Professor Epstein on Economic Inequality

Our own Professor Epstein went on PBS NewsHour to defend the positive aspects of economic inequality. Epstein eloquently argues that wealth inequality is a motivating force behind innovation and wealth creation.

Skip the first 54 seconds to go straight to the interview.

Watch Does U.S. Economic Inequality Have a Good Side? on PBS. See more from PBS NewsHour.

ReasonTV presents Peter Schiff Speaking for the 1%

Thursday Links

Room for agreement?

• Prof. Epstein on California's horribly inefficient rent control laws
  Defining Ideas: California's Kafkaesque Rent Control Laws
  

  
  

  New York is not the only economically failing state that treats rent control as the road to salvation for its financially pressed citizens. California matches it stride for stride. Under California’s rent control regime, the right to any and all increases in the value of the underlying property is shifted, without compensation, from the owner to the tenant. This is an unjust “taking” of property from the owner. The consequences of policy are plain to see in the implosion of the California real estate market.

• Howie Carr reports that the 99% movement has been inflitrated by 1% posers
  Boston Herald: Cantabrigians Arrested - Ain't That Rich?
• Lucy Steigerwald explores the libertarian potential of the Occupy Wall Street! movement
  Reason: The Possibility of a Tea Party-Occupy Wall Street Alliance
• Two looks at the latest Nobel laureate in economics, NYU's own Thomas Sargent
  WSJ: A Nobel for Non-Keynesians
  Reason: A Nobel for Thomas Sargent
• Interesting NY Times article (even a blind squirrel...) on NYU's John Sexton's mission to recruit America's top economists
  NYTimes: Ivy Envy
• And, apparently this guy just really doesn't want to be reelected
  NYPost: Obama's Hiroshima Apology Gambit

Event TODAY! Bob Inglis on Conservatives Against Climate Change

Today, at 4pm, we will be privileged to host Mr. Bob Inglis.  Mr Inglis served in the U.S. House of Representatives where he represented South Carolina's 4th District from 1993-99 and from 2005-11.  He has not been afraid to differ with the GOPs on issues where he thinks the party is off base, and on Thursday he will be speaking on one of those areas: climate change.  Mr. Inglis is launching a conservative effort to address climate change, and he has written extensively on the subject in the past.  While many may decry the Republican party as "anti-science," Mr. Inglis shows that there is much less uniformity of opinion within the GOP than one might expect.

You can read Mr. Inglis' writing on this topic here: Conservative Means Standing with Science on Climate 

New York Times article on Mr. Inglis: Former Rep. Inglis to Launch Conservative Coalition to Address Climate Change

What: Bob Inglis on Conservatives Against Climate Change?
Where: VH 214
When: Wednesday 10/12 @ 4pm

As always, there will be plenty of time for questions and free food will be provided.

What Separates the Tea Party from the Occupiers?

Monday Links

• Discussion of the DOJ memo used to justify the targeted killing of al-Awlaki (NYT)
  Secret US Memo Made Legal Case to Kill Citizen
• Blog post on Steve Jobs's contributions to the economy (Cato)
  Steve Jobs, Prosperity Creator
  
• Will recapitalization of Europe's banks solve the crisis? Probably not (FT)
  Eurozone Quick-Fix Will Create Political Monster
• As the Occupy Wall Street protests gain momentum, some contrary thoughts (Daily Telegraph)
  If capitalism does fail, the alternative is far, far worse

New Anthem for Occupy Wall Street!

Full lyrics, courtesy of Reason:

Come gather round people
come and join your hands
we're taking Wall Street
and we're making demands
and we're heeding the call
and we're crying for help
only 1% of us have wealth

but first we need posters
we need to make signs
but to do so it seems
that we need some supplies

We need poster board
I can't make it myself
but it's 10 cents a sheet
at the store it's on sale
an example of economies of scale
it's so evil

They're saying that freedom
has done little to stop
Corporations from keeping
the wealth at the top
But at what point in history
would a kid and a king
both have clean water to drink?

George Washington was
the richest man of his age
But he lost all his teeth
at a very young age
Because they didn't have Scope
and they all crapped in trays
we're not wealthy?

now there's fountains on streets
from which clean water pours
Four dollar generics
at all big box stores
a sultan and student
both have iPhone 4s
it's not fair

Come gather young people
come on everyone
and I'll tell you a tale
of a fortunate son

He's born in a country
and given vaccine
and rendered immune
to all kinds of disease
the Kardashians are on
all his TVs
it's not perfect

Banks don't need bailouts
on that we agree
so let's start up a group
and let's take to the streets
because if we do that then
you know what that means
we're racist.

