Guest Post: A Note on Economic Impacts and Average Reciprocity of Advantage

Here’s the latest from William W. Wade, Ph.D., a resource economist with the firm Energy and Water Economics (Franklin, Tennessee). Bill is a frequent author and speaker on the regulatory takings issue, and he’s brought much needed clarification to an often confusing issue about how to apply the Penn Central test. He has authored several guest posts for the blog, and we’re glad to have him back with a short piece on regulatory takings.Here, he responds to a recently-published article on the “economic impact” prong of the Penn Central test for a regulatory taking.

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A Note on Economic Impacts andAverage Reciprocity of Advantage

William W.Wade, Ph. D.

Daniel L. Siegel, SupervisingDeputy Attorney General, California Department of Justice, published anarticle, Evaluating Economic Impact in Regulatory Takings Cases in the summer 2013 West NorthwestJournal of Environmental Law & Policy.[1]Perhaps a brief rejoinder by an economist is suitable because the article isabout economic impacts and the journal encompasses policy, which is the domainof economists.[2]Mr. Siegel calls for “rules [in regulatory takings cases that limit justcompensation] to extreme situations, requiring, among other things, a showingthat a regulation’s economic impact on property is severe, counting directbenefits that the owner receives as part of the impact calculation, andevaluating that impact by including potential future uses of the property (theparcel as a whole).”[3]

I will ignore the value judgment ofMr. Siegel’s “extreme situation” criterion, which Penn Central never had an inmind, its emphasis throughout being on “reasonable returns.” His compound requirement invokes both themeasurement of benefits to offset the burdens of the regulatory constraint atissue and the Tahoe-Sierra parcel asa temporal whole economic error. I will gloss over the Tahoe-Sierra error to focus on the benefits and burdens phraseinvoked in the article, which arises in Penn Central cases.[4] 

This notedraws from the author’s 2007 article about average reciprocity of advantagecited in footnote 2.

1. Tahoe-Sierraprovides no theortetical support for measuring severity of economic impact.

The Tahoe-Sierra[5] decision expanded PennCentral’s geographic parcel-as-a-whole[6]to include a temporal dimension to deny a regulatory taking. The temporal parcel included “theremaining life of the property.” Tahoe-Sierrarests on a basic misunderstanding of economic theory: time values of money areat the heart of people’s investment decisions. Income lost in time is not restored as if by magic at the end of atemporary taking. Time values of money differentiate temporal segmentation ofthe parcel as a whole per Tahoe-Sierrafrom physical segmentation. Returning the use of the property after some takingperiod does not return the income flow that was lost in time.[7]

2.  Severity of economic impact is measured by interferencewith investment backed expectations.

The gist of Mr. Siegel’s economicerror that catapults his argument to the average reciprocity of advantage (ARA)element of the Penn Central test arises from misconstruing language from Rose Acre Farms. “. . . [F]or aneconomic impact to be so onerous that it is similar to eliminating a coreproperty interest, the impact has to be huge.As the Federal Circuit has explained, a ‘severe economic deprivation’ istherefore required by “the very nature of a regulatory takingsclaim.”[8] Themeaning of the actual language from the decision is different in context andrelates to prior discussion and the remand instructions: “First, as noted above, courts have traditionally rejectedtakings claims in the absence of severe economic deprivation. This hesitationstems from the very nature of a regulatory takings claim.” 

The appellate court’scorrect “hesitation” to confirm the trial court’s award of damages was that thetrial court reached a decision for the plaintiff with no basis to evaluateseverity of economic impact. The plaintiff’s expert economist demonstratedsubstantial revenue losses, but never benchmarked the losses to any denominatorvalue. The necessary comparison to evaluate severity of economic impactinvolves calculating the extent of frustration of investment-backedexpectations. The Federal Circuit cited to both the plaintiff’s andgovernment’s testimony on losses, and determined succinctly: “This analysis wasinsufficient. . . . [N]either the testimony nor the economic data cited by thetrial court appropriately gauge the severity of the economic impact of theregulations on Rose Acre.”[9]  “[W]e remand for reconsideration of the severity of the economicimpact wrought by the relevant . . . restrictions on Rose Acre, and forconsideration of the significance of that impact in light of . . . theregulations’ interference with Rose Acre’s reasonable investment-backedexpectations.”[10]

Severity of economic impactconsistently has been evaluated in a comparative context in takings cases overthe last 25 years.[11]Mr. Siegel’s vague absolute standard to justify compensation in a taking claimis rhetoric without legal or economic meaning. It facilitates the heart of hisargument. Requiring a huge economicimpact justifies Mr. Siegel’s claim that government restrictions and otheractions benefit property as well as burden it. Quantifying the increased value of individual properties due to thesebenefits, however, is generally very difficult. Therefore, a huge diminution requirement accounts forthe uncertain nature of the economic evaluation of these benefits.[12] 

This requirement makes no moreeconomic sense than going into court with a tort claim for damages of a certainamount plus some vague additive amount to account for other losses anddisappointments experienced in life.  With millions of dollars and people’splans and aspirations at stake, hard economic evidence of regulatory benefitsand burdens should be presented to courts instead of legal argument—orpolitical beliefs. Estimating thedistribution of the benefits and burdens of any regulatory imposition is the bailiwick of economics.  Economists are qualified to estimate whether “some public program [merely adjusts] the benefits andburdens of economic life to promote the common good,”[13]or disproportionately slams selected few property owners. Hard evidence of regulatory impacts is asrelevant to a court’s discerning whether reciprocal benefits govern the legaldecision as benefits and costs are to state and federal agencies guided by E.O.12,866.[14] 

