slope preservation zones, floodplains, road rights-of-way and wetlands.”[17] During the 1970s, the basic ordinance was amended to address the development of two adjacent substandard lots (i.e., two lots which do not have at least one acre of net project area).[18] Under this scheme, two adjacent substandard lots with a common owner would be treated as if their titles had merged, allowing the owner to develop only one of the lots. The resulting prohibition on development under Wisconsin law attached to the combined lots forever, remaining in effect even if one of the two lots were subsequently sold to a third party unrelated to the original owners.

It was this prohibition that tripped up the Murrs when they combined two separate lots under single ownership. The two lots in issue were Lots E and F, contiguous properties along the St. Croix River. The Murrs’ parents, now deceased, first purchased Lot F in their own names in 1960. Consistent with the laws at that time, they built themselves a cabin close to the river, and subsequently transferred the title to that lot and cabin to a plumbing company of which they were sole owners. Three years later in 1963, the Murrs’ parents purchased Lot E, which they kept in their own name. They did not build anything on the property, but instead held it for investment purposes.[19]

The two lots share a common topography. Each lot has a low portion near the river, and another flat portion located above a 130-foot bluff. The top and bottom portions of both lots are suitable for construction. Nonetheless, since their combined buildable area is about 0.98 acres of net project area, taken together, they constitute a substandard lot under the Wisconsin ordinance.[20]

The two lots remained under separate ownership, and thus could have allowed for the construction of two houses under the 1976 ordinance, until the Murrs’ parents transferred Lot F to their children in 1994. In 1995, one year after transferring Lot F, they transferred Lot E to their children, which automatically triggered the merger feature of the Wisconsin ordinance.[21] The conveyances were made even though the Murrs were on notice that the property in question was “subject to easements, covenants, restrictions and declarations of record,” including the merger restrictions created under the Wisconsin ordinance.[22] The entire controversy could have been avoided, however, if the Murr children had transferred title to Lot E to a wholly owned corporation to which the merger doctrine would not have applied.

 After the various transfers, the Murrs had serious flooding difficulties with the cabin built on the lower portion of Lot F, which they sought in vain to fix. At the same time, they asked for a variance from the ordinance to allow them to carry through with the original plan to sell Lot E, which had been held for investment purposes.[23] That request was denied by the local zoning board, and its decision was affirmed by an earlier decision of the Wisconsin Court of Appeals.[24] At that point, the Murrs were confronted with a set of unpalatable alternatives. They could sell Lot E with the right to build, but only if they destroyed the cabin on Lot F. They could repair the cabin on Lot F, but only if they agreed never to build, or let their successors build, on Lot E. They could move their cabin on Lot F to higher land, but only if they razed their cabin on the lower part of the Lot F, while remaining unable to build on Lot E. What they could not do was to build on both lots in the same manner as two separate owners could have done.

Frustrated by this limited menu of choices, the Murrs brought a constitutional challenge to the Wisconsin ordinance, which was rejected by the Wisconsin Court of Appeals.[25] The court did not address the state interest in passing this ordinance, but concentrated its attention exclusively on whether the regulation constituted a taking under the test derived from Penn Central Transportation Co. v. City of New York.[26] Under the current analysis there is a threshold question: Does a regulation that diminishes the value of a discrete piece of property leave the owner able to make some economic use of the property? If so, then no taking is found, no matter how great the diminution in value.[27] In Murr, this inquiry naturally raised the question of whether Lots E and F should be characterized as a single unit: If the parcel was one tract, the Murrs’ ability to build a single cabin somewhere on the premises meant that the regulation did not constitute a compensable taking of any portion of the merged lots. Conversely, treating Lots E and F separately would result in one of the properties becoming worthless due to the ability to build only one structure. The court elected to treat the parcel as a whole, and proceeded to reason that unless the level of diminution of the entire property reached a certain level, nothing else mattered at all, including the nature of the state interest in imposing the restriction.[28] Hence all losses in value from land-use restrictions were outside the scope of judicial review under the takings clause, unless that (unidentified) limit was reached.

In reaching this conclusion, the Wisconsin Intermediate Court relied heavily on earlier decisions of the Wisconsin Supreme Court, which in turn relied on the usual set of United States Supreme Court takings cases: Pennsylvania Coal v. Mahon,[29] Euclid v. Ambler Realty Co.,[30] Penn Central, Loretto v. Teleprompter Manhattan CATV Corp.,[31] and Lucas v. South Carolina Coastal Council.[32]

B.     The Denominator Problem

Putting the parcel-as-a-whole rule in play in Murr raises the question of how to conceptualize Lots E and F. If the two parcels are treated separately, the total restriction on development of Lot E would count as a total taking for which full compensation, equal to the fair market value of the asset, would be owed; after all, the new ordinance prevented development of Lot E for any purpose given the presence of the cabin on Lot F. But if the two lots are treated as a single unit, as was the case under the merger ordinance, then the ability to build on one would leave the Murrs with sufficient rights such that they would receive no compensation for a restriction that cut their development rights in half. In the Supreme Court parlance developed after Penn Central, this problem is commonly called the denominator question. As noted in Keystone Bituminous Coal Ass’n v. DeBenedictis,[33] “[b]ecause [the] test for regulatory taking requires [a court] to compare the value that has been taken from the property with the value that remains in the property, one of the critical questions is determining how to define the unit of property ‘whose value is to furnish the denominator of the fraction.’”[34]

This intellectual journey toward the denominator problem began with Justice William Brennan’s pronouncement in Penn Central that the proper analysis started with the “parcel” itself:

“Taking” jurisprudence does not divide a single parcel into discrete segments and attempt to determine whether rights in a particular segment have been entirely abrogated. In deciding whether a particular governmental action has effected a taking, this Court focuses rather both on the character of the action and on the nature and extent of the interference with rights in the parcel as a whole—here, the city tax block designated as the “landmark site.”[35]

By treating the single parcel as the relevant unit, it was easy for the Penn Central Court to conclude that the loss of air rights above Penn Central Station, standing alone, could not be treated as a complete wipeout when the petitioner retained the ability to operate at ground level. Subsequently, Justice John Paul Stevens explained in Keystone

Because our test for regulatory taking requires us to compare the value that has been taken from the property with the value that remains in the property, one of the critical questions is determining how to define the unit of property “whose value is to furnish the denominator of the fraction.”[36]

In Keystone, Justice Stevens simply concluded that a statutory requirement that coal companies leave some 27 million tons of coal in place to support the interests of surface owners did not constitute a taking of that coal because those tons “do not constitute a separate segment of property for takings law purposes.”[37] In so doing, he necessarily departed from the earlier decision of Justice Oliver Wendell Holmes in Pennsylvania Coal, which made no mention of the denominator problem in assessing analogous facts, but simply concluded that “[t]o make it commercially impracticable to mine certain coal has very nearly the same effect for constitutional purposes as appropriating or destroying it.[38] Justice Stevens ignored this passage and thus spared himself the need to explain why the basic test for regulatory takings should predicate the availability of comparison upon the ratio between what was taken and what was left behind. He had no occasion to ask how “the parcel” should be defined. Nor did he consider the possibility of police-power justifications that might have been raised in Murr.

The denominator issue raised in Keystone has often surfaced in the lower courts, none of whose decisions were discussed by the Supreme Court in Murr. These cases have uniformly recognized the importance of the inquiry without giving any definitive guidance on how to resolve it. Thus, in Lost Tree Village Corp. v. United States,[39] the Federal Circuit endorsed the banal proposition that “[t]he relevant parcel determination is a question of law based on underlying facts.”[40] With those words, the court then upheld a decision of the trial court which had allowed the Army Corps of Engineers to deny Lost Tree a permit to fill in 4.99 acres of wetlands, which it deemed was part of a larger parcel consisting of two “distinct legal parcels” that were “undoubtedly contiguous.”[41] Accordingly, it denied any relief when it was shown that the diminution in value of the combined plots was “approximately 58.4%.”[42]

Similarly in Bevan v. Brandon Township,[43] the Michigan Supreme Court held that separate but “contiguous lots under the same ownership are to be considered as a whole.”[44] Hence the court refused compensation to the owner of a combined lakefront parcel who had been denied a permit to build two houses on his off-road lot. The lot consisted of two separate parcels that had been acquired by the plaintiff at different times under separate deeds before the current zoning ordinance had been put into place. The only access to these two plots was through an easement that was just twenty feet wide, when the applicable ordinance required a roadway of sixty-six feet in width to service multiple units. The lower courts had found a taking when no possible construction was allowed on one of the two plots, after noting that the twenty-foot easement was sufficient to allow fire-fighting and other emergency equipment to go through. In dealing with the appeal, the Michigan Supreme Court disputed the determination of the lower courts that this easement was wide enough to accommodate the provision of any needed emergency services, stating that the individual property owner bore the burden of proof of this issue.[45] Ultimately, “[b]ecause the access regulation in question serves a legitimate governmental interest and does not deny the owners [all] economically viable use of their land, [the court] conclude[d] that enforcement does not effect an unconstitutional taking of plaintiffs’ property.”[46] Left unexplained, however, was how the easement—apparently wide enough to allow emergency equipment access to serve one house—was not sufficiently wide to allow it to service two. Bevan thus involved the interaction of both the denominator question and the state’s police-power justification. In Murr, the Supreme Court never addressed that second issue, given that the threshold question of diminution in value was resolved against the Murrs.

Finally, on the opposite side of the coin is Palm Beach Isles Associates v. United States,[47] yet another dredge-and-fill case. The Federal Circuit held that “[c]ombining [ ] two tracts for purposes of the regulatory takings analysis involved here, simply because at one time they were under common ownership, or because one of the tracts sold for a substantial price, cannot be justified,” thus reversing the trial court.[48] It is instructive that in this instance the court relied on the important 1994 Federal Circuit decision in Loveladies Harbor, Inc. v. United States,[49] which incorporated into its account of regulatory-takings law the proposition that one of the elements that made compensation appropriate was whether a property interest had vested which, as a matter of state property law, was “not within the power of the state to regulate under common law nuisance doctrine.”[50] In this formulation at least, the diminution-of-value question does not set a threshold that has to be crossed before other issues—namely the legitimacy of the state’s action—are considered.

A similar result was reached in Department of Transportation, Division of Administration v. Jirik,[51] where the Florida Supreme Court stated that “we believe that a presumption of separateness as to vacant platted urban lots is reasonable and would facilitate the determination of the separateness issue in the absence of contrary evidence.”[52] Jirik involved access from a private plot of land to a public road. A newly built retaining wall blocked access to one of three lots that had previously been subject to unitary private ownership, rendering it worthless for construction. In assessing whether the obstruction constituted a taking, the court never asked whether the lot could have been sold for a positive sum to the owner of the neighboring plot of land so as to give it some residual economic value. And once again, the state offered no police power justification for its restriction, such as that advanced in Bevan. Rather, the court treated each lot as a discrete unit for the takings analysis.

C.     Reasonable Investment-Backed Expectations:     Penn Central to Murr

As should be evident from the previous discussion, the “parcel-as-a-whole” test formed only a part of the conceptual framework for regulatory takings first set up in the Penn Central decision and then modified by Justice Kennedy in Murr. It is important to trace the development and transformation of this elusive test. Penn Central’s fuller account of regulatory takings does not treat the diminution-of-value question as an isolated threshold issue. Instead, it joins that inquiry with two other key issues—the property owner’s investment-backed expectations and the state’s justification for its actions—for a more holistic balancing test. Thus, Justice Brennan wrote:

In engaging in these essentially ad hoc, factual inquiries, the Court's decisions have identified several factors that have particular significance. The economic impact of the regulation on the claimant and, particularly, the extent to which the regulation has interfered with distinct investment-backed expectations are, of course, relevant considerations. So, too, is the character of the governmental action. A “taking” may more readily be found when the interference with property can be characterized as a physical invasion by government, than when interference arises from some public program adjusting the benefits and burdens of economic life to promote the common good.[53]

The first puzzle about Penn Central is why it imported into takings law the wholly extra-textual term “investment-backed expectations”; Justice Brennan’s sole motivation for its adoption was to degrade the independent status of the air rights located above the terminal. He therefore wrote that the landmark-preservation law

does not interfere with what must be regarded as Penn Central's primary expectation concerning the use of the parcel. More importantly, on this record, we must regard the New York City law as permitting Penn Central not only to profit from the Terminal but also to obtain a “reasonable return” on its investment.[54]

Note his odd use of the passive voice “must be regarded,” without any explanation of why or by whom. The opinion certainly gave no reason why Penn Central would not treat those air rights as an essential component of value for the asset as a whole, thus raising the question then of whose expectations are relevant to this analysis. Of course, the primary expectations referred to in Penn Central matter, but so do secondary ones, which are always included in setting the value of property for all market transactions between private parties.

In writing down those air rights to zero via the “reasonable return” test, Brennan incorporated the rate-of-return standard applicable to public utilities into the regulatory-takings area.[55] In so doing, he made two key errors. First, he shifted the just-compensation measure from the fair market value of the asset that is taken, to one that rests exclusively on the original cost basis, even for assets that are known to have appreciated in value. But this rule is wholly inconsistent with any standard technique of valuation, which takes into account all of the positive features of any given asset. Brennan thus could not explain what should have been done if the air rights had been sold off to a third party before the landmark statute had been put into place, for then their new owner’s sole expectation of value would come solely from the development of air rights that were deemed worthless by this truncated analysis. In addition, Brennan did not explain what should be done to value any asset that is currently not in use, including of course the vacant Lot E in Murr, whose entire value rests in its expected future use. If we take the investment-backed-expectations test seriously, the point should count strongly in favor of the Murrs, given that Lot E was acquired solely for investment purposes in 1962. Yet that point just disappeared from view in Murr given the Supreme Court’s preoccupation with the denominator question.

The same analysis applies to the second element of the Penn Central test, namely the strength of the government’s interest in blocking the development of Lot E as a single-family home. That state power is at its high point whenever the private owner wishes to engage in conduct that counts as a nuisance at common law, for it is hard to imagine any reason why the government could not, as an agent for its aggrieved citizens, enjoin conduct that the citizens themselves are entitled to enjoin. Given the diffuse nature of the harm in public-nuisance cases, it is possible to advance a simple yet compelling transaction-costs justification for direct government regulation. No single person has the incentive to bear the full costs of litigation from which he or she could only expect to receive a tiny fraction of the benefit. But at the same time, the transaction costs of coordinating actions by hundreds, thousands, or even millions of claimants into a single coherent force are prohibitive. The state therefore takes over the task, raising tax revenues for the purpose of controlling harmful actions on behalf of its citizens.

This rationale for government intervention consequently does not carry over to behaviors that do not rise to the level of common law nuisances. Yet one of the features built into Penn Central from the get-go was the insistence that the common law of nuisance did not set the outer limits on state power to impose uncompensated restrictions on the conduct of private parties—a result that Justice Kennedy’s opinion in Murr fully endorsed: “Coastal property may present such unique concerns for a fragile land system that the State can go further in regulating its development and use than the common law of nuisance might otherwise permit,” without explaining why.[56]

In large part, the rejection of the nuisance test, first in Penn Central and its progeny, and then in Murr, was accomplished by belittling the common-law tests for nuisances as conceptually incoherent.[57] Thus, in Lucas, Justice Blackmun wrote:

There is nothing magical in the reasoning of judges long dead. They determined a harm in the same way as state judges and legislatures do today. If judges in the 18th and 19th centuries can distinguish a harm from a benefit, why not judges in the 20th century, and if judges can, why not legislators? There simply is no reason to believe that new interpretations of the hoary common-law nuisance doctrine will be particularly ”objective” or ”value free.” Once one abandons the level of generality of sic utere tuo ut alienum non laedas, one searches in vain, I think, for anything resembling a principle in the common law of nuisance.[58]

I regard these remarks on the linguistic use of the term “nuisance” as a misguided, uninformed, and unwarranted attack on a body of law that has far more coherence than Justice Blackmun attributes to it, and I have offered a detailed analysis of the subject to explain how that body of law goes far to maximize the value of the land subject to its control.[59] More generally, I deplore the constant judicial efforts to expand the scope of judicial deference by insisting on the conceptual incoherence of traditional doctrinal terms, all while confidently asserting the conceptual clarity of their own positions.[60]

A second explanation for the shift away from the nuisance-control standard is that judges came to regard requiring compensation for imposing land-use controls as an intolerable intrusion on the good judgment of local governments in dealing with such hot-button topics as aesthetic regulation, height restrictions, population density, blight control, antigrowth ordinances, affirmative-action mandates, and of course landmark-preservation statutes.

That basic deferential approach was settled at the latest in the 1954 decision of Berman v. Parker,[61] where the Supreme Court, speaking through Justice William Douglas, upheld a huge urban renewal project under the police power by insisting that “[a]n attempt to define its reach or trace its outer limits is fruitless, for each case must turn on its own facts. The definition is essentially the product of legislative determinations addressed to the purposes of government, purposes neither abstractly nor historically capable of complete definition.”[62] It then concluded that strong deference was required to allow these urban-renewal projects intended to remove blight from neighborhoods.

No matter how courts analyze the state’s interest in regulatory takings cases, it is only when we add the remaining investment-backed expectations into the mix that it is possible to understand the role of the parcel-as-a-whole doctrine. As to the former, it was clear that the Murrs at all times had the primary expectation that Lot E was held for investment. Indeed, the Murrs could have avoided the application of the parcel-as-a-whole doctrine by following the simple expedient of keeping the title to the two parcels in separate legal entities at all relevant times. There is nothing that the government could have done to stop them from so doing. The initial question is thus: Why should state power be at its zenith because of that elementary procedural oversight? The state took the position that, “[c]ontrary to what Petitioners suggest, it was their own acts, not the conduct of the County or State, which caused their property to be subjected to the applicable land-use regulations.”[63] Justice Kennedy echoed the same theme when he wrote that the decision of the Murrs to put the two plots under the same ownership was “voluntary,” without pausing to consider whether their fundamental mistake as to the state of the law undermined that confident characterization.[64] Surely, it deserved at least some mention that conveyance only had its calamitous consequences because the Wisconsin ordinance operated as a trap for the unwary. It is perfectly clear that no well-advised parties would ever do what the Murrs did under the same circumstances. Deciding this case in their favor therefore does not open up the world to manipulative behavior, for no person who understands the legal framework would gratuitously choose to expose himself to that high level of risk.

In dealing with this question, Justice Kennedy at no point asks the simple question whether the environmental risks that come from someone building on that second part of plan are greater because the two lots were merged by operation of state law. To that question, the answer is clearly no. At this point, Justice Kennedy’s stated concern with the “fragile” nature of the local environment drops out because, given all the other substantive restrictions that are in place, the environmental issues are no greater here than they are under the alternative scenario where the conveyancing niceties had been observed.

Nonetheless, the stage is now set for the application of the reasonable-expectations tests in Murr. In dealing with this issue, Justice Kennedy starts with the position that he has taken elsewhere, namely that bright-line rules do not capture the inherent complexity in the situation. In dealing with the commerce clause, for example, he has written that it is a mistake to approach the constitutional challenge by “defining by semantic or formalistic categories those activities that were commerce and those that were not.”[65] This statement is an illustration of supposed intellectual sophistication that turns every boundary question into a multi-factored balancing test, which is of course useless for anyone who has to decide what actions that Congress can lawfully undertake.

Kennedy adopted the same unfortunate approach in Rapanos v. United States,[66] where, as the decisive fifth vote,[67] he insisted that a facts-and-circumstances test to establish some “significant nexus” was needed to decide whether wetlands located some eleven to twenty miles from the Rapanos land qualified as “waters of the United States”—understood as a synonym for navigable waters—which could not be filled without a government permit.[68] The net effect of this statutory tour de force has been to concede virtually full power to the Army Corps of Engineers to decide when to issue permits, and when not. The resulting legal quagmire has added immense confusion to the permitting process, without doing any good for anyone.[69]

Unfortunately, the same disdain for clear tests carries over to the takings area, where Justice Kennedy’s Murr opinion puts his legal ingenuity into intellectual overdrive, and embellishes on Justice Brennan’s dalliance with investment-backed expectations. He begins clearly enough by noting that the challenge of regulatory takings law is to “reconcile two competing objectives.”[70] The first is “the individual’s right to retain the interests and exercise the freedoms at a core of private property ownership.”[71] The second is “the government’s well established power to adjust rights for the public good.”[72] At this point one would hope that he would explain why the traditional tests of nuisance law failed to properly make those needed adjustments. Instead, he returns to his favorite theme of the need for “flexibility” by listing the factors that he regards as relevant in this case.

These constitute a laundry list of considerations relevant to determining the denominator in a regulatory takings case:

As the foregoing discussion makes clear, no single con­sideration can supply the exclusive test for determining the denominator. Instead, courts must consider a number of factors. These include the treatment of the land under state and local law; the physical characteristics of the land; and the prospective value of the regulated land. The endeavor should determine whether reasonable expecta­tions about property ownership would lead a landowner to anticipate that his holdings would be treated as one par­cel, or, instead, as separate tracts. The inquiry is objec­tive, and the reasonable expectations at issue derive from background customs and the whole of our legal tradition.[73]

What is odd about this list in the first instance is that it never addresses the actual expectations of the landowners in question—the Murrs. They expected to hold the property for investment purposes, which could only be achieved if its development were possible by a potential buyer of the property. Those expectations were based on the state of the law for real estate at the time of the initial purchase, and the expectations were necessarily constant over the entire period in which title was held in various forms by various members of the Murr family. This rewriting of expectations is not too far off from the tactic that Justice Brennan had deployed in Penn Central, where he insisted that Penn Central’s main expectation was the economic yield from the terminal’s operations, and not from some future and uncertain sale of its air rights, all of which were fully vested under New York law. On this view, the Murrs have a stronger case because from start to finish their only expectation for lot E was to hold it for investment purposes, an expectation that was completely shattered after the merger took place under Wisconsin law.

It is also the case that little can be gleaned from looking at the status of the land under state and local law. Justice Kennedy tries to have it both ways when he writes, first, that “[a] valid takings claim will not evaporate just because a purchaser took title after the law was enacted,”[74] and second, that “[a]reasonable restriction that predates a landowner’s acquisi­tion, however, can be one of the objective factors that most landowners would reasonably consider in forming fair expectations about their property.“[75] On the one hand, yes; on the other hand, no. Once again, everything is relevant, but nothing is decisive. After all, some fraction of these expectations were formed in response to the adoption of the ordinance. But surely part of these same expectations were formed with reference to the engrained practice that the title records determine what counts as a separate parcel (as they did in fact in Penn Central), and that the transfer of Lot E to the Murrs individually did nothing to change the boundaries of either of the two parcels (lots) involved in this case.

In this connection, it is instructive to see the confusion a group of law professors, writing as amici curiae on behalf of Wisconsin, sowed in seeking to downgrade this element by putting a wedge between public and private law.

State property definitions and corresponding boundary lines—and in particular, surface/horizontal lot lines—reflect historical practices serving technical, and administrative purposes that are unrelated to the purposes of protecting investment expectations or assuring justice and fairness.[76]

Yet how can that possibly be so? The need to determine precise boundary line conditions is necessary for anyone who wants to buy or mortgage any property, and the uncertainties associated with their delineation cause major declines in real estate values.[77] Those exact same questions are as critical for valuations made in the context of admitted government takings as they are in any private context. Indeed, if the law puts a wedge between the standards of valuation for public and private purposes, it necessarily becomes unclear in this case and thousands of other cases that do not go to litigation, exactly how those differences should cash out. What, for example, should be done if the title to Lot E referenced one person not on the title to Lot F? Is the substantial overlap enough, or is complete overlap required in future cases? There are no answers here, and people are entitled to more certainty than the flexible answer Justice Kennedy provides. Private buyers of property care about the regulatory risk as they do about all other factors that impact property values. It is impossible to protect expectations when these basic norms are systematically flouted. And it is hard to see how massive levels of ad hocery advance any conception of fairness and justice.

On this point, therefore, the Chief Justice is surely correct to conclude that following record title is far better because, ironically, it is the only approach that can stabilize expectations as to the denominator of the regulatory-takings formula—whose overall merits I examine in the second portion of this paper. As Chief Justice Roberts explains:

Our decisions have, time and again, declared that the Takings Clause protects private property rights as state law creates and defines them. By securing such established property rights, the Takings Clause protects individuals from being forced to bear the full weight of actions that should be borne by the public at large. The majority’s new, malleable definition of “private property”—adopted solely “for purposes of th[e] takings inquiry,”—undermines that protection.[78]

To put this point in its simplest form, one vice of the Kennedy formulation is that it undermines the “settled expectations” on which any system of property rights depends. However, what the Chief Justice does not ask is whether, and if so how, the entire regulatory-takings framework of Penn Central is reconcilable with the Taking Clause’s purpose of protecting property rights. As the second part of this article explains, whatever reasons the Chief Justice has for disliking the ad hoc judgments on the question of what is the proper parcel apply with equal force to the use of the Penn Central balancing test that he accepts?[79]

For all the attention paid to the Murrs’ putative expectations, it is striking that neither Justice Kennedy nor Chief Justice Roberts ventured to examine the strength of Wisconsin’s interest, another Penn Central factor. That point is most unfortunate in this context, because it is hard to see any state justification for the ordinance. Clearly, an ordinary cabin on Lot E is no more a nuisance than the cabin already on Lot F, or indeed for any cabin along the St. Croix River. The only way that Wisconsin could prevail on this factor is to show a need to control some unidentified soft externalities that might compromise the unique character of the river.[80] But that rationale fails as well. Wisconsin can point to no serious aesthetic or historical concern that would have justified preventing construction of a cabin on Lot E had the land been held by a separate legal entity. Rather, the state’s position is based on the location of the title rather than the actual use of the land. If there are no adverse effects when the two parcels are legally separate, then there are similarly no dangers if the plots are combined. Part B of the St. Croix County ordinance requires that all construction meet the applicable rules on sanitation and zoning, which is sufficient to protect against any and all serious externalities.[81] So the question is this: Why are the state’s environmental concerns, however broadly conceived, enhanced simply because Lots E and F had once been in common hands? The chain of title gives no information whatsoever about environmental impacts, all of which are better addressed by alternative means such as case-specific inquiries into the external effects of proposed projects. Thus, the two key components of the Penn Central balancing test in regulatory takings cases point to treating the Wisconsin ordinance as imposing a total wipeout on Lot E, which should be fully compensated.

Justice Kennedy’s many confusions in Murr all stem in large measure from his failure to address a critical ambiguity in the meaning of the term “reasonable expectations.” His opinion stresses a meaning of the term which asks whether the property owner will make a prediction of whether the state will in fact at some time impose these restrictions. But this test has deep perverse consequences. Knowledge becomes surrender. The more knowledge that the landowner has of the long-time ambitions of the state, the greater his exposure to the regulation.

Descriptively, there are factors within factors. The treatment of land under state and local law can involve a detailed history of the evolution of the pattern of regulation over many years, which happened in Murr. In this particular case, the prediction is a certainty. Once the law is in place, he knows that he will lose. Of course, if the Murrs knew that, they would have avoided the decision to take Lot E out of the corporate entity. Either way, of course, they will know something about the prospective value of the plot in question, but at this point the argument becomes circular. If the landowner thinks that the regulation will not stick, he will value it as a parcel capable of development. If he thinks the regulation will be struck down, then he will set the value of that unit at a far lower level, equal to its residual value as a side lot to Lot F. If he thinks that the lot lines should really matter, he should gain some advantage. If he fears that the state will disregard lot lines, that factor cuts the other way. Nor do the physical characteristics of the lot supply any useful information. The two are adjacent to each other, and one characteristic of Lot E is that it is capable of development as is Lot F. Another is that it retains some modest value if left undeveloped.

To Justice Kennedy, the case becomes easy because the state law was clear at the time of the key transfer of Lot E out of the corporate form, where it had a long common border with the other land. But what is instructive about his ad hoc application of this test is that he never asks what it does to revise the treatment in any of the earlier cases that have opined on the “denominator question.” There is, therefore, the real possibility that Murr will lead to uniform judicial deference to state administrative action across the board. That is what we should expected, given that his entire conception of reasonable expectations is wrenched out of its correct normative context. Justice Kennedy thus repeats the same intellectual mistakes that he made when he constantly invoked the phrase “reasonable expectations” in his 1992 concurrence in Lucas v. South Carolina Coastal Commission,[82] in which he labored under the false impression that the constant repetition of this elusive phrase could give it some much needed clarity.

In fact, that exact opposite is true. The great value of the phrase “reasonable expectations” is that it lends some precision to a coordination game in which two parties each have to figure out what actions that they should take conditional on the other party making the parallel calculation. The way the exercise works is to make sure that both parties take actions that mesh together so that at the end of the day the value of the entitlements of both parties are maximized even in the absence of some contract between them.

To give one simple example, a rule followed by both parties on the street that each will drive on the right side of the road will allow them both to behave in ways that avoids collision and thus improves their joint position. The alternative rule that each party drive on the left has the same desirable impact. What is excluded is a situation where one party drives on the right and the other drives on the left at which point collisions can abound. In those cases, where it is uncertain whether the correct equilibrium is left/left or right/right, a look to background expectations should be able to identify which of the two eligible pairings offers the stable equilibrium. In this model, of course, we want people to drive in reliance on the preferred equilibrium, because traffic will become an unholy jumble if half the parties drive on the left and half on the right. And oftentimes we take the customary practice and elevate it to a rule in order to reduce the likelihood of noncompliance.

As a predictive matter, of course, we can be confident that some persons at some time will make the mistake. But it hardly follows that having the gloomy prediction come true excuses that party from responsibility for the error in question. What it does do is to create, as under the doctrine of the last clear chance, the obligation to react to a breach of the norm provided it has become apparent.[83] In all legal systems, the initial entitlements generate strong obligations, even if the prediction is that someone will violate the norm. Equally strong is the duty to mitigate once the transgression is made clear, but with this caveat: the innocent party has to act in good faith, but cannot be held responsible if an honest and reasonable choice does not extricate either or both parties from the dilemma.

It should be clear that the predictive account offered by Justice Kennedy has no application to the normative inquiry of how best to optimize the use of the common resource. It should thus be equally clear why the term “reasonable (investment-backed) expectations” does not appear in the Takings Clause, which pertains to the protection of private property. The correct answer to this coordination game is that the government should pay when it takes property for a public use. When development rights are stripped from the owner’s rights bundle without compensation, that answer is rejected.

II.     Murr as a Matter of First Principle

A.     Today’s Conceptual Confusions

This Part of the Article asks the second of our two questions: how Murr should have been decided as a matter of first principle. In this regard, there is something obviously jarring about a rule that allows a land-use regulation to impair sixty, seventy, or eighty percent of the value of any given piece of property without compensation. First, there is no obvious tipping point along that continuum where compensation is suddenly required. Yet no matter where that point is put, the law creates an indefensible discontinuity. Let the amount of value destroyed by the land use restriction be one percent less than some undefined X, and nothing is owed. Let it be X, and full value is now owed. Where should X be located, and why, are obvious questions that have not been answered under Penn Central, which offers no theoretical framework to address the issue. Nothing that is said in either of the two primary opinions in Murr shows the faintest awareness of the difficulties in the underlying doctrine, nor of the social importance of the basic issue.