The Holdout Myth Underlying Current Takings Doctrine

By Brandon Kressin

In 2005, the Supreme Court decided Kelo v. City of New London, a landmark Fifth Amendment case that effectively grants the government license to seize private property for whatever purpose it deems in the public interest.[i]  Kelo involved a local redevelopment project in the city of New London, Connecticut.  The city wished to bulldoze a small neighborhood and hand the property over to private developers for commercial use.  The Court ruled that the economic growth that the city anticipated resulting from this conversion qualified as a “public use” within the meaning of the Fifth Amendment’s takings clause.  Therefore, existing property owners such as Susette Kelo would be forced to give up their homes and accept court-determined compensation.

Susette Kelo's House

The scope of this eminent domain power has been highly controversial and the majority of states passed laws strengthening protections for private property rights in the wake of the decision.  But economic growth takings such as that which formed the basis for the Kelo dispute continue unabated.  Local governments in major states such as California and New York enjoy practically unfettered power to force private landowners to sell their homes to powerful developers at prices determined by courts.  These prices routinely undercompensate the small landowners, who receive nothing for their destroyed business goodwill or the subjective values they gain from living or working in the neighborhood from which they are uprooted.

Much of the debate over current takings doctrine revolves around the meaning of the term “public use.”  Opponents of the Kelo decision argue that the original public meaning of the term requires a stricter test for permissible takings.  In her dissent in Kelo, Justice O’Connor argued that only economic takings that are necessary to abate a public nuisance such as blight should be permissible.  Justice Thomas’ dissent proposes an even stricter test that would overturn past precedent and require that the taken property be put under government ownership. 

Proponents of the Court’s decision, on the other hand, argue that the Fifth Amendment’s use of the term “public use” requires application of a far more deferential standard by courts review legislative decisions.  William Treanor, for instance, surveys colonial and post-revolutionary governments’ use of takings in the eighteenth century and argues that the takings clause places few if any restrictions on the state’s ability to seize private property so long as compensation is paid.[ii]  While his account of the original understanding of the Fifth Amendment is disputed[iii], proponents of economic takings argue that the phrasing of the Amendment is at the very least ambiguous.  After all, the Amendment never even explicitly outlaws non-public use takings.  It merely requires that public use takings be compensated.  One could even go so far as to argue that by implication non-public use takings require no compensation (though no one has made that absurd argument as far as I can tell).  In the face of a vague constitutional standard, the argument goes, we should err on the side of allowing legislatures to act in the public’s interest.  Proponents of economic takings then point to the “holdout problem” boogeyman to argue that such takings are necessary from an efficiency perspective.

The holdout justification for economic takings is based on the idea that it is very expensive to assemble small properties for conversion into large redevelopment projects.  The problem is compounded when existing property owners act strategically and “holdout” for higher prices than what they would normally accept to sell their property.  The holdouts behave in this way when they recognize that the developer has already sunk a great deal of cost into the project, meaning that they are loath to walk away.  Holdouts thus believe that they are in a strong position to extract the majority of the consumer surplus from any sale to the developer, so they hold out for high prices.  This narrows the bargaining window for voluntary transactions between the property owner and the developer and may result in many otherwise efficient transfers not taking place.  Eminent domain claims to solve for this holdout problem by forcing the property owner to transfer title to the developer in return for a court-determined price.

Most legal discussions of eminent domain seem to assume the validity of the holdout justification without examining whether it is actually a problem in the first place.   But this ignores the fact that various free-market mechanisms exist and have been frequently used to avoid such holdout problems without state interference.  Land aggregation has been accomplished throughout our history, and continues to be accomplished today, without the intrusive and coercive use of eminent domain.  If such aggregation is possible, then perhaps we should err on the side of protecting the subjective values that private property owners put in their homes that are not reflected by market prices.

The Citigroup Building

One popular method of aggregating small parcels of land is secret purchases.  Large developers frequently employ agents and dummy companies to discretely purchase small parcels of land that will later be aggregated into one plot.  The property owners are thus not tempted to behave strategically and dramatically misrepresent their subjective valuation of their properties.  The land on which Disney World sits in Orlando was largely aggregated in this way, and a 1974 article by Peter Hellman in New York Magazine describes in detail how the land currently occupied by the Citigroup Center was put together.[iv]  The article describes the process as onerously long and expensive, but we must take note of the fact that the aggregation ultimately succeeded and Citibank built its tower.

