A Wisconsin Waste

When I taught Public Choice, I liked to give my undergrads a news story for their take-home final, and just say "Discuss with reference to the theory developed in your lectures and readings."

Dan Kaufman's story in the New Yorker on Wisconsin's Foxconn mess would have been a bit late in the year to make the final, but it was final-worthy.

A snippet:

But as the public has become aware of the spiralling costs for these jobs, the Foxconn deal has become something of a political liability for Walker, particularly among voters outside of southeastern Wisconsin. Those costs include taxpayer subsidies to the company totalling more than $4.5 billion, the largest subsidy for a foreign corporation in American history. Since Wisconsin already exempts manufacturing companies from paying taxes, Foxconn, which generated a hundred and fifty-eight billion dollars in revenue last year, will receive much of this subsidy in direct cash payments from taxpayers. Depending on how many jobs are actually created, taxpayers will be paying between two hundred and twenty thousand dollars and more than a million dollars per job. According to the Legislative Fiscal Bureau, a nonpartisan agency that provides economic analysis to the Wisconsin state legislature, the earliest citizens might see a return on their Foxconn investment is in 2042.

Oh - and much of the land for the deal was stolen by the Wisconsin government under eminent domain provisions.

To make space for Foxconn’s development, which will also necessitate many miles of new roads, the Village Board has been buying properties, sometimes using the threat of eminent domain to force reluctant homeowners to sell at a price determined by the village. Several weeks before the groundbreaking, the seven-member board went further. By a 6–1 vote, the board designated the entire twenty-eight-hundred-acre area “blighted,” which will allow Mt. Pleasant to issue bonds that are exempt from both federal and state taxes, and may also grant the village a more expansive use of eminent domain to seize the property of the few remaining holdouts, a small if highly visible group, whose property-rights fight embodies a wider sense of disenchantment with the Foxconn deal.

And it looks like Wisconsin's post-Kelo move to restrict takings was a sham.

Kim reached out to her political representatives, including her congressman, Speaker of the House Paul Ryan. “His response was: this is not a federal issue,” Kim said. “And that I should reach out to my state representatives.” That surprised her. In 2005, Ryan co-sponsored the Private Property Rights Protection Act, which was written in reaction to the Supreme Court’s decision in Kelo v. City of New London. That ruling allowed New London, Connecticut, to use eminent domain to take several homes for an economic-development project. “When someone works years to secure a home or establish a successful family store or restaurant, only to be forced by the government to give it up so a corporation can redevelop the land, that’s wrong,” Ryan said in a statement supporting the measure. The bill passed the House, 376–38, but failed in the Senate. (Ryan also attended Foxconn’s groundbreaking ceremony in Mt. Pleasant.)

The same year, Wisconsin passed its own law in response to Kelo, co-sponsored by Leah Vukmir, now the Republican U.S. Senate nominee. It outlawed the use of eminent domain to seize a property for use by a private corporation, with one exception: if the property was “blighted.” Kim believes the state law was written in such a way as to protect a new home like hers—it defined blighted property as one that is “detrimental to the public health, safety, or welfare.” However, the Village Board has relied on a different statute, one that applies the designation for property that, among other things, “impairs or arrests the sound growth of the community.”

New Zealand needs to be very careful in giving Councils expanded powers for takings with urban development authorities. We need not follow America into that asylum.

For Kim Mahoney, the issue reinforced her determination to keep fighting. She pointed to the Creuziger’s Land of Giants Pumpkin Farm, the last big holdout. The four-hundred-acre property has been in the Creuziger family for ninety-two years, but the family was ordered to vacate on October 8th. (After the Cruezigers challenged the move in court, the village withdrew the order, saying it won’t need the land for another year.) “If they’re allowed to do this, they can do this to anybody at any time,” Kim said. “Wisconsin’s eminent-domain laws and private-property-rights laws are meaningless. All they have to do is rezone it and call it blighted.” On my last visit with the Mahoneys, the big Caterpillar machines were working closer to their house than usual, and the noise was louder. Jim and I were standing outside in his driveway. A brilliant orange-red sunset lit up the horizon, but it was hard to escape the sound. “It used to be so quiet here,” Jim said.

Playing in the SandPit

I've been blogging a bit over at The Sandpit - the NZ Initiative's blog. A few recent highlights there:

• Eminent domain is not nearly as awesome as the latest Productivity Commission report makes out.
• Notes from my chat with Bryan Crump at Nights on Radio NZ on Social Impact Bonds.
• Know your times tables - me at the ChCh Press on our recent Numeracy report.
• Correcting Mathew Elliot on Social Impact Bonds.
• Would that we had a regulatory budget to complement our fiscal budget.

Enjoy!