Nor, in theory, is there any reason why this discontinuity should be tolerated in the first place, because the same rationales for the robust just-compensation requirement in the physical-takings context carry over to the regulatory-takings arena. The just compensation requirement of the takings clause was designed as an intermediate position between two unpalatable extremes: at the one end, the government could take property without any compensation, at which point individual property owners would be subject to the abuses of a dominant majority faction. At the other end, the property could be taken only with the express consent of the property owner, at which point the holdout problem would become insurmountable. Each owner along the path of a proposed highway, for example, could hold out for some fraction of the social gain that the road generated. As multiple parties engage in the same conduct, the project will be stillborn, and many important social improvements will never take place. The intermediate position lets the government take the property, but not at the price of zero. The original owner is not left worse off, and the just compensation requirement then forces the state to carefully consider whether it is worth appropriating funds for the project in question. A simple compensation requirement thus prevents abuse at one end of the takings equation while inducing responsible behavior on the other. That is a sensible way to create reasonable, investment-backed expectations.

These rationales developed in the context of physical-takings cases carry over with undiminished force to regulatory ones. Thus, the development rights in Euclid, the air rights in Penn Central, the mineral rights in Pennsylvania Coal, and the materialmen’s liens in Armstrong v. United States[84] are subject to huge political forces if they can be taken without just compensation, leading to the same kind of indefensible overreach that prompted the adoption of the takings clause in the first place. The compromise here allows the government to have its way on matters pertaining to public use, but not to wipe out private holdings when it abstains from taking, either in whole or in part, physical possession of property whose value it nonetheless destroys in part. To show that these takings are justified requires evidence that the public gains exceed the private losses. Yet without a compensation requirement, that showing can rarely be made, thus demonstrating that the aggressive application of the regulatory-takings doctrine is necessarily contrary to any sound system of social welfare.

There is ample reason, therefore, to start over, and that means taking a hard look at the supposed constitutional distinction, entrenched by volumes of precedent, between permanent physical takings and regulatory takings. The former, which are governed by Loretto, involve situations where the state either enters into the property of private owners or authorizes private individuals to enter for their own benefit. It is now settled, for example, that easements allowing either the government or private parties to walk across the land of another count as physical takings.[85] Under the Loretto rule, such physical takings require compensation. In contrast, regulatory takings leave a property owner in exclusive possession of his land, but subject him to restrictions, often quite severe, on the traditional powers of use and disposition.[86] The availably of compensation is subject to an ad hoc balancing test under Penn Central, which typically finds that the property’s lost value is non-compensable when the parcel as a whole retains some degree of economic value.

In announcing this test in Penn Central, Justice Brennan did not offer any reason why takings law should offer no independent protection to the divided interests—such as air rights—within a single parcel when it is undisputed that one of the prime missions of state property law is to encourage the creation of such divided interests in order to maximize the productive value of any given parcel of land. It is for just that reason that state law recognizes not only the creation of air and mineral rights, but also divisions of real property into life estates and remainders, mortgages and equity interests, leases and reversions, use and development rights, and servitudes (covering both easements and restrictive covenants) over the property of another.[87] It is no mere coincidence that the difficulties that have emerged in takings law arise precisely because of the failure of modern takings law to track the private law’s formulation of these well-established forms of property interests.

That gap has fatal consequences for the political economy of takings. In all private transactions, any neighbors that trespass or infringe upon any property right of a neighbor can be enjoined or required to pay full compensation. In the public law established by Penn Central, however, those same neighbors can use majority rule to intrude upon others by persuading local governments, where they hold disproportionate influence, to take that same interest by regulation—at least if it is not a physical interest within the meaning of Loretto. But that purported boundary between the physical and the regulatory quickly gives rise to the art of circumvention by clever draftsmanship, because it is clear from Loretto that some physical invasions are allowed notwithstanding the ostensible per se rule requiring compensation in such cases. Thus the Court held, without explanation, that prohibiting installations of cable equipment unless just compensation was paid “in no way alters the analysis governing the State's power to require landlords to comply with building codes and provide utility connections, mailboxes, smoke detectors, fire extinguishers, and the like in the common area of a building.”[88] The obvious explanation lies in the health and safety justifications—the police power, once again—that are available in these cases, but not when a cable company wants for its own benefit to place its box on a landlord’s roof.

It is critical to note, however, that these safety-based rationales are not available for rent-control and antidiscrimination laws, also mentioned in Loretto. In those cases, the sole purpose of the law is to create a wealth transfer from existing landlords to current or prospective tenants. Yet it defies any rational explanation to claim that these bodies of law do not involve the state authorization of one group’s entry into, and permanent occupation of, the private property of another group. After all, the central purpose of rent-control laws is to authorize a tenant to remain in possession of property at a state-determined rental after the expiration of a lease, and the major purpose of the antidiscrimination laws is to remove the landlord’s right to exclude tenants to whom he does not wish to surrender possession. Let us assume that there is some public use in putting particular tenants where they are not, for whatever reason, welcome. It is still the case that these forced entries should be subject to the per se compensation requirement under Loretto. Under any rent control or stabilization scheme, the rent that is required from the unwelcome tenant is a down payment on that obligation, which the state is then required to top off until the landlord receives compensation that leaves him at least as well off as he was before the regulatory imposition. Under the antidiscrimination laws, the measure of damages is the loss in value attributable to the substitution of a less desirable tenant for a more desirable tenant. It is quite clear that the per se rule that protects against physical takings should be far more extensive than Justice Thurgood Marshall suggested in Loretto. It is equally clear that all the movement in the case law has gone in the opposite direction, given the strong political support in many circles for both rent-control and antidiscrimination laws. It has narrowed the class of physical takings and expanded the scope of the balancing test under Penn Central.

The key point of that transformation is as follows. When a taking is treated as a physical taking, the correct measure of damages is the fair market value of the estate lost, wholly without reference to the amount of property that is retained. Thus, in United States v. Causby,[89] distinguished in Penn Central, the United States organized direct invasions of the plaintiff’s property that was located under the flight path of incoming planes. In measuring the compensation owed for the loss of the air rights, Justice William O. Douglas stated that ”[i]t is the owner’s loss, not the taker’s gain, which is the measure of the value of the property taken."[90] The hard question is why this rule should not be applied across the board, to physical and regulatory takings alike.

B.     The Chief Justice Roberts on Strategic Behavior

This question is one that has already confronted the Chief Justice, who in Horn v. Department of Agriculture[91] had insisted that the distinction between physical and regulatory takings was embedded in Supreme Court case law, without probing the reasons behind the distinction.[92] Yet in this case the Chief Justice felt compelled to explain why he thought that a per se rule was appropriate for the definition of “the” parcel, but not for the ultimate determination of whether compensation was owed once the regulation was put in place. At multiple points in his opinion, the Chief Justice insisted that the balancing test was developed in “response to the risk that owners will strategically pluck one strand from their bundle of property rights —such as the air rights at issue in Penn Central— and claim a complete taking based on that strand alone.”[93] He added, “[The Court] rejected the strategic splitting of property rights in Penn Central, and courts could do the same if faced with an attempt to create a takings-specific definition of ‘private property.’”[94]

The initial response to the Chief Justice is there was no risk of strategic behavior by the landowner in either Penn Central or Murr. In Penn Central the landowner had always planned to develop the air rights; in Murr the same was true with respect to Lot E. Neither property owner “plucked” one right out of the entire bundle of rights for special protection. Both just wanted to preserve the rights that they had before their respective regulations went into place.

Unfortunately, Roberts’ myopic view of property rights leads him to misunderstand the risk of strategic behavior in connection with air rights, or indeed, mortgages, reversions or any other property interest. The only reason why this so-called problem of strategic behavior arises is because the Supreme Court has insisted on using the denominator test in dealing with restrictions on use, even though it rejects that approach in physical occupation cases. But at no point has the Court offered an explanation as to why that distinction should have any traction. Thus, suppose the Court applied the same test that Justice Douglas applied to the overflight easement—namely, applying what is lost, not what is gained. At this point, there is zero risk of strategic behavior in any regulatory takings situation. At no point in time is there any action that any property owner can take that will lead to a divergence between private and social cost. At all points in time, the government has to pay the fair market value of the property taken, which it will do only if the political branches of government conclude that the property is worth more than the price accurately set by the takings law. Those private rights were not some arbitrary assemblage of rights that had no market value.

In Penn Central, for example, the air rights in that case were not plucked out from some arbitrary bundle of rights; the air rights were a recognized property interest under New York law that could be sold, mortgaged, and leased just like any other property interest. In a private market, these rights will be transferred in some way from the owner of the fee simple only if the gains from trade exceed the costs of organizing and enforcing the transaction.

Given this simple relationship, where is the opportunity for private strategic behavior if the government is required to pay just compensation for the interest that it chooses to take, either by occupation or by restriction? The only way in which private owners can increase the compensation owed to them is to increase the value of their private holdings through appropriate market transactions, which is, of course, precisely what the social interest demands. In Penn Central, the owners did not sell the air rights because they thought that they had greater value when attached to the land below. The unified ownership essentially eliminated the costs of having to negotiate a set of support easements between strangers. Hence this issue of strategic behavior did not arise at all in that case, which makes clear that the rationale offered by the Chief Justice is an ex post rationalization that fails to justify the balancing test which he favors.

The same argument, moreover, applies to any and all other partial interests in property. The divisions take place when they increase net value, at which point the compensation paid should increase to ensure that the value of the property taken for public use has greater value in the hands of the state than it had in private hands.

But the situation is indeed worse than this. Under Penn Central, the opportunities for strategic behavior by the government are now vastly increased, for there are now manifold ways in which governments can take actions where private and social costs diverge. The basic formula is that the takings that do not go “too far” are left uncompensated, while those that do go too far are fully compensated. Thus, the dominant, and socially perverse, government incentive is to stop just short of that undefined line so that it can gain rights, often in the form of restrictive covenants, for a price of zero.

To see how this works, return again to the air rights in Penn Central. Assume first that the government has two options for taking those air rights. The first of these is to announce that it will take them so that it would have the right to build some structure. At this point, the government would be engaging in a physical taking under Loretto such that full compensation would be owed. If the gain to the government from that approach is 100 and the losses to the private owner are 150, the government, if under an obligation to pay full compensation, will decline to take action. But now suppose that the government backs off the original plan, and only imposes a restriction on the ability of the landowner to build on those air rights but does not seek to develop the air rights itself. The loss to the Penn Central owner remains at 150, because it still cannot use those rights. If the benefit to the government from this secondary approach is 90, then the social losses will increase by 10 from 50 to 60. Yet the compensation owed by the government from its strategic decision to scale back its demands will remain precisely zero under Penn Central. The government compensates nothing for a social loss of 60—a classic form of strategic behavior.

The takings calculations only become more convoluted if one asks what should be done in Penn Central if it turns out that the terminal itself can only be operated at a loss, but the property, as a whole, has positive value if it can exercise those air rights. In this case, does the Penn Central case require compensation, and if so, how much? If no compensation is owed, then the government will again claim too much. But if compensation is owed, then, again, the government has every incentive to engage in strategic behavior. Instead of condemning all the air rights, it might decide to condemn only some of them if it can escape the obligation to compensate for any loss if it merely scales down its claim. But the social losses still remain if the value of the air rights taken is worth less to the government than to the owner. And, of course, the situation only gets more bizarre where the Penn Central analysis applies to undeveloped land, where it is still not clear under Penn Central what is owed. In all these cases, the standard formula—you pay for what the owner loses—avoids all of these problems and forces the government to engage in honest valuations. The mistaken premise of the Chief Justice’s analysis is that it treats the problem of strategic behavior by private parties as something that the takings law has to counter. In practice, it is the government who gets all of the options of how to take or to regulate. The risk of strategic behavior is, therefore, all on government side of the ledger. The Penn Central rule that he embraces only makes the entire situation far worse.

C.     A Fresh Start

It seems clear that both the majority and the dissent in Murr have badly muffed the conceptual challenge when they treat the combination of the ”too far” test in Mahon and the balancing test of Penn Central as an accurate statement of the law. Neither of these two tests has any textual foundation in the takings clause, and together they systematically encourage the government to impose regulations with public benefits that are less than the private costs imposed on the landowner.

It is important, therefore, to start over. To do so, it is essential to unpack the various factors that are larded into the modern takings tests. Disaggregation of the takings problem into its constituent elements is the key to developing a unified approach that treats occupation, regulation, and all combinations of the two as part of a unified theory. In past work, I have identified four key questions that have to be tackled, in sequence, in connection with the Takings Clause, all of which have been referred to above:[95]

First, has there been a taking of private property?

Second, if so, is it justified under the police power so that no compensation need be paid?

Third, if not, has the taking been for a public use?

Fourth, if so, has just compensation, be it in cash or in-kind, been provided?

In dealing with the first of these questions, the phrase “private property” bears no connection to the Supreme Court’s favorite expression, “investment-backed expectations,” which is, of course, plucked from thin air. Rather, the term private property has a long and powerful lineage. The term chosen in the Fifth Amendment is perfectly general. It is not limited to land or to any other specific form of property, such as chattels, water rights, air rights, or intellectual property. As the Chief Justice properly noted in his dissent, “[o]ur decisions have, time and again, declared that the Takings Clause protects private property rights as state law creates and defines them.”[96] It protects those interests as defined under state law from government taking. Partial interests in property are protected as much as outright ownership. The size of the takings may be smaller, and the compensation owing may be less given the smaller size of the interest taken.

Prima facie, the just-compensation requirement attaches to all forms of property taken. But there are further complications, as a separate and independent inquiry looks to police power justifications of health and safety, and in this regard the connection between the law of nuisance and the law of takings is powerful, notwithstanding Justice Kennedy’s refusal to see that it imposes a critical limitation on government power. The conceptual underpinnings of this branch of law have become thoroughly confused because of the failure, most notably in Berman v. Parker,[97] to distinguish between the police power and public use under the Fifth Amendment. Thus, in Berman, compensation was offered for taking down a building that in itself was neither ugly nor blighted, simply because it was located in an urban renewal district. But precisely because it was not a nuisance, Berman’s suit was to enjoin condemnation when compensation was offered, not to enjoin it when it was not. The court nonetheless found that the state’s aesthetic interests fell within the police power, even though earlier cases rejected that line on the ground that private parties cannot bring actions for nuisance on these grounds. Thus, State v. Brown[98] invalidated a statute that required fencing or screening to keep from public view junk yards, trash, refuse or garbage. More modern cases tend to take a broader view but the construction of an ordinary, even elegant, riverfront house is miles away from those rules intended to regulate eyesores.[99] The slightly broader definition of the police power, however, does not make the tests for the police power converge with the public-use requirements, for surely the state needs a more powerful justification to take property without compensation than to take the property with it. If the law of nuisance does not establish that boundary, what does?

Neither Justice Kennedy nor Chief Justice Roberts offers any considered answer to this challenge. Nor do they recognize that the resort to the nuisance law has this enormous social advantage: it avoids political arbitrage between the judicial and legislative branches. By tying government power to a well-established branch of private law, the state can act on behalf of its citizens only when they cannot act on their own behalf. There is therefore no strategic advantage in seeking to use legislative power, as the only reasons that justify public action without compensation are those that justify private action without compensation. Hence the sole determinant of whether to rely on public or private enforcement of various public and private rights is the relative efficiency of the two systems in protecting those same set of rights. In general, private enforcement will work well for discrete harms directed against particular individuals. Public enforcement works better when diffuse injuries, often from multiple sources, harm large numbers of parties. But there is no way in which the shift in enforcement can expand the permissible grounds for coercive intervention and its attendant risks of majoritarian overreach.

At this point, the next stage of the nuisance—or police power—inquiry is the same in both public and private law: Does the relief sought fit the injury suffered? In general, the principle of proportionality requires a court to balance the equities in all cases, so as to minimize the errors of over- and under-enforcement. For these purposes, it is often the case that the correct set of remedies starts with injunctive relief and then uses damages to clean up the residual harms that are not enjoined. The use of these mixed remedies will in general work better than a complete injunction, which can go too far, especially when crafted so that it does not tolerate background risks. This mixed approach also works better than the total denial of any injunctive relief that in turn permits the wholesale destruction of the interests of innocent parties when it is difficult to value the consequential losses that flow from massive property destruction. In short, tying the use of police power to the private law’s nuisance framework offers both a necessary limit on majoritarian impulses and a viable mechanism for assessing the proper scope of the government’s remedial actions.

Third, if the police-power justifications are not available, then the taking in question must be for “public use.” Under the Supreme Court decision in Hawaii Housing Authority v. Midkiff,[100] that term has been unduly expanded to allow for virtually any “conceivable” social benefit to count as a public use,[101] including the transfers of given parcels of land from one private person to another. But even if those direct transfers are ruled out, the public-use requirement does not require that the government take ownership of what is taken. It is quite sufficient to let private parties own property so long as it is in some sense open to the public, as is the case with common carriers and public utilities, which commonly exercise the condemnation power.[102] In addition, the public-use requirement is surely fulfilled in cases like Penn Central, where the preservation of views along Park Avenue could be enjoyed by the public at large. Similarly, the environmental benefits posited by the Wisconsin ordinance in Murr also satisfy the public-use requirement, so there are no difficulties here. Indeed, Supreme Court cases have rightly extended the public-use requirement to cover genuine bilateral-monopoly holdout cases, for otherwise a single well-situated property owner could undermine the functions of the takings clause by blocking the assembly of larger property units by demanding an extortionate price for a trivial asset.[103] However, note that even under this broader definition, the Court’s decision in Kelo v. City of New London[104] was incorrect given that the property condemned was neither for use by the government nor necessary to overcome a holdout problem in assembling land for some licit government project.[105] This issue is not in play in these regulatory-takings cases.

Finally, where the taking is for a public use, because injunctive relief is not available under the police power, the taking of any interest in private property has to be compensated. In those situations where a single party, or a small group of parties, is singled out for special treatment, the compensation must be in cash so that they receive “‘just compensation’ [that is the] full equivalent [of] the property taken.”[106] This metric does not include “any supposed benefit that the owner may receive in common with all from the public uses to which his private property is appropriated.”[107] That last qualification is strictly necessary because there is no reason why the party who contributes property to the public should not share equally in the public gains from the project. If those social gains were an offset against compensation, he would be left worse off than every other member of the public. In addition, the valuation questions inherent in measuring these diffuse social benefits would impose heavy and unnecessary burdens through the operation of the condemnation system in every case of a targeted acquisition.

The overall analysis, however, becomes more difficult when a comprehensive regulation impacts large numbers of persons at the same time. At this point, the key insight follows from Justice Holmes’s famous remark in Mahon that compensation is not needed when the regulation in question secures “an average reciprocity of advantage” among all the relevant players.[108] To make the theoretical point more explicit, each comprehensive regulation imposes burdens and benefits on the same parties. The burdens in question are the limitation in the occupation, use, or disposition of various forms of property, all of which count as takings which are prima facie compensable. The benefits of these regulations inure to the same parties who are subject to the burdens, and thus count as implicit (and inseparable) in-kind compensation that satisfies the demands of the just-compensation requirement of the Fifth Amendment. In these cases, so long as there are no negative spillovers to third parties, there is every reason to believe that the uniform imposition of both benefits and burdens will produce a net benefit for each party within this closed system, and therefore no cash compensation is required. Typically, it is difficult to make direct valuations of the interests that are taken under these general laws, so the useful proxy is to allow such laws to go forward so long as they do not have a disproportionate impact on one group of affected parties relative to another. But in those cases where a disproportionate impact on the affected parties is detected, then an explicit cash compensation is required from public funds to make up the shortfall, leaving open the question of whether these funds should be raised by a special assessment or from general revenues.[109]

D.    The Penn Central Line of Cases Reconsidered

The decisive advantage of the alternative approach sketched out here is that it does not have the ad hoc quality that is found in the Penn Central version of takings law, and it makes easy those cases that otherwise seem difficult. The only issues on which factual disputes can arise are empirical questions on the valuation of property interest taken and on the choice of remedy against actual or imminent nuisances, which are unavoidable in any cases. But on the conceptual issues the results are both clear and unambiguous. The strength of these claims becomes clear by going back over all of the cases that were discussed above, as well as several others that figured in the articulation of the Penn Central standard.

Start with Penn Central itself. The property taken, as protected under state law, was the air rights. Justice Brennan points to the promotion of the general welfare, but that should count only on the question of public use; it does nothing to create a credible police power claim under the nuisance law, unless every building above a certain height counts as a nuisance. The blocking of the views of others by using one’s air rights is not a nuisance any more than their blocking a latecomer’s views with their own prior structure is a nuisance. The basic structure of nuisance does not allow any person to get a strategic advantage over others by building either early or late, which is why the “coming to the nuisance” doctrine does not allow a party that creates a nuisance to claim prescription against a neighbor that builds at a subsequent time.[110] Public use is of course no issue. Moving to the compensation issue, there is no average reciprocity of advantage to supply in-kind compensation, for even if other sites are designated as landmarks, those benefits inure to the public generally and not to Penn Central’s owners. Nonetheless, the just-compensation problem under this landmark-preservation scheme does raise important complications, given that one part of the landmark preservation package came in the form of air rights over other properties, whose value could be substantial. The correct way to treat these in-kind benefits is as an offset against the compensation owed. But there is no reason to presume conclusively that the rights received as the perfect equivalent of the air rights surrendered, a proposition supported by the “full equivalent” principle of Monongahela Navigation Co. v United States.[111] Instead, the correct way to proceed in these cases is to avoid these knotty valuation questions by requiring the compensation be paid in cash, so that the air rights in question can then be accurately valued in an arm’s length transaction with third parties. Putting it all together, the case is easy: the correct result in Penn Central is for the government to purchase the air rights at market value, obviating all the complications that have been introduced under current law. Politically, it is an open question whether the government would have been prepared to collect the revenues needed to block construction of a tower, given that the views up Park Avenue were already blocked by the preexisting Pan Am building. But the appropriate lesson to learn is that the just-compensation clause has its greatest value in preventing government actions that should not take place to begin with.

It is also clear from this analysis that Justice Brennan played fast and loose with the key case of Armstrong, in which Justice Hugo Black closed his opinion with this correct categorical statement: “The Fifth Amendment's guarantee that private property shall not be taken for a public use without just compensation was designed to bar Government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.”[112]

The facts of Armstrong put bones on the basic proposition. The plaintiffs were subcontractors who held materialmen’s liens against boats owned by the United States on which they had performed repair work. These liens were valid because the general contractor had neither paid for the work done, nor obtained lien waivers. Any private boat owner would have to satisfy these liens. The United States, however, chose to sail its boats into international waters, effectively dissolving the liens. Justice Black noted that as the naval boats supplied protection to the public at large, the public should have to pay for the work rather than foisting a disproportionate burden on the government’s hapless subcontractors. There was obviously no question of police-power justification, public use, or just compensation to compensate the inquiry. All that was needed was a judgment that a lien is an interest in private property, even though it does not become possessory until foreclosure. Justice Brennan protested in Penn Central that the courts could not develop any principled account as to when to apply this rule. But the exact opposite is true. The taking of the air rights over Grand Central Terminal was for public benefit, and should have been caught by the same rule given that the police power, public use, and just compensation questions were easy to resolve.

The same approach allows for a rational reexamination of all the earlier cases that Justice Brennan used to justify his Penn Central approach. On this view, it is clear that the decision in Euclid, v. Ambler, which I have discussed at length on other occasions,[113] is the source of much of this mischief. The decision to take a compact 68-acre plot of land with good access to markets by railroad and highway, and divide it into three parallel plots of lands for both manufacturing and different zones for single-family and multi-family residences is the height of folly. The resulting reduction in value of about seventy-five percent was not offset by any identifiable gains to outsiders, which reveals the allocative losses of a regulatory-takings regime. Indeed, the arbitrarily mandated usage divisions within a once-coherent plot of land create externalities where none existed; the plot’s single owner had every incentive to make sure that the uses over the entire plot were compatible with each other, given that he would internalize the harms of any self-inflicted nuisances in the form of lower sale prices. Justice George Sutherland sought to justify zoning in general by talking about the need for health and safety for children on public streets, without once relating those abstract concerns to the particular scheme in question. Nor at any point in time did he go through the four separate questions, which lead to the inexorable conclusion that, without payment of compensation, this particular zoning scheme fails, even if other zoning schemes might succeed.

The test of success for these zoning schemes comes from the application of this basic framework, given that some zoning ordinances could function as nuisance-prevention devices or supply needed in-kind compensation. The point is illustrated by two schemes that Justice Brennan discusses in Penn Central. Gorieb v. Fox,[114] decided by Justice Sutherland one year after his decision in Euclid, involved a local setback ordinance for each city block, which prevented any new construction in residential areas from taking place closer to the street than the overall setoff levels of current housing. Gorieb applied for a permit to build a brick store building next to his own home, and wished to locate it closer to the street in violation of the pre-established setback line. The restriction in question counts as a prima facie taking, for which compensation is owed equal to the loss in value of the property if no police power justification or in-kind compensation exists. In this case, both the police-power and the in-kind compensation doctrines are in play. The safety features of the setback do matter because of the residential area, and it is always an open question whether the uniform setback line improves the value of all properties along the street from the ex ante perspective, which, if found, establishes Holmes’s average reciprocity of advantage. In this spirit, Justice Sutherland accepted the contention of the city council that

front yards afford room for lawns and trees, keep the dwellings farther from the dust, noise and fumes of the street, add to the attractiveness and comfort of a residential district, create a better home environment, and, by securing a greater distance between houses on opposite sides of the street, reduce the fire hazard; that the projection of a building beyond the front line of the adjacent dwellings cuts off light and air from them, and, by interfering with the view of street corners, constitutes a danger in the operation of automobiles.[115]

But he does not estimate the safety benefits, which are hard to determine, given that other neighborhoods may have no setbacks at all. In this case, a helpful benchmark would be the setbacks that are imposed by developers as part of a planned unit development, and if these setbacks fall within that range, there is a strong reason to uphold them on a joint rationale: there is both a health and safety purpose, and a high level of in-kind compensation. But the hard question is whether this issue is so obvious, as Sutherland insists, that there is no reason to take evidence on the question, or whether matters are sufficiently complex that some more specific evidence gathered on remand might help put the matter in perspective. I think that this case is close—certainly far closer than Penn Central—but I would be inclined to ask courts to take a closer look before signing off on the regulations. In other contexts, that closer look might easily lead to a different result, if for example the setback line for new housing were located further from the public streets than for preexisting homes.

A similar analysis applies to a case on which Gorieb relied, Welch v. Swasey,[116] in which Justice Rufus Peckham upheld for a unanimous Supreme Court a Massachusetts statute that specified, first, a general height limitation of 125 feet above street grade for all buildings, but which was subject to a broad exception that allowed local commissioners in Boston (and elsewhere) to designate by commission a lower limit of 80 to 100 feet over large parts of the city (except for some commercial districts). It was conceded—too quickly in my view—that the general height limitation was constitutional, but the Court determined that the selective reduction in certain Boston areas was both unreasonable and arbitrary. The decision did not discuss the question of whether a property interest had been taken, but the answer to that question is surely in the affirmative: the ad coelum rule, even in its most limited formulation, cedes to the owner of the soil the right to all air space over which he can exercise “effective possession.”[117] The case therefore turns on the question of whether there is either a police-power justification for the limitation, or some implicit in-kind compensation for the surface owner. In Welch, Justice Peckham chose not to address this question de novo, but instead showed enormous deference to the Massachusetts Supreme Judicial Court, which given its knowledge of the facts on the ground was, although not conclusive, entitled to “the very greatest respect,”[118] a form of deference that was not invoked in Justice Peckham’s earlier decision to strike down a state maximum-hours law in Lochner v. New York.[119]

That deference mattered in Welch. The property owner’s argument was that the ordinance in question was passed solely for aesthetic purposes, and thus did not meet the health and safety objectives required by the police power justification for takings. Justice Peckham’s response was that this statute could serve both aesthetic and safety concerns, and hence was saved under the police power because of the second of its two motivations. Most notably, the Massachusetts court had spoken of the “risk of falling walls in the case of fire.”[120] At this point, the obvious question is why the statute tolerated higher buildings in dense commercial areas, where these fire risks are, if anything, greater. The limp response to the point was:

It might well be supposed that taller buildings in the commercial section of the city might be less dangerous in case of fire than in the residential portion. This court is not familiar with the actual facts, but it may be that in this limited commercial area the high buildings are generally of fireproof construction; that the fire engines are more numerous and much closer together than in the residential portion, and that an unlimited supply of salt water can be more readily introduced from the harbor into the pipes, and that few women or children are found there in the daytime and very few people sleep there at night.[121]

At this point, Justice Peckham concedes that the Court is “not familiar” with the facts, but then shows no interest in learning what they might be. Why not when it helps to develop a record? Think of some variations. It is surely easy to argue that the higher density commercial districts pose greater dangers than sparsely populated residential areas, and that it is easy to deal with most of these risks by requiring tall buildings in noncommercial areas to meet the same safety and construction standards as those which are located elsewhere, and perhaps by special assessment to pay for any additional fire protection needed in the given area.