Another method of free-market land aggregation might be referred to as combinatorial auctions.  Bruce Benson describes this method in an article in the Independent Review.[v]  He introduces the subject by referencing a clever solution to the holdout problem suggested by Steven Landsburg.[vi]  Landsburg frames his solution in the context of Joseph Conrad’s novel Typhoon.  As Benson summarizes:

A number of sailors stored their gold coins in personal boxes in the ship’s safe, but a sever storm caused the boxes to break open and mixed all of the coins together.  Everyone knows how many coins he had placed in the safe, but no one knew how many the others had placed there.  Therefore, everyone had an incentive to claim that he had put more coins in the safe than he actually had, and the captain’s problem was to determine how to divide the coins to give each sailor his actual savings.  Landsburg’s proposed solution: “Have each sailor write down the number of coins he is entitled to.  Collect the papers and distribute the coins.  [But] [a]nnounce in advance that if the numbers on the papers don’t add up to the correct total, you will throw all the coins overboard.”  This scheme clearly reduces and perhaps eliminates the incentive to hold out for more coins than the men had actually contributed.[vii]

How would a developer apply this solution in the context of land aggregation?  The developer would inform the owners of the parcels of land that she is attempted to aggregate that she is interested in purchasing their land.  But, she must make it clear that she is only interested in either buying all of their parcels or none at all.  She would then ask the landowners to individually submit the minimum amount that they would be willing to accept to sell their land.  The landowners no longer have incentives to misrepresent their subjective valuations of their land, because if they do so then their combined offers might well exceed the amount that the developer is willing to pay.  Instead, the landowners are in the same position as they would be if they were engaged with a smaller purchaser.  They will offer to sell for a price that they believe makes them better off, but not one so high that it will scare the purchaser away.

So, if combinatorial auctions are such a great solution to the holdout problem, then why don’t developers use them?  As Benson points out, they do.  He reports that several large firms that routinely engage in such land aggregations (such as Sears, Wal-Mart, Kmart, and Ford) successfully use combinatorial auctions to mitigate the holdout problem.  But, if you are a developer in a state like New York or California and you know that you can get the land through eminent domain at a bargain price, why bother?  The use of economic takings to redistribute private property to developers thus opens the door to inefficient and unfair property transfers.  It does so to solve for a holdout problem that turns out to be largely mythological.  Perhaps, in light of the vagueness of the “public use” phrasing in the Fifth Amendment, we should therefore err on the side of protecting property owners and leave land aggregation for the market to figure out.

---

[i] Kelo v. City of New London, 545 U.S. 469 (2005).

[ii] William Michael Treanor, The Original Understanding of the Takings Clause and the Political Process, 95 Colum. L. Rev. 782 (1995).

[iii] See, e.g., Nicole Stelle Garnett, “No Taking With A Touching?” Questions From an Armchair Originalist, 45 San Diego L. Rev. 761 (2008); Eric R. Claeys, Takings Regulations, and Natural Property Rights, 88 Cornell L. Rev. 1549 (2003); Andrew Gold, Regulatory Takings and Original Intent: The Direct, Physical Takings Thesis “Goes Too Far”, 49 Am. U. L. Rev. 181 (1999); Kris W. Kobach, The Origins of Regulatory Takings: Setting the Record Straight, 1996 Utah L. Rev. 1211 (1996); David A. Thomas, Finding More Pieces for the Takings Puzzle: How Correcting History Can Clarify Doctrine, 75 U. Colo. L. Rev. 497 (2004).

[iv] Peter Hellman, How They Assembled the Most Expensive Block in New York’s History, N.Y. Mag., Feb. 25, 1974, at 30.

[v] Bruce L. Benson, The Mythology of Holdout as a Justification for Eminent Domain and Public Provision of Roads, 10 Independent Rev. 165 (2005).

[vi] Steven E. Landsburg, The Armchair Economist: Economics and Everyday Life (1993).

[vii] 10 Independent Rev. at 171.

Occupy Wall Street! Update

Union thugs beating pro-union hippies.  Ironic?

NYU Law’s Most Adorable Act of Civil Disobedience

Which to choose?

This afternoon (evening?), the law school community was rocked by a mass act of civil disobedience so bold and daring that the spirit of Henry David Thoreau briefly manifested itself in the Vanderbilt courtyard. As students stormed out of their classrooms to join the Wall Street Occupation!, professors shook their fists in rage and denounced the excesses of capitalism that had made such audacious disruptions necessary.

Or at least, I imagine that they did. You see, I didn’t have class at 4:00 this afternoon when the walkout was scheduled. In fact, I don’t know anybody who did. To be fair, the 4:00 hour is scheduled as an S4 Block on Wednesdays. S4 Blocks are reserved for “Faculty Meetings & Adjuncts Only.” Still, I’m sure students could have defiantly walked out the library. If they made enough of a huff about it, somebody might have even noticed.