An offer you can't refuse

Earthquakes can cause uninsurable losses. In Christchurch, a decent proportion of those losses are being borne by those who owned vacant sections at the time of the Canterbury earthquakes. When you purchase insurance on a house, it's coupled with a mandatory payment to EQC, who provide coverage against earthquakes, landslips, floods and the like, up to $100,000 per event. But EQC doesn't cover vacant sections, and figuring out arrangements with an insurance company for getting insurance on vacant land didn't seem obvious to most owners of vacant sections.*

In theory, this shouldn't matter a ton. Because there's a potential for an uninsured loss, everyone pays a bit less for the property because of it and takes their risks. 

But suppose that, after the earthquake, the government comes in and tells you that your land is unremediable even if you think otherwise. They offer to pay you half its value as compensation. And there are hints that you'll be compelled to sell on worse terms if you refuse the offer. 

Suppose that you decided to hold out: you don't want to take the offer and want to live on your land. Council would likely stop providing services to the property even if you offered to pay more for service provision, but you could always dig a well, put in a septic tank, hire a rubbish service, and put in some solar panels: off-grid in-town. But it was a vacant section: it may be impossible to get Council permission to build anything there, even if you build a one-story wooden place on screw piles that go down a few dozen meters and pay for extensive land strengthening. But suppose you get that sorted out, somehow. Council still could forbid access to the land: the street by your house will be reclaimed for some other purpose, all the neighbours have sold out, and you may be forbidden from using government-owned land for an access lane (or from purchasing an easement for such use). If the neighbors across the street are on TC-3 land [allowed to live there, but any new building has to be on much stronger foundations], it's harder for Council to force you out by preventing access because the road will still be in use. But it seems awfully likely that they'd simply refuse to allow you to build on it, even if you had a sound engineering design. Council doesn't like things that don't fit the plan.

The earthquake imposed a lot of damage on the land. But much of the subsequent loss is consequent to policy decisions. If you don't take the red zone offer, you may well be stuck with a piece of land that policy has made unusable. And because of that risk, and the veiled threats of expropriation if you don't take the red zone offer, it's not really an offer that can be refused.

CERA maintains a land status map. A static image is below. The red zones are the ones where the government says that land repair would be prolonged and uneconomic. This is different from the downtown Red Zone where access remains forbidden due to demolition work.

The government has never quite said what it's planning on doing with the red-zoned properties it acquires. There's been talk of a park running along the banks of the Avon; it would be a wonderful amenity if provided. But I'm not sure that anyone quite believes that reasonable parts of the red zone won't eventually be fixed up and sold back for development, albeit likely with substantial constraints on foundation types and construction method. The potential value of the land if fixed up and sold off could remain fairly high, even with the LIM restrictions; that locked-up value will be awfully tempting for future governments. 

Imagine that you bought a section for your retirement home. You followed all the rules, but you didn't think to get insurance on a vacant section. You are happy to bear your own quake-losses. Post-quake, you're red-zoned and the government offers you half the land's value. You'd still prefer to stay on the section and build a redesigned house. The neighbours across the street are TC-3, so the street will continue to exist and services aren't hard. But you're very likely not allowed to do it with your own property that you still own. And then Aucklanders insult you because you didn't have insurance on a vacant section and begrudge the half-value payment offered by the government on terms that effectively cannot be refused. 

I see little compelling reason that government should be insurer of last resort for those who failed to get insurance. But what proportion of the subsequent losses have really been due to changes in permitted land use rather than the direct effects of the earthquake? The half-value offer would be more than fair if the owners could still have the reversion option of making do on their own. But what's going on feels an awful lot more like forced purchase at well below the owners' willingness to accept.

And, if the land really is unbuildable, then it's costless to offer those selling first option to repurchase should the government ever decide that the land really could be sold - at the price at which they were compelled to sell to the government plus their apportioned share of the improvements. This still has problems: suppose that you're on the side of the street used as park while those on the other side of the street get the option to repurchase and subsequently on-sell at a profit. Perhaps a more clever scheme would then pay a dividend later on based on average comparable price increases. It's not an easy thing to set up, but we're really imposing a pretty substantial potential taking on many owners of vacant sections.

Take-away note for the Aucklanders: this isn't simply the government coming in and compensating people who hadn't bought insurance. This is the government coming in, telling you your land is unusable because they have deemed it to be so (the red zone has incurred substantial damage - true, but you're also kinda forbidden from making it usable at your own cost), and telling you that they'll give you half its prior value. Sure, there's been a real reduction in the land's value because of the earthquakes. And sure, some of those wanting full compensation are likely just rent-seeking: where the real reduction in land value is more than half of its prior assessed value. But there are some folks who really seem to be undergoing a forced and poorly compensated taking here.

* Newspaper reports keep claiming it was impossible, but I see conflicting reports from Kiwiblog commenters who claim to have sorted out such insurance on their own.