Justice Peckham also made a passing reference to the fact that the ordinance was passed with a view towards advancing the “comfort [and] convenience” of the citizenry,[122] which is an oblique way of making the argument that there is in-kind compensation shared by the plaintiff. But again, the disproportionate impact is evident if the scheme is measured at the time that the statute is enacted, for only this landowner was targeted. If all plots of land increased in value, then the compensation requirement is satisfied. If not, so that some persons win and some lose, it is a hard question whether the difficulties in calculating losses are so pervasive that it is better to let the inequity run than to try to correct it. As a general matter, the less likely overall social gain, the more likely that some compensation will be required, but it is difficult to generalize.[123]

That difficulty does not arise in all height cases, so, even if Welch is accepted as good law, cases like Haas v. City and County of San Francisco[124] reveal the critical necessity of properly defining the police power. This case was decided shortly after Penn Central when the abuses of selective land use restrictions were at their height. At issue was a decision by San Francisco to downzone a lot such that its owner could not build a high-rise structure similar to those that surrounded it “on the ground that the project would have a detrimental effect on the City as a whole and upon the residents and property of the neighborhood.”[125] The downzoning had taken place after Haas had obtained a final permit to construct an apartment complex up to 300 feet in height. The local Russian Hill Improvement Association raised an environmental challenge to the permit, which was then revoked, after which the City Planning Commission adopted a 40-foot height limitation applicable to Haas’s project, reducing the value of his property from about $2,000,000 to $100,000. That ordinance had no effect on the surrounding properties that were already built at a higher level. No matter, by this time aesthetic justifications were recognized as part of the police power, so there was no need to conduct a charade on safety to sustain the ordinance. Judge Shirley Hufstedler paid lip service to the view that excessively onerous regulations could be struck down, but held that this principle did not apply in this case because the regulation was general in form and did not single out Haas for special treatment, even though it was well known that “Haas appears to have suffered a disproportionate impact because no other affected landowner has as large a parcel of undeveloped land as does Haas.”[126] Judge Hufstedler should have added that everyone in government knew of that exact imbalance so the outcome was not an incidental byproduct of some general improvement or environmental scheme, but rather a conscious and focused effort to force a huge wealth transfer to existing owners from Haas. A simple rule that requires the planning commission to treat latecomers on the same terms as early arrivals would go a long way towards stopping the abuse, which is now institutionalized under the flawed Penn Central approach. Does anyone believe that these same neighbors would have paid $1,900,000 in compensation to Haas to procure the supposed social benefits of halting construction? Or doubt that the seeds of the current housing shortage in San Francisco have their origins in the Penn Central doctrine?[127]

The same defects that corrupt the takings analysis in land-use-regulation cases also carry over to the takings of mineral rights in both Pennsylvania Coal and Keystone. In both cases, the loss of mineral rights, coupled with any increased costs in operating the respective mines, is the result of the taking of the support estate that lies between the surface owner and the miner. There is no need to frame the inquiry as if the dispositive question is whether this regulation goes “too far”—questions of degree should always be avoided in making binary determinations about whether compensation should be paid, in contrast to how much compensation is owed.[128] Instead, the relevant point here is that there is no police-power justification because the surface owners had consented to the subsidence risk when they purchased their properties, and there is no threat to third parties who are protected under the nuisance law against subsidence of their lands should that happen to occur. The public-use requirement is also satisfied, given that the broad group of surface owners is not in a position to bargain for itself. But the statutory schemes in both cases founder because there is neither cash nor in-kind compensation for the loss of the mineral estate.

Similarly, the situation in Causby is easy enough. The loss of the easement to overflight is the taking of a property right even under current law. There is no police-power justification because the surface owners are just victims of the nuisances created by overflights authorized by the government. And, under Monongahela, the owners do not get special compensation from the general availability of aviation services that are equally enjoyed by the public at large. Hence in-kind compensation is not properly supplied for their losses.

Penn Central also cited the Court’s 1962 decision in Goldblatt v. Town of Hempstead, N.Y.[129] without bothering to comment on its interesting facts. There, the town had passed an ordinance that regulating dredging and pit excavation on any property within town limits. The plaintiffs claimed that the ordinance prevented them from continuing with their business of mining sand and gravel on their property, which they had started in 1927. They thus argued that the regulation constituted a taking without due process under the Fourteenth Amendment. The more accurate account of the case is that the loss of excavation rights was a taking of a traditional incident of property, namely a profit a prendre. [130] Deny that incident and all mineral rights are worthless. The case itself did not turn on any purported distinction between physical and regulatory takings. Instead the town defended itself on the ground that the ordinance constituted a valid exercise of the police power. The grounds for the police power claim rested on the fact that the excavation had created a man-made lake that covered 20 acres of property to a depth of 25 feet.[131] In the interim, population centers had moved closer to the defendant’s property.

The key question here is whether this regulation is necessary to protect the health and safety of the community. Hempstead did not allege any risk of flooding or subsistence. The most that it could claim was the possibility that the lake would operate as an attractive nuisance—for which a strong fence should be sufficient protection, as is the case for other attractive nuisances. At this point, the Court, speaking through Justice Tom Clark, undertook a meandering discussion that failed to identify the particular harm against which the ordinance was intended to guard, let alone offer an explanation as to whether the total prohibition was excessive relative to any risk posed. Instead, Justice Clark lamely concluded that there was not enough evidence in the record to make an independent determination on the merits. He therefore upheld the ordinance on the worst of all possible grounds, by noting that the landowner bore the burden of proof on the question of “reasonableness.”[132] The private-law rule is of course the opposite; the parties who seek to impose restrictions on another’s use of his land bear the burden of proof on the choice of ends and means. The best that can be said for the decision is that it isolates the police-power question from the other issues in takings cases. But at the very least the case should have been remanded to decide the impact of the ordinance both on the operations of the landowner and its purported public benefit. But the last thing that the case shows is the need to further a dubious takings analysis by moving to some diffuse Penn Central standard. The traditional account of the police power works well and points in favor of the invalidation of this ordinance unless compensation for the loss of the mining rights is provided.

The next of the cases cited by Brennan, United States v. Central Eureka Mining Co.,[133] involved Eureka’s challenge to a 1942 order of the War Production Board that shut down the operation of all nonessential gold mines after other measures intended to limit the labor and the machinery used in the mine had failed to reduce output. The opinion of Justice Harold Burton first anticipated Penn Central when it stated “that the Government did not occupy, use, or in any manner take physical possession of the gold mines or of the equipment connected with them.”[134] Thereafter he concluded that “[t]he mere fact that [the Limitation Order] L-208 was in the form of an express prohibition of the operation of the mines, rather than a prohibition of the use of the scarce equipment in the mines, did not convert the order into a ‘taking’ of a right to operate the mines.”[135]

Once again it is helpful to examine the facts of the case in light of the four questions set out above. On the first point, the limitation of the development rights is a temporary taking of property. Although the language in Loretto stressed the word “permanent”[136] (with respect to a cable box that was doubtless obsolete in a short time), Justice Brennan in San Diego Gas & Electric Co. v. City of San Diego[137] correctly observed that “[t]he fact that a regulatory ‘taking’ may be temporary, by virtue of the government’s power to rescind or amend the regulation, does not make it any less of a constitutional ‘taking.’ Nothing in the Just Compensation Clause suggests that ‘takings’ must be permanent and irrevocable.”[138] The same argument applies here. The uncertain duration of the ban on production only goes to the level of compensation owing, not the basic existence of some compensable event. The former inquiry encourages continuous distributions that are always appropriate in valuation cases. Next, there is the question of whether wartime necessity counts as a police power justification for this action, for which the correct answer is no. No one doubts that the war would not excuse the confiscation of gold from the mine to pay for the war effort; the costs of collective goods must fall upon the general public under Armstrong. Therefore, the decision to ban the mining to improve the lot of the public at large satisfies the public-use requirement but not the police-power test. Nor is there any compensation offered either in cash or in-kind for the restriction in question. To be sure, valuation does raise tricky questions because the temporary prohibition does mean that the gold not mined today is worthless: after all, it can still be mined once the prohibition is lifted. Hence the correct measure of damage is for the anticipated deferment, which after the war is over means a three-year delay in the utilization of the gold. There are further complications given the interim costs needed to keep the mine safe, and still other complications with possible systematic shifts in market prices. The overall level of compensation should not be that great, but there is nothing in the logic of the basic takings framework that allows the government pay nothing for the imposition of these restrictions.

The purpose of going through all these variations is to make clear just how easy a case Murr is once the correct framework is established. There is of course no police-power justification, nor any cash or in-kind compensation, so that the taking, evidently for a public use, is complete with the adoption of the regulation. The hard question is the measure of compensation for the loss of these development rights, which should be fully compensable for the duration of the restriction. The correct view here is to give the government the choice to keep the restrictions in place, at which point it has to pay full value, or to allow them to rescind the regulation, at which point the correct measure of damages is the interim loss of development rights over the period in which the restrictions were in place. Again, the only hard questions are those of valuation. The conceptual framework thus holds.

Conclusion

In the course of this article, I have used the occasion of yet another takings case before the Supreme Court, Murr v. Wisconsin, to comment on the structure of the takings law as it is, and as it ought to be. On the former count, it is quite clear that the entire structure of the modern law of physical and regulatory takings tends to fixate on the ratio of the value of property rights taken to the value of the full bundle of rights before the regulation was put into place. Once that major premise is accepted, it becomes necessary to determine the appropriate parcel over which that ratio is calculated. In Penn Central there was no dispute that the air rights were over the same parcel on which the station was built. In Murr, there was a titanic puzzle over whether two adjoining parcels of land become one when both parcels were held for a time by the same persons, even though the titles remained separate on the books. On this question, Justice Kennedy revealed his intellectual predilection to turn every situation into a hard case and hence defended a fact-and-circumstances test that is all too malleable in individual cases and gives no guidance to landowners as to which regulations can be imposed without compensation. On this point, at least, the Chief Justice’s view that the deeds should control for constitutional purposes makes eminently good sense even if it would marginally increase the number of instances in which the government has to provide compensation under the now regnant Penn Central test.

The larger question is why the ratio between numerator and denominator should ever be relevant in any regulatory takings context. What is so disappointing about Murr is that neither Justice Kennedy nor Chief Justice Roberts thought it necessary to explain why this ratio has any significance at all. Hence, they never addressed the question of why the standard rule in physical-takings cases—that the fair market value of the rights taken affords the correct measure of compensation—is not serviceable in the regulatory takings area. That test does not exhaust the takings analysis, for it is also critical to consider separately whether a police justification eliminates the need for any compensation or, if not, whether the taking is for a public use for which compensation is then required. Within this peculiar framework, it is a mistake to make the right of compensation for the loss of development rights under the Wisconsin ordinance turn on the technicalities of the chain of title to a particular plot. This seems a uniquely inappropriate reason to deny compensation for the loss of development rights.

Any multi-factorial analysis of Murr is inherently messy, and it leaves open the endless challenge of reconciling this case with a wide range of other cases that cannot decide whether two contiguous parcels held by different titles can be a collective denominator in takings cases. The second part of the analysis shows that the muddle and confusion of the current law is largely obviated by the simple proposition that, prima facie, the more the government takes, the more it pays.

That rule applies both to the outright taking of any given parcel of land and to the taking of a divided interest in property. In all of these cases, the shifts in what is taken do not create odd and indefensible discontinuities. To the contrary it is the only rule that controls the risk of strategic behavior by government that the Chief Justice overlooked in this treatment of the subject. In the end, the correct approach only leaves for judicial determination the valuation questions as to the size of the loss, taking into account any return benefits that a property owner may receive when the taking is part of some comprehensive scheme. But those issues are routinely encountered in all physical-takings cases. In all instances, police-power justifications, tied closely to the law of nuisance, may be invoked, and in cases of comprehensive regulation, courts must be alert to determine whether the scheme that takes rights away also affords compensation in-kind from the parallel restrictions on others in the scheme. Under this view, the full range of divided interests, be they air rights, mineral rights, liens, covenants, or easements, are fully compensable. The untenable discontinuities under current doctrine disappear. The requirement of compensation thus forces governments to internalize the costs of their actions on individual property owners, which should lead to more efficient and responsive decisions.

In looking at Murr, it is deeply disappointing that at no point did either Justice Kennedy nor Chief Justice Roberts look at the incentive effects created on both private and government actors; nor did they consider the social welfare consequences of their decision. The result is that the Court has doubled down on a constitutional loser, one which unambiguously embolden governments to take private property at bargain prices by strategically regulating the use and disposition of property within their respective domains.

 

* Laurence A. Tisch Professor of Law, New York University School of Law; Peter and Kirsten Bedford Senior Fellow, The Hoover Institution; James Parker Hall Distinguished Service Professor of Law Emeritus and Senior Lecturer, The University of Chicago Law School. I would like to thank Bijan Aboutarabi, Philip Cooper, Thomas Molloy, and John Tienken of the University of Chicago Law School for their usual excellent and thorough research assistance.

 

[1] U.S. Const. amend. V.

[2] For further discussion, see Richard A. Epstein, Concepts Before Percepts: The Central Role of Doctrine in Law, 84 U. Chi. L. Rev. 99 (2017).

[3] No. 15-214, 2017 WL 2694699 (U.S. June 23, 2017).

[4]Brief for Petitioner, Murr v. State, No. 15-214 (U.S. Apr. 11, 2016), http://www.scotusblog.com/wp-content/uploads/2016/04/MeritsBrf.pdf.

[5] 260 U.S. 393 (1922).

[6] 438 U.S. 104 (1978). The test is set out in Section I.C infra.

[7] Murr, 2017 WL 2694699 ,at *8.

[8] Id. at *20 (Roberts, C.J., dissenting). A brief dissent of Justice Thomas requested that the Court reconsider: “[T]ake a fresh look at our regulatory takings jurisprudence, to see whether it can be grounded in the original public meaning of the Takings Clause of the Fifth Amendment or the Privileges or Immunities Clause of the Fourteenth Amendment.” I shall not venture into those deep waters in this article. Id at *1.

[9] Richard A. Epstein, Simple Rules for a Complex World (1995).

[10] For an earlier defense of this position, see Richard A. Epstein, Physical and Regulatory Takings: One Distinction Too Many, 64 Stan. L. Rev. Online 99 (2012), available at http://www.stanfordlawreview.org/online/physical-regulatory-takings.

[11] St. Croix County, Wis., Code of Ordinances ch. 17.36(I)(4)(a) (July 2007) (cited in case).

[12] Wild and Scenic Rivers Act, 16 U.S.C. §§ 1271–87.

[13] Id. § 1271.

[14] Id. § 1273(a).

[15] See Wis. Stat. § 30.27(1)–(2).

[16] St. Croix County, Wis., Code of Ordinances ch. 17.36(G)(1)(b).

[17] Wis. Admin. Code NR 118.03(27) (Feb. 2012).

[18] St. Croix County, Wis., Code of Ordinances ch. 17.36(I)(4)(a) makes the following provisions for substandard lots:

Lots of record in the Register Of Deeds office on January 1, 1976 or on the date of the enactment of an amendment to this subchapter that makes the lot substandard, which do not meet the requirements of this subchapter, may be allowed as building sites provided that the following criteria are met:

1) The lot is in separate ownership from abutting lands, or

2) The lot by itself or in combination with an adjacent lot or lots under common ownership in an existing subdivision has at least one acre of net project area. Adjacent substandard lots in common ownership may only be sold or developed as separate lots if each of the lots has at least one acre of net project area.

3) All structures that are proposed to be constructed or placed on the lot and the proposed use of the lot comply with the requirements of this subchapter and any underlying zoning or sanitary code requirements.

[19] Murr v. State, No. 2013AP2828, 2014 WL 7271581, at *1 (Wis. Ct. App. Dec. 23, 2014).

[20] Id.

[21] Id.

[22] Brief in Opposition to Petition for Writ of Certiorari at 4, Murr v. State, No. 15-214 (U.S. Oct. 16, 2015), available at http://www.scotusblog.com/wp-conten/pload/2015/11/Murr-opposition-to-PWC.pdf.

[23] Id. at 9.

[24] Murr v. St. Croix County Bd. of Adjustment, 796 N.W.2d 837, 840 (Wis. Ct. App. 2011).

[25] Murr v. State, No. 2013AP2828, 2014 WL 7271581, at *8 (Wis. Ct. App. 2014).

[26] 438 U.S. 104 (1978).

[27] The leading case for this point is Lucas v. South Carolina Coastal Council, 505 U.S. 1003, 1016 (1992) (holding that regulation works a taking only when it denies an owner all economically viable use of land).

[28] Murr, 2014 WL 7271581, at *4, *6.

[29] 260 U.S. 393 (1922).

[30] 272 U.S. 365 (1926).

[31] 458 U.S. 419 (1982).

[32] 505 U.S. 1003 (1992).

[33] Keystone Bituminous Coal Ass’n v. DeBenedictis, 480 U.S. 470 (1987).

[34] Id. at 497 (quoting Frank Michelman, Property, Utility, and Fairness: Comments on the Ethical Foundations of “Just Compensation” Law, 80 Harv. L. Rev. 1165, 1192 (1967)). See also John E. Fee, Unearthing the Denominator in Regulatory Takings Claims, 61 U. Chi. L. Rev. 1535, 1536 (1994) (noting the difficulty of determining the correct scope of the “denominator” against which the loss should be measured).

[35] Penn Central, 438 U.S. at 130–31.

[36] Keystone, 480 U.S. at 497 (quoting Michelman, supra note 34, at 1192).

[37] Id. at 498.

[38] Penn. Coal, 260 U.S. at 414.

[39] Lost Tree Vill. Corp. v. United States, 707 F.3d 1286 (Fed. Cir. 2013).

[40] Id. at 1292.

[41] Id. at 1291.

[42] Id.

[43] Bevan v. Brandon Twp., 475 N.W.2d 37 (Mich. 1991).

[44] Id. at 43.

[45] Id. at 44.

[46] Id. at 39.

[47] Palm Beach Isles Assocs. v. United States, 208 F.3d 1374 (Fed. Cir. 2000).

[48] Id. at 1381.

[49] Loveladies Harbor, Inc. v. United States, 28 F.3d 1171 (Fed. Cir. 1994).

[50] Id. at 1179. The full statement of the court’s position on takings reads:

a) A property owner who can establish that a regulatory taking of property has occurred is entitled to a monetary recovery for the value of the interest taken, measured by what is just compensation.

b) With regard to the interest alleged to be taken, there has been a regulatory taking if

(1) there was a denial of economically viable use of the property as a result of the regulatory imposition;

(2) the property owner had distinct investment-backed expectations; and

(3) it was an interest vested in the owner, as a matter of state property law, and not within the power of the state to regulate under common law nuisance doctrine.

[51] Dep’t of Transp., Div. of Admin. v. Jirik, 498 So. 2d 1253 (Fla. 1986).

[52] Id. at 1257.

[53] Penn Central, 438 U.S. at 124 (internal citations and quotation marks omitted).

[54] Penn Central, 438 U.S. at 136.

[55] For a discussion of the various permutations of common-carrier rate regulation, see Duquesne Light Co. v. Barasch, 488 U.S. 299 (1989).

[56] Murr, 2017 WL 2694699, at *12 (internal quotations omitted) (quoting Lucas, 505 U.S. at 1035 (Kennedy, J., concurring)).

[57] Richard. A. Epstein, Nuisance Law: Corrective Justice and Its Utilitarian Constraints, 8 J. Legal Stud. 49 (1979).

[58] Lucas, 505 U.S. at 1055 (Blackmun, J., dissenting); see also id. at 1061 (Stevens, J., dissenting).

[59] See Richard. A. Epstein, Nuisance Law: Corrective Justice and Its Utilitarian Constraints, 8 J. Legal Stud. 49 (1979).

[60] See generally Richard A. Epstein, Linguistic Relativism and the Decline of the Rule of Law, 39 Harv. J. L. & Pub. Pol’y 583 (2016); see also id. 616-617 (discussing the law of nuisance).

[61] 348 U.S. 26 (1954).

[62] Id. For criticism, see Richard A. Epstein, Public Use in a Post-Kelo World, 17 Sup. Ct. Econ. Rev. 151, 167–71 (2009).

[63] Brief in Opposition to Petition for Writ of Certiorari at 4, Murr v. Wisconsin, 136 S. Ct. 890 (2016) (No. 15-214).

[64] Murr, 2017 WL 2694699, at *14 (“Petitioners' land was subject to this regulatory burden, moreover, only because of voluntary conduct in bringing the lots under common ownership after the regulations were enacted.”).

[65] United States v. Lopez, 514 U.S. 549, 569 (Kennedy, J., concurring). For my criticism, see Epstein, supra note 60, 39 Harv. J. L. & Pub. Pol’y at 615–17.

[66] 547 U.S. 715 (2008).

[67] See id. at 758 (Kennedy, J., concurring in the judgment).

[68] See 33 U. S. C. § 1362(7)

[69] See Lawrence Hurley, “Supreme Court’s Murky Clean Water Ruling Created Legal Quagmire,” N.Y. Times, Feb. 7, 2011 (“Attorneys representing all interested parties say lower court judges, regulators, the business community and individual landowners continue to suffer as a result of the confusion sown by the justices whose main job is to provide clarity in the law.”). It was the Kennedy vote in a 4-1-4 split that was decisive.

[70] Murr, 2017 WL 2694699, at *8.

[71] Id.

[72] Id. at *9 (internal citation and quotation marks omitted).

[73] Id. at *11.

[74] Id. at *11.

[75] Id.

[76] Brief of Property Law Professors as Amici Curiae in Support of Respondents at 4, Murr v. Wisconsin, 136 S.Ct. 890 (2016) (No. 15-214), http://www.scotusblog.com/wp-content/uploads/2016/06/15-214-bsac-Property-Law-Professors.pdf.

[77] Gary D. Libecap & Dean Lueck, The Demarcation of Land and the Role of Coordinating Property Institutions, 119 (3) J. Pol. Econ. 426–67 (2011).

[78] Murr, 2017 WL 2694699, at *17 (Roberts, C.J., dissenting) (citation omitted).

[79] See id. at *18 (Roberts, C.J., dissenting).

[80] See Richard A, Epstein, Forbidden Grounds: The Case Against Employment Discrimination Laws (1992) 497 (discussing soft externalities); Richard A. Epstein, Mortal Peril: Our Inalienable Right to Health Care 227 (2000) (applying the concept to the medical context).

[81] St. Croix County, Wis., Code of Ordinances ch. 17.36(B) (2007).

[82] 505 U.S. 1003, 1032 (1992) (Kennedy, J., concurring in the judgment). I critiqued his analysis there in Richard A. Epstein, Lucas v. South Carolina Coastal Council: A Tangled Web of Expectations, 45 Stan. L. Rev. 1369 (1993). For a discussion of the parallel problem in connection with reasonable expectations for searches and seizures under the Fourth Amendment, see Richard A. Epstein, Privacy and the Third Hand: Lessons from the Common Law of Reasonable Expectations, 24 Berkeley Tech. L. Rev. 1199 (2009).

[83] See Restatement (Second) Torts, §§ 479,480 (1966).

[84] Armstrong v. United States, 364 U.S. 40, 47 (1960).

[85] See Nollan v. Cal. Coastal Comm’n, 483 U.S. 825, 832 (1987) (“We think a ‘permanent physical occupation’ has occurred, for purposes of that rule, where individuals are given a permanent and continuous right to pass to and fro, so that the real property may continuously be traversed, even though no particular individual is permitted to station himself permanently upon the premises.”).

[86] Andrus v. Allard, 444 U.S. 51, 65–66 (1979):

The regulations challenged here do not compel the surrender of the artifacts, and there is no physical invasion or restraint upon them. Rather, a significant restriction has been imposed on one means of disposing of the artifacts. But the denial of one traditional property right does not always amount to a taking. At least where an owner possesses a full "bundle" of property rights, the destruction of one "strand" of the bundle is not a taking, because the aggregate must be viewed in its entirety.

[87] See Restatement (Third) of Property (Servitudes) (2000) (showing unification). See also Susan F. French, Servitudes Reform and the New Restatement of Property: Creation Doctrines and Structural Simplification, 73 Cornell L. Rev. 928 (1988) (defending the unified conception); Richard A. Epstein, Notice and Freedom of Contract in the Law of Servitudes, 55 S. Cal. 1353 (1982).

[88] Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419, 440 (1982).

[89] United States v. Causby, 328 U.S. 256 (1946).

[90] Id. at 261. Where there are either incidental benefits or costs from taking only part of a given property it gives rise to complex valuation issue, not present in Murr, on how to modify the basic formula. See generally United States v. Miller, 317 U.S. 369 (1943).

[91] 135 S. Ct. 2419 (2015).

[92] Id. at 2428: “But that distinction flows naturally from the settled difference in our takings jurisprudence between appropriation and regulation. A physical taking of raisins and a regulatory limit on production may have the same economic impact on a grower. The Constitution, however, is concerned with means as well as ends.” For my critique of that decision, see Richard A. Epstein, The Unfinished Business of Horne v. Department of Agriculture, 10 N.Y.U. J. Law & Lib. 734 (2017).

[93] Murr, 2017 WL 2694699, at *20 (Roberts, C.J., dissenting).

[94] Id.

[95] See Richard A. Epstein, Takings: Descent and Resurrection, 1987 Sup. Ct. Rev. 1, 5 (1987).

[96] Murr, 2017 WL 2694699, at *17 (Roberts, C.J., dissenting). For further support, see e.g., Board of Regents v. Roth, 408 U.S. 564, 577 (1972) (“Property interests, of course, are not created by the Constitution. Rather, they are created and their dimensions are defined by existing rules or understandings that stem from an independent source such as state law—rules or understandings that secure certain benefits and that support claims of entitlement to those benefits”).

[97] Berman v. Parker, 348 U.S. 26 (1954).

[98] State v. Brown, 108 S.E.2d 74 (1959).

[99] See Aesthetic Purposes in the Use of the Police Power, 1960 Duke L.J. 299 (1960) (commenting on Brown).

[100] Haw. Hous. Auth. v. Midkiff, 467 U.S. 229 (1984).

[101] Id. at 242 (“Where the exercise of the eminent domain power is rationally related to a conceivable public purpose, the Court has never held a compensated taking to be proscribed by the Public Use Clause”).

[102] See Thomas W. Merrill, The Economics of Public Use, 72 Cornell L. Rev. 61 (1986).

[103] See, e.g., Clark v. Nash, 198 U.S. 361 (1905) (allowing condemnation of a right of way to allow plaintiff to access to a stream of water needed for irrigation); Strickley v. Highland Boy Gold Mining Co., 200 U.S. 527 (1906) (permitting condemnation of aerial buckets to carry ore over defendant’s property).

[104] Kelo v. City of New London, 545 U.S. 489 (2005).

[105] See Ilya Somin, The Grasping Hand: “Kelo v. City of New London” and the Limits of Eminent Domain (2015) (discussing the case).

[106] Monongahela Navigation Co. v United States, 148 U.S. 312, 326 (1893).

[107] Id.

[108] Pa. Coal Co. v. Mahon, 260 U.S. 393, 415 (1922).

[109] For discussion of the many variations, see Stephen Diamond, The Death and Transfiguration of Benefit Taxation: Special Assessments in Nineteenth-Century America, 12 J. Legal Studies 201 (1983).

[110] See Restatement (Second) Torts, § 840(C)–(D). For one influential statement of the rule, see also Sturges v. Bridgman, 11 Ch. D. 872 (1879) (allowing an injunction after a short delay to let defendant remove his equipment). The key to understanding the doctrine involves the tolling of the statute of limitations. Thus, when the initial party creates a nuisance that harms no one, the injunction is not available at that time. But in order to guard against the creation of a prescriptive easement, the statute of limitations is tolled until the actual conflict emerges. This set of rules maximizes wealth over all relevant periods of time. For a more extended discussion, see Richard A. Epstein, Principles for a Free Society: Reconciling Individual Liberty with the Common Good 202–06 (1998).

[111] Monongahela Navigation Co., 148 U.S. at 326.

[112] Armstrong, 364 U.S. at 49.

[113]See, e.g., Richard A. Epstein, Supreme Neglect: How to Revive the Constitutional Protection of Property Rights 117 (Oxford 2008).

[114] Gorieb v. Fox, 274 U.S. 603 (1927).

[115] Id. at 609.

[116] Welch v. Swasey, 214 U.S. 91 (1909).

[117] Swetland v. Curtiss Airports Corp., 41 F.2d 929, 937 (N.D. Ohio 1930). For a general discussion of the difficulties of the transition, see Eric R. Claeys, On the Use and Abuse of Overflight Column Doctrine, 2 Brigham-Kanner Prop. Rights Conf. J. 61 (2013). In my view, the implicit in-kind compensation doctrine applies to upper airspace even if it does not apply to the overflights in Causby. See Richard A. Epstein, Takings: Private Property and the Power of Eminent Domain 49-51 (1985).

[118] Welch, 214 U.S. at 106–08.

[119] Lochner v. New York, 198 U.S. 45 (1905).

[120] Welch, 214 U.S. at 107.

[121] Id.

[122] Id. at 106.

[123] See Coffin v. Left Hand Ditch Co., 6 Colo. 443, 447 (1882) (imperative necessity excludes the need for compensation in case where the enormous system-wide gains excused small losses that were hard to isolate or value).

[124] William C. Haas & Co. v. City and County of San Francisco, 605 F.2d 1117 (9th Cir. 1979).

[125] Id. at 1119.

[126] Id. at 1121.

[127] See, e.g., Matt Weinberger, This is Why San Francisco’s Insane Housing Market Has Hit the Crisis Point, Business Insider, June 15, 2016, http://www.businessinsider.co/an-francisco-housing-crisis-history-2016-6/#san-francisco-is-the-second-densest-city-in-the-us-after-new-york-city-with-about-18451-people-per-square-mile-packed-into-about-47-square-miles-1. The full explanation of the situation is very complex because the increased demand for housing is coupled with all sorts of restrictions on supply, as applied to both new construction and rent-controlled units. Higher prices in response to the change in demand are welcome; those in response to supply constriction are not. For an illustration of how the rational-basis test allows for affordable-housing mandates that reduce supply, see California Building Industry Association v. City of San Jose, 351 P.3d 974 (Cal. 2015). For a generally glum assessment of the California real-estate market, see Richard A. Epstein, California’s Needless Housing Crisis, Hoover Defining Ideas, (November 21, 2016), http://w.hoove.r/research/californias-needless-housing-crisis.

[128] See Richard A. Epstein, The Takings Clause and Partial Interests in Land: On Sharp Boundaries and Continuous Distributions, 78 Brook. L. Rev. 589 (2013).

[129] Goldblatt v. Town of Hempstead, 369 U.S. 590 (1962).

[130] A profit a prendre enables a person to take part of the soil or product of land that someone else owns. It is a right to take from the land, as in the mining of minerals and is therefore distinguishable from an easement, which is a nonpossessory interest in land generally giving a person a right of way on the property of another.” The Free Dictionary, http://legal-dictionary.thefreedictionary.com/Profit+a+prendre.

[131] Id. at 591.

[132] Id. at 596.

[133] United States v. Cent. Eureka Mining Co., 357 U.S. 155 (1958).

[134] Id. at 165–66.

[135] Id. at 166 (emphasis added).

[136] Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419, 421 (1982).

[137] San Diego Gas and Elec. Co. v. City of San Diego, 450 U.S. 621 (1981).

[138] Id. at 657.

 

For an earlier discussion of the Supreme Court's jurisprudence of takings law before Murr was decided, see Will the Supreme Court Clean Up Takings Law in Murr v. Wisconsin?

Will the Supreme Court Clean Up Takings Law in Murr v. Wisconsin?

Will the Supreme Court Clean Up Takings Law in Murr v. Wisconsin?

Richard A. Epstein*

Abstract: This article examines Murr v. Wisconsin, which will be the Supreme Court’s latest addition to its takings jurisprudence for the 2016–17 term. The precise question in the case asks how the “parcel-as-a-whole” test of Penn Central Transportation Co. v. City of New York applies to two contiguous parcels that for some limited period of time came under common ownership by different routes. This article first traces the evolution of takings law leading up to that conclusion, and it argues that even under the flawed Penn Central test the two parcels acquired separately in Murr should be treated as one because their merger did not increase any negative physical externalities on the protected St. Croix River. A simple mistake in conveyancing, easily avoided, should not wipe out development rights that any other owner could possess over the undeveloped parcel.

