Chicago-Kent Law Review Volume 67 Issue 3 University of Virginia Law School of Law John M. Olin Foundation: Symposium on Law Article 8 and Economics of Local Government October 1991 Exploring the Kozinski Paradox: Why Is More Efficient Regulation a Taking of Property William A. Fischel Follow this and additional works at: https://scholarship.kentlaw.iit.edu/cklawreview Part of the Law Commons Recommended Citation William A. Fischel, Exploring the Kozinski Paradox: Why Is More Efficient Regulation aaking T of Property, 67 Chi.-Kent L. Rev. 865 (1991). Available at: https://scholarship.kentlaw.iit.edu/cklawreview/vol67/iss3/8 This Article is brought to you for free and open access by Scholarly Commons @ IIT Chicago-Kent College of Law. It has been accepted for inclusion in Chicago-Kent Law Review by an authorized editor of Scholarly Commons @ IIT Chicago-Kent College of Law. For more information, please contact [email protected], [email protected]. EXPLORING THE KOZINSKI PARADOX: WHY IS MORE EFFICIENT REGULATION A TAKING OF PROPERTY?* WILLIAM A. FISCHEL** I. THE PARADOX OF EFFICIENCY IN HALL V CITY OF SANTA BARBARA Alex Kozinski is a Federal Judge for the Ninth Circuit Court of Appeals. He is among the Reagan judicial appointees who have been in- fluenced by the law and economics movement. Unlike some others in the law and economics tradition, Kozinski retains a libertarian outlook on many issues. He has defended flag mutilation as a form of free speech both on the bench' and at gatherings of conservatives. At one of the latter, he dramatized his position by unfolding a flag he had obtained during a trip to his native Rumania. The Rumanian flag was defaced, its hammer-and-sickle center ripped out in protest during the revolution against the Communist Ceuscescu regime. 2 My text for this article is Judge Kozinski's 1986 opinion in Hall v. City of Santa Barbara.3 Hall held that a mobile home rent-control regu- lation could be a taking of property and hence require just compensation under the Fifth Amendment, seemingly contrary to a long line of prece- dents that have upheld rent control. The paradox to which the title of this article alludes appears in footnote 24 of the opinion.4 Citing economists of a variety of political persuasions (e.g., conserv- atives Alchian and Allen and liberals Nordhaus and Samuelson), Judge * Revision of a draft presented at the Conference on Law and Economics of Local Government, University of Virginia Law School, Nov. 8-9, 1991, sponsored by the John M. Olin Foundation. The article was written while I was an Olin Fellow in Law and Economics at the Law School of the University of California at Berkeley. I wish to thank both the Foundation and the Law School for their support. My leave was supported in part by a Rockefeller Grant from Dartmouth College. Helpful comments on earlier drafts were received from Vicki Been, Richard Epstein, Daniel Farber, Saul Levmore, Edgar Olsen, Andrea Peterson, Daniel Rubinfeld, Joseph Sax, Stewart Sterk, and participants in seminars at Berkeley, Stanford, the University of British Columbia, and the University of Hawaii as well as the University of Virginia. ** Professor of Economics, Dartmouth College, Department of Economics, Hanover, NH. 1. See McCalden v. California Library Ass'n, 955 F.2d 1214, 1230 (9th Cir. 1992) (Kozinski, J., dissenting) ("The federal courts have a long and proud tradition of protecting the right of individ- uals with unpopular points of view to express themselves publicly even where this subjects onlookers to intense discomfort, even anger.") (citing Texas v. Johnson, 491 U.S. 397 (1989) (flag burning)). 2. Professor Daniel Rodriguez, who clerked for Judge Kozinski, told me this story. 3. 833 F.2d 1270 (9th Cir. 1986), cert. denied, 485 U.S. 940 (1988). 4. 833 F.2d at 1279 n.24. CHICAGO-KENT LAW REVIEW [Vol. 67:865 Kozinski noted that the typical rent control ordinance creates inefficient incentives for tenants to overstay. Because tenants normally lose their right to a below-market rent when they move, they are apt to remain in their units longer than otherwise in order to have the advantage of low rents. The Santa Barbara mobile home rent control ordinance at issue in Hall cured such inefficient incentives because existing tenants could cash out future benefits when they moved. (The indirect method of the cash- out will be described presently.) In distinguishing Santa Barbara's ordi- nance from conventional rent control, Judge Kozinski noted that "the very fact of the inefficiency-that the tenant is not given too great a stake in the property-saves most rent control schemes from potential uncon- stitutionality. After all, efficiency would be maximized by giving the ten- ant a fee simple interest in the property."'5 The paradox to be explored is why a judge versed in law and eco- nomics should regard improved efficiency as a reason to strike down a regulation as a taking. Note that this goes beyond what I believe most critics of law and economics would say about efficiency, that it is or should be irrelevant to judicial decisions. 