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As is reflected in the competing positions of Justices Taney and Story in Charles River Bridge, our legal system seeks to strike a balance between majoritarianism and entrenchment, as well as between change and stability.
• Sources of Forbearance
From the perspective of a property owner, the problem of government forbearance is largely one of minimizing the risks associated with changes in government policy that impair the value of property. Property owners do not want to abolish government. After all, this would leave property at the mercy of trespasses, nuisances, and conversions committed by others, and would almost certainly result in a severe undersupply of public works such as roads and sewers that greatly enhance the value of property. Nor do property owners necessarily even favor minimal government. Zoning appears to be highly popular with owners of single-family residences, perhaps because zoning has been designed to protect single-family homes against potential adverse effects from commercial or multifamily development (see Chapter 8). What most owners want is to be able to predict with some confidence what the government is likely to do in the future that could have an impact on the use and enjoyment of their property. Will the government prohibit certain uses previously permitted, or dramatically change tax rates, or embark on a takeover of property by public authorities? Forbearance means, above all, predictability about future government policy.
There are multiple sources of government forbearance, in the sense of predictability about government policy toward property. Lawyers are most interested in constitutional constraints on government, such as the protection against uncompensated takings of property. But these are not the only sources of forbearance, or even the most important ones. Among the other sources of constraint are democratic politics, social norms that encourage respect for property, and rule of law values. We will return to the rule of
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law momentarily. But first, a few words about democratic politics and social norms.
As should be obvious, one very important source of government forbearance is ordinary politics. In a democracy, government is unlikely to take action that would affect large numbers of property owners in an adverse way. Consider, for example, the tax deduction for home mortgage interest. There is no constitutional or other legal impediment to abolishing this deduction, and it has been widely criticized as an unwarranted subsidy for homeownership. But the home mortgage interest deduction enhances the value of millions of homes throughout the country (and its supporters cite the greater involvement of homeowners in their communities). Notwithstanding repeated calls to eliminate the deduction, or phase it out for higher-income taxpayers, the political outcry that would greet any attempt at repeal probably insures against any such adverse action taking place in the foreseeable future.
The political support that property enjoys depends not only on how widespread the form of ownership is, but also on whether owners have a credible threat to exit from the jurisdiction. Property that is immovable, such as land and fixed-plant investment, is generally more vulnerable to changes in government policy. Many railroads learned this lesson the hard way in the nineteenth century. State and local governments made lavish promises to induce the construction of new rail lines. But after they were built, many governments reneged on their promises, or attempted to impose new taxes and regulations that restricted the profitability of the investments that had been made. This kind of “bait and switch” behavior is one interpretation of what happened in Charles River Bridge.
The importance of political constraints is reflected in the fact that property is generally much less secure in authoritarian regimes than in democratic ones. Outright expropriation is rare in democracies. It is much more common in authoritarian and one-party regimes. In the extreme cases of Soviet Russia and Maoist China, expropriation became celebrated as official policy. There seems to
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be a loose associational relationship between widespread property ownership and political democracy, in that widespread property ownership supports democracy, and democracy helps support widespread ownership of property. One reason for this is that democracies tend to promote government forbearance from interfering with property.10
Social norms provide another important source of government forbearance. The relevant norms range from general customs of society to internal bureaucratic habits. In countries with strong traditions of respect for property rights, government officials—whether elected or not—are likely to act with restraint in taking action that affects owners. This will be true whether or not constitutional or other formal laws require this, and whether or not owners have access to courts to call officials to account—although formal legal constraints and judicial enforcement will no doubt reinforce social norms of respect. In effect, in a society with strong norms supporting ownership, elected politicians and bureaucrats will internalize these norms, so it is unlikely they will take action that deeply upsets owner expectations, even if such opportunism might be in their short-term interests.
The history of post-Maoist China provides a possible illustration of the importance of social norms in fostering forbearance.11 Reflecting its communist heritage, all land in China is owned by the state or by rural collectives. Buildings and other improvements can be held privately, in the form of time-limited ownership rights, and the Chinese constitution has been amended to stipulate that these rights cannot be taken by the government except in the public
10.See Mancur Olson, Power and Prosperity: Outgrowing Communist and Capitalist Dictatorships 25–43 (2000); Douglass C. North & Barry R. Weingast, Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England, 49 J. Econ. Hist. 803 (1989).
11.See generally Kenneth W. Dam, The Law-Growth Nexus: The Rule of Law and Economic Development 233–78 (2006).
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interest and for compensation. Nevertheless, there is little tradition of judicial enforcement of these rights. Moreover, China engages in frequent takings of rural land and of urban land that was developed before China opened itself up to foreign investment.12 There are many complaints about the lack of procedures and the adequacy of compensation for these takings. Yet notwithstanding the weak legal and political checks on government interference with property rights, China has had little difficulty in recent years attracting large amounts of capital from foreign investors. This investment has fueled an enormous construction boom, especially in major cities along the coasts.
The intriguing question presented by China is: What is the basis for the apparent confidence on the part of foreign investors that they will get their money back from the fixed-plant investment projects they have funded? How do they know the Chinese government will forbear from directly or indirectly expropriating these investments? Formal legal guarantees cannot be the answer, because judicial enforcement is too weak. Legislative checks on administrative opportunism cannot be the answer, as China is a one-party state. The best answer would seem to be that Chinese administrators in the post-Mao era have developed a strong norm against interfering with the expectations of foreign investors. Chinese officials have “compartmentalized” their behavior toward property, with one set of attitudes about old property—rural land and older Mao-era urban buildings—and a different set of attitudes about new property developed in the post-Mao era. Foreign investors have been able to observe the consistent behavior generated by these compartmentalized norms, and have become confident that Chinese officials will forbear from interfering with foreign investment. The conditions of repeat play with current and future foreign investors and the practice of partnering with local government
12.See Katherine Wilhelm, Rethinking Property Rights in Urban China, 9 UCLA J. Int’l L. & Foreign Aff. 227 (2004).