The second part of this article attacks the dominant Penn Central test that makes the availability of any compensation turn on the ratio of the value taken to the full value of the parcel. The same political considerations that justify a per se compensation rule (subject to a police power exception) in physical cases apply equally in the regulatory context, given that both circumstances present opportunities for majoritarian abuses. The article then examines many of the cases cited in Penn Central, and some decided after it, in relation to the taking of partial interests in land, be they air rights, mineral rights, liens, or covenants. In these cases, a simple rule that sets compensation equal to the fair market value of the property lost outperforms on administrative and welfare grounds the Penn Central test. That test fails because it ignores huge private losses created by takings so long those losses do not result in a sufficient diminution of the property’s value, a standard that is nowhere either articulated or defended. As such, Penn Central should be overruled or cut down in size.

Introduction: The Latest Episode in the Supreme Court’s Ongoing Takings Saga           

A.    The General Conceptual Question

One telltale sign of intellectual disarray in any area of law is the extent to which existing doctrine finds itself unable to resolve simple and recurring cases. That problem is evident in spades in dealing with the Constitution’s takings clause, which states that “private property [shall not] be taken for public use, without just compensation.”[1] In an effort to interpret and apply this clause, the Supreme Court commonly hears one or two takings cases a year. But with each new doctrinal tweak, the level of gloom and confusion only increases as the Justices struggle to fit the new piece into a puzzle that has become less tidy and satisfactory with each passing iteration. But any effort at harmonization will necessarily fail if the initial conceptual framework is unsound.[2] And so takings law remains a disorderly jumble precisely because the Supreme Court, and hence all lower courts, are utterly adamant in their refusal to think hard about first principles. Indeed, it appears as though the Court’s major objective with this clause, shared by conservatives and liberals alike, is to figure out some means whereby the broad and capacious terms of the clause are narrowed, so as to remove the constraint that it imposes on the actions of federal and state governments. This exercise in judicial restraint comes, however, at the high cost of persistent intellectual incoherence. Under the doctrine, there is no clear delineation as to which land use activities are subject to a constitutional takings challenge, and which are not. The uncertainty on development efforts dampens the market, not just for a particular parcel owner, but for the real estate market as a whole. The large landowner losses suffered in Murr are common occurrences in similar cases. The positive externalities that developments often create are ignored and the negative externalities, given the absence of any nuisance-like behavior are exaggerated.[3]

These trends are all too apparent in a takings case that is now before the Supreme Court. Murr v. Wisconsin[4] involved a challenge originally brought in Wisconsin state court to an ordinance of St. Croix County,[5] which had been in effect since the 1970s. Murr had its inception when Congress passed the Wild and Scenic Rivers Act (Act) in 1968[6] with the purpose of preserving certain wild and scenic rivers for their enjoyment by present and future generations.[7] One such protected waterway was the lower portion of the St. Croix River, which was found to meet the statutory standard of “wild, scenic, or recreational.”[8] The federal statute then led Wisconsin to pass its own statute in order to be in compliance with the federal mandates dealing with wild and scenic rivers.[9]

The relevant county ordinance implemented the federal and state mandates by imposing restrictions on the development of land abutting the St. Croix River. In effect, the ordinance provided that building could take place only on plots of land with a sufficient “net project area” of at least one acre.[10] This measurement encompassed the total area of “developable land area minus slope preservation zones, floodplains, road rights-of-way and wetlands.”[11] During the 1970s, the basic ordinance was amended to address the development of two adjacent substandard lots (i.e., two lots which do not have at least one acre of net project area).[12] Under this scheme, two adjacent substandard lots with a common owner would be treated as if their titles had merged, allowing the owner to develop only one of the lots. The resulting prohibition on development under Wisconsin law attached to the combined lots forever, remaining in effect even if one of the two lots were subsequently sold to a third party unrelated to the original owners.

It was this prohibition that tripped up the Murrs when they combined two separate lots under single ownership. The two lots in issue are Lots E and F, contiguous properties along the St. Croix River. The Murrs’ parents, now deceased, first purchased Lot F in their own names in 1960. Consistent with the laws at that time, they built themselves a cabin close to the river, and subsequently transferred the title to that lot and cabin to a plumbing company of which they were sole owners. Three years later in 1963, the Murrs’ parents purchased Lot E, which they kept in their own name. They did not build anything on the property, but instead held it for investment purposes.[13]

The two lots share a common topography. Each lot has a low portion near the river, and another flat portion located above a 130-foot bluff. The top and bottom portions of both lots are suitable for construction. Nonetheless, since their combined buildable area is about 0.98 acres of net project area, taken together, they constitute a substandard lot under the Wisconsin ordinance.[14]

The two lots remained under separate ownership, and thus could have allowed for the construction of two houses under the 1976 ordinance, until the Murrs’ parents transferred Lot F to their children in 1994. In 1995, one year after transferring Lot F, they transferred Lot E to their children, which triggered the merger feature of the Wisconsin ordinance.[15] The conveyances were made even though the Murrs were on notice that the property in question was “subject to easements, covenants, restrictions and declarations of record,” including the merger restrictions created under the Wisconsin ordinance.[16] The entire controversy could have been avoided, however, if the Murr children had transferred title to a wholly owned corporation to which the merger doctrine would not have applied.

 After the various transfers, the Murrs had serious flooding difficulties with the cabin built on the lower portion of Lot F, which they sought in vain to fix. At the same time, they asked for a variance from the ordinance to allow them to carry through with the original plan to sell Lot E, which had been held for investment purposes.[17] That request was denied by the local zoning board, and its decision was affirmed by an earlier decision of the Wisconsin Court of Appeals.[18] At that point, the Murrs were confronted with a set of unpalatable alternatives. They could sell Lot E with the right to build, but only if they destroyed the cabin on Lot F. They could repair the cabin on Lot F, but only if they agreed never to build, or let their successors build on Lot E. They could move their cabin on Lot F to higher land, but only if they razed their cabin on the lower part of the Lot F, while remaining unable to build on Lot E. What they could not do was to build on both lots in the same manner as two separate owners could have done.

Frustrated by this limited menu of choices, the Murrs brought a constitutional challenge to the Wisconsin ordinance, which was rejected by the Wisconsin Court of Appeals.[19] The court did not address the state interest in passing this ordinance, but concentrated its attention exclusively on whether the regulation constituted a taking under the test derived from Penn Central Transportation Co. v. City of New York.[20] Under the current analysis there is a threshold question: Does a regulation that diminishes the value of a discrete piece of property leave the owner able to make some economic use of the property? If so, then no taking is found, no matter how great the diminution in value.[21] In Murr, this inquiry naturally raised the question of whether Lots E and F should be characterized as a single unit: If the parcel was one tract, the Murrs ability to build a single cabin somewhere on the premises meant that the regulation did not constitute a compensable taking of any portion of the merged lots. Conversely, treating Lots E and F separately would result in one of the properties becoming worthless due to the ability to build only one structure. The court elected to treat the parcel as a whole, and proceeded to reason that unless the level of diminution of the entire property reached a certain level, nothing else mattered at all, including the nature of the state interest in imposing the restriction.[22] Hence all losses in value from land use restrictions were outside the scope of judicial review under the takings clause, unless that (unidentified) limit was reached.

In reaching this conclusion, the Wisconsin Court relied heavily on earlier decisions of the Wisconsin Supreme Court, which in turn relied on the usual set of United States Supreme Court takings cases: Pennsylvania Coal v. Mahon,[23] Euclid v. Ambler Realty,[24] Penn Central, Loretto v. Teleprompter Manhattan CATV Corp.,[25] and Lucas v. South Carolina Coastal Council.[26] The underlying basic position had been starkly reiterated by the Wisconsin Supreme Court in Zealy v. City of Waukesha[27] as follows: “the rule emerging from opinions of our state courts and the United States Supreme Court is that a regulation must deny the landowner all or substantially all practical uses of a property in order to be considered a taking for which compensation is required.”[28] In Zealy, 8.2 acres of the petitioner’s 10.4-acre parcel had been downzoned into a conservancy district. Since the 2.2 remaining acres retained substantial economic value, the Wisconsin court held that there was no taking, solely on the strength of this level of residual value.[29] Note that the state would have had to pay full value if it had actually taken title to those 8.2 acres instead of simply severely curtailing via the conservation easement the owner’s use of that 8.2 acre chunk of the original property.

However, Zealy did not address the precise question on which the Supreme Court granted certiorari in Murr, which reads:

In a regulatory taking case, does the “parcel as a whole” concept as described in Penn Central Transportation Company v. City of New York, 438 U.S. 104, 130–31 (1978), establish a rule that two legally distinct, but commonly owned contiguous parcels, must be combined for takings analysis purposes?[30]

In Zealy, at no point were separate portions of` the 10.4-acre plot held under two distinct deeds. It was therefore quite simple for the court in that case to determine that the entirety of the petitioner’s property retained some value under the Penn Central test given that the 2.2 acres remained unencumbered. Conversely, in Murr, application of the same rule first raises the question of how to conceptualize Lots E and F. If the two parcels are treated separately, the total restriction on development of Lot E would count as a total taking for which full compensation, equal to the fair market value of the asset, would be owed; after all, the new ordinance prevented development of Lot E for any purpose given the presence of the cabin on Lot F. But if the two lots are treated as a single unit, as was the case under the merger ordinance, then the ability to build on one would leave the Murrs, under Zealy and the applicable Supreme Court precedents, with sufficient rights such that they would receive no compensation for a restriction that cut their development rights in half. In Supreme Court parlance developed after Penn Central, this problem is commonly called the denominator question. As noted in Keystone Bituminous Coal Ass’n v. DeBenedictis,[31] “[b]ecause [the] test for regulatory taking requires [a court] to compare the value that has been taken from the property with the value that remains in the property, one of the critical questions is determining how to define the unit of property ‘whose value is to furnish the denominator of the fraction.’”[32]

This intellectual journey toward the denominator problem began with Justice William Brennan’s pronouncement in Penn Central that the proper analysis started with the “parcel” itself:

“Taking” jurisprudence does not divide a single parcel into discrete segments and attempt to determine whether rights in a particular segment have been entirely abrogated. In deciding whether a particular governmental action has effected a taking, this Court focuses rather both on the character of the action and on the nature and extent of the interference with rights in the parcel as a whole—here, the city tax block designated as the “landmark site.”[33]

By treating the single parcel as the relevant unit, it was easy for the Penn Central Court to conclude that the loss of air rights above Penn Central Station, standing alone, could not be treated as a complete wipeout when the petitioner retained the ability to operate at ground level. Murr thus differs from Penn Central in two key respects, which could prove relevant under current law, even if they are irrelevant under the alternative view of takings that measures compensation by the value of rights taken from government action.[34] First, the two parcels in Murr were at one time owned separately, unlike the situation in Penn Central, in which the air rights were carved out of the original fee simple estate. Second, the restriction on use in Murr is horizontal, that is, by metes and bounds. As is detailed in the petition for certiorari, the status of the “parcel-as-a-whole” test has not been clarified in subsequent Supreme Court decisions.[35] Nor has it received a definitive interpretation in either lower federal or state court decisions.

B.     The Case Law Framework

In order to sense the depth of what is at stake in the choice between rival approaches to takings law, it is useful to review in some detail just a few of the highlights of the earlier Supreme Court doctrinal developments. Most notable in this progression is Justice John Paul Stevens’s aforementioned statement in Keystone, which put the problem as follows:

Because our test for regulatory taking requires us to compare the value that has been taken from the property with the value that remains in the property, one of the critical questions is determining how to define the unit of property “whose value is to furnish the denominator of the fraction.”[36]

In Keystone, Justice Stevens simply concluded that a statutory requirement that coal companies leave some 27 million tons of coal in place to support the interests of surface owners did not constitute a taking of that coal because those tons “do not constitute a separate segment of property for takings law purposes.”[37] In so doing, he necessarily departed from the earlier decision of Justice Oliver Wendell Holmes in Pennsylvania Coal, which made no mention of the denominator problem in assessing analogous facts, but simply concluded that “[t]o make it commercially impracticable to mine certain coal has very nearly the same effect for constitutional purposes as appropriating or destroying it.”[38] Justice Stevens ignored this passage and thus spared himself the need to explain why the basic test for regulatory takings should predicate the availability of comparison upon the ratio between what was taken and what was left behind. He had no occasion to ask how “the parcel” should be defined. Nor did he consider the possibility of police power justifications that are raised in Murr.[39]

The denominator issue raised in Keystone has often surfaced in the lower courts, which have recognized the importance of the inquiry without giving any definitive guidance on how to resolve it. Thus in Lost Tree Village Corporation v. United States[40] the Federal Circuit endorsed the banal proposition that “[t]he relevant parcel determination is a question of law based on underlying facts.”[41] With those words, the court then upheld a decision of the trial court which had allowed the Army Corps of Engineers to deny Lost Tree a permit to fill in 4.99 acres of wetlands, which it deemed was part of a larger parcel consisting of two “distinct legal parcels” that were “undoubtedly contiguous.”[42] Accordingly, it denied any relief when it was shown that the diminution in value of the combined plots was “approximately 58.4%.”[43]

Similarly in Bevan v. Brandon Township,[44] the Michigan Supreme Court held that separate, but “contiguous lots under the same ownership are to be considered as a whole.”[45] Hence the court refused compensation to the owner of a combined lakefront parcel who had been denied a permit to build two houses on his off-road lot. The lot consisted of two separate parcels that had been acquired by the plaintiff at different times under separate deeds before the current zoning ordinance had been put into place. The only access to these two plots was through an easement that was just twenty feet wide, when the applicable ordinance required a roadway of sixty-six feet in width to service multiple units. The lower courts had found a taking when no possible construction was allowed on one of the two plots, after noting that the twenty-foot easement was sufficient to allow fire-fighting and other emergency equipment to go through. In dealing with the appeal, the Michigan Supreme Court disputed the determination of the lower courts that this easement was wide enough to accommodate the provision of any needed emergency services, stating that the individual property owner bore the burden of proof of this issue.[46] Ultimately, “[b]ecause the access regulation in question serves a legitimate governmental interest and does not deny the owners [all] economically viable use of their land, [the court] conclude[d] that enforcement does not effect an unconstitutional taking of plaintiffs’ property.”[47] Left unexplained, however, was how the easement—apparently wide enough to allow emergency equipment access to serve one house—was not sufficient to allow it to service two. Bevan thus involved the interaction of both the denominator question and the state’s police-power justification. In Murr, that second issue was never raised, given that the threshold question of diminution in value was resolved against the Murrs.

Finally, on the opposite side of the coin is Palm Beach Isles Associates v. United States,[48] yet another dredge-and-fill case. The Federal Circuit held that “[c]ombining [ ] two tracts for purposes of the regulatory takings analysis involved here, simply because at one time they were under common ownership, or because one of the tracts sold for a substantial price, cannot be justified,” thus reversing the trial court.[49] It is instructive that in this instance the court relied on the important 1994 Federal Circuit decision in Loveladies Harbor, Inc. v. United States,[50] which incorporated into its account of regulatory-takings law the proposition that one of the elements that made compensation appropriate was whether a property interest had vested which, as a matter of state property law, was “not within the power of the state to regulate under common law nuisance doctrine.”[51] In this formulation at least, the diminution-of-value question does not set a threshold that has to be crossed before other issues—namely the legitimacy of the state’s action—are considered.

A similar result was reached in Department of Transportation, Division of Administration v. Jirik,[52] where the Florida Supreme Court stated that “we believe that a presumption of separateness as to vacant platted urban lots is reasonable and would facilitate the determination of the separateness issue in the absence of contrary evidence.”[53] Jirik involved access from a private plot of land to a public road. A newly built retaining wall blocked access to one of three lots that had previously been subject to unitary private ownership, rendering it worthless for construction. In assessing whether the obstruction constituted a taking, the court never asked whether the lot could have been sold for a positive sum to the owner of the neighboring plot of land so as to give it some residual economic value. And once again, the state offered no police power justification, such as that advanced in Bevan. Rather, the court treated each lot as a discrete unit for the takings analysis.

In sum, the issue raised in Murr has had wide exposure in lower courts that show no sign of reaching a consensus on the subject. At this point, it is necessary to look at the problem from two distinct points of view. In the next section, I shall ask the question of how Murr should be decided on the assumption that the Penn Central “parcel-as-a-whole” test represents an essential, often threshold, component of the correct analysis of regulatory takings. The analysis of that part turns out to be deeply muddled, but in this case at least there seems to be good reason to think that the separateness of the parcels should be sustained in Murr. Nonetheless, that analysis is sufficiently ad hoc that it properly invites a return to the inquiry that I raised in the introduction to this paper—is the Supreme Court correct when it insists that it is not possible to give a definitive and coherent approach to takings cases that avoids the need for ad hoc judgments? In order to reject the Court’s analytic claim, it is not sufficient, in my view, to point out the idiosyncrasies of the current law. It is also necessary to offer an alternative analytical framework that eliminates these oddities and produces substantive results that lead to superior social outcomes. In short, this alternative proposal should produce situations that yield a better mix of public and private values, such that the line between compensable and noncompensable takings provides desirable incentives for both public and private actors alike. In my view, that result can only be achieved by junking the distinction between physical and regulatory takings. In its place, the ideal rule requires the government—in situations lacking traditional police power justifications for regulation—to compensate private owners for all losses in value whether attributed to physical occupation, restrictions on land use and development, or restrictions on the right of an owner to dispose of property to a third person by way of any voluntary transaction, be it a sale, lease, gift, or mortgage.[54]

I.               Murr under Current Takings Law

As should be evident from the previous discussion, the “parcel-as-a-whole” test formed only a part of the conceptual framework for regulatory takings set up in the Penn Central decision. The fuller account of regulatory takings as developed in Penn Central does not treat the diminution-of-value question as a threshold issue. Instead, it joins that inquiry with two other key issues—the property owner’s investment-backed expectations and the state’s justification for its actions—for a more holistic balancing test. Thus Justice Brennan wrote:

In engaging in these essentially ad hoc, factual inquiries, the Court's decisions have identified several factors that have particular significance. The economic impact of the regulation on the claimant and, particularly, the extent to which the regulation has interfered with distinct investment-backed expectations are, of course, relevant considerations. So, too, is the character of the governmental action. A "taking" may more readily be found when the interference with property can be characterized as a physical invasion by government, than when interference arises from some public program adjusting the benefits and burdens of economic life to promote the common good.[55]

The first question is why import into takings law the wholly extra-textual term “investment-backed expectations”? Justice Brennan’s sole reason for its use was to degrade the independent status of the air rights located above the terminal. He therefore wrote that the landmark preservation law

does not interfere with what must be regarded as Penn Central's primary expectation concerning the use of the parcel. More importantly, on this record, we must regard the New York City law as permitting Penn Central not only to profit from the Terminal but also to obtain a “reasonable return” on its investment.[56]

Note the odd use of the passive voice “must be regarded,” without an explanation of why or by whom. The opinion certainly gave no reason why Penn Central would not treat those air rights as an essential component of value for the asset as a whole, thus raising the question then of whose expectations are relevant to this analysis. Of course, the primary expectations referred to in Penn Central matter, but so do secondary ones, which are always included in setting the value of property for all market transactions between private parties.

In writing down those air rights to zero via the “reasonable return” test, Brennan incorporated the rate-of-return standard applicable to public utilities into the regulatory-takings area.[57] In so doing, he made two key errors. First, he shifted the just compensation measure from the fair market value of the asset that is taken, to one that rests exclusively on the original cost-basis, even for assets that are known to have appreciated in value. But this rule is wholly inconsistent with any standard technique of valuation, which takes into account all of the positive features of any given asset. He thus could not explain what should have been done if the air rights had been sold off to a third party before the landmark statute had been put into place, for then their new owner’s sole expectation of value would come from the development of air rights that were deemed worthless by Justice Brennan’s truncated analysis. In addition, it does not explain what should be done to value any asset that is currently not in use, including of course the vacant Lot E in Murr, whose entire value rests in its expected future use. If we take the investment-backed-expectations test seriously, the point should count strongly in favor of the Murrs, given that Lot E was acquired solely for investment purposes in 1962. Yet that point just disappeared from view in the Murr decision given the State Supreme Court’s preoccupation with the denominator question.

The same analysis applies to the second element of the Penn Central test, namely the strength of the government’s interest in blocking the development of Lot E as a single-family home. That state power is at its high point whenever the private owner wishes to engage in conduct that counts as a nuisance at common law, for it is hard to imagine any reason why the government could not, as an agent for its aggrieved citizens, enjoin conduct that the citizens themselves are entitled to enjoin. Given the diffuse nature of the harm in public nuisance cases, it is possible to advance a simple yet compelling transaction costs justification for direct government regulation. No single person has the incentive to bear the full costs of litigation from which he or she could only expect to receive a tiny fraction of the benefit. But at the same time, the transaction costs of coordinating actions by hundreds, thousands, or even millions of claimants into a single coherent force are prohibitive. The state therefore takes over the task, raising tax revenues for the purpose of controlling harmful actions on behalf of its citizens.

This rationale for government intervention consequently does not carry over to behaviors that do not rise to the level of common law nuisances. Yet one of the features built into Penn Central from the get-go was the insistence that the common law of nuisance did not set the outer limits on state power to impose uncompensated restrictions on the conduct of private parties. In part, that result was achieved in Penn Central and its progeny by belittling the common-law tests for nuisances as conceptually incoherent.[58] In part, it was done out of the recognition that many forms of modern land use and development regulation would require compensation if courts adhered to the nuisance-control standard. Yet that result was regarded as an intolerable intrusion on the good judgment of local governments in dealing with complex land-use issues on such hot-button topics as aesthetic regulation, height restrictions, population density, blight control, antigrowth ordinances, affirmative-action mandates, and of course landmark-preservation statutes.

That basic approach was settled at the latest in the 1954 decision of Berman v. Parker,[59] where the Supreme Court, speaking through Justice William Douglas, upheld a huge urban renewal project under the police power by insisting that “[a]n attempt to define its reach or trace its outer limits is fruitless, for each case must turn on its own facts. The definition is essentially the product of legislative determinations addressed to the purposes of government, purposes neither abstractly nor historically capable of complete definition.”[60] It then concluded that strong deference was required to allow these urban renewal projects intended to remove blight from neighborhoods.

It is only when we add the remaining two elements of the equation—investment-backed expectations and the state’s justification for its actions—that it is possible to understand the role of the parcel-as-a-whole doctrine. As to the former, it was clear that the Murrs at all times had the primary expectation that Lot E was held for investment. More importantly, it is unwise to amalgamate Lots E and F as the relevant parcel for regulatory takings purposes. Indeed, the Murrs could have avoided the application of the parcel-as-a-whole doctrine by following the simple expedient of keeping the title to the two parcels in separate legal entities at all relevant times. There is nothing that the government could have done to stop them from so doing. The initial question is thus: Why should state power be at its zenith because of that elementary procedural oversight? The state took the position that, “[c]ontrary to what Petitioners suggest, it was their own acts, not the conduct of the County or State, which caused their property to be subjected to the applicable land-use regulations.”[61] But those acts only had these calamitous consequences because the Wisconsin ordinance operated as a trap for the unwary. It is perfectly clear that no well-advised parties would ever do what the Murrs did under the same circumstances. Deciding this case in their favor therefore does not open up the world to manipulative behavior, for no person who understands the legal framework would gratuitously choose to let himself be exposed to that level of risk. Nor are the difficulties of the Wisconsin approach addressed by a group of law professors writing as amicus curiae on behalf of the state of Wisconsin. In their effort to create a wedge between public and private law, they write:

State property definitions and corresponding boundary lines – and in particular, surface/horizontal lot lines – reflect historical practices serving technical, and administrative purposes that are unrelated to the purposes of protecting investment expectations or assuring justice and fairness.[62]

Yet how can that possibly so? The need to determine precise boundary line conditions is necessary for anyone who wants to buy or mortgage any property, and the uncertainties associated with their delineation cause major declines in real estate values.[63] Those exact same questions are as critical for valuations made in the context of admitted government takings as they are in any private context. Indeed, if the law puts a wedge between the two standards of valuation, it is unclear in this and thousands of other contexts, exactly how those differences should cash out. Private buyers of property care about the condemnation risk as they do about all other risks. It is impossible to protect expectations when these basic norms are systematically flouted. And it is hard to see how massive levels of ad hocery advance any conception of fairness and justice.

Finally, it is hard to see any state justification for the ordinance. Clearly, an ordinary cabin on Lot E is no more a nuisance than the cabin already on Lot F, or indeed for any cabin along the St. Croix River. So at this point, the only way that the State could prevail is to show a need to control some unidentified soft externalities that might compromise the unique character of the river.[64] But that rationale fails as well, for none are available. Wisconsin can point to no serious aesthetic or historical concern that would have justified preventing construction of a cabin on Lot E had the land been held by a separate legal entity. Rather, the state’s position is based on the location of the title rather than the actual use of the land. If there are no adverse effects when the two parcels are legally separate, then there are similarly no dangers if the plots are combined. Part (B) of the St. Croix County ordinance requires that all construction meet the applicable rules on sanitation and zoning, which is sufficient to protect against any and all serious externalities.[65] So the question is thus: Why are the state’s environmental concerns, however broadly conceived, enhanced simply because Lots E and F had once been in common hands? The chain of title gives no information whatsoever about environmental impacts, all of which are better addressed by alternative means such as case-specific inquiries into the effects of proposed projects. Thus all three components of the Penn Central test point to treating the Wisconsin ordinance as imposing a total wipeout on Lot E, which should be fully compensated.

II.              Murr as a Matter of First Principle

The last part of the analysis asks how Murr should be decided as a matter of first principle. In this regard, there is something obviously jarring about a rule that says it is permissible for a land-use regulation to impair sixty, seventy, or eighty percent of the value of any given piece of property without compensation. First, there is no obvious tipping point along that continuum where compensation is suddenly required. And no matter where that point is put, the law creates an indefensible discontinuity. Let the amount of value destroyed by the land use restriction be one percent less than some undefined X, and nothing is owed. Let it be X, and full value is now owed. Where should X be located, and why, are obvious questions that have not been answered under Penn Central, which offers no theoretical framework to address the issue.

       Nor is there any reason why this discontinuity should be tolerated in the first place, because the same rationales for the robust just-compensation requirement in the physical-takings context carry over to the regulatory-takings arena. The just-compensation requirement of the takings clause was designed as an intermediate positive between two unpalatable extremes: At the one end, the government could take property without any compensation, at which point individual property owners would be subject to the abuses of a dominant majority faction. Alternatively, the property could be taken only with the express consent of the property owner, at which point the holdout problem would become insurmountable. Each owner along the path of a proposed highway could hold out for some fraction of the social gain that the road generated. As multiple parties engage in the same conduct, the project will be stillborn, and many important social improvements will never take place. The intermediate position lets the government take the property, but not at the price of zero. The original owner is not left worse off, and the just-compensation requirement then forces the state to carefully consider whether it is worth appropriating funds for the project in question. A simple compensation requirement thus prevents abuse at one end of the takings equation while inducing responsible behavior on the other.

       These rationales developed in the context of physical-takings cases carry over with undiminished force to regulatory ones. Thus the development rights in Euclid, the air rights in Penn Central, the mineral rights in Pennsylvania Coal, and the materialmen’s liens in Armstrong v. United States[66] are subject to huge political forces if they can be taken without just compensation, leading to the same kind of indefensible overreach that prompted the adoption of the takings clause in the first place. The compromise here allows the government to have its way on matters pertaining to public use, but not to wipe out private holdings when it abstains from taking full physical possession of property whose value it nonetheless destroys. To show that these takings are justified requires evidence that the public gains exceed the private losses. Yet without a compensation requirement, that showing can rarely be made, thus demonstrating that the aggressive application of the regulatory-takings doctrine is necessarily contrary to any sound system of social welfare.

There is ample reason, therefore, to start over, and that means taking a hard look at the supposed constitutional distinction, entrenched by volumes of precedent, between permanent physical takings and regulatory takings. The former, which are governed by Loretto, involve situations where the state either enters into the property of private owners or authorizes private individuals to do so enter for their own benefit. It is now settled, for example, that easements allowing either the government or private parties to walk across the land of another count as physical takings.[67] Under the Loretto rule, such physical takings require compensation. In contrast, regulatory takings leave a property owner in exclusive possession of his land, but subject him to restrictions, often quite severe, on the traditional powers of use and disposition.[68] The availably of compensation is subject to an ad hoc balancing test under Penn Central, which typically finds that the property’s lost value is non-compensable when the parcel as a whole retains some degree of economic value.

In announcing this test in Penn Central, Justice Brennan did not offer any reason why takings law should offer no independent protection to the divided interests—such as air rights—within a single parcel when it is undisputed that one of the prime missions of state property law is to encourage the creation of such divided interests in order to maximize the productive value of any given parcel of land. It is for just that reason that state law recognizes not only the creation of air and mineral rights, but also divisions of life estates and remainders, mortgages and equity interests, leases and reversions, use and development rights, and servitudes (covering both easements and restrictive covenants) over the property of another.[69] It is no mere coincidence that the difficulties that have emerged in takings law arise precisely because of the failure of modern takings law to track the private law’s development of these well-established forms of property interests.

That gap has fatal consequences for the political economy of takings. In all private transactions, any neighbors that trespass or infringe upon any property right of a neighbor can be enjoined or required to pay full compensation. In the public law established by Penn Central, however, those same neighbors can use majority rule to intrude upon others by persuading local governments, where they hold disproportionate influence, to take that same interest by regulation—at least if it is not a physical interest within the meaning of Loretto. But that purported boundary between the physical and the regulatory quickly gives rise to the art of circumvention by clever draftsmanship, because it is clear from Loretto that some physical invasions are allowed notwithstanding the ostensible per se rule requiring compensation in such cases. Thus the Court stated, without explanation, that a holding that prohibited installations of cable equipment unless just compensation was paid “in no way alters the analysis governing the State's power to require landlords to comply with building codes and provide utility connections, mailboxes, smoke detectors, fire extinguishers, and the like in the common area of a building.”[70] The obvious explanation lies in the health and safety justifications—the police power, once again—that are available in these cases, but not when a cable company wants for its own benefit to place its box on a landlord’s roof.

