The Human Condition:

The Risk-Transfer Society – July 19, 2015

Alpine meadow

I’ve written before about why I don’t believe this country is actually headed for a Marxist-style socialist government, with aggressive nationalization of various industries, such as the British undertook in the post-war period.1 Basically, it is much more difficult, time-consuming, and risky for government agencies to try running complex businesses like steelmaking, farming, and banking themselves. We in the U.S. find it far easier to impose complicated, interlocking sets of regulations on shareholder-owned and professionally managed businesses in order to achieve the policy goals we want.

You see this every day. The government would like to run any unit of the business sector—manufacturing, retail, financial, or service—as both a productive enterprise and as an instrument of social engineering, employment policy, and wealth distribution. But the government would soon run that factory, bank, or business into the ground—or into bankruptcy. Instead, bureaucrats can more easily impose regulations governing hiring and firing policies, payment and benefit policies, work and safety conditions, and environmental impacts without regard to their actual effects on production or the economics of the business. Sure, these regulations start out as a means of correcting obvious abuses and societal harm: banning child labor, eliminating overt discrimination against women and minorities, or keeping toxic wastes out of nearby rivers. But soon the scope of the perceived harm broadens and the scale of impact diminishes to the point that government regulation is used to favor and reward certain groups and activities while discouraging others.

But this is not just the action of a “laissez-majesté” government. Our entire society has become a game of risk transfer and rent seeking.

Take, for example, the differences between a property owner and a renter. Traditionally, the person who owned his or her home has enjoyed certain benefits. The cost of ownership in terms of mortgage payments are generally known within specific limits, so that the only unknowns are the costs of unexpected damage and loss—which can be insured against—and of routine maintenance—which can be forecast and budgeted—as well as changes in property valuation and assessed taxes. On the contrary, the renter of an apartment or house has usually been subject to unpredictable changes in cost and conditions, such as rising rents, unexpected evictions, and deteriorating maintenance, with only a short-term lease contract—typically of six months or a year duration—as protection.

But now in most big cities, and particularly in California, the government has stepped in on the side of the renter against the property owner. Rents are government-controlled to limit raises, despite increasing property taxes and maintenance costs due to inflation. State law severely restricts landlords from evicting tenants, and even the Ellis Act (Government Code Section 7060-7060.7), which allows landlords to take a rental property off the housing market without having to sell it, is under fire in San Francisco. These rules give the renter the kind of security that a homeowner has traditionally enjoyed while leaving the property owner on the hook with the risks of loss due to fire, earthquake, or other catastrophe, along with the responsibility and rising cost of paying for maintenance, upkeep, and taxes.

As another example, the Environmental Protection Agency is continually expanding the scope of the Clean Air Act and the Clean Water Act to encompass, respectively, more pollutants, more sources, and more resources. The government does not have to own the land to prescribe how the owner will manage its productive use, and it does not have to assume the costs and risks to productive use of meeting its own regulations. This is one thing when a property owner is banned from dumping raw sewage or toxic wastes into the river bordering his or her property. It’s quite another when federal law imposes development restrictions on a low-lying property that occasionally collects water after a rainstorm and so has been officially declared a precious wetland.

Or consider the grab bag of goodies that our court system and the practice of tort law has become. A plaintiff with any claim of injury can, usually with the support of a self-interested lawyer and a pending class-action suit, identify a “deep pocket” and profit from it. The take includes not only actual damages, if they can be proved, but damages for putative pain and suffering and sometimes punitive damages that are meant serve as a warning to future defendants. I’m not saying that a person does not have a right to seek recompense, have his or her damages due to malice or negligence made whole, and see wrongs corrected, but it’s become a commonplace in our society to envision six figures with every slip on an icy sidewalk or coffee spill by a harried waitress.

And then we have the case of Kelo v. City of New London, in which the Connecticut city forced a private property owner to sell under the Takings Clause of the Fifth Amendment in order to promote private development by a third party and so boost local economic activity. It is one thing to take a piece of property under public domain in order to build a facility designed for public use, like a road or sewer system, but quite another to take the property because you think someone else can make more profit from it and thereby increase the tax base.

In California we have the Coastal Commission, established in the 1970s, which regulates land development and public use along the seashore. Its jurisdiction extends inland from the mean high tide line to a variable distance: some hundreds of feet in urban areas, or up to five miles in rural areas. The commission can establish public rights of way across your private property for beach access. It reviews land-use development plans and issues permits. However, it does not have the power to issue fines or prosecute violations through the courts.

Now, I believe in competition and creative tension. I understand that every disagreement has two sides, and that we can only determine what is right and true when we bring both sides into the open to examine cases, expose facts, and air differences. So the legal struggle between opposing interests such as buyer and seller, labor and management, owner and renter, and other fields of conflict can establish what is fair and equitable in the public view. It would be a sad world if one side or the other automatically took precedence and won every case without contest. That would be a monopoly on the power of justice equivalent to the ancient divine right of kings and their prerogatives.

But still, I sense a movement in this country away from the rights of property ownership, self-expression, and personal interest and accountability. We are drifting toward automatic, reflexive adherence to community interest, public access, and communal property rights. This would all seem to be proper and fair, favoring the little guy and the public interest over the private rights of the landed and wealthy. But I also believe you can take this notion too far.

Since the opening of private land for public grazing in rural 19th-century England, economists have recognized a principle known as the tragedy of the commons. The reasoning is simple: when a resource like open land, productive assets, ground water, the fish in the sea, or anything else that people might value is held as a public good rather than as private property, it tends to deteriorate, be exploited, or become depleted. That’s because people are still rational economic beings who tend to maximize their satisfactions and minimize their burdens. So we see the English commons overgrazed; the seas fished with huge drag nets; public buildings, facilities, and infrastructure left dirty, worn, and badly maintained; and untended property defaced with the impulses of graffiti artists and vandals. People cherish and take care of the things they own personally; they are less careful of property for which they believe others are responsible. It’s a commonplace that some of the greatest environmental disasters have occurred in Communist countries like the Soviet Union and the People’s Republic, where all property is theoretically owned in common by the state or “the people”—which means no one in particular owns or cares for it.

Transferring private property to public use through government regulation would seem to be a way around this problem. You simply leave the upkeep and maintenance, the cherishing and the associated risks, to the nominal owner while letting others take what they want or need from the property’s active use. The owner is left holding the basket while everyone else gets to extract the goodies.

The process will continue for a while. But like almost everything else in the universe—except perhaps for the gravitational pulse of a black hole—the situation is unstable. If the owner perceives too little value from trying to run the business, develop the land, maintain title to the property, hold the company’s shares, or otherwise participate in the game, he or she will drop out and become one of the public users. People are not stupid, and they will not go through the motions of playing a losing hand forever.

A society that does not value fairness and equity, and that has no appreciation of the essentials of human nature, will not last long. One can fail on the side of protecting and promoting the little guy and the public interest just as surely as you can fail on the side of preserving the rights of the landed and wealthy. In the long view, one can see the Western World in the 19th century as favoring the top tiers of society and vested interests, while the late 20th century and the start of the 21st now favor the dispossessed and the landless.

These are interesting time we live in, and which way the government and economy of this country and the Western world as a whole will go is now to open to question. I can only leave you with the Buddha’s blessing, which is also a curse: Nothing lasts forever. Not even black holes.

1. See Why Own When You Can Rent? from October 13, 2013.