3.  Reciprocal benefits are measured inconcrete terms from their first appearance in takings cases.

Thereciprocal benefits element of regulations in takings law has required concreteevaluations from their first appearance. The article cited at footnote 2 revealedthat the notion of offsetting plaintiff’s losses with benefits imbued by thesame regulatory constraint originally was based on concrete facts. Specific benefits to theclaimants were identified in two early cases – Plymouth Coal[15]& Jackman[16]– related to mutual boundary walls that enhanced safety and provided otherspecific services to each property. Jackman involved maintenance of a common wallbetween two properties to the mutual benefit of both due to safety and theeconomic advantage of sharing the wall to support both buildings.[17]  Justice Holmes created the phrase, averagereciprocity of advantage in Jackman[18]referring back to the “pillarof coal to the left along the line of adjoining property, . . . [in PlymouthCoal as] a barrier sufficient for the safety of the employees of either mine .. . [which] secured an average reciprocity of advantage . . . .” for theplaintiff.  Theburden was deemed less than the benefit of requiring the mutual walls and therulings went against the claimants.

4.  Penn Central invoked a broader conceptof reciprocity. 

The phrase “average reciprocity ofadvantage” next appears half a century later in Justice Rehnquist’s Penn Central dissent.[19] Rehnquist’sargument was consistent with the earlier decisions, Plymouth Coal and Jackman,which required reciprocity to be evaluated narrowly with direct benefits to theregulated parties.  He specificallyargued that reciprocity of advantage is not satisfied where the benefits flowto the general public.[20] 

The Penn Central majority ruled otherwise:

[T]heapplication of New York City’sLandmarks Law has not effected a “taking” of appellants’ property.The restrictions imposed are substantially related to the promotion of the general welfare and not only permitreasonable beneficial use of the landmark site but also afford appellantsfurther opportunities to enhance . . . the Terminal. . . .[21] 

Thedecision found “that the preservation of landmarks benefits all New Yorkcitizens and all structures, both economically and by improving the quality oflife in the city as a whole. . .  conclud[ing] that the owners of theTerminal have . . .  benefited by theLandmarks Law.”[22] The focus on broad benefits to the generalpublic allows subjective results, perhaps influenced by politics.[23]

5.  The Federal Circuit directed Florida Rockin Federal Claims Court to evaluate direct compensating benefits.

Reciprocitysurfaced as an important element in the FloridaRock line of cases in Florida Rock IVand V.[24]  The Federal Circuit Court emphasized thenarrow alignment of benefits and burdens and the Court of Federal Claimscarefully analyzed reciprocal benefits and Florida Rock’s burden.  In FloridaRock IV, the appellate court directed the trial court on remand to dealwith reciprocity in the original sense of evaluating whether directcompensating benefits to the property offset the requirement to compensate theproperty owner. 

In addition, then, to a demonstrationof loss of economic use to the property owner as a result of the regulatoryimposition . . . the trial court must consider: are there direct compensatingbenefits accruing to the property, and others similarly situated, flowingfrom the regulatory environment?  Or arebenefits, if any, general and widely shared through the community and thesociety, while the costs are focused on a few?[25]

Federal Claims Judge Loren Smith wrote the watershed Florida Rock V decision.[26]Evaluating the evidence within the economic impact prong of the Penn Central test, he specificallycontrasted “diminution in value” with “reciprocity of advantage” as two partsof the economic impact prong. The decision threads its way through both the Penn Central language dealing withbenefits to the community and the original formulation of average reciprocity,which dealt exclusively with “direct offsetting benefits” of the regulationrequired to avoid payment of compensation. 

Here, thesurrounding community benefits from the wetland’s filtering action, stabilizingeffect, and provision of habitat for flora and fauna. Florida Rock benefitsfrom being a member of a community which has the potential for a betterenvironment.   But there can be noquestion that Florida Rock has been singled out to bear a much heavier burdenthan its neighbors, without reciprocal advantages. . . . The court finds thatFlorida Rock’s disproportionately heavy burden was not offset by anyreciprocity of advantage.[27]

6.  Economic rigor will improveconsiderations of average reciprocity of advantage.

Ihave briefly described the ARA debate in takings law between the broaderconsideration of societal benefits from the regulation at issue and the narrowconsideration of directly offsetting benefits sufficient to denycompensation.  In either situation, caselaw has invoked concrete measurable issues, which various courts have evaluatedwith greater or lesser understanding. Apparently with a view of the vagaries of the range of understanding andestimation of the reciprocal benefits, Mr. Siegel dismisses any attempt toidentify the exact offsetting benefits at issue and concludes that because theyare “difficult to measure, therefore [theyshould be] accounted for by the major diminution in value requirement.”[28]  Of course, this vague standard would allowdefendant counsel and the judiciary to opine to suit themselves about “how huge is huge enough.”[29]

Infusingeconomic rigor into “average reciprocity of advantage” may reduce part of thevexation with the concept.  An economistcan interpret reciprocity under takings case law to discover if positiveexternalities of the regulation benefit the owner’s remaining uses of theproperty sufficiently to offset instant losses. Following the Federal Circuit’sreciprocity of advantage test: the economist would evaluate whether “direct compensating benefits accruing to theproperty, and others similarly situated, flow from the regulatory environment,”or whether the “benefits [are] general and widely shared through the community. . . while the costs are focused on a few.”[30] 

Thedismal profession has been involved in measuring benefits and costs ofgovernment policies for decades; clearly economic expertise exists to supportgovernment counsel’s presentation of direct offsetting benefits to mitigate orovercome plaintiff’s demand for compensation. Economic methods to estimatethese offsetting benefits are available and should overwhelm Mr. Siegel’sbelief that these estimates are “generallyvery difficult . . . [and] therefore best captured by simply requiring theplaintiff to establish a large economic impact.”[31]  This nonsense would further confoundregulatory takings’ already confused economic underpinnings.