It is critical to note, however, that these safety-based rationales are not available for rent-control and antidiscrimination laws, also mentioned in Loretto. In those cases, the sole purpose of the law is to create a wealth transfer from existing landlords to current or prospective tenants. Yet it defies any rational explanation to claim that these bodies of law do not involve the state authorization of one group’s entry into, and permanent occupation of, the private property of another group. After all, the central purpose of rent-control laws is to authorize a tenant to remain in possession of property at a state-determined rental after the expiration of a lease, and the major purpose of the antidiscrimination laws is to remove the landlord’s right to exclude tenants to whom he does not wish to surrender possession. Let us assume that there is some public use in putting particular tenants where they are not, for whatever reason, welcome. It is still the case that these forced entries should be subject to the per se compensation requirement under Loretto. Under any rent control or stabilization scheme, the rent that is required from the unwelcome tenant is a down payment on that obligation, which the state is then required to top off until the landlord receives compensation that leaves him at least as well off as he was before the regulatory imposition. Under the antidiscrimination laws, the measure of damages is the loss in value attributable to the substitution of a less desirable tenant for a more desirable tenant. It is quite clear that the per se rule that protects against physical takings should be far more extensive than Justice Thurgood Marshall suggested in Loretto. It is equally clear that all the movement in the case law has gone in the opposite direction, given the strong political support in many circles for both rent-control and antidiscrimination laws. It has narrowed the class of physical takings and expanded the scope of the balancing test under Penn Central.

The key point of that transformation is as follows. When a taking is treated as a physical taking, the correct measure of damages is the fair market value of the estate lost, wholly without reference to the amount of property that is retained. Thus in United States v. Causby,[71] distinguished in Penn Central, the United States organized direct invasions of the plaintiff’s property that was located under the flight path of incoming planes. In measuring the compensation owed for the loss of the air rights, Justice Douglas stated that ”[i]t is the owner’s loss, not the taker’s gain, which is the measure of the value of the property taken."[72] The hard question is why this rule should not be applied across the board, to physical and regulatory takings alike.

To understand how the argument goes, it is useful to unpack the various factors that are larded into the modern takings tests. In past work, I have identified four key questions that have to be tackled in sequence in connection with the Takings Clause, all of which have been referred to above:[73]

First, has there been a taking of private property?

Second, if so, is it justified under the police power so that no compensation need be paid?

Third, if not, has the taking been for a public use?

Fourth, if so, has just compensation, be it in cash or in-kind, been provided?

In dealing with the first of these questions, the phrase “private property” is perfectly general, and is not limited to land or to any other specific form of property, such as chattels, water rights, air rights, or intellectual property. As the Supreme Court has commonly held, the Constitution does not define private property interests.[74] It protects those interests as defined under state law from government taking. Partial interests in property are protected as much as outright ownership. The size of the takings may be smaller, and the compensation owing may be less given the smaller size of the interest taken.

Prima facie, the just-compensation requirement attaches to all forms of property taken. But there are further complications, as a separate and independent inquiry looks to police power justifications of health and safety, and in this regard the connection between the law of nuisance and the law of takings is powerful. The conceptual underpinnings of this branch of law have become thoroughly confused because of the failure, most notably in Berman v. Parker,[75] to distinguish between the police power and public use under the Fifth Amendment. Thus in Berman, compensation was offered for taking down a building that in itself was neither ugly nor blighted, simply because it was located in an urban renewal district. But precisely because it was not a nuisance, Berman’s suit was to enjoin condemnation when compensation was offered, not to enjoin it when it was not. The court nonetheless found that the state’s aesthetic interests fell within the police power, even though earlier cases rejected that line on the ground that private parties cannot bring actions for nuisance on these grounds. Thus, State v. Brown[76] invalidated a statute that required fencing or screening to keep from public view junk yards, trash, refuse or garbage. More modern cases tend to take a broader view but the construction of an ordinary riverfront house is miles away from those rules intended to regulate eyesores.[77] The slightly broader definition of the police power, however, does not make the tests for the police power converge with the public-use requirements, for surely the state needs a more powerful justification to take property without compensation than to take the property with it. If the law of nuisance does not establish that boundary, what does?

The standard law offers no answer. Yet resort to the nuisance law has this enormous advantage: it avoids political arbitrage between the judicial and legislative branches. By tying government power to a well-established branch of private law, the state can act on behalf of its citizens only when they cannot act on their own behalf. There is therefore no strategic advantage in seeking the use of legislative power, as the only reasons that justify public action without compensation are those that justify private action without compensation. Hence the sole determinant of whether to use public or private enforcement is the relative efficiency of the two systems in enforcing the same set of rights. In general, private enforcement will work well for discrete harms directed against particular individuals. Public enforcement works well when diffuse injuries, often from multiple sources, harm large numbers of parties. But there is no way in which the shift in enforcement can expand the permissible grounds for coercive intervention and its attendant risks of majoritarian overreach.

At this point, the next stage of the nuisance—or police power—inquiry is the same in both public and private law: Does the relief sought fit the injury suffered? In general, the principle of proportionality requires a court to balance the equities in both contexts, so as to minimize the errors of over- and under-enforcement. For these purposes, it is often the case that the correct set of remedies starts with injunctive relief and then uses damages to clean up the residual harms that are not enjoined. The use of these mixed remedies will in general work better than a complete injunction, which goes too far when it does not tolerate background risks. It also works better than the total denial of any injunctive relief that in turn permits the wholesale destruction of the interests of innocent parties. In short, tying the use of police power to the private law’s nuisance framework offers both a necessary limit on majoritarian impulses and a viable mechanism for assessing the proper scope of the government’s remedial actions.

Third, if the police-power justifications are not available, then the taking in question must be for “public use.” Under the Supreme Court decision in Hawaii Housing Authority v. Midkiff,[78] that term has been unduly expanded to allow for virtually any “conceivable” social benefit to count as a public use,[79] including the transfers of given parcels of land from one private person to another. But even if those direct transfers are ruled out, the public-use requirement does not require that the government take ownership of what is taken. It is quite sufficient to let private parties own property so long as it is in some sense open to the public, as is the case with common carriers and public utilities, which commonly exercise the condemnation power.[80] In addition, the public-use requirement is surely fulfilled in cases like Penn Central, where the preservation of views along Park Avenue could be enjoyed by the public at large. Similarly, the environmental benefits posited by the Wisconsin ordinance in Murr also satisfy the public-use requirement, so there are no difficulties here. Indeed, Supreme Court cases have rightly extended the public-use requirement to cover genuine bilateral-monopoly holdout cases, for otherwise a single well-situated property owner could undermine the functions of the takings clause by blocking the assembly of larger property units by demanding an extortionate price for a trivial asset.[81] However, note that even under this broader definition, the Court’s decision in Kelo v. City of New London[82] was incorrect given that the property condemned was neither for use by the government nor necessary to overcome a holdout problem in assembling land for some licit government project.[83] This issue is not in play in these regulatory-takings cases.

Finally, where the taking is for a public use, because injunctive relief is not available under the police power, the taking of any interest in private property has to be compensated. In those situations where a single party, or a small group of parties, is singled out for special treatment, the compensation must be in cash so that they receive “‘just compensation’ [that is the] full equivalent [of] the property taken.”[84] This metric does not include “any supposed benefit that the owner may receive in common with all from the public uses to which his private property is appropriated.”[85] That last qualification is strictly necessary because there is no reason why the party who contributes property to the public should not share equally in the public gains from the project. If those social gains were an offset against compensation, he would be left worse off than everyone else in the public. In addition, the valuation questions inherent in measuring these diffuse social benefits would impose heavy and unnecessary burdens through the operation of the condemnation system in every case of a targeted acquisition.

The overall analysis, however, becomes more difficult when a comprehensive regulation impacts large numbers of persons at the same time. At this point, the key insight follows from Justice Holmes’s famous remark that compensation is not needed when the regulation in question secures “an average reciprocity of advantage” among all the relevant players.[86] To make the theoretical point more explicit, each comprehensive regulation imposes burdens and benefits on the same parties. The burdens in question are the limitation in the occupation, use, or disposition of various forms of property, all of which count as takings which are prima facie compensable. The benefits of these regulations inure to the same parties who are subject to the burdens, and thus count as implicit (and inseparable) in-kind compensation that satisfies the demands of the just-compensation requirement of the Fifth Amendment. In these cases, so long as there are no negative spillovers to third parties, there is every reason to believe that the uniform imposition of both benefits and burdens will produce a net benefit for each party within this closed system, and therefore no cash compensation is required. Typically, it is difficult to make direct valuations of the interests that are taken under these general laws, so the useful proxy is to allow such laws to go forward so long as they do not have a disproportionate impact on one group of affected parties relative to another. But in those cases where a disproportionate impact on the affected parties is detected, then an explicit cash compensation is then required from public funds to make up the shortfall, leaving open the question of whether these funds should be raised by a special assessment or from general revenues.[87]

Case analysis. The advantage of this approach is that it does not have the ad hoc quality that is found in the Penn Central version of takings law, and it makes easy those cases that otherwise seem difficult. The point is clear if one goes back over all of the cases that were discussed above, as well as several others that figured in the articulation of the Penn Central standard.

Start with Penn Central itself. The property taken, as protected under state law, was the air rights. Justice Brennan points to the promotion of the general welfare, but that should count only on the question of public use; it does nothing to create a credible police power claim under the nuisance law, unless every building above a certain height counts as a nuisance. The blocking of the views of others by using one’s air rights is not a nuisance any more than their blocking a latecomer’s views with their own prior structure is a nuisance. The basic structure of nuisance does not allow any person to get a strategic advantage over others by building either early or late, which is why the “coming to the nuisance” doctrine does not allow a party that creates a nuisance to claim prescription against a neighbor that builds at a subsequent time.[88] Public use is of course no issue. Moving to the compensation issue, there is no average reciprocity of advantage to supply in-kind compensation, for even if other sites are designated as landmarks, those benefits inure to the public generally and not to Penn Central’s owners. Nonetheless, the just-compensation problem under this landmark-preservation scheme does raise important complications, given that one part of the landmark preservation package came in the form of air rights over other properties, whose value could be substantial. The correct way to treat these in-kind benefits is as an offset against the compensation owed. But there is no reason to treat the rights received as the perfect equivalent of the air rights surrendered, a proposition supported by the “full equivalent” principle of Monongahela Navigation Co. v United States.[89] Instead, the correct way to proceed in these cases is to avoid these valuation questions by requiring the compensation be paid in cash, so that the air rights in question can then be accurately valued in an arm’s length transactions with third parties. Putting it all together, the case is easy: the correct result in Penn Central is for the government to purchase the air rights at market value, obviating all the complications that have been introduced under current law. Politically, it is an open question whether the government would have been prepared to collect the revenues needed to block construction of a tower, given that the views up Park Avenue were already blocked by the preexisting Pan Am building. But the appropriate lesson to learn is that the just-compensation clause has its greatest value in preventing government actions that should not take place to begin with.

It is also clear from this analysis that Justice Brennan played fast and loose with the key case of Armstrong, in which Justice Hugo Black closed his opinion with this correct categorical statement: “The Fifth Amendment's guarantee that private property shall not be taken for a public use without just compensation was designed to bar Government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.”[90] The facts of the case put bones on the basic proposition. The plaintiffs were subcontractors who held materialmen’s liens against boats owned by the United States on which they had performed repair work. These liens were valid because the general contractor had neither paid for the work done, nor obtained lien waivers. Any private boat owner would have to satisfy these liens. The United States, however, chose to sail its boats into international waters, effectively dissolving the liens. Justice Black noted that as the naval boats supplied protection to the public at large, the public should have to pay for the work rather than foisting a disproportionate burden on the hapless subcontractors. There was obviously no question of police-power justification, public use, or just compensation to compensate the inquiry. All that was needed was a judgment that a lien is an interest in private property, even though it does not become possessory until foreclosure. Justice Brennan protested in Penn Central that the courts could not develop any principled account as to when to apply this rule. But the exact opposite is true. The taking of the air rights over Grand Central Terminal was for public benefit, and should have been caught by the same rule given that the police power, public use, and just compensation questions were easy to resolve.

The same approach allows for a rational reexamination of all the earlier cases that Justice Brennan used to justify his Penn Central approach. On this view, it is clear that the decision in Euclid, v. Ambler, which I have discussed at length on other occasions,[91] is the source of much of this mischief. The decision to take a compact 68-acre plot of land with good access to markets by railroad and highway, and divide it into three parallel plots of lands for both manufacturing and different zones for single-family and multi-family residences is the height of folly. The resulting reduction in value of about seventy-five percent was not offset by any gains to outsiders, which reveals the allocative losses of a regulatory-takings regime. Indeed, the arbitrarily mandated usage divisions within a once-coherent plot of land create externalities where none existed; the plot’s single owner had every incentive to make sure that the uses over the entire plot were compatible with each other, given that he would internalize the harms of any self-inflicted nuisances in the form of lower sale prices. Justice George Sutherland sought to justify zoning in general by talking about the need for health and safety for children on public streets, without once relating those abstract concerns to the particular scheme in question. Nor at any point in time did he go through the four separate questions, which lead to the inexorable conclusion that this particular zoning scheme fails, even if other zoning schemes might succeed.

The test of success for these zoning schemes comes from the application of this basic framework, given that some zoning ordinances could function as nuisance-prevention devices or supply needed in-kind compensation. The point is illustrated by two schemes that Justice Brennan discusses in Penn Central. Gorieb v. Fox,[92] decided by Justice Sutherland one year after his decision in Euclid, involved a local setback ordinance for each city block which prevented any new construction in residential areas from taking place closer to the street than the overall setoff levels of current housing. Gorieb applied for a permit to build a brick store building next to his own home, and wished to locate it closer to the street in violation of the pre-established setback line. The restriction in question counts as a prima facie taking, for which compensation is owed equal to the loss in value of the property if no police power justification or in-kind compensation exists. In this case, both the police-power and the in-kind compensation doctrines are in play. The safety features of the setback do matter because of the residential area, and it is always an open question whether the uniform setback line improves the value of all properties along the street from the ex ante perspective, which, if found, establishes Holmes’s average reciprocity of advantage. In this spirit, Justice Sutherland accepted the contention of the city council that

front yards afford room for lawns and trees, keep the dwellings farther from the dust, noise and fumes of the street, add to the attractiveness and comfort of a residential district, create a better home environment, and, by securing a greater distance between houses on opposite sides of the street, reduce the fire hazard; that the projection of a building beyond the front line of the adjacent dwellings cuts off light and air from them, and, by interfering with the view of street corners, constitutes a danger in the operation of automobiles.[93]

But he does not estimate the safety benefits, which are hard to determine, given that other neighborhoods may have no setbacks at all. In this case, a helpful benchmark would be the setbacks that are imposed by developers as part of a planned unit development, and if these setbacks fall within that range, there is a strong reason to uphold them on a joint rationale: there is both a health and safety purpose, and a high level of in-kind compensation. But the hard question is whether this issue is so obvious, as Sutherland insists, that there is no reason to take evidence on the question, or whether matters are sufficiently complex that some more specific evidence might help put the matter in perspective. I think that this case is close—certainly far closer than Penn Central—but I would be inclined to ask courts to take a closer look before signing off on the regulations. In other contexts, that closer look might easily lead to a different result, if for example the setback line for new housing were located further from the public streets than in the individual cases.

        A similar analysis applies to a case on which Gorieb relied, Welch v. Swasey,[94] in which Justice Rufus Peckham upheld for a unanimous Supreme Court a Massachusetts statute that specified, first, a general height limitation of 125 feet above street grade for all buildings, but which was subject to a broad exception that allowed local commissioners in Boston (and elsewhere) to designate by commission a lower limit of 80 to 100 feet over large parts of the city (except for some commercial districts). It was conceded—too quickly in my view—that the general height limitation was constitutional, but the Court determined that the selective reduction in certain Boston areas was both unreasonable and arbitrary. The decision did not discuss the question of whether a property interest had been taken, but the answer to that question is surely in the affirmative: the ad coelum rule, even in its most limited formulation, cedes to the owner of the soil the right to all air space over which he can exercise “effective possession.”[95] The case therefore turns on the question of whether there is either a police-power justification for the limitation, or some implicit in-kind compensation for the surface owner. In Welch, Justice Peckham chose not to address this question de novo, but instead showed enormous deference to the Massachusetts Supreme Judicial Court, which given its knowledge of the facts on the ground was, although not conclusive, entitled to “the very greatest respect,”[96] a form of deference that was not invoked in Justice Peckham’s earlier decision to strike down a state maximum-hours law in Lochner v. New York.[97]

       That deference mattered in Welch. The property owner’s argument was that the ordinance in question was passed solely for aesthetic purposes, and thus did not meet the health and safety objectives required by the police power justification for takings. Justice Peckham’s response was that this statute could serve both aesthetic and safety concerns, and hence was saved under the police power because of the second of its two motivations. Most notably, the Massachusetts court had spoken of the “risk of falling walls in the case of fire.”[98] At this point, the obvious question is why the statute tolerated higher buildings in dense commercial areas, where these risks are, if anything, greater. The limp response to the point was:

It might well be supposed that taller buildings in the commercial section of the city might be less dangerous in case of fire than in the residential portion. This court is not familiar with the actual facts, but it may be that in this limited commercial area the high buildings are generally of fireproof construction; that the fire engines are more numerous and much closer together than in the residential portion, and that an unlimited supply of salt water can be more readily introduced from the harbor into the pipes, and that few women or children are found there in the daytime and very few people sleep there at night.[99]

At this point, Justice Peckham concedes that the Court is “not familiar” with the facts, but then shows no interest in learning what they might be. Why not when it helps to develop a record? Think of some variations. It is surely easy to argue that the higher density commercial districts pose greater dangers than sparsely populated residential areas, and that it is easy to deal with most of these risks by requiring tall buildings in noncommercial areas to meet the same safety and construction standards as those which are located elsewhere, and perhaps by special assessment to pay for any additional fire protection needed in the given area.

Justice Peckham also made a passing reference to the fact that the ordinance was passed with a view towards advancing the “comfort [and] convenience” of the citizenry,[100] which is an oblique way of making the argument that there is in-kind compensation shared by the plaintiff. But again, the disproportionate impact is evident if the scheme is measured at the time that the statute is enacted, for only this landowner was targeted. If all plots of land increased in value, then the compensation requirement is satisfied. If not, so that some persons win and some lose, it is a hard question whether the difficulties of calculation are so pervasive that it is better to let the inequity run than to try to correct it. As a general matter the less likely overall social gain, the more likely that some compensation will be required, but it is difficult to generalize.[101]

That difficulty does not arise in all height cases, so, even if Welch is accepted as good law, cases like Haas v. City and County of San Francisco[102] reveal the critical necessity of properly defining the police power. This case was decided shortly after Penn Central when the abuses of selective land use restrictions were at their height. At issue was a decision by San Francisco to downzone a lot such that its owner could not build a high-rise structure similar to those that surrounded it “on the ground that the project would have a detrimental effect on the City as a whole and upon the residents and property of the neighborhood.”[103] The downzoning had taken place after Haas had obtained a final permit to construct an apartment complex up to 300 feet in height. The local Russian Hill Improvement Association raised an environmental challenge to the permit, which was then set aside, after which the City Planning Commission adopted a 40-foot height limitation applicable to Haas’s project, reducing the value of his property from about $2,000,000 to $100,000. That ordinance had no effect on the surrounding properties that were already built at a higher level. No matter, by this time aesthetic justifications were recognized as part of the police power, so there was no need to conduct a charade on safety to sustain the ordinance. Judge Shirley Hufstedler paid lip service to the view that excessively onerous regulations could be struck down, but held that this principle did not apply in this case because the regulation was general in form and did not single out Haas for special treatment, even though it was well known that “Haas appears to have suffered a disproportionate impact because no other affected landowner has as large a parcel of undeveloped land as does Haas.”[104] Judge Hufstedler should have added that everyone in government knew of that exact imbalance so the outcome was not an incidental byproduct of some general improvement or environmental scheme, but rather a conscious and focused effort to force a huge wealth transfer to other owners from Haas. A simple rule that would require the planning commission to treat latecomers on the same terms as early arrivals would go a long way towards stopping the abuse, which is now institutionalized under the flawed Penn Central approach. Does anyone believe that these same neighbors would have paid $1,900,000 in compensation to Haas to procure the supposed social benefits of halting construction? Or doubt that the seeds of the current housing shortage in San Francisco have their origins in the Penn Central doctrine?[105]

The same defects that corrupt the takings analysis in land-use-regulation cases also carry over to the takings of mineral rights in both Pennsylvania Coal and Keystone. In both cases, the loss of mineral rights, coupled with any increased costs in operating the respective mines, is the result of the taking of the support estate that lies between the surface owner and the miner. There is no need to frame the inquiry as if the dispositive question is whether this regulation goes “too far”—questions of degree should always be avoided in making binary determinations about compensation. Instead, the relevant point here is that there is no police-power justification because the surface owners had consented to the subsidence risk when they purchased their properties, and there is no threat to third parties who are protected under the nuisance law against subsidence of their lands should that happen to occur. The public-use requirement is also satisfied, given that the broad group of surface owners is not in a position to bargain for itself. But the statutory schemes in both cases founder because there is neither cash nor in-kind compensation for the loss of the mineral estate.

Similarly, the situation is Causby is easy enough. The loss of the easement to overflight is the taking of a property right even under current law. There is no police-power justification because the surface owners are just victims of the nuisances created by overflights authorized by the government. And, under Monongahela, the owners do not get special compensation from the general availability of aviation services that are equally enjoyed by the public at large. Hence in-kind compensation is properly supplied for their losses.

Penn Central also cited the Court’s 1962 decision in Goldblatt v. Town of Hempstead, N.Y.[106] without bothering to comment on its interesting facts. There, the town had passed an ordinance that regulating dredging and pit excavation on any property within town limits. The plaintiffs claimed that the ordinance prevented them from continuing with their business of mining sand and gravel on their property, which they had started in 1927. They thus argued that the regulation constituted a taking without due process under the Fourteenth Amendment. The more accurate account of the case is that the loss of excavation rights was a taking of a traditional incident of property. Deny that incident and all mineral rights are worthless. The case itself did not turn on any purported distinction between physical and regulatory takings. Instead the town defended itself on the ground that the ordinance constituted a valid exercise of the police power. The grounds for the police power claim rested on the fact that the excavation had created a man-made lake that covered 20 acres of property to a depth of 25 feet.[107] In the interim, population centers had moved closer to the defendant’s property.

The key question here is whether this regulation is necessary to protect the health and safety of the community. Hempstead did not allege any risk of flooding or subsistence. The most that it could claim was the possibility that the lake would operate as an attractive nuisance—for which a strong fence should be sufficient protection, as is the case for other attractive nuisances. At this point, the Court undertook a meandering discussion that failed to identify the particular harm against which the ordinance was intended to guard, let alone offer an explanation as to whether the total prohibition was excessive relative to any risk posed. Instead, Justice Thomas Clark lamely concluded that there was not enough evidence in the record to make an independent determination on the merits. He therefore upheld the ordinance on the worst of all possible grounds, by noting that the landowner bore the burden of proof on the question of “reasonableness.”[108] The private-law rule is of course the opposite; the parties who seek to impose restrictions on another’s use of his land bear the burden of proof on the choice of ends and means. The best that can be said for the decision is that it isolates the police-power question from the other issues in takings cases. But at the very least the case should have been remanded to decide the impact of the ordinance on the operations of the landowner and its purported public benefit. But the last thing that the case shows is the need to further corrupt takings analysis by moving to some diffuse Penn Central standard. The traditional account of the police power works well, and points in favor of the invalidation of this ordinance unless compensation for the loss of the mining rights is provided.

The next of the cases cited by Brennan, United States v. Central Eureka Mining Co.,[109] involved Eureka’s challenge to a 1942 order of the War Production Board that shut down the operation of all nonessential gold mines after other measures intended to limit the labor and the machinery used in the mine had failed to reduce output. The opinion of Justice Harold Burton first anticipated Penn Central when it stated “that the Government did not occupy, use, or in any manner take physical possession of the gold mines or of the equipment connected with them.”[110] Thereafter he concluded that “[t]he mere fact that [the Limitation Order] L-208 was in the form of an express prohibition of the operation of the mines, rather than a prohibition of the use of the scarce equipment in the mines, did not convert the order into a ‘taking’ of a right to operate the mines.”[111]

Once again it is helpful to examine the facts of the case in light of the four questions set out above. On the first point, the limitation of the development rights is a temporary taking of property. Although the language in Loretto stressed the word “permanent”[112] (with respect to a cable box that was doubtless obsolete in a short time), Justice Brennan in San Diego Gas & Electric Co. v. City of San Diego[113] correctly observed that “[t]he fact that a regulatory ‘taking’ may be temporary, by virtue of the government’s power to rescind or amend the regulation, does not make it any less of a constitutional ‘taking.’ Nothing in the Just Compensation Clause suggests that ‘takings’ must be permanent and irrevocable.”[114] The same argument applies here. The uncertain duration of the ban on production only goes to the level of compensation owing, not the basic existence of some compensable event. The former inquiry encourages continuous distributions that are always appropriate in valuation cases.[115] Next, there is the question of whether wartime necessity counts as a police power justification for this action, for which the correct answer is no. No one doubts that the war would not excuse the confiscation of gold from the mine to pay for the war effort; the costs of collective goods must fall upon the general public under Armstrong. Therefore, the decision to ban the mining to improve the lot of the public at large satisfies the public-use requirement but not the police-power test. Nor is there any compensation offered either in cash or in-kind for the restriction in question. To be sure, valuation does raise tricky questions because the temporary prohibition does mean that the gold not mined today can be mined once the prohibition is lifted. Hence the correct measure of damage is for the anticipated deferment, which after the war is over means a three-year delay in the utilization of the gold. There are further complications given the interim costs needed to keep the mine safe, and still other complications with possible systematic shifts in market value. The overall level of compensation should not be that great, but there is nothing in the logic of the basic takings framework that allows the government pay nothing for the imposition of these restrictions.

The purpose of going through all these variations is to make clear just how easy a case Murr is once the correct framework is established. There is of course no police-power justification, nor any cash or in-kind compensation, so that the taking, evidently for a public use, is complete with the adoption of the regulation. The hard question is the measure of compensation for the loss of these development rights, which should be fully compensable for the duration of the restriction. The correct view here is to give the government the choice to keep the restrictions in place, at which point it has to pay full value, or to allow them to rescind the regulation, at which point the correct measure of damages is the interim loss over the period in which the restrictions were in place. Again, the only hard questions are those of valuation. The conceptual framework thus holds.

Conclusion

In the course of this article, I have used the occasion of yet another takings case before the Supreme Court, Murr v. Wisconsin, to comment on the structure of the takings law as it is, and as it ought to be. On the former count, it is quite clear that the entire structure of the modern law of physical and regulatory takings tends to fixate on the ratio of the value of property rights taken to the value of the full bundle of rights before the regulation was put into place. But there is no explanation as to why this ratio has any significance in light of the standard rule in physical-takings cases that the fair market value of the rights taken affords the correct measure of compensation so long as the taking is for a public use when no police-power justification is available. Within this peculiar framework, it is a mistake to make the right of compensation for the loss of development rights under the Wisconsin ordinance turn on the technicalities of the chain of title to a particular plot. This seems a uniquely inappropriate reason to deny compensation for the loss of development rights.

Any analysis of Murr is inherently messy, and it leaves open the endless challenge of reconciling this case with a wide range of other cases that cannot decide whether two contiguous parcels held by different titles can be a collective denominator in takings cases. The second part of the analysis shows that the muddle and confusion of the current law is largely obviated by the simple proposition that, prima facie, the more the government takes, the more it pays. That rule applies to the outright taking of any given parcel of land or to the taking of a divided interest in property. In all of these cases, the shifts in what is taken do not create odd and indefensible discontinuities, but only raise valuation questions as to the size of the loss, taking into account any return benefits that a property owner may receive when the taking is part of some comprehensive scheme. But those issues are routinely encountered in all physical-takings cases. In all instances, police-power justifications, tied closely to the law of nuisance, may be invoked, and in cases of comprehensive regulation, courts must be alert to determine whether the scheme that takes rights away also affords compensation in-kind from the parallel restrictions on others in the scheme. Under this view, the full range of divided interests, be they air rights, mineral rights, liens, covenants, or easements, are fully compensable. The untenable discontinuities under current doctrine disappear. The requirement of compensation thus forces governments to internalize the costs of their actions on individual property owners, which should lead to more efficient and responsive decisions. In looking at the case, it is far from certain whether the Supreme Court will give the correct analysis under the current law. But the hope here is that, once it realizes how messy the calculations are, it will take the first step toward the reconsideration of the Penn Central formula which has been the modern source of all this mischief.

Postscript

The Oral Argument in Murr v. Wisconsin

Of Synergistic Losses and Common Ownership*

       I completed this article on Murr before the Supreme Court held its oral argument on the case on March 20, 2017.[116] Two points are clear from those arguments. The first is that it is unlikely that the Court will reexamine its basic framework in takings cases in light of the first principles that should govern this area: Justice Breyer made it quite clear that “I’ve not got beyond Holmes.  Holmes says that a regulatory taking violates the Constitution unless it’s compensated when it goes too far.”[117] And so that highly questionable standard seems to govern even though the Justices all confessed to ignorance as to how it would apply, given the divided ownership of the surface.[118]

       The second point is that the oral argument demonstrated the usual conservative/liberal split. Thus it seems as though Justices Ginsburg, Breyer, Kagan and Sotomayor will vote to affirm the decision below. The Chief Justice, Justice Alito, and (at a guess) the silent Justice Thomas will vote to overturn. Justice Kennedy was on both sides of the case, so a four-to-four split is at least possible.  The liberal justices were attracted to the notion that the plaintiffs “when they took were subject to the regulation, and they knew it.”[119]  And they distinguished this case from Palazzolo v. Rhode Island[120] on the grounds that Palazzolo simply stood for the proposition that the transfer of property from one party to another does not deprive the transferee of whatever takings claim that the transferor had against the government, even if the transfer was made with notice of the government ordinance. But this case involved a situation where the transfer itself effectuated as a matter of Wisconsin law a merger of the two lots that for the first time entailed the restrictions on development of the two properties.[121] The argument that got the greatest traction on the other side was that the state could not simply remove the protection that the law afforded to separate parcels by declaring the two properties to be merged just because they had been brought under common ownership.

       For these purposes, however, I want to comment on one hypothetical case with which Justice Kennedy began. He asked what would happen if the same person owned two plots of land, side by side, that could be used to construct a large building worth $500,000, but that each of the plots of land separately were worth only $100,000. The government then takes one of the plots of land to build a fire station. Under these facts, is the appropriate level of compensation $100,000 for the separate parcel or $400,000 for the combined loss in value? Justice Kennedy wanted Mr. Groen, lawyer for the plaintiffs, to say that the higher value was the appropriate measure of compensation, because that would indicate that the two plots had to be taken together to determine value. The apparent inference was that if the two plots are to be considered together for one purpose, they should be considered together for all purposes, so that the “parcel” under Penn Central must be the two combined parcels. Mr. Groen insisted on the separation of the two parcels for all purposes.

       The question that Justice Kennedy raised involves the application of the doctrine of severance damages and incidental benefits that was discussed in United States v. Miller.[122] The relevant passage in that opinion reads:

The owner is to be put in as good position pecuniarily as he would have occupied if his property had not been taken. . . .