6 Judge Kozinski's dictum is used in this article to explain why inefficient regulatory transfers, as economists normally understand that term, should not usually be re- garded as takings of property. Conversely, it is argued here that certain efficient regulatory trans- fers, 7 those that respond to the wishes of the majority of voters and 5. Id. 6. This position is taken most vigorously by the Critical Legal Studies school. See, e.g., Duncan Kennedy, Cost-Benefit Analysis of Entitlement Problems: A Critique, 33 STAN. L. REV. 387 (1981). One leading Crit, however, rationalizes normal rent control on the grounds that its inefficient inalienability serves the desirable goal of perpetuating a low income community in the face of gen- trification. Mark Kelman, On Democracy Bashing: A Skeptical Look at the Theoretical and "Empiri- cal" Practice of the Public Choice Movement, 74 VA. L. REV. 199, 271 (1988); see also William H. Simon, Social Republican Property, 38 UCLA L. REV. 1335, 1359-61 (1991). Neither Kelman nor Simon considers mobile home rent control of the type at issue in Hall, but presumably both would oppose it, since the ability of tenants to cash out their entitlement increases the original tenants' mobility and hence does nothing to perpetuate the original community and its communitarian val- ues. Scholars who subscribe to the view that local politics especially advances communitarian values should be alarmed by the evidence that, when given the opportunity, prevailing local factions are inclined to take the money and run. 7. The term "regulatory transfer" is intended to exempt regulations that impose burdens pro- portionately among those who receive the benefits. The classic example is the zoning regulation imposed on people who have equal holdings of land to refrain from activities that may benefit one but devalue the property of others. Such zoning may be efficient if it is the least costly means of accomplishing mutually agreed upon goals. Robert Ellickson, Alternatives to Zoning: Covenants, Nuisance Rules, and Fines As Land Use Controls, 40 U. CHI. L. REV. 681, 693 (1973). In many cases, however, zoning imposes burdens on one set of owners (e.g., owners of undeveloped land) to benefit another set of owners (e.g., owners of already-developed homes). WILLIAM A. FISCHEL, Do GROWTH CONTROLS MATrER? 47 (1990). The type of ordinance considered in the present article is of the latter variety, in which there is a transfer of wealth from one group to another, but in which 19911 EXPLORING THE KOZINSKI PARADOX which have little deadweight loss, are much stronger candidates for being regarded as takings. My position is not that inefficiency is desirable, but that in many contexts, inefficiency is evidence that political and economic processes are available to protect those burdened by excessive regulation, so that courts should not intervene on behalf of the aggrieved property owners. This approach finds jurisprudential virtue in two of the bugbears 8 of economists, deadweight loss and special-interest legislation. Hall's footnote 24 is not a sport on Kozinski's part. I wrote to him about it on March 6, 1989. In his letter to me of March 20, 1989, he cited his opinion in another case in which he "espouses the advantages of inef- ficiency in running the government." 9 I must add that this communica- tion, our sole intellectual contact, should in no way suggest that Judge Kozinski agrees with what I have written here or elsewhere about the takings issue. Nor have I seen the efficiency dictum referred to in later opinions on rent control by Judge Kozinski. t0 A brief description of my previous work on regulatory takings may help the reader grasp the thrust of my argument. Most of my economic research since the early 1970s has concerned government land use regu- lation, usually in an urban, local government context."I I came to the conclusion that the takings clause was an attractive means of disciplining the inefficient excesses of local government land use controls. With that in mind, I authored or coauthored several papers on economic aspects of the takings issue,12 and I organized (with Richard Brooks) a conference there is at least some color of public purpose. This article will not consider the question of the plausibility or efficiency of the public purpose. 8. I will proceed in this article on the pessimistic assumption that most state and federal regu- lations have much deadweight loss and are the product of special interest legislation. I half believe that, but the other half thinks that many regulations so characterized have subtle efficiency virtues and, more importantly, that a lot of regulatory legislation is passed by politicians who want to do good things for the general public.