Anyways, after walking out, the brave Occupiers! were summoned to the fountain at Washington Square Park. Now, as a radical anarcho-capitalist, I simply refuse to kowtow to the Man’s tyrannical enforcement of Daylight Savings Time. As such, I was about an hour late to the pre-march pow wow in the park, and by the time I had arrived the hippy brigade had been replaced by some grim looking sound and camera people filming a scene for C.S.I. New York (Fridays on CBS). Admittedly, I probably could have caught up with the Occupiers! down at City Hall, but I am deathly afraid of bedbugs, and rubbing shoulders with New York’s grungiest, unemployed-iest hippies seemed like a recipe for disaster.

Pictured: A risk I'm not willing to take.

So instead of reporting on the Wall Street Occupation! firsthand, I am unfortunately reduced to drawing from hearsay, blog posts, and my own impressive capacity for stereotyping and generalization. But that has never stopped me from loudly sharing my opinions in the past, and I’ll be damned if it’s going to stop me now!

The Occupiers! (so I imagine) were drawn together by their shared outrage at the radical rightwing establishment currently occupying the White House (D), the Governor’s mansion (D), and the New York State Assembly (D) and Senate (R, actually. Who knew?). The Occupiers! blame America’s dire position on rampant capitalism. Of course, protesting capitalism in America is akin to protesting designated hitters in the NFL, but nevermind. The system, it would seem, has been bought and paid for by cigar-smoking, rotund, and probably bald Wall Street fat-cats. The only cure is a movement towards socialism. Because nothing does more to end cronyism and corruption in our political system than centralizing all economic decision making to a small caste of political elite.

Quiz: Which curve represents the
demand for labor?  Hint: Paul
Krugman says "B".  It's not "B".

The Occupy Wall Street! movement is a response to America’s continued economic malaise. The SEIU, Transit Workers Union, and United Federation of Teachers have joined the Occupiers! and proposed their own unique solutions to persistent unemployment. As is customary, these solutions undoubtedly involve the unions’ members being paid more to work less. After all, only a heartless social Darwinist would deny that increasing costs and slackening production are the keys to turning this economy around. Being empathetic and public-minded organizations, multiple NYU Law student groups have come forward to express their solidarity with the unions. This, of course, is because law students generally have a poor understanding of economics (see figure). After all, if we were good at making economic decisions we wouldn’t be paying $70k a year for law school.

Pictured: The undeniable success of increased education
expenditures.

But the student groups hold a special place in their hearts for teachers’ unions. A special focus of the email calling for the walkout was the draconian statewide cuts to education spending. This was a nice touch. Who’s gonna come out against the chilluns? And nothing has proven to have as big an impact on bettering education as increasing teachers’ salaries. Perhaps I should rephrase: doing nothing has proven to have as big an impact on bettering education as increasing teachers’ salaries. But graphs and statistics are just tools of the bourgeois elite. They must be ignored. Throwing more money down the education hole just kinda sounds right, and it makes us feel good. That’s all that should matter.

Finally, if there is anything that we can all agree on, it’s that the only surefire way to put the kibosh on Wall Street’s greed is to reelect Barack Obama (the recipient of record amounts of Wall Street contributions in the 2008 presidential election). Given the aims of the Wall Street Occupation! movement, Obama clearly deserves reelection given his administration’s remarkable immunity to the cronyism that has plagued America in the past (Solyndra, General Motors, labor unions, and countless other well-connected businesses aside).

Event Tomorrow! Ilya Somin & Rick Hills

Prof. Ilya Somin

Late tomorrow morning we will be having a very exciting event with Prof. Ilya Somin of GMU and our own Prof. Rick Hills.  You may be familiar with Prof. Somin's work on the popular Volokh Conspiracy blog.  His focus includes constitutional law, property law, and the study of popular political participation.  Prof. Somin will be discussing the Tea Party movement and its role as a popular constitutional movement.  He recently published an article on the subject in the Northwestern University Law Review Colloquy that you can access here.

Prof. Rick Hills

After the speech, NYU's Prof. Hills will provide commentary and critique.  Questions and debate will be welcomed, and we will have a wide assortment of breakfast foods available to get your day started.

Whether you think of the Tea Party as a bunch of know-nothings or as the last best hope of our constitutional republic, this should be an exciting and informative event.  We look forward to seeing you there!

What: Ilya Somin & Rick Hills discuss the Tea Party & popular constitutionalism
When: Wednesday Oct. 5 @ 11am
Where: Vanderbilt Hall 204

Donuts, danishes, bagels, coffee etc. provided!!!!!!

UPDATE: AND SANDWICHES!