Courts have had to adopt working rules in order to do substantial justice in eminent domain proceedings. One of these is that a parcel of land which has been used and treated as an entity shall be so considered in assessing compensation for the taking of part or all of it.

This has begotten subsidiary rules. If only a portion of a single tract is taken, the owner's compensation for that taking includes any element of value arising out of the relation of the part taken to the entire tract. Such damage is often, though somewhat loosely, spoken of as severance damage. On the other hand, if the taking has in fact benefited the remainder, the benefit may be set off against the value of the land taken.

As respects other property of the owner consisting of separate tracts adjoining that affected by the taking, the Constitution has never been construed as requiring payment of consequential damages; and unless the legislature so provides, as it may, benefits are not assessed against such neighboring tracts for increase in their value.

This passage contains a deep cleavage between its major and minor premises. Under the major premise, the only way in which the owner of the parcel taken can be put back into his initial financial position is if he recovers consequential damages for the loss in the assembly value of the two parcels. That is his economic loss, and it is clear that in any voluntary transaction for the sale of the one parcel, he would take into account the loss from the other parcel. Given, moreover, that he has a common ownership of the two, the case does not present the situation where the two plots are under different ownership, and it is not clear that the two owners would ever have agreed on a common venture that would produce the anticipated gains.  So it looks as though the higher value should be paid.

       That result, moreover, is confirmed by the way in which the parallel issue has been treated in the private law. Thus the Lex Aquilia contains this instructive passage on the measure of damages when a slave or a herd animal is killed:

[I]f one kills one of a troupe of actors or singers, or one of two or of a chariot team or of a pair of mules, . . . not only must a valuation be made of the object destroyed, but account must be also taken of the amount by which the other objects have been depreciated.[123]

The point is that the animal or slave killed is part of an integrated whole, and that full loss must be taken into account. The rule of course does not apply to “depreciation” that follows if the owner decides that he does not wish to hold slaves or animals because those are not synergistic losses.

       The argument applies with equal force in this case. It should not matter for these purposes whether the two lots have been reduced to a single plot of land, whether by state fiat or voluntary merger. In either case, the consequential damages should be recovered for the reasons stated here, and the traditional cases unwilling to follow this private law rule should be reversed. The economics of the situation should drive the analysis, not the form of title. The private owner need not merge title of the two lots in order to get the higher damages, and the government cannot impose its rule limiting development rights by announcing that the merger has taken place simply because the same person owns both lots.

       It follows therefore that Mr. Groen did not have to reject the claim for higher compensation under the Kennedy hypothetical. The correct analysis goes in two stages. The first is that if there is no synergy between the properties, then each plot has to stand on its own, so that the full compensation under Penn Central remains the correct answer. But, if in fact there were synergistic losses from the taking, the plaintiff should be allowed to recover for those damages if he could prove the synergies that were postulated in Justice Kennedy’s hypothetical. That same result, moreover, applies under the correct analysis once the untenable distinction between physical and regulatory takings is rejected. In both cases, the total loss to the two properties sets the correct measure of damages, whether or not there are synergistic losses. It is highly unlikely that the Court will explore the larger question addressed here. But it should follow Miller in the cases in which there are no synergistic losses, and reject it when there are such losses between two parcels under common ownership.

 

 

* Laurence A. Tisch Professor of Law, New York University School of Law; Peter and Kirsten Bedford Senior Fellow, The Hoover Institution; James Parker Hall Distinguished Service Professor of Law Emeritus and Senior Lecturer, The University of Chicago Law School. I would like to thank Bijan Aboutarabi, Philip Cooper and John Tienken of the University of Chicago Law School for their usual excellent and thorough research assistance.

 

[1] U.S. Const. amend. V.

[2] For further discussion, see Richard A. Epstein, Concepts Before Precepts: The Central Role of Doctrine in Law, 84 U. Chi. L. Rev. (forthcoming 2017).

[3] For some sense of the relative magnitudes, see Euclid v. Ambler Realty Company, 272 U.S. 365 (1926), where the approximately eighty-five percent decline in market value was not offset by any positive benefits to neighbors. Indeed, the fractionalization of a single plot into a number of smaller plots increased the number of potential land use conflicts. For discussion, see Richard A. Epstein, How to Revive the Constitutional Protection of Property Rights 115-126 (2008).

[4] Murr v. State, No. 2013AP2828, 2014 WL 7271581 (Wis. Ct. App. 2014).

[5] St. Croix County, Wis., Code of Ordinances ch. 17.36(I)(4)(a). (July 2007) (cited in case).

[6] Wild and Scenic Rivers Act, 16 U.S.C. §§ 1271–87.

[7] Id. § 1271.

[8] Id. § 1273(a).

[9] See Wis. Stat. § 30.27(1)–(2).

[10] St. Croix County, Wis., Code of Ordinances ch. 17.36(G)(1)(b).

[11] Wis. Admin. Code NR 118.03(27) (Feb. 2012).

[12] St. Croix County, Wis., Code of Ordinances ch. 17.36(I)(4)(a) makes the following provisions for substandard lots:

Lots of record in the Register Of Deeds office on January 1, 1976 or on the date of the enactment of an amendment to this subchapter that makes the lot substandard, which do not meet the requirements of this subchapter, may be allowed as building sites provided that the following criteria are met:

1) The lot is in separate ownership from abutting lands, or

2) The lot by itself or in combination with an adjacent lot or lots under common ownership in an existing subdivision has at least one acre of net project area. Adjacent substandard lots in common ownership may only be sold or developed as separate lots if each of the lots has at least one acre of net project area.

3) All structures that are proposed to be constructed or placed on the lot and the proposed use of the lot comply with the requirements of this subchapter and any underlying zoning or sanitary code requirements.

[13] Murr v. State, No. 2013AP2828, 2014 WL 7271581, at *1 (Wis. Ct. App. 2014).

[14] Id.

[15] Id.

[16] Brief in Opposition to Petition for Writ of Certiorari at 4, Murr v. State, No. 15-214 (U.S. Oct. 16, 2015), available at http://www.scotusblog.com/wp-content/uploads/2015/11/Murr-opposition-to-PWC.pdf.

[17] Id. at 9.

[18] Murr v. St. Croix County Bd. of Adjustment, 796 N.W.2d 837, 840 (Wis. Ct. App. 2011).

[19] Murr v. State, No. 2013AP2828, 2014 WL 7271581, at *8 (Wis. Ct. App. 2014).

[20] Penn Cent. Transp. Co. v. City of New York, 438 U.S. 104 (1978).

[21] The leading case for this point is Lucas v. South Carolina Coastal Council, 505 U.S. 1003, 1016 (1992) (regulation a taking only when it denies an owner economically viable use of land).

[22] Murr, 2014 WL 7271581, at *4, *6.

[23] Pa. Coal. Co. v. Mahon, 260 U.S. 393 (1922).

[24] Vill. Of Euclid v. Ambler Realty Co., 272 U.S. 365 (1926).

[25] Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419 (1982).

[26] Lucas v. S.C. Coastal Council, 505 U.S. 1003 (1992).

[27] Zealy v. City of Waukesha, 548 N.W. 2d 528 (Wis. 1996).

[28] Id. at 531.

[29] Id. at 530.

[30]Brief for Petitioner at i, Murr v. State, No. 15-214 (U.S. Apr. 11 2016), http://www.scotusblog.com/wp-content/uploads/2016/04/MeritsBrf.pdf.

[31] Keystone Bituminous Coal Assn. v. DeBenedictis, 480 U.S. 470 (1987).

[32] Id. at 497 ((quoting Frank Michelman, Property, Utility, and Fairness: Comments on the Ethical Foundations of “Just Compensation” Law, 80 Harv. L. Rev. 1165, 1192 (1967)). See also John E. Fee, Unearthing the Denominator in Regulatory Takings Claims, 61 U. Chi. L. Rev. 1535, 1536 (1994) (noting the difficulty of determining the correct scope of the “denominator” against which the loss should be measured).

[33] Penn Central, 438 U.S. at 130–131.

[34] See infra Section I.

[35] See Petition for Writ of Certiorari, Murr v. State (No. 15-214), at *11 (Aug. 14, 2015) (offering a more exhaustive compilation of the conflicts and inconsistencies present in this area of law), http://www.scotusblog.com/wp-content/uploads/2015/11/Murr-petition-for-cert.pdf.

[36] Keystone Bituminous Coal Assn. v. DeBenedictis 480 U.S. at 497 (quoting Michelman, supra note 32, at 1192).

[37] Id. at 498.

[38] Pa. Coal. Co. v. Mahon, 260 U.S. at 414.

[39] See infra Section I.

[40] Lost Tree Vill. Corp. v. United States, 707 F.3d 1286 (Fed. Cir. 2013).

[41] Id. at 1292.

[42] Id. at 1291.

[43] Id.

[44] Bevan v. Brandon Twp., 475 N.W.2d 37 (Mich. 1991).

[45] Id. at 43.

[46] Id. at 44.

[47] Id. at 39.

[48] Palm Beach Isles Assocs. v. United States, 208 F.3d 1374 (Fed. Cir. 2000).

[49] Id. at 1381.

[50] Loveladies Harbor, Inc. v. United States, 28 F.3d 1171 (Fed. Cir. 1994).

[51] Id. at 1179. The full statement of the court’s position on takings reads:

a) A property owner who can establish that a regulatory taking of property has occurred is entitled to a monetary recovery for the value of the interest taken, measured by what is just compensation.

b) With regard to the interest alleged to be taken, there has been a regulatory taking if

(1) there was a denial of economically viable use of the property as a result of the regulatory imposition;

(2) the property owner had distinct investment-backed expectations; and

(3) it was an interest vested in the owner, as a matter of state property law, and not within the power of the state to regulate under common law nuisance doctrine.

[52] Dep’t of Transp., Div. of Admin. v. Jirik, 498 So. 2d 1253 (Fla. 1986).

[53] Id. at 1257.

[54] For an earlier defense of this position, see Richard A. Epstein, Physical and Regulatory Takings: One Distinction Too Many, 64 Stan. L. Rev. Online 99 (2012), http://www.stanfordlawreview.org/online/physical-regulatory-takings.

[55] Penn Cent. Transp. Co. v. City of New York, 438 U.S. at 124 (internal citations omitted). The two citations in the passage were Goldblatt v. Town of Hempstead, N.Y., 369 U.S. 590 (1962), discussed infra at note 106, and United States v. Causby, 328 U.S. 256 (1946), discussed infra at note 71.

[56] Penn Central, 438 U.S. at 136.

[57] For a discussion of the various permutations of common-carrier rate regulation, see Duquesne Light Co. v. Barasch, 488 U.S. 299 (1989).

[58] See, e.g., Lucas, 505 U.S. at 1036, 1054–55 (Blackmun, J., dissenting); see also id. at 1061 (Stevens, J., dissenting). Justice Blackmun writes:

Even more perplexing, however, is the Court's reliance on common-law principles of nuisance in its quest for a value-free takings jurisprudence. In determining what is a nuisance at common law, state courts make exactly the decision that the Court finds so troubling when made by the South Carolina General Assembly today: They determine whether the use is harmful. Common-law public and private nuisance law is simply a determination whether a particular use causes harm. See Prosser, Private Action for Public Nuisance, 52 Va. L. Rev. 997 (1966) (“Nuisance is a French word which means nothing more than harm”). There is nothing magical in the reasoning of judges long dead. They determined a harm in the same way as state judges and legislatures do today. If judges in the 18th and 19th centuries can distinguish a harm from a benefit, why not judges in the 20th century, and if judges can, why not legislators? There simply is no reason to believe that new interpretations of the hoary common-law nuisance doctrine will be particularly ”objective” or ”value free.” Once one abandons the level of generality of sic utere tuo ut alienum non laedas, one searches in vain, I think, for anything resembling a principle in the common law of nuisance.

I regard these remarks on the linguistic use of the term nuisance as a misguided and uninformed attack on a body of law that has far more coherence than either Justice Blackmun or Stevens, let alone Professor Prosser, attributes to it. For a detailed account of its internal cohesion and sense, see Richard. A. Epstein, Nuisance Law: Corrective Justice and Its Utilitarian Constraints, 8 J. Legal Stud. 49 (1979). More generally, I deplore the constant judicial efforts to expand the scope of judicial deference by insisting on the conceptual incoherence of traditional doctrinal terms, all while confidently asserting the conceptual clarity of their own positions. See, Richard A. Epstein, Linguistic Relativism and the Decline of the Rule of Law, 39 Harv. J. Law & Pub. Pol. 583 (2016).

[59] Berman v. Parker, 348 U.S. 26 (1954).

[60] Id. Cf. Richard A. Epstein, Public Use in a Post-Kelo World, 17 Sup. Ct. Econ. Rev. 151, 167–71 (2009) (criticizing Berman).

[61] Brief in Opposition to Petition for Writ of Certiorari at 4, Murr v. Wisconsin, 136 S.Ct. 890 (2016) (No. 15-214).

[62] Brief of Property Law Professors As Amici Curiae in Support of Respondents at 4, Murr v. Wisconsin 136 S.Ct. 890 (2016) (No. 15-214), http://www.scotusblog.com/wp-content/uploads/2016/06/15-214-bsac-Property-Law-Professors.pdf.

[63] Gary Libecap, and Dean Lueck, The Demarcation of Land and the Role of Coordinating Property Institutions, 119 (3) J. Pol. Econ. 426–67 (2011).

[64] See Richard A, Epstein, Forbidden Grounds: The Case Against Employment Discrimination Laws (1992) 497 (discussing soft externalities); See Richard A. Epstein, Mortal Peril: Our Inalienable Right to Health Care 227 (2000) (applying to the medical context).

[65] St. Croix County, Wis., Code of Ordinances ch. 17.36(B) (2007).

 

[66] Armstrong v. United States, 364 U.S. 40, 47 (1960).

[67] See Nollan v. Nollan v. Cal. Coastal Comm’n, 483 U.S. 825, 832 (1987). (“We think a ‘permanent physical occupation’ has occurred, for purposes of that rule, where individuals are given a permanent and continuous right to pass to and fro, so that the real property may continuously be traversed, even though no particular individual is permitted to station himself permanently upon the premises.”).

[68] Andrus v. Allard, 444 U.S. 51, 65–66 (1979):

The regulations challenged here do not compel the surrender of the artifacts, and there is no physical invasion or restraint upon them. Rather, a significant restriction has been imposed on one means of disposing of the artifacts. But the denial of one traditional property right does not always amount to a taking. At least where an owner possesses a full "bundle" of property rights, the destruction of one "strand" of the bundle is not a taking, because the aggregate must be viewed in its entirety.

[69] See Restatement (Third) of Property (Servitudes) (2000) (showing unification). See also Susan F. French, Servitudes Reform and the New Restatement of Property: Creation Doctrines and Structural Simplification, 73 Cornell L. Rev. 928 (1988) (defending the unified conception); Richard A. Epstein, Notice and Freedom of Contract in the Law of Servitudes, 55 S. Cal. 1353 (1982).

 

[70] Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419, 440 (1982).

 

[71] United States v. Causby, 328 U.S. 256 (1946).

[72] Id. at 261. Where there are either incidental benefits or costs from taking only part of a given property it gives rise to complex valuation issue, not present in Murr, on how to modify the basic formula. See generally United States v. Miller, 317 U.S. 369 (1943).

[73] See Richard A. Epstein, Takings: Descent and Resurrection, 1987 Sup. Ct. Rev. 1, 5 (1987).

[74] See, e.g., Board of Regents v. Roth, 408 U.S. 564, 577 (1972) (“Property interests, of course, are not created by the Constitution. Rather, they are created and their dimensions are defined by existing rules or understandings that stem from an independent source such as state law—rules or understandings that secure certain benefits and that support claims of entitlement to those benefits”).

[75] Berman v. Parker, 348 U.S. 26 (1954).

[76] State v. Brown, 108 S.E.2d 74 (1959).

[77] See Aesthetic Purposes in the Use of the Police Power, 1960 Duke L.J. 299 (1960) (commenting on Brown).

[78] Haw. Hous. Auth. v. Midkiff, 467 U.S. 229 (1984).

[79] Id. at 242 (“Where the exercise of the eminent domain power is rationally related to a conceivable public purpose, the Court has never held a compensated taking to be proscribed by the Public Use Clause”).

[80] See Thomas W. Merrill, The Economics of Public Use, 72 Cornell L. Rev. 61 (1986).

[81] See, e.g., Clark v. Nash, 198 U.S. 361 (1905) (allowing condemnation of a right of way to allow plaintiff to access to a stream of water needed for irrigation); Strickley v. Highland Boy Gold Mining Co., 200 U.S. 527 (1906) (permitting condemnation of aerial buckets to carry ore over defendant’s property).

[82] Kelo v. City of New London, 545 U.S. 489 (2005).

[83] See Ilya Somin, The Grasping Hand: “Kelo v. City of New London” and the Limits of Eminent Domain (2015)(discussing the case).

[84] Monongahela Navigation Co. v United States, 148 U.S. 312, 326 (1893).

[85] Id.

 

[86] Pa. Coal Co. v. Mahon, 260 U.S. 393, 415 (1922).

[87] For discussion of the many variations, see Stephen Diamond, The Death and Transfiguration of Benefit Taxation: Special Assessments in Nineteenth-Century America, 12 J. Legal Studies 201 (1983).

[88] See Restatement (Second) Torts, § 840(C)–(D). For one influential statement of the rule, see also Sturges v. Bridgman, 11 Ch. D. 872 (1879) (allowing an injunction after a short delay to let defendant remove his equipment). The key to understanding the doctrine involves the tolling of the statute of limitations. Thus, when the initial party creates a nuisance that harms no one, the injunction is not available at that time. But in order to guard against the creation of a prescriptive easement, the statute of limitations is tolled until the actual conflict emerges. This set of rules maximizes wealth over all relevant periods of time. For a more extended discussion, see Richard A. Epstein, Principles for a Free Society: Reconciling Individual Liberty with the Common Good 202–06 (1998).

[89] Monongahela Navigation Co., 148 U.S. at 326.

[90] Armstrong v. United States, 364 U.S. at 49.

 

[91]See, e.g., Richard A. Epstein, Supreme Neglect: How to Revive the Constitutional Protection of Property Rights 117 (Oxford 2008).

[92] Gorieb v. Fox, 274 U.S. 603 (1927).

 

[93] Id. at 609.

[94] Welch v. Swasey, 214 U.S. 91 (1909).

[95] Swetland v. Curtiss Airports Corp., 41 F.2d 929, 937 (N.D. Ohio 1930). For a general discussion of the difficulties of the transition, see Eric R. Claeys, On the Use and Abuse of Overflight Column Doctrine, 2 Brigham-Kanner Prop. Rights Conf. J. 61 (2013). In my view, the implicit in-kind compensation doctrine applies to upper airspace even if it does not apply to the overflights in Causby. See Richard A. Epstein, Takings: Private Property and the Power of Eminent Domain 49-51 (1985).

[96] Welch, 214 U.S. at 106–08.

[97] Lochner v. New York, 198 U.S. 45 (1905).

 

[98] Welch, 214 U.S. at 107.

[99] Id.

[100] Id. at 106.

[101] See Coffin v. Left Hand Ditch Co., 6 Colo. 443, 447 (1882) (imperative necessity excludes the need for compensation in case where the enormous system-wide gains excused small losses that were hard to isolate or value).

[102] William C. Haas & Co. v. City and County of San Francisco, 605 F.2d 1117 (9th Cir. 1979).

[103] Id. at 1119.

[104] Id. at 1121.

[105] See, e.g., Matt Weinberger, This is why San Francisco’s insane housing market has hit the crisis point, Business Insider, June 15, 2016, http://www.businessinsider.com/san-francisco-housing-crisis-history-2016-6/#san-francisco-is-the-second-densest-city-in-the-us-after-new-york-city-with-about-18451-people-per-square-mile-packed-into-about-47-square-miles-1. The full explanation of the situation is very complex because the increased demand for housing is coupled with all sorts of restrictions on supply, dealing with both new construction and rent-control laws. Higher prices in response to the change in demand are welcome; those in response to supply constriction are not. For an illustration of how the rational-basis test allows for affordable-housing mandates that reduce supply, see California Building Industry Association v. City of San Jose, 351 P.3d 974 (Cal. 2015). For a generally glum assessment of the California real-estate market, see Richard A. Epstein, California’s Needless Housing Crisis, Hoover Defining Ideas, (November 21, 2016), http://www.hoover.org/research/californias-needless-housing-crisis.

[106] Goldblatt v. Town of Hempstead, 369 U.S. 590 (1962).

[107] Id. at 591.

 

[108] Id. at 596.

[109] United States v. Cent. Eureka Mining Co., 357 U.S. 155 (1958).

[110] Id. at 165–66.

[111] Id. at 166 (emphasis added).

[112] Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419, 421 (1982).

 

[113] San Diego Gas and Elec. Co. v. City of San Diego, 450 U.S. 621 (1981).

[114] Id. at 657.

[115] For a longer discussion, see Richard A. Epstein, The Takings Clause and Partial Interests in Land: On Sharp Boundaries and Continuous Distributions, 78 Brook. L. Rev. 589 (2013).

* My thanks to Kenneth Hersey, Class of 2018 New York University Law School, for his speedy and accurate research assistance.

[116]    Oral Argument, Murr v. State, No. 15-214, available at https://www.supremecourt.gov/oral_arguments/argument_ transcripts/2016/15-214_l6hn.pdf.

[117]    Id. at 14, 28.

[118]    Id. at 28–30.

[119]    Id. at 8.

[120]    533 U.S. 608 (2001).

[121]    Transcript of Oral argument at 8–9, Murr v. State, colloquy between Mr. Groen and Justice Kagan: “In Palazzolo, all we said was that if the seller has a takings claim, it's not extinguished just because the property is transferred; that the buyer could have the exact same takings claim.”

 

[122]    317 U.S. 369 (1943).

[123]    Justinian Digest Bk. IX, Title 2, ¶ 22.

Brussels Gets Brexit Wrong—Again

Richard Epstein*

Richard Epstein

Richard Epstein

Theresa May, the British prime minister, recently sent a letter to Donald Tusk, president of the European Council, announcing that the UK would withdraw from the EU under the procedures set out in Article 50 of the Lisbon Treaty. Her letter noted that, even though withdrawal was irrevocable, the UK seeks to forge the closest and most cooperative arrangement possible with the EU moving forward. Although Article 50 prevents the EU from blocking Brexit, it offers little by way of guidance on how the exit negotiations should proceed.

The treaty provides that if the parties fail to reach an agreement within two years, the EU treaties “shall cease to apply” to the UK unless both sides agree to an extension. If not, all relations under the EU are severed, even if other obligations, such as those under the World Trade Organization, remain in place. Still, Article 50 of the Treaty contemplates that withdrawal from the EU need not constitute a clean break, given that in working out the terms of withdrawal, the parties may take into account “the framework for [the UK’s] future relationship with the Union.” The treaty also provides that the EU will entrust its side of the negotiations to the head of its negotiating team, who in this instance is Michel Barnier, a French politician. At this point, everything is up for grabs.

The Brexit process has now been launched, and the different attitudes taken by the two sides to the negotiations are, indeed, striking. In her well-crafted letter, Prime Minister May sought to preserve good relations with the EU after the breakup. There was of course no denying that the UK left Brexit because of its unhappiness with the dominant position that the EU Commission in Brussels held over economic and social matters in Britain; the Commission has the ability in many important areas, such as employment law, to require each member state to harmonize its laws with the EU’s directives. That direct control from the center was in stark contrast to the earlier plan of a smaller European Economic Community, which stressed four freedoms involving the movement of goods, services, capital, and people across national boundary lines. In June 2016, the UK voted to leave the EU in large measure to avoid the Union’s control on matters of economic regulation and the movement of people, especially immigrants, across national boundaries.

At the time, alarmist commentators thought that the UK exit showed that populist and isolationist forces would lead the nation to turn inward. But May’s conciliatory message took exactly the opposite tack: It stressed the importance of keeping—indeed, expanding—free trade relations with the EU as the UK seeks, without any impediment from the EU, to expand its trading relationships with the rest of the world. She wrote about “the deep and special partnership” between the UK and the EU; and the EU, she continued, is the UK’s “closest friend and neighbor.” Finally, she proposed that “it is necessary to agree [on] the terms of our future partnership alongside those of our withdrawal from the European Union.”

Unfortunately, the EU’s Barnier, echoing Germany’s Angela Merkel, took a frostier tone. He, of course, recognized that both sides would lose from the failure to reach an agreement within the two-year period. But he then adopted a needlessly tough negotiation stance that increases the odds of a breakdown. He stressed that the EU had to show “unity” in dealing with the crisis, and then blamed the UK for introducing “uncertainty” into the ongoing relationships with the EU member states. Most critically, he then announced that it would be “very risky” for the two sides to negotiate the terms of their future relationship until they sorted out the mechanics of leaving. In so doing, he explicitly rejected May’s proposal for parallel negotiations on the two issues. His dubious assertion that the EU was not legally in a position to negotiate with a still-member state—because it is not yet an outsider—would seem to contradict the language of Article 50. In order to complete the divorce proceedings, he insisted that the parties first settle, to the last penny, the sums that the UK owes to the EU for obligations previously incurred as a member. He then set that figure at €60bn (£51bn) to cover the key items of account: budget commitments, pension liabilities, loan guarantees, and EU spending on UK projects.

It is hard to imagine a more counterproductive opening gambit. Barnier’s call for unity is a thinly disguised claim that the remaining 27 EU members remain in lockstep like any other cartel. In so doing, Barnier was likely trying to forestall a situation in which other EU members might wish to negotiate or withdraw from the EU. More modestly, he might also have been trying to prevent some backsliding into a “multispeed Europe.” That idea has gained some traction inside the EU. The multispeed position starts from the premise that compulsory harmonization might not sit well with all 27 EU members. Thereafter, it contemplates a set of arrangements in which different EU members might have more or less close arrangements with the center. The approach, which could move the EU back in the direction of a free-trade zone, has been suggested in part to reduce the likelihood that other member nations might be tempted to leave the EU.

That intriguing idea seems dead for the moment. Barnier, like Angela Merkel, insists that the UK cannot “cherry-pick” among the four freedoms of movement--of goods, services, capital, and people--“because that would have disastrous consequences for the other 27 member countries." But it was this uncompromising dogmatism that fueled Brexit in the first place. A more sensible approach would welcome the decision of other EU members to weaken Brussels’ control over their internal affairs, because, in the long run, the EU is more stable as a free-trade zone than it is as a top-down organization. The recent and prolonged economic stagnation inside the EU is a product of the same harmonization tactics that undermine competition among states in the EU.

The sequencing of negotiations is always critical to their long-term success. In this regard, nothing in Article 50 mandates Barnier’s position of sequential dealings. Indeed, the better reading of the text is that future relationships should be negotiated at the same time as withdrawal. Proceeding along dual lines should make any transition less painful. But the Frenchman Barnier’s hardline position is a classic illustration of cutting off one’s nez to spite one’s face. The virtue of the EU was economic integration by the removal of trade barriers, not heavy-handed top-down control. By deciding to postpone the negotiations until the separation is complete, Barnier has made it more difficult to reestablish economic integration from trade that will work to the benefit of both sides. EU members obviously benefit from the excellence of the UK’s financial and banking services, and the EU clearly benefits from having open access to the UK for the sale of the EU’s goods and services. The first priority should be to see how much these arrangements can be safeguarded after Brexit is concluded.

Putting divorce first complicates all these business arrangements. In particular, it is unclear whether, and to what extent, Article 50 authorizes the payment of any sums between members at the time of exit. But even if these side payments are required, it is as yet unclear whether the UK could make demands on the EU for a return of excess moneys. Regardless of whether side payments are off the table, the UK is sure to demand the right to challenge each of Barnier’s claims in a process that could take legions of skilled expert witnesses to sort out in some judicial proceeding. Those obligations, however determined, are more or less fixed as of the date of the UK’s withdrawal from the EU. A sensible procedure is to make, if warranted, some prompt preliminary down payment, after which the balance plus interest could be paid later. The delay is no big deal for money payments. But delay is an enormous matter if ordinary business arrangements are put on hold for years until the dispute over transfer payments is resolved.

Barnier thus has his priorities backwards . As a general matter, it should be relatively easy to resolve most of the economic and social issues so long as the EU, Barnier, and Chancellor Merkel back off their all-or-nothing stance. The knottiest question by far is how the refugee and immigration issues interact with the principle of free movement of persons across the EU. In part because of Merkel’s decision to take about one million refugees into Germany, the EU’s expanded membership has complicated that problem. One sensible way to deal with this matter is to partition the refugee problem from the movement of citizens across lines for the usual purposes of business, travel, and retirement. Unfortunately, that might not happen if the EU hard-liners have their way.

*Considered one of the most influential thinkers in legal academia, Richard Epstein is known for his research and writings on a broad range of constitutional, economic, historical, and philosophical subjects.

The Affordable Housing Crisis

Richard Epstein*

Richard Epstein

Richard Epstein

Housing policy has become yet another flashpoint in these highly polarized times. Much of the controversy swirls around President Donald Trump’s nomination of Ben Carson, a distinguished neurosurgeon, as Secretary of Housing and Urban Development. HUD operates a wide range of subsidized federal housing programs that impassioned critics of his nomination are sure Carson will dismember. His chief vice in their eyes is his lack of direct experience working in the housing area. In a real sense this is a mixed blessing. On the one hand, these programs must be managed—and, ideally, by someone competent and somewhat knowledgeable in the field. On the other, his greatest strength is that from an outside perspective he understands that many of these programs must be cut back or shut down. There is some overstatement in the charge that HUD is a socialist program. But there is much truth to the claim that many of its programs have seriously aggravated housing difficulties around the country, especially for the most vulnerable groups.

The key challenge is to choose the correct path for housing reform. Many of Carson’s critics think the proper line is to require new developments to save a proportion of units for low-income residents, which will ensure, they claim, “that economically diverse neighborhoods and housing affordability will be preserved for generations to come.” The implicit assumption behind this position is that government agents have enough information to organize complex social institutions, when in fact they are slow to respond to changes in market conditions and are often blissfully unaware of the many different strategies that are needed in different market settings. No one wants to say that governments should not lay out street grids and organize infrastructure. But they operate at a huge comparative disadvantage when it comes to real estate development on that public grid.

Far superior is an alternative view that I have long championed. The first thing to do is to abandon the assumption that there is a systematic market failure requiring government intervention. The second is to remove all barriers to entry in the housing markets, so that supply can increase and prices can fall. These barriers are numerous, and include an endless array of fees, taxes, and permits that grant vast discretionary authority to local officials. A removal of these burdens will allow us to harness the private knowledge of developers who will seek to work in those portions of the market that hold the greatest profit opportunities.

