Supreme Court Roundup
The end-of-term rulings from the Supreme Court this past week have inspired an enormous amount of discussion; rather than repeating what has already been said, I’d rather share a handful of observations and links to some of the better coverage of the topic.
On the Kelo v. City of New London case regarding eminent domain, it appears that the majority of justices trust that local governments can make decisions for private parties better than the private parties themselves. While some application for eminent domain can be found in large-scale projects to create public infrastructure, which are both clearly in the public service and highly vulnerable to the “holdout problem”, the willingness of the court to undermine private property rights by interpreting eminent domain in this way– allowing private to private transfers for commercial development– is unsettling. If a mere boost in the tax rolls is enough “public benefit”, razing someone’s home so that a larger and more valuable (and thus more taxable) one can be built could be justified.
A better test would be to allow invocation of eminent domain only if market-based solutions could not succeed.In any free-market transfer of property, the utility of the property to the buyer must be greater than (or equal to) the utility of the property to the seller. When these utilities are reflected in prices, this means that the maximum price the buyer is willing to offer must be greater than (or equal to) the minimum price the seller is willing to accept. If the transaction occurs at any price between these two, both buyer and seller are better off– one paid less than the property was worth to him, the other received more than it was worth. When eminent domain is invoked, however, the seller is given what is considered the “fair market value” of the property, which may be less than the value of the property to him, and usually is, otherwise eminent domain need not have been invoked. In a private-to-private transfer, this means that the buyer receives the maximum possible benefit, while the seller is actually harmed.
This way of doing business can have negative consequences for the public good, however, which is why eminent domain does have some use. If one were to try to build a highway without use of eminent domain, one would likely encounter the holdout problem: if all the necessary properties but one are sold to the builder, the marginal value of the final property is extraordinarily high– the owner of a lot consisting of an outhouse and a tire fire could hold out for millions of dollars, as a highway that reaches no destination but a tire fire is essentially worthless. In private developments, this can be addressed through a unanimity clause: each of the private property owners is presented with an offer, each of which is contingent on the unanimous acceptance of the offers by all property owners. In this situation, no individual owner could hold out hoping that the marginal value of his land would rise– he would either take the (hopefully generous) offer or leave it. Given the choice, unanimous acceptance would be likely. The problem with this approach in terms of projects that directly benefit the public good (pipelines, roads, power lines, etc.) is that unanimity clauses don’t scale well– the transaction costs of attempting to administer such a program with thousands of potential buyers would be prohibitive, and a single irrational property owner could prevent anything of public benefit from ever being built. Thus, eminent domain is only appropriate in such cases as this, when the free-market cannot provide a solution.
One of the best discussions can be found over at The Becker-Posner Blog; Gary Becker’s take is here, Richard Posner’s is here. Commentary on the “holdout problem” and further discussion can be found over at Knowledge Problem.
The Grokster ruling, despite the whining over at BoingBoing, makes sense. Grokster differs substantially from Sony in the Betamax case in that Grokster built a business model around illegal activity (file sharing), which Sony did not. It is true that Grokster, like Sony’s Betamax, offered some potential for legitimate use. However, Grokster was a profitable enterprise only as a result of rampant copyright infringement, unlike the VCR industry. To expect that the Supreme Court would adopt a theoretical legal use as the standard to establish a shield from liability is preposterous.
Worthy of note is Tyler Cowen’s take on “Why economists should feel conflicted about the Grokster ruling”, which makes an interesting point. However, Cowen’s argument (which, to be fair, is a book excerpt that was not written to address the Grokster ruling specifically) fails somewhat in that it considers what Cowen believes to be “deeper issues”, which basically consist of an argument for the public good of file sharing, while ignoring the fundamental issue of private property rights. While Tyler may be right about an overall efficiency gain from filesharing, he’s arguing for a solution that is puzzling from an economic perspective. Why should the record companies, who hold property rights, have those property rights eroded and lose some of the value of their property simply because it might produce an overall gain in efficiency? An argument that is fundamentally economic in nature but suggests an erosion of private property rights for a rather ethereal bit of efficiency is somewhat suspect.
Dahlia Lithwick’s commentary on the Ten Commandments rulings is classic, and does a good job of undercutting the notion that these cases are somehow “landmark” in anything other than the topic of the dispute.
Finally, on the Court’s refusal to hear Judith Miller and Matthew Cooper’s appeal in the Valerie Plame case, it would still be quite interesting to know what, if anything, Robert Novak has told prosecutor Robert Fitzgerald, and whether Fitzgerald has fully pursued Novak’s involvement. Hopefully the White House leak will be named and subjected to trial, as revealing the identity of an undercover CIA agent is inexcusable.
It will also be interesting to see whether Miller talks or takes the prison sentence to protect her administration source. The reason this is particularly interesting is that she is the same reporter who (perhaps inadvertently) bolstered the administration’s case for war with her now-discredited reports of weapons of mass destruction in Iraq. Miller has had a very successful career overall, her reporting on the WMD issue aside, and much of this success has been due to her cultivation of anonymous sources. However, this reliance on confidential sources was what allowed Ahmed Chalabi to manipulate her into publishing false claims about WMDs, and it is what had her found in contempt of court for refusing to speak to Fitzgerald. The WMD debacle embarrassed her publisher; it remains to be seen whether she will be willing to suffer more personally in her pursuit of a story.