The critics often fear that developers will look to build only mansions and high-rise towers to satisfy the endless desires of the millionaire class. But that hyperbole ignores every relevant feature of an unregulated housing market. Most critically, as costs of housing construction and maintenance go down, developers are able to offer lower-priced units to people of more limited means. Prices are kept low by new entry across the full spectrum. Some developers will move quickly into the luxury market, but others, knowing of the potential glut, will move into other market niches in different neighborhoods where they can secure the highest rate of return. And once that is done, the expanded supply will provide more opportunities to lower-income tenants.

Yet as matters stand, there is good reason why developers gravitate to the higher end of today’s highly regulated market—because they cannot absorb the high fixed costs of planning, permitting, and construction for smaller projects. As demand surges in highly desirable supply contracts, the result is always the same. Equilibrium prices march steadily upward, leading local activists to cry for a new round of subsidies, restrictions, and reforms, all of which start the cycle over again.

One highly controversial program is Measure S, which is on the ballot in Los Angeles. As the Los Angeles Times—a fierce opponent of this ballot initiative—notes, “Measure S would impose a two-year moratorium on all real estate projects that require a General Plan amendment, zone change or increase in allowable height.” One LA project that would be forced to stop would house homeless veterans and other low-income folks. Nor should that consequence come as a surprise. The reference to amendments and zoning changes cuts far more deeply than it appears, because under modern land use law, modifications of existing ordinances, often called “contract zoning,” are routinely necessary to get a deal through. The way it works is the initial zoning laws are set in a highly restrictive fashion. The developer then has to come forward with a package of benefits for the community as a way to secure a more favorable zoning classification. By blocking renegotiations, Measure S freezes everything, virtually assuring a mass developer exit from the market. The preexisting process already is a huge deterrent to development, which started its relentless decline after the 1950s with the onset of strict zoning regulations.

The bad ideas for housing regulation do not end with blanket moratoria. Indeed, the most popular approach nationwide does not directly limit the amount of new housing that can be built. Instead, it embraces “inclusive zoning” in which the developer is forced to set aside some fraction of the total number of units as designated affordable housing units. As one might expect, the worse the underlying situation, the more stringent the matching requirements. Thus, this past December, Portland, Oregon, unanimously approved its “Historic Inclusionary Housing Program” that requires all developments of twenty or more units to designate 20 percent of these units as affordable. Look for a lot of 19 unit projects. Earlier in the summer of 2016, San Francisco, whose zany housing policies have no known limitations, raised the ante when its voters approved Proposition C. Prior to its adoption, developers had three options: Set aside 12 percent of units for affordable housing; build some units off-site; or contribute to an “in lieu” fund to enable the City to take on new projects. Proposition C raises the ante by insisting that the projects have 25 percent on-site housing; 33 percent off-site housing; or that their developers pay a commensurately higher fee.

This program is reasonable insofar as it imposes less stiff requirements for the on-site units than the off-site ones. These are usually more expensive to construct. And, ironically, they are less desirable to low-income tenants who cannot afford to live in high-price areas. It is just for that reason that a recent op-ed in the New York Times by financial journalist Eric Uhlfelder called for a “new fix” for affordable housing that requires the imposition of an annual luxury tax “on new high-end condos and rentals.” As Uhlfelder notes, this proposal essentially eliminates the difficulties of in-kind contributions. But it is hard to see why it should make a dent in the underlying supply problem. Generally speaking, the elimination of two options will not improve the position of the developers. Instead, it becomes absolutely critical to know which of these new construction projects will be covered by the luxury tax and which will not. If the line is announced in advance, a City will find itself in the odd position of insisting that new construction meets its parameters, as developers seek to gain permits under the radar. If the rate, moreover, is set incorrectly, the entire scheme could fail for want of takers, sending the city’s program back to square one.

One way to avoid this difficulty, now under active consideration in Los Angeles, is for developers to pay a so-called “linkage fee” on all new commercial and residential housing, which can then be used to remedy the chronic undersupply of affordable housing. The program here, however, could—in combination with the city’s new project moratoria—put all development into paralysis. One clear improvement over both the Uhlfelder and Los Angeles proposals is to sever the link between new affordable housing programs and any special tax on new real estate development, by funding all local affordable housing programs out of general revenues. That switch in emphasis means that a specific tax is less likely to wreck a specific segment of the housing industry. It will also provide a modest political check on the willingness of local governments to dedicate funds to affordable housing programs, given popular resistance to overall tax increases. That just might switch the political balance in favor of the liberalization of the notorious zoning codes that have stifled new construction in the first place.

But even these are really stopgap measures. All taxes deter development. Market liberalization increases it. Folks like Uhlfedler are explicit that they resort to these schemes because they expect a Trump administration to cut back on federal subsidies, which I regard as a welcome counterforce to unsound HUD programs. So it is back again to Ben Carson, whose real comparative advantage is that he has no historical connection with the dysfunctional public housing world. But Carson does grasp the dangers of “mandated social-engineering schemes,” and appreciates the risks of “unintended consequences” of various social interventions. Hopefully, when he takes over HUD, he will bring with him a broom that will sweep clean much of the detritus that currently exists.

As Carson has noted, one of his first targets will be the multiple Obama programs that grant HUD funds to affordable housing that is built in wealthier neighborhoods. Apart from the endless paperwork these “fair housing” programs require, they also depart from Uhlfelder’s observation that most local housing activists would prefer to use government grants to fix up housing in areas where low and moderate-income people actually choose to live. Any decision by Carson to scrap the rule would be a vast improvement for housing markets, as lower administrative costs would lead to higher levels of local development.

The so-called housing experts all sign on to the general mission of HUD to deal with the various ills of housing shortages, but none of them have the slightest interest in the market solutions that could improve the overall situation. To make the point more clearly, market solutions do not include letting developers steamroll small property owners through eminent domain abuse, or allowing local communities to pass restrictive zoning and permitting requirements that are intended to block low-income housing. Rather, the correct answer is to stop eminent domain abuse, to peel away layers of regulation, and to cut out the extensive network of government grants that impose strings on how housing can be built. Perhaps Carson does not know much about the current programs. But if he puts the necessary reforms in place, he will have no need to master the details of endless federal, state, and local regulations that have created the affordable housing crisis in the first place.

*Considered one of the most influential thinkers in legal academia, Richard Epstein is known for his research and writings on a broad range of constitutional, economic, historical, and philosophical subjects.

A Revolution in Administrative Law

Richard Epstein*

Richard Epstein

Richard Epstein

One of the most vital, but technical, items on the Republican agenda is not likely to get its fair share of public attention. On the first day of the new Congress, Republican Representative Bob Goodlatte of Virginia introduced two pieces of legislation that could fundamentally alter the structure of American administrative law for years to come.

The first bill, H.R. 26, the Regulations From the Executive In Need of Scrutiny (REINS) Act, languished in three previous successive Congresses, but it has now cleared the House by a vote of 237-187. If enacted, this bill will give Congress a final say on regulations with an estimated cost over $100 million through a mandatory up-or-down vote before they go into effect. More importantly for the day-to-day operation of administrative law is Goodlatte’s other bill, H.R. 5, the Regulatory Accountability Act, which the congressman claims will “wipe out abusive regulation—freeing Americans to innovate and prosper once more.”

This last claim is a tall order for any one piece of legislation. But there is no underestimating the effect H.R. 5 will have in shaping the agendas that Scott Pruitt will bring to the Environmental Protection Agency, Betsy DeVos to the Department of Education, Andy Puzdur to the Department of Labor, and Rick Perry to the Department of Energy—each of whom will administer a complex set of statutes that authorize their agency actions while delimiting their authority. In the Obama administration, there were profound political clashes between his progressive administrators, who constantly sought to extend the scope of their authority in all of these areas, and their opponents both on and off the bench.

The great challenge of H.R. 5 is to rethink a system of administrative law that was ushered in by the passage of the Administrative Procedure Act of 1946 in the aftermath of World War II. The APA has a quasi-constitutional status because it seeks to rationalize judicial oversight of administrative agencies that received vastly greater power after the New Deal constitutional revolution. This expansion came to fruition during the October 1936 Supreme Court term, during which the Court first increased the scope of congressional power by allowing it to regulate in virtually any area of economic or social importance, and second, weakened the individual rights afforded to private property and to economic liberties in the pre-New Deal Constitution. A decade later, Congress passed the APA to cut back on the aggressive implementation of legislation through regulation and enforcement actions instituted by the new generation of New Deal agencies. These transformative laws dealt with such core matters as labor, agriculture, communications, and securities law.

One essential provision of the APA, Section 706, regulates the interaction between the agencies and the courts. It states in part: “To the extent necessary to decision and when presented, the reviewing court shall decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning or applicability of the terms of an agency action.” In addition, Section 706 provides that the reviewing court shall “hold unlawful and set aside agency action, findings, and conclusions found to be—(A) arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”

Under the APA’s sensible original design, a reviewing court stands in relation to the administrative agency much as an appellate court stands in relation to a trial court. On all questions of law, the appellate court makes its own interpretation of the relevant legal materials in deciding the meaning and scope of a particular provision. On questions of fact, an appellate court tends to defer to the trial court decision. Finally, an important class of cases deals with mixed questions of law and fact—e.g., whether the basic facts establish negligence by the defendant.

This time-tested regime reflects the application of the principle of comparative advantage by the different layers involved in judicial administration. Triers of fact often have to examine many witnesses and documents, for which they develop the appropriate expertise on such key issues as credibility and weight. Giving them latitude speeds up the process of adjudication, reduces the burden on appellate judges, and prevents the introduction of a fresh round of factual errors by appellate judges. At the other extreme, reading statutes and regulations is what appellate courts do well, and these questions can be resolved by standard techniques of interpretation that carry over from one substantive field to another. Courts typically apply an intermediate standard of judicial review to those difficult mixed questions of law and fact.    

For many years, the APA more or less kept true to its original conception, which treated administrative agencies as if they functioned like trial courts. By the 1970s, however, it became clear that the courts, most notably the liberal Circuit Court for the District of Columbia, had adopted an activist role in the overall process, particularly in their comprehensive review of the factual record. That Court was slapped down hard in 1978 by a young Justice Rehnquist in Vermont Yankee v. National Resources Defense Council, Inc. for introducing added layers of complexity, especially in dealing with the approval of new nuclear power plants, into the relatively lean structure of the APA.

But the truly great transformation of American administrative law took place in two major decisions of the 1980s, both of which changed administrative law for the worse, by inverting the relationship of review of facts and review of law. The first became subject to a hard-look doctrine, and the second to extensive judicial deference.

On the former, in the 1983 Supreme Court decision Motor Vehicle Manufacturers Association v. State Farm Mutual Automobile Insurance Co., the Court, speaking through Justice Byron White, read the arbitrary and capricious standard strictly to require the National Highway Transportation Safety Administration to give a “hard look” to the NHTSA’s decision to postpone the implementation of passive restraint devices in automobiles. The Court insisted, among other things, that “an agency rule would be arbitrary and capricious if the agency has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.”

Under this standard any complex factual determination becomes fair game for an intensive review, which could be used not only to block new regulations but also to block efforts to roll back existing regulations on the ground that they were too onerous. The correct position is one that, as Section 706 suggests, shows some degree of deference to agency decisions. Otherwise no factual determination can be put into place, which is one reason why the nuclear power industry in the United States has been stopped dead in its tracks by judicial oversight.

In my view, the Goodlatte legislation goes in exactly the wrong direction when it proposes a grotesquely convoluted system of factual review under the grandiose claim that the law “restores to the people the true right to be heard by Washington’s regulators.” But “the people” also includes every special interest group that wishes to obstruct sensible reform, as in State Farm itself, as well as those, like the new cadre of Trump administrators, who have a more deregulatory frame of mind. There are many tasks of administration that need to be done and the Goodlatte labyrinth could bring the entire administrative process to a halt, killing off good projects as well as bad ones. No system of appellate review can neutralize incompetent regulators without hamstringing competent ones in the bargain. This portion of the legislation should be withdrawn and reengineered.

Nonetheless, H.R. 5 is on the mark with a far shorter and far more coherent provision that it styles the Separation of Powers Restoration Act (SOPRA), which in 2016 had been sensibly introduced as a freestanding bill. Its key provision reads that any court reviewing administrative action shall “decide de novo all relevant questions of law, including the interpretation of constitutional and statutory provisions, and rules made by agencies.” “De novo” review means that the reviewing court gives no deference to the legal opinions of either the parties or lower court judges and administrators.

This compact and straightforward provision, which should be promptly enacted, takes aim at two of the most misguided decisions of administrative law that instructed courts to take a deferential stance toward agency actions interpreting the key statutes and regulations they administer. The first of these cases, Chevron USA Inc. v. NRDC (1984), written by Justice John Paul Stevens, insisted that in all ambiguous cases, reviewing courts should defer to an agency interpretation of its governing statute. Auer v. Robbins (1997), written by the late Justice Antonin Scalia, similarly held that for an agency’s “own regulations, [its] interpretation of it is, under our jurisprudence, controlling unless ‘plainly erroneous or inconsistent with the regulation.’”

The current regime of deference enjoys strong bipartisan support even though it is plainly inconsistent with Section 706, which provided for the de novo review called for in SOPRA. The change is long overdue. It is difficult to describe in a short space the enormous doctrinal refinements of both Chevron and Auer. No one knows quite when any given statute or regulation becomes ambiguous, and there is a futile debate as to whether the same level of deference should be afforded to memoranda and opinion letters as to regulations issued after the more extensive notice and comment procedures the APA calls for in dealing with major regulations. Scholars thus talk about Chevron step zero, step one, and step two in an effort to decide just how much deference is required in any given context.

But the implicit assumption that all agencies are neutral and dispassionate enforcers of their own statutes is falsified by the day-to-day actions of agencies. Their heads have strong political agendas to advance on key issues such as labor, education, and environment, all flash points in the Obama administration. The acceptance of high levels of deference lets agencies make hash out of statutes, which is what happened, for example, in the Department of Labor’s ruling that the statutory prohibitions against sex discrimination, passed decades before, meant to apply to modern gender identity cases that no one had even imagined at the time. Deferring to agencies invites huge flip-flops with the change of administration, given their radically different views of how these various relationships could be shaped. It also allows agencies like the Federal Communications Commission to expand their jurisdiction with dubious interpretive strategies, which often upsets the balance initially designed by Congress.

That potent combination of intellectual incoherence and institutional instability makes it hard for private businesses and organizations to plan for the future. Concerns for their plans could be effectively moderated if these legal issues were simply decided by courts as they have been for centuries.

The fruits of this confusion will become evident the day after the Trump inauguration when major agencies reverse field, an action requiring as little justification as the process that adopted these (dubious) rules in the first place. It is often said about administrative agencies that only they possess the expertise to make sense out of arcane statutory and regulatory language. Nothing could be further from the truth. Most of the really important language consists of words like discrimination and pollution that judges can understand and apply as well as anyone else. The great danger of entrusting these issues to administrative agencies lies in their inherent bias. The independent agencies are in most cases run by commissions of five members, which often divide three-to-two, with the President appointing a chairman from his own party. Bias in administration is not some rare Black Swan event, but is, as standard public choice theory predicts, a common occurrence.

This is why the Democrats in Congress are so fiercely opposed to the key Trump appointments mentioned above. Now that they are out of power, the Democrats, who once praised executive and administrative power, will sound the rule of law trumpet loudly. And they should be heard on this point. H.R. 5 is important now because it can be used to restrain the abuse of discretion of Republican administrators, just as it can be used to restrain the abuse of Democratic ones.

For the moment at least, the proposed revolution in administrative law will have its greatest impact on the regulatory misadventures of the highly partisan Obama agencies. But in the long run, we need SOPRA to make sure that Republican administrators do not return the favor by hiding behind Chevron and Auer deference in order to impose, by regulation and interpretation, their own dubious decisions. Whether one deals with constitutions, statutes, or regulations, the only safe guide is to try to use text, context, structure, and purpose to determine the correct interpretation of disputed provisions. Gimmicks like Chevron and Auer deference only muddy the waters. In all cases, de novo review of questions of law is a matter of the highest importance for constitutional and institutional safeguards of the rule of law. We need it today.

*Considered one of the most influential thinkers in legal academia, Richard Epstein is known for his research and writings on a broad range of constitutional, economic, historical, and philosophical subjects.

Obama’s Dangerous Palestinian Gambit

Richard Epstein*

Richard Epstein

Richard Epstein

As we reach the end of the Obama presidency, U.S.–Israeli relations are in a state of turmoil after the administration abstained on the UN Security Council vote of December 23, 2016 regarding Resolution 2234, which, among other things, “Reaffirms that the establishment by Israel of settlements in the Palestinian territory occupied by since 1967, including East Jerusalem, has no legal validity and constitutes a flagrant violation under international law and a major obstacle to the achievement of the two-State solution and a just, lasting and comprehensive peace.”   

To say that this resolution has not been well received in the United States is something of an understatement. The House of Representatives, for instance, recently issued a nonbinding resolution that condemned the UN act as “one-sided and anti-Israel.”

At this point, it is imperative to take a close look at what the resolution says to see whether or not this and similar charges raised against it can be sustained. That inquiry in turn has to deal with two issues, one legal and one political. The first question is whether the Israeli settlements are in fact a flagrant violation of international law. The second asks whether the settlements are a serious impediment to the creation of a two-state solution. I conclude that the UN resolution overstates its condemnation of Israel, and join the chorus of those who think that the Obama administration stumbled badly when its abstention allowed the Resolution to become official UN policy.

As is often the case with poorly crafted resolutions, this one goes astray with its very first word. To say that the UN “reaffirms” the current status quo implies that, on some earlier occasion, it had voiced the same position that it does today. But the earlier positions taken by both the UN and the United States were far more nuanced than this latest one..

The most relevant document for these purposes is Resolution 242 of November 22, 1967 in the aftermath of the Israeli victory in the Six Day War that started when Egypt, Jordan, and Syria engaged in military action intended to destroy the state of Israel. The short resolution in effect adopted the land-for-peace formula that has guided American policy for close to 50 years. The Israelis agreed to withdraw from “territories occupied in the recent conflict” in exchange for a deal that resulted in the acceptance by all powers within the region of the legitimacy of the state of Israel with secure and defensible borders. At no point was it required that the Israelis return to the de facto borders that had been established under the 1949 armistice. Instead it could keep some territories to rationalize its national boundary lines in ways that allowed it to obtain defensible borders.

But this no longer applies after Resolution 2234, which “Reiterates its demand that Israel immediately and completely cease all settlement activities in the occupied Palestinian territory, including East Jerusalem, and that it fully respect all of its legal obligations in this regard. . . .” The resolution was not invoked under the UN’s so-called Chapter VII powers that address “threats to the peace, breaches of the peace, and acts of aggression.” Instead, it relies on Chapter VI, which is intended to deal with peaceful resolution of disputes. There is more than a whiff of complexity in this resolution. First, it condemns all Israeli settlements post-1967, including those in the Jewish quarter in East Jerusalem. But it is not clear how much further it goes, given that the phrase “completely cease all settlement activities” can easily be read to say that the Israelis are under an obligation not only to not expand existing settlements, but also to dismantle all settlements in the West Bank, or at the very least to stop all “natural growth” in Jewish populations within the settlements—a futile proposal that became national policy under Obama after, as Elliot Abrams reports, it had been explicitly rejected by George W. Bush’s administration.

It may therefore be an open question as to whether Israel is under a further obligation to turn over effective administration to Palestinian control, given what has been condemned as a flagrant violation of international law. No one can be sure, but texts less emphatic have been subject to broader interpretations. Indeed Hamas was quick to “emphasize the need to turn such a resolution into action, not only to halt settlements but to eradicate Israel’s occupation in all its forms,” including, of course, the occupation of all territories within the 1949 armistice lines. Clearly, the Resolution does not go that far, but on any reading it represents a major shift from the earlier views that Israeli settlements, especially those in or near Jerusalem, could continue to accept more people on the ground that they would be incorporated into Israel as part of any final settlement.

In light of its announced transformation, it is fair to ask, how solid is the legal foundation on which the new Resolution rests, especially compared to Resolution 242? Given its categorical denunciation of the Israeli position, we should expect to see unassailable evidence in support of its position. But the record is, in my view, far weaker than advertised. In dealing with this issue, Resolution 2234 points to two major sources of authority, both of which require some explanation. First, there is the Fourth Geneva Convention concerning the Protection of Civilian Persons in Time of War of August 1949, and second there is an advisory opinion rendered by the International Court of Justice in July 2004. At no point does Resolution 2234 discuss the rationales of these two key documents. This omission is troubling.

Most relevant to this discussion is the short text in Article 49 that provides simply: “The Occupying Power shall not deport or transfer parts of its own civilian population into the territory it occupies.” Yet the widespread consensus treats Israel as an occupying power. But it is not clear how this provision applies given the complex history of the region. The first point to note is that the phrase occupying power does not quite capture the Israeli-Palestinian dispute. Context matters.

The Fourth Geneva Convention was adopted in the aftermath of World War II, when there was an urgent humanitarian need to take care of refugees and other persons who had been displaced by the war. The Convention does deal extensively with occupied territories, but it offers no definition of what counts as such a territory. The clear cases of occupation are those in which one nation takes over the territory of another during armed conflict, which happened for example when the Soviet Union occupied the Baltic States in June 1940, in the aftermath of the notorious Molotov-Ribbentrop Pact that partitioned Eastern Europe into a Soviet and German spheres of influence. The occupation was then followed by the mass deportation of local citizens and the mass transfer of Russian citizens into the Baltics.

By linking the term “deport” with “transfer,” it is arguable, perhaps probable, that the abuse targeted was not the voluntary migration of individuals into occupied territories, but the Stalinesque activities of the forced transferal of a nation’s own people into occupied territories against their will, which happened in the aftermath of the occupation of the Baltics. None of this means that Palestinians do not have legal protection under the Geneva Conventions, but the ongoing security issues in these cases make it difficult in the abstract to determine just how far they run. But right now there is a serious debate, pro and con, over the condemnation with full compensation of vacant and uncultivated land on which to build Jewish settlements.

Set against this background, it is far from clear as a textual matter exactly how Article 49 applies to the Israeli occupation of the West Bank in the aftermath of the Six-Day War. The war began as an act of aggression against Israel by Jordan, and the legal status of those territories had not been resolved by the 1949 Armistice. The Israelis had their own historical claims to these territories, the status of which was disputed at the time. In their view, as developed here, these territories are “disputed territories” to which the Geneva Convention does not apply at all. To make matters more complicated, at the close of the Six-Day War, the only party that had a legal interest in the territories was Jordan, who had exercised de facto territorial sovereignty prior to the onset of hostilities. There was at that time no Palestinian nation either in the West Bank or in Gaza, which was then part of Egypt.

The Jordanians were, of course, no friends of the Palestinians. Indeed, in September 1970 there was a fierce conflict, known as Black September, in which the Palestinian Liberation Organization forces led by Yasir Arafat were defeated by the Jordanian forces led by then-King Hussein, and were forced into exile after the death of thousands. Just what would have happened to Palestinian national ambitions if the territories had been returned to Jordan so that the Fourth Convention would no longer apply? We shall never know the answer to that question because Jordan never sought to regain the territories and indeed in 1988 renounced all claim to the West Bank in part to clear the path to Palestinian claims. Note that the Jordanians did not—nor could they have—transferred their claims to Palestine which did not (and still does not) have statehood status. At this point, we have the novel situation in which the stripping away of the initial sovereign leaves Israel without a genuine competitor for sovereignty over the territories. Nothing in the Fourth Convention covers these unique circumstances. And it is a political, not a legal, issue that governs the implementation of any potential two-state solution.

Nor is the situation made any clearer by the 2004 Advisory opinion, which addressed the legality of the wall that Israel erected around the West Bank to protect itself against widespread Palestinian terrorist attacks. Clearly the wall separated the West Bank from the rest of Israel, and it was condemned for that reason as illegal by the ICJ, which heavily relied on notions of customary international law that have never been supported by a consistent practice that requires nations to remain immobile in the face of systematic terror threats. To be sure, Resolution 2234 condemns terrorist activities, but only in a disembodied sense that makes no reference to the constant activities of Hamas or the active support for terrorist activities that is fully institutionalized by the Palestinian authority, which offers financial support for individuals and the families of those who kill or maim Israelis. Generalized pronouncements make it appear that Israel and the Palestinian Authority are equal offenders in the commission of terrorist acts, when it is highly likely that the Israeli security measures would be vastly curtailed if there were credible assurances that the bombings, shootings, and stabbings would come to an end.

The one-sided treatment of these legal issues is consistent with the general UN approach that obsessively condemns Israel while mostly overlooking the atrocities that have ravaged the greater Middle East. In light of these issues, it is somewhat odd to treat the settlements as though they were the major obstacle to the two-state solution. Remove them tomorrow, especially in response to the UN resolution, and the most likely outcome is that the PA and Hamas would intensify their activities to destroy the Jewish state, just as they did in 1948, 1956, 1967, and 1973 when Israel fought wars of survival, knowing full well that the first defeat would be the last one, even if the 1949 Geneva Convention places strict limitations on how occupying powers have to behave toward conquered people.

The Israelis know this all too well. They also know that the lesson of the 2005 withdrawal from Gaza led to the rise of Hamas and to repeated military actions and missile attacks between 2006 and 2014. Any unilateral surrender of lands in the West Bank to a new Palestinian state opens up the possibility that greater hostilities could be launched against an Israel weakened by successive rounds of fatal concessions. The Israelis claim that the only path to peace is through bilateral negotiations between the parties, backed by the US and the UN. Those negotiations were apparently close to success in 2000 and 2008, but the deal was never closed because of the Palestinians.

At this point, Resolution 2234 has killed the prospects for any negotiated peace in the foreseeable future. The Palestinian Authority will treat compliance with a ruinous Resolution as a precondition for further negotiations. The Israelis cannot live in a world that requires them to surrender territories under their control before 1967. The terms of the UN Resolution thus have put an effective end to all negotiations between the two sides. The Israelis are likely to continue the dangerous game of expanding settlements in the West Bank, as the only credible way of punishing the Palestinians for their continued delay. Whether this strategy will work, or should work, is a hard call. But much of the blame for the current impasse lies at the feet of Secretary of State John Kerry who never did understand the political dynamics of the Israeli-Palestinian negotiations.

*Considered one of the most influential thinkers in legal academia, Richard Epstein is known for his research and writings on a broad range of constitutional, economic, historical, and philosophical subjects.

Obsolete Climate Science On CO2

Richard Epstein*

Richard Epstein

Richard Epstein

The incoming Trump administration has promised dramatic transformations on many vital domestic issues. The best gauge of this development is the fierce level of opposition his policies have generated from Democratic stalwarts. One representative screed is a New York Times Op-Ed by Professors Michael Greenstone and Cass Sunstein, who lecture the incoming president on climate change: “Donald Trump Should Know: This is What Climate Change Costs Us.”

Greenstone and Sunstein have a large stake in the game: During their years in the first Obama administration, they convened an interagency working group (IWG) drawn from various federal agencies that determined that the social cost of carbon (SCC)—or the marginal cost of the release of a ton of carbon into the atmosphere—should be estimated at about $36 per ton (as of 2015). Choose that number and there is much justification for taking major policy steps to curb the emission of carbon dioxide. Greenstone and Sunstein hoped that the working group process would draw on the “latest research in science and economics,” and establish the claimed costs by “accounting for the destruction of property from storms and floods, declining agricultural and labor productivity, elevated mortality rates and more.”

Their effort should be dismissed as a rousing failure, and as an affront to the scientific method that they purport to adopt in their studies. The first error is one of approach. The worst way to get a full exchange of views on the complex matter of global warming is to pack the IWG entirely with members from the Obama administration, all surely preselected in part because they share the president’s exaggerated concerns with the problem of global warming. The only way to get a full and accurate picture of the situation is to listen to dissenters on global warming as well as advocates, which was never done. After all, who should listen to a “denier”?

This dismissive attitude is fatal to independent inquiry. No matter how many times the president claims the science is rock-solid, the wealth of recent evidence gives rise to a very different picture that undercuts the inordinate pessimism about climate change that was in vogue about 10 years ago. The group convened in the Obama administration never examined, let alone refuted, the accumulation of evidence on the other side. Indeed, virtually all of its reports are remarkable for the refusal to address any of the data at all. Instead, the common theme is to refer to models developed by others as the solid foundation for the group’s own work, without questioning a word of what those models say.

The second major mistake in the government studies is the way in which they frame the social costs of carbon. As all champions of cost/benefit analysis understand, it is a mistake to look at costs in isolation from benefits, or benefits apart from costs. Yet that appears to be the approach taken in these reports. In dealing with various objections to its reports, the IWG noted in its July 2015 response that “some commenters felt that the SCC estimates should include the value to society of the goods and services whose production is associated with CO2 emissions.” Their evasive response has to be quoted in full to be believed: "Rigorous evaluation of benefits and costs is a core tenet of the rulemaking process. The IWG agrees that these are important issues that may be relevant to assessing the impacts of policies that reduce CO2 emissions. However, these issues are not relevant to the SCC itself. The SCC is an estimate of the net economic damages resulting from CO2 emissions, and therefore is used to estimate the benefit of reducing those emissions."

In essence, the benefits from present or future CO2 emissions are not part of the story. Yet a truly neutral account of the problem must be prepared to come to the conclusion that increased levels of CO2 emissions could be, as the Carbon Dioxide Coalition has argued, a net benefit to society when a more comprehensive investigation is made. The entire process of expanding EPA regulations and other Obama administration actions feeds off this incorrect base assumption. The most striking admission of the folly of the entire EPA project comes from EPA Chief Gina McCarthy, who has stated that she would regard a decrease of one one-hundredth of a degree as enormously beneficial, notwithstanding its major cost, because its symbolism would “trigger global action.” No cost/benefit analysis would justify wasted expenditures solely on symbolic grounds. After all, human progress on global warming will only suffer if other nations follow our false siren on CO2 emissions, while ignoring the huge pollution that envelops major population centers like Delhi and Beijing.

Unfortunately, support for regulating CO2 emissions relies unduly on a Regulatory Impact Analysis that is worth no more than the faulty assumptions built into the model. These include the EPA’s hugely complicated Clean Power Plan, temporarily enjoined by the United States Supreme Court, that relies once again on the flawed social costs of carbon estimates.

The weakness of the EPA approach is shown by the data that Greenstone and Sunstein cite to support the contention that global warming has reached dangerous levels. They refer, for example, to a Geophysical Research Letter of 2014 that notes the retreat of ice in the West Antarctic between 1992 and 2011. But that one finding has to be set in context, as is done in the 2016 State of the Climate Report  prepared by the Committee for a Constructive Tomorrow (CFACT) and sent to the U.N. Climate Conference in Morocco. This more complete account notes that the mass gain in East Antarctica has been at 200 billion tons per year on average, compared to the 65 billion tons, which was offset by substantial gains in ice in West Antarctica, generating a net gain of roughly 82 billion tons per year in Antarctic ice between 2003 and 2008. The upshot: “The good news is that Antarctica is not currently contributing to sea level rise, but is taking 0.23 millimeters per year away.” Overall, the temperature over the Antarctic has been constant for the past 35 years.

No analysis that looks at the minuses can afford to ignore the larger pluses and maintain its credibility. Indeed, for what it is worth, the CFACT report notes that the ice mass in the Arctic is now about 22 percent greater than it was at its low point in 2012. This fact helps explain why there has been no recent change in the rise of sea levels, and certainly none that can be attributed to the relatively modest level of temperature increases in the past 100 years. Recent trends suggest the rate of increase in ocean levels has been decelerating over the last 18 years, during which time there has been a substantial increase in carbon dioxide levels. Yet the 102 different models used by the Intergovernmental Panel on Climate Change (IPCC) are all high in their estimates, by roughly four-fold. As documented in the 2016 CFACT report, there has been substantially no change in overall global temperature over the past 18 years, and the record highs reported are by tiny fractions of degrees that are smaller than the margin of measurement error. Yet the government’s methodology is to look at the models and ignore the data.

Just that was done by the now anachronistic 2009 EPA Endangerment Findings for Greenhouse Gases, which reported on the overall shrinkage of Arctic ice and claimed that the “elevated CO2 levels” were expected to result “in small beneficial effect[s] on crop yields.” The good news on this point seems to be that the increase in CO2 has led to about a 14 percent increase in green vegetation on earth over the past 30 years, as Matt Ridley reported in a 2016 lecture. It is the best of all possible CO2 worlds if the level of arable land increases with minor temperature changes and there are no appreciable changes in ocean levels. Put these numbers together and a revision of the SCC must be made, as it now appears that the net costs of carbon are negative. Further, the revised projections have only strengthened the lower estimates of global warming from elevated CO2 levels.

This basic conclusion is reinforced by other data, easily accessible, that addresses other concerns raised in the Greenstone and Sunstein article. For starters, there has been no recent increase in the level of storms and floods, or the damage that is said to result from them. To the contrary, the trend line has been unambiguously favorable, as the number of extreme events like floods and storms has declined steadily over the past 100 years. Indeed, the last major event in the United States was Hurricane Katrina in 2005, followed by eleven years of relative tranquility in the United States and around the world. This point is critical because one of the constant claims on global climate change is that the system-wide instability has increased these extreme events, even if overall temperature levels have remained constant.

The overall picture with respect to the SCC, then, is the exact opposite of that described by Greenstone and Sunstein, and that change in direction has a serious effect on the success of various legal challenges. Greenstone and Sunstein note that a legal decision in 2008 held that ignoring the SCC makes an administrative rule “arbitrary and capricious” and thus requires its reformulation by the applicable agency. They also reference another 2016 decision that upheld an administrative decision of the Department of Energy that explicitly took into account the SCC. But these judicial decisions have a surreal aura about them. The key statute for these cases was the Energy Policy and Conservation Act of 1975 (EPCA), which was passed in the aftermath of the 1973 Mideast Oil Embargo that followed in the wake of the 1973 Yom Kippur War. The EPCA’s chief finding was that “the fundamental reality is that this nation has entered a new era in which energy resources previously abundant will remain in short supply, retarding our economic growth and necessitating an alteration in our life’s habits and expectations.”

It was on the strength of this 41-year-old statute that the Court in 2008 required the National Highway Traffic Safety Administration to reissue its rules for the average fuel economy standards for light trucks because they failed to take into account the SCC. The ruling is wholly anachronistic today because the revolution in energy technology has obviated the entire factual premise on which the so-called CAFE (corporate average fuel economy) rules rest. Given fracking, energy is abundant. Thus, the SCC has to be reevaluated in light of evidence collected outside the EPA, and summarized above, none of which was taken into account when working within the closed universe of the current set of environmental and energy laws. At this time, it appears that virtually all the EPA rules rest on outdated science.

Greenstone and Sunstein are not alone in their refusal to deal with evidence that undermines their claims. But if the SCC looks to be negative, the Trump administration should act to eliminate the current endangerment finding for carbon dioxide, and dismantle the regulatory apparatus that rests upon its highly questionable estimation of the positive value of SCC. The sorry truth is that the EPA and the regulatory process in the Obama administration show no respect for the scientific method they claim to rely on.

*Considered one of the most influential thinkers in legal academia, Richard Epstein is known for his research and writings on a broad range of constitutional, economic, historical, and philosophical subjects.

America’s Immigration Quagmire

Richard Epstein*

Richard Epstein

Richard Epstein

America’s immigration problem raises a huge set of thorny issues. At a theoretical level, it is difficult to articulate, let alone implement, the ideal immigration policy. While there are compelling arguments in favor of the basic norm of free trade, an open immigration policy could lead to massive political dislocations. Allowing the free flow of goods across borders is quite unlike allowing people to do the same. Goods do not put potential burdens on educational, health, and social service institutions; they do not participate in political activities, lobby to become citizens, or vote. By the same token, goods do not bring with them entrepreneurial skills and professional expertise like that possessed by immigrants; and, at the other end of the economic ladder, they help to fill many low-wage positions. Anyone who thinks they can come to a categorical judgment on immigration policy has not thought hard enough about the problem.

These difficulties work themselves into the fabric of our current immigration law. Right now, enforcement of immigration law is entrusted to ICE, the eerie acronym for the U.S. Immigration and Customs Enforcement. ICE is responsible for border protection and dealing with aliens already in the country. Its portfolio of duties involves the enforcement of over 400 different federal statutes. To get the barest sense of the massive size of this apparatus, just leaf through the major provisions of the Illegal Immigration Reform and Immigrant Responsibility Act (IIRIRA), which addresses border control, smuggling, document fraud, employment restrictions, and, with renewed urgency given the imminent arrival of the Trump administration, the “inspection, apprehension, detention, adjudication, and removal of inadmissible and deportable aliens.”

Every cranny of such statutes is laced with hidden complexities and potential constitutional problems. Just this past week, in Jennings v. Rodriguez, the United States Supreme Court grappled with the vexing question of what kind of statutory and constitutional protections are or should be given to immigrants who are held in detention for long periods of time without a review of their status. The Ninth Circuit decided that all these detainees had to be released after six months of detention if the government did not prove by a preponderance of evidence that their detention was warranted. It is unlikely  that this aggressive bit of judicial intervention will be sustained. But no matter the outcome of the case, the underlying difficulty remains. How does ICE deal justly and efficiently with the tens of thousands of individuals in custody at any one time, even at current enforcement levels?

To add to the complications, the detainees are wildly heterogeneous. Some are stateless persons, who by definition cannot be deported to their home countries. Some are persons with strong but uncertain claims for refugee status. Others are legal permanent aliens who are threatened with deportation for the commission of minor drug offenses that would merit only modest punishment if committed by citizens. Handling these cases in the criminal justice system is made infinitely more delicate because a plea bargain that might easily be reached with a natural-born citizen could precipitate a deportation proceeding against a similarly situated alien, thereby putting enormous pressure on prosecutors and defense attorneys to avoid penalties that could trigger a deportation that neither side wants.

In light of these difficulties, the prudent practical approach is to give strong weight to the status quo ante, by implementing only those changes that will make some clear improvement to the immigration situation, without upsetting America’s fragile consensus on immigration policy. One sensible place to start is with the liberalization of the H-1B visa program, which could help expand the competitiveness of American businesses both at home and abroad. These visas represent only a small fraction of the overall immigration system. The far greater risk to the system comes from the bellicose remarks of President-Elect Donald Trump, who has vowed repeatedly to step up enforcement of the immigration laws. Thus, in his November 13 60-minutes interview with Lesley Stahl, Trump minced no words when he said:

What we are going to do is get the people that are criminal and have criminal records—gang members, drug dealers—where a lot of these people, probably two million, it could be even three million, we are getting them out of our country or we are going to incarcerate. But we’re getting them out of our country, they’re here illegally. After the border is secure and after everything gets normalized, we’re going to make a determination on the people that they’re talking about who are terrific people, they’re terrific people but we are gonna make a determination at that. But before we make that determination, it’s very important, we are going to secure our border.

These statements reveal that Trump has paid scant attention to the nature of the immigration problem, the probable impact his policies will have on aliens and citizens alike, and the huge financial, logistical, and constitutional obstacles that stand in the path of his proposed program.

Start with the nature of the underlying problem. Trump makes it appear as though there were some vast new threat from immigration, most notably from Mexico. But the facts reveal a different story. The overall rate of immigration into the United States stands at about 3.1 immigrants per 1,000 per year, trending slightly downward from 2000 onward. Set against the backdrop of a declining birth rate inside the United States, foreign immigration acts as a useful counterweight, which among other things is necessary to prop up the generous entitlements supplied to senior citizens under Social Security, Medicare, and Medicaid. More concretely, the net rate of immigration from Mexico, which was very high, totaling 600,000 in the boom years of 2006-2007, was sharply negative in the recession years of 2012-2013, at minus 600,000, and roughly neutral since that time. The same picture has applied globally since 2009, with net immigration and outflow of illegal aliens about constant, with between 300,000 and 400,000 in each group per year. I use the term “illegal” instead of the more fashionable “undocumented” for two reasons. First, it is the statutory language; and second, it expresses an accurate statement about the legal position, which the word “undocumented” fails to to capture. It is not possible to be a legal illegal alien. It is possible to be a legal but undocumented one.

No matter the terminology, however, Trump’s broad allegations also fail to make any sense in dealing with aliens with criminal records. As noted before, the risk of deportation creates a powerful deterrent against the commission of crimes for any illegal alien. Over the past 25 years, we have seen a rapid decline in the overall and violent crime rates of the early 1990s, both when illegal immigration was high and after it declined. A similar decline is found among all subgroups of illegal aliens. The recent upsurge in criminal activity in the post-Ferguson era has nothing to do with immigrant populations. It is more likely that, in some key urban areas, it stems from the so-called Ferguson Effect. Hillary Clinton’s well-noted campaign charges of institutional racism against the police only worsened the situation. But no matter how one views that controversial issue, gang members and drug dealers make up at most an insignificant fraction of the illegal aliens in the United States. In any event, they are already subject to deportation under current rules. It is also worth noting that the net removals of aliens increased in the Obama years, both for criminal and noncriminal aliens. That number was 392,000 in 2010, and it is hard to see how the system could double or triple that figure in the next several years without a massive commitment of resources, which in turn would produce vast dislocations in a domestic economy that depends heavily on illegal aliens to keep things moving. A recent McKinsey study offers a powerful endorsement of the massive social gains that occur globally through immigration.

In light of all of this, it is hard to fathom how any major shift in immigration enforcement policy would be a net good for this nation. At one level, mass deportations would undermine local economies, reduce tax revenues (especially all sales and excise taxes), militarize our cities, and cost a fortune. Wholly apart from the economics are the potentially catastrophic social consequences of turning upside down the lives of these illegal aliens.

The threat of the Trump program is also manifest in the outspoken statements of key Democratic mayors. These city leaders plan to run “sanctuary cities” in which they will not cooperate with ICE officials in enforcing immigration laws, even as they stand to lose millions in potential federal aid. In one sense, the effectiveness of this program is limited, because it is clear as a matter of constitutional law that the federal government has full power to enforce its immigration laws without the cooperation of local officials, who in turn are bound not to interfere with those federal efforts. As the 2012 Supreme Court decision in Arizona v. United States makes clear, the United States can preempt all local laws that are inconsistent with federal policy. Arizona was an Obama administration victory because it preempted Arizona laws that wanted to step up enforcement of the control of illegal aliens beyond the level of federal norms. Turnabout is fair play, so now states cannot, under any Trump administration reforms, interpose their authority against that of the federal government. On the other hand, Trump should know that these expanded federal efforts will surely falter as the United States is not under current law entitled to dragoon local officials into funneling individuals into the ICE system. A little cooperation could go a long way.

It is critical in this situation for the new Trump administration to back off its confrontational policy and instead seek a more incremental and balanced approach to the issue. Ironically, one hugely important step in dealing with the immigration problem is to liberalize our trade policy with Mexico and other Latin American nations from which large numbers of illegal immigrants come to the United States. Increased trade will have two key effects. First, it will improve the economic situation in other countries, which in turn will reduce immigration into the United States and also induce some illegal immigrants to return to their home countries. In addition, free trade will increase exports to foreign nations, thereby increasing job opportunities for citizens and aliens alike. Trump’s quixotic campaign will at the very least block these improvements, and worse could serve to further inflame political passions and partisan divisions that only make the task of intelligent immigration reform even more difficult.

*Considered one of the most influential thinkers in legal academia, Richard Epstein is known for his research and writings on a broad range of constitutional, economic, historical, and philosophical subjects.

Obama’s Labor Market Mischief

Richard Epstein*

Richard Epstein

Richard Epstein

Under the Fair Labor Standards Act of 1938 and its subsequent amendments (FLSA), Congress has delegated to the President the power to set overtime regulations for all public and private employees throughout the United States. On March 13, 2016, President Obama directed Thomas E. Perez, head of the Department of Labor (DOL), to “modernize and streamline the existing overtime regulations for executive, administrative, and professional employees,” which, in his view, “have not kept up with our modern economy.” The Department of Labor conducted exhaustive hearings on the matter, during which it received comments from close to 300,000 individuals and organizations.

In May 2016, following these hearings, the Department issued its Overtime Final Rule that showed how little it had learned from the process. It did nothing to adjust the definitions of EAP (executive, administrative, and professional employees) workers. But it did raise the minimum salary level for exempt EAP workers from $23,660 per year, or $455 per week, to $47,892 per year, or $921 per week. The regulation also included a provision that automatically raised the minimum salary level every three years to take into account the effects of inflation.

This rule, which generated widespread consternation in government and business, was scheduled to go into effect on December 1, 2016. But on November 22, 2016, in Nevada v. U.S. Department of Labor, Judge Amos L. Mazzant of the Eastern District of Texas, an appointee of President Obama, issued a nationwide preliminary injunction that blocked its implementation at the request of 21 states (all but Louisiana with Republican governors) and a number of private businesses. Under the FLSA, the exemption only applies to workers paid on a salary (as opposed to an hourly) basis who must be paid the minimum amount set by the regulation in question. Most critically, the FLSA regulations contain a so-called “duties test” that must be met in order for employees to be treated as exempt
EAP workers.

Executives typically have management powers and the ability to hire and fire. Administrators do office and non-manual work related to firm management. Professionals have to engage in intellectual work that, with study, allows them to acquire “advanced knowledge . . . in a field of science or learning.” In the end Judge Mazzant held that the regulation failed because in raising the minimum level to $47,892, it did not take any steps to make sure that EAP workers under that level were not exempt from the overtime provision. In other words, the duties component of the test had to be satisfied independently of the hourly test.

In reaching his decision, Judge Mazzant upended the usual expectation that the government is given broad discretion in interpreting its own regulations. Thus in the course of its argument, the Department of Labor insisted that the well-known 1997 Supreme Court decision of Auer v. Robbins gave the Secretary of Labor virtually full discretion in fleshing out the details of the regulations that it promulgated under the FLSA. In that decision, Justice Scalia held that the Secretary could refuse to classify police sergeants and lieutenants as bona fide EAPs because they were subject to reductions in pay for various disciplinary infractions. The supposed standard for upholding an interpretation was that the interpretive rule was not “plainly erroneous or inconsistent with the regulation.” But it was laughable nonetheless because it was at enormous variancewith ordinary language, which everywhere describes sergeants as “field supervisors” and lieutenants as the supervisors of a “bureau, squad or unit.” Notwithstanding Auer’s indefensible intellectual acrobatics, Judge Mazzant decided to apply a “plain meaning” test that struck down the regulation on the simple ground that many workers earning below the new threshold in fact occupy bona fide EAP roles. Yet the Secretary made no effort to provide separately for any of those cases. Interestingly enough, the same objection did not succeed against the lower, previous minimum salary number given that few if any EAPs earn such low wages.

In making this decision, however, Judge Mazzant turned away another challenge to the FLSA insofar as it applies to public employees, to whom his decision devoted virtually exclusive attention. This more fundamental challenge should have been based on the sensible view that the United States has no business regulating the wages or overtime pay of state government employees. In principle, the strongest argument in favor of this position is that the United States and the states should be regarded as coequal sovereigns, each within its own defined territory. Under that conception, the states should be able to organize the internal affairs of all its own agencies as it sees fit. In National League of Cities v. Usery (1976), Justice Rehnquist did not embrace this strong originalist conception, but he did hold that the states were exempt from federal oversight insofar as they discharge “traditional governmental functions”—a phrase that the Court never fully defined. The unworkable nature of that needless distinction led the Court in 1985 to overturn National League of Cities in Garcia v. San Antonio Metropolitan Transit Authority, given its professed inability to decide whether mass transit in a metropolitan area fell within the class of traditional government functions.

Unfortunately, this whole judicial episode was misconceived, because in the post-New Deal Era, there is no principled reason at all to distinguish between traditional and novel government functions when both are regarded as equally legitimate. The correct result is that all states should be liberated from any statute, including the FLSA, that seeks to set the wages and hours of a state’s own employees. Judge Mazzant briefly noted correctly that the Court did some modest backtracking from Garcia in Printz v. United States, which held that the federal government could not require state and local enforcement officers to conduct background tests on prospective handgun purchasers. But he was surely correct to conclude that Garcia is still the law. Ideally, the model of coequal sovereignty is most faithful to our constitutional traditions. A reconstituted Supreme Court could solve a large fraction of this problem by ditching Garcia and expanding the exemption under National League of Cities so that it covered all state and local workers, regardless of their function.

Nonetheless, in the short run, the new Trump administration should not wait to find out whether Judge Mazzant’s edgy decision will be sustained on appeal. On day one in office, President Trump should scrap the DOL’s new overtime rule: Far from modernizing and streamlining business, the new rule, as is evident from the torrent of objections, throws a massive wrench into the new economy. The simplest point here is that the “hour” is no longer the gold standard of compensation for many workers. The gig economy, for example, pays its workers by the job and not by the hour. It is impossible for these employers to monitor the hours of workers who, under their contracts, have complete freedom to decide whether or not to take any given assignment. It becomes the road to economic ruin to impose rules of this sort when the penalties for noncompliance are so high.

The same can be said with respect to graduate students whose laboratory work is a mixture of study and employment, where it is again impossible to tease out the one component from the other. The objection also applies to tech start-ups, whose employees receive a huge chunk of their compensation in the form of stock options and future bonuses, which are largely ignored under the myopic FLSA hourly formula. None of these cases gave rise to much difficulty when the base wage was set low, but they cause enormous confusions to millions of workers whose responsibilities are not accurately measured by their base rate of compensation.

Nonetheless, the DOL has buried its head deeply in the sand in promulgating the regulation. Its own original assessment of the impact of its new overtime rule is a perfect self-parody of economic analysis. The stated point of the rule was to raise “salary threshold at the 40th percentile of weekly earnings for full-time salaried workers in the lowest wage Census region in the country, currently the South.” The meaning of this particular figure is never explained. Nor did DOL come to grips with the massive disruption that the new overtime rule could cause to many established forms of business. Instead, it adopted the naïve conclusion that “managerial costs” will be about $224 million, which is “based on the median compensation of a manager multiplied by the assumed average 5 minutes per week for the additional monitoring (i.e. more than one hour per quarter) multiplied by the total number of directly affected workers who work overtime either regularly or occasionally but on a regular basis.”

At no point does the DOL even ask whether to include in its calculation the key decisions that firms must make on whether to keep workers below the threshold, or to raise them above it, in order to avoid the heavy monitoring costs. Nor does it ask whether firms will choose to lay off some workers or redefine job classifications in ways that minimize the impact of the new rule. The DOL also fails to examine whether, and if so how, these firms will have to adjust other salaries to keep relative compensation in order. And, of course, the DOL ignores the possibility that some workers are opposed to the shift, given the loss of potential status from having to punch a clock, and the possibility that some departments might have to close or restructure or let go of some workers. The DOL model also assumes that it is easy to set in place the systems needed, and that the firms in question need not worry about inspections, fines, and potential civil liability for noncompliance with the rules. It is laughable to think that the fight over this rule is about the allegedly $224 million per annum in quantified managerial costs or even the $1.2 billion in pay increases that are identified by the DOL. The greatest sin of the DOL is that it assumes blithely that neither private nor government firms and agencies respond to incentives, so that it can reduce a complex economic inquiry into a simple set of mathematical calculations not worth the paper that they are written on.

Nonetheless, the DOL is largely unrepentant; in response to Judge Mazzant’s decision, it wrote: “We strongly disagree with the decision by the court, which has the effect of delaying a fair day’s pay for a long day’s work for millions of hardworking Americans." But once again this pronouncement suggests that the DOL knows what counts as a fair day’s pay for the millions of workers who are subjected to the rule. In so doing, it makes the most fundamental mistake in economic analysis. It assumes that the agreements that are in place do not reflect the revealed preferences of the workers who have signed on to these deals. It is of course the case that workers want to receive higher wages, and every employer would prefer to pay less. It is just these two pressures that drive a competitive market to set wages as they do. There is absolutely no reason to think that the optimal pay schedule for overtime is one-and-a-half of basic wages. A huge number of firms will have to change their job classifications and reorganize their work and production schedules to avoid overtime payments. Yet the DOL ignores this elephant in the room, so little does it understand the market that it regulates.

The only way in which to achieve permanent wage increases is to reduce the many impediments on the FLSA and other statutes that make it harder for employers and workers to achieve productivity gains. The fruitless overtime rule of the DOL, if implemented, will probably result in resource losses that exceed, by at least an order of magnitude, the paltry sums that it purports to transfer from employers to workers. The quicker the DOL is pushed to the sideline, the better it is for the American economy, its workers, and employers and consumers alike. Let’s hope that the change in presidential administration leads to a long overdue change in labor market regulation. 

*Considered one of the most influential thinkers in legal academia, Richard Epstein is known for his research and writings on a broad range of constitutional, economic, historical, and philosophical subjects.

California’s Needless Housing Crisis

Richard Epstein*

Richard Epstein

Richard Epstein

Everyone agrees the most attractive areas in California suffer from a housing crisis that calls for drastic action. The difficult question is deciding what should be done. Many of the challenges are embodied in the small California town of Mountain View, population 80,000, which should be basking in sunshine as the home of Google. But instead the town is mired in discord and controversy over a set of well-entrenched anti-growth policies concerning housing. The tight supply of housing has raised the price of the median home to about $1.4 million. Rents, too, have skyrocketed, resulting in the displacement of many long-term tenants—teachers, nurses, and tech employees—who have to endure long daily commutes to work or find jobs elsewhere. Mountain View is now the proud home to numerous mobile home parks, occupied by individuals who crave access to the city—and who reportedly drive Teslas and Mercedeses, no less—but who lack the means to purchase or rent ordinary housing.

The situation in Mountain View has provoked two distinct responses. The first of these was the approval on November 8 of Measure V, a rent control statute that turns Mountain View’s rental market into a regulated public utility, complete with its own five-member board. The ordinance exempts all units built after February 1, 1995. But for the covered units, it rolls back rents to their October 2015 levels, and then limits rent increases going forward to between 2 and 5 percent, with allowances for higher increases if justified by extraordinary costs. The tenant groups that support the statute seek, without explicit acknowledgement, to secure a massive wealth shift in their favor, without discouraging future development. In so doing, they ignore the costs to other potential residents who put a higher value on those units, which will lead to a misallocation of available units whose number is kept artificially low by a wide range of entry constraints. The administrative costs of running this system for their exclusive benefit will, moreover, be borne by everyone inside the city. It is also likely that the threat of a new rent control law will weigh heavily on the market for exempt units, and will retard the ability to build new units as well.

That last possibility is the subject of an intense struggle between Mountain View’s pro- and anti-growth factions. Generally, pro-growth forces have made gains in California leading to a new YIMBY (Yes, in my Back Yard) movement.  And new pro-growth members of the Mountain View City Council have spurred proposals to add about 10,000 new units—roughly 50 percent of the current total housing stock—to provide homes for Google employees. The politics around this proposal are intense, because new housing projects bring new tenants whose children will need to be educated in local schools, funded in part by local property tax dollars, some of which might come from existing tenants. Yet the construction of new office buildings and other facilities, which avoids this educational burden, will only aggravate the mismatch between jobs and homes in the area, further intensifying the housing shortage.

So the questions are: What caused this housing crisis, and what can be done to dig California communities like Mountain View out of their giant housing holes?

On the first question, it should be noted that similar issues occur from time to time outside of California, but usually with far less severity. The explanation for the situation lies in the heavy hand of government regulation on the operation of housing markets through tools like zoning and rent control laws, endless permitting requirements, and a host of other restrictions that go far beyond what is needed to control the health and safety risks associated with real estate development. Of course, real estate markets need some form of external regulation. But the particular form makes all the difference.

On this score, the traditional small-government approach could still work today. The first system of social control is the law of nuisance that prevents landowners from engaging in activities that are offensive to their neighbors, like the emission of filth, noises, and odors. These restrictions are efficient because they imitate standard restrictions always included in all forms of planned-unit developments, whether they be apartment complexes or gated communities. The initial owner of the property knows that his gain from selling or leasing is far greater if all owners are subject to these restrictions than if none are. The owner therefore “internalizes the externalities,” to use a term of art, by picking the optimal set of rules to regulate these risks. There is no conflict between his welfare and that of his buyers. The law of nuisance backstops these rules by protecting outsiders from the combined activities of the new project.

Every standard voluntary development goes far beyond the prevention of nuisances by imposing a set of covenants and restrictions that address such matters as setbacks, height restrictions, aesthetics, common areas, taxation, governance, and many other details. These tend to differ across developments based on the income, tastes, and preferences of the unit owners. But the same logic drives them to efficient outcomes. Any benefit given to one tenant is a restriction on the others. The optimal set of rules continues to maximize the difference between total benefits and total costs, and the entire arrangement “runs with” the land so as to preserve the basic governance structure as individual units are bought and sold.

What is striking about the system of public restraints in California is that they go far beyond the various covenants and conditions that developers devise for their own projects. And they do so in ways that benefit local residents by imposing crushing costs on new arrivals. At this point, the self-balancing mechanism that constrains the behavior of developers is removed, now that local homeowners and voters are given a free hand in how they regulate, because they never have to compensate current landowners or future buyers and tenants for the losses these restrictions impose. Local citizens are prepared to consume a lot of goodies at zero price, which is all that an emaciated takings law now requires of them. At this point, they only cast their ballots for particular restrictions that benefit themselves, no matter what the cost to future members of their community. “Welcome stranger” and “not in my backyard” become the order of the day, so each small community adopts rules that keeps out any new activity that sitting tenants think will lower the value of their own units. Let them build elsewhere is the modern equivalent to Marie Antoinette’s “let them eat cake.”

The correct way to deal with this problem is to impose a serious compensation requirement on the communities that implement these regulations so that the prices they impose on others are now borne by themselves. This elaborate system of takings law should not, of course, require that communities compensate landowners that engage in noxious activities. But by the same token, it requires a strong sense of discipline to make sure that feigned “nuisances” do not justify the full range of large-lot and height restrictions, setbacks, and the like that local communities routinely impose on new arrivals. All too often, the result is an endless back and forth in which developers challenge one set of restrictions, only to find that they have to go back to square one when the plan is rejected by the local planning board. Under current law, the aggrieved landowner cannot oppose these restrictions in court until internal administrative procedures are exhausted, which gives local governments the incentive to string out the process until developers die from financial exhaustion. The endless cycles of application and denial are ample warning to potential developers who become reluctant to buy land, develop plans, and go through endless hearing cycles before obtaining—often from multiple independent bodies—their precious permits. The potential residents that they represent are typically unheard in these proceedings. In similar fashion, the rent control laws generate an enormous wealth transfer to sitting tenants, which, over time, leads to a stagnation in real estate markets, as people hold on to their units knowing they cannot afford the higher prices available to them in the limited unregulated market.

This two-tier system creates massive inequities, which then inspires local governments to try to supply affordable housing to newcomers in ways that are routinely self-destructive. California is a national leader in this institutional folly, because its Supreme Court routinely upholds rules that act as strong barriers to entry. Thus in San Remo v. San Francisco (2002), it upheld a law that required a developer—who wanted to convert prime downtown property into a hotel—to supply substitute housing to sitting tenants, even after their leases had expired, or contribute to an “in lieu” fund that could be used to create new public housing. This senseless tax on conversion prevents the movement of property to higher value uses and thus shrinks the tax base. If a city wants to supply affordable housing programs, it can do so through general appropriations that make taxpayers take the hit for the generosity.

The situation got even worse in California Building Industry Association v. City of San Jose (2015), where a unanimous California Supreme Court held that all builders of new housing had to supply a fraction of affordable housing units at their own expense, even if their proposed plans displace no sitting tenants. The net effect of this convoluted price control system is to retard new development. Again, putting these costs on the taxpayers is the only way to break the logjam. We can be confident that the number of affordable units demanded will shrink because the expenditures will now be on-budget. But, at the same, time the total supply of housing should expand by increasing new entry, which will drive down overall price and rental levels.

At this point, it becomes clear why any Mountain View growth plan will be mired in controversy for years to come. The City Council has full discretion over what kinds of restrictions it can put on new units, and its combined weight will delay the housing relief, increase its costs, and reduce its benefits. What is needed is a systematic way out of the impasse. The first component of this program is to remove any and all permit restrictions on housing that are not related to public health and safety, narrowly defined as under traditional nuisance law. On this model, virtually every development will pass muster, and the key task of the planning commission is to make sure that vehicular access and off-street parking are properly supplied. Otherwise, the regulation stops.

More importantly, Mountain View and other towns have vacant areas and these should be regulated by a simple rule that lets the developer make all decisions inside that area on issues involving density, design, and governance. At this point, the older logic of land use restrictions can go into place. Supply will increase, and prices will go down. Where current citizens want to impose further restrictions, they can do so if they are prepared to pay for them.

The way out is therefore available. But how is that transition to be secured in the face of implacable local opposition? Local governments have no incentive to reform themselves. The California Supreme Court is so convinced of the wisdom of local governments that it will not impose any meaningful restrictions on their operations. The state is thus locked in by bad laws and bad institutions. Ironically, one of the only possible solutions to this blue state problem will come from a potentially remade conservative Supreme Court, which will likely enforce federal constitutional guarantees on takings and due process against California and its local governments.

That process will take time, and it will require the U.S. Supreme Court to recognize that it, too, has to mend its ways. But the populist wave that brought Donald Trump to power may yet protect California from its ingrained regulatory system. The incredible mess in the California housing markets is not a product of bad luck. It is the consequence of horrible laws whose destructive impact is all too evident in the daily hardship and senseless political battles now raging across the state.

*Considered one of the most influential thinkers in legal academia, Richard Epstein is known for his research and writings on a broad range of constitutional, economic, historical, and philosophical subjects.