Lecture 8: Privatizing Government I: Utilities, Eminent Domain, and Local Government

– Okay, let’s get to work. – We want to turn now to
the issue of eminent domain, which is being debated
right here in New Hampshire. And Josh McElveen is
the political director and the anchor of WMURTV. Josh? – Thank you, David. And good evening, candidates. Mr. Trump, you have said, quote, “I love eminent domain”, which is the seizure of private property for the sake of the greater
good, theoretically. You’ve tried to use the
measure in business endeavors. You’ve said you support its use for the Keystone Pipeline Project. Here in New Hampshire, a project known as the Northern Pass would bring hydroelectric
power from Canada into the northeastern grid. Do you see eminent domain
as an appropriate tool to get that project done? – Well, let me just tell
you about eminent domain because almost all of these people, actually, Chris hasn’t. But so many people have hit me with commercials and other
things about eminent domain. Eminent domain is an absolute
necessity for a country. For our country. Without it, you wouldn’t have roads, you wouldn’t have hospitals,
you wouldn’t have anything. You wouldn’t have schools, you wouldn’t have bridges. You need eminent domain. And a lot of the big Conservatives that tell me how Conservative they are, think I’m more than they are, they tell me, oh, well they
want the Keystone Pipeline. The Keystone Pipeline
without eminent domain wouldn’t go 10 feet, okay? You need eminent domain. And eminent domain is a
good thing, not a bad thing. And what a lot of people don’t know, because they were all saying, oh, you’re gonna take their property, when somebody, when eminent domain is used on somebody’s property, that person gets a fortune. They get at least fair market value, and if they’re smart, they’ll get two or three times
the value of their property. But without eminent domain, you don’t have roads, highways, schools, bridges, or anything. So, eminent domain,
it’s not that I love it. But eminent domain is absolutely, it’s a necessity for a country. And certainly, it’s a
necessity for our country. – The difference between eminent domain for public purpose, as Donald said, roads and infrastructure,
pipelines and all that, that’s for public purpose. But what Donald Trump did was use eminent domain to try to take the property of an elderly woman on the strip in Atlantic City. That is not public purpose. That is downright wrong. And here’s the problem with that. To turn this into a limousine
parking lot for his casinos is not about public use. And in Florida, based on what we did, we made that impossible. It is part of our Constitution. That’s the better approach. That is the Conservative approach. – So, eminent domain will be a big part of our discussion today. This class and Thursday, we’re gonna be concerned
with privatization at home and abroad. Today we’re gonna focus
on what is privatization, first of all. Then we’re gonna revisit neoliberalism and the Washington Consensus, both of which feature privatization centrally in their recommendations. And that’ll be some
conceptual table setting for what’s coming later. Then we will talk in some detail about the politics, law and economics of eminent domain, followed by privatization in the realm of utilities and local government, with some links that might not be immediately apparent to you yet, to last Thursday’s
lecture on Proposition 13 and the anti-tax movement. And then on Thursday, we will deal with the trend towards private sector prisons and
privatization of the military, both of which have been, both of which have been led by the US, but they’re going on in many
other parts of the world. So, that’s our agenda for
the next couple of sessions. Privatization means a
lot of different things. And I want to just start out by distinguishing some of them with a kind of conceptual
map of privatization. So when we think back to the
early lectures of this course, we talked about the
post-communist privatizations. This was the era after 1989 of creating market systems de novo, which meant creating
private property rights, the enforcement of private contracts, systems of adjudication, and so on. And as we, this is just reviewing what was involved in those debates about creating a private economy. The basic disagreement in privatizing things like oil, mining, heavy industries, retail, services, basic property rights, the basic disagreement was between the shock therapists, on the one hand, and the gradualists on the other. And we worked through those debates when we talked about China, Vietnam, and modernization theory and all of that. And particularly, the
rather simplistic view that if you democratize a country before you had completed the
transformation of the economy, the transformation would never occur. And so, it was important to really to do the economy first and do the democracy later. And we saw that the
upshot of those debates, 20 years later, they washed
out in Eastern Europe, so that countries like Czechoslovakia, which had been gradual in
their economic transformation, certainly didn’t seem to
be performing any worse than countries like Poland that had gone for shock therapy. And indeed, by some measures, including poverty and inequality, you might say the Czech
economy is more appealing. But then with a focus
on China and Vietnam, the question might be also that
if you wait to democratize, it might be waiting for Godot. It might never actually arise. So now we’re gonna be focusing on different privatizations. This is what sometimes gets
called neoliberal privatization. And that too includes a lot
of quite disparate things. So, one is privatization as
in the Thatcher and Reagan and as we saw even in the Blair and Clinton eras of previously public sector
or nationalized industries. Things like transportation, British rail, which was nationalized in 1948, was denationalized in 1984. It was re-privatized. Many countries have
privatized their mail systems in whole or in part. And then what we’re
gonna talk about today, privatization of utilities, privatization of many
of the instrumentalities of local government. But there have been other
kinds of privatizations. Much more central to the traditional functions of government. So, under the heading that I’m gonna call privatization of public authority, we’ve had things like much more use of private arbitration in solving government disputes. We’re gonna talk about eminent domain. The use of eminent domain, as Donald Trump was being
accused of in that video to facilitate the private transactions of individuals or individual corporations. Another form that I’m
not gonna spend time on but just want to put on the list there is the increasing role of lobbyists in actually writing legislation. More and more legislation in Washington is not written by staffers. It’s actually written by lobbyists. So, the private sector’s
getting more centrally involved in the wielding of public authority through the legislature. And then we might say, even further into the
traditional conception of government than that, the privatization of core state functions. And here, we think of things like policing, prisons, and the military. And those are gonna be
our topic on Thursday. So as I said, this is a
word with many meanings. And that’s fine. They bear a family
resemblance to one another, but they are all different. And it’s important to keep
those differences distinct. So, let’s revisit the larger political and ideological framework within which these debates
have been going on. And I talked earlier about what was what I called
neoliberalism at home and the Washington Consensus abroad. Pretty much the same basket of policies. But let me ask a question. When I say the word neoliberalism, how many people had
never heard of it before you had entered this classroom? Okay, so most people
have heard of it, okay. Those who had heard it, how many think it’s a pejorative term? Pejorative term. Not pejorative term. Not pejorative, not sure. (laughing)
Okay. So the not sure’s have it. Okay, what about Washington Consensus? Pejorative term? Fewer think it’s pejorative
than the neoliberalism. Not pejorative? Not sure? (laughing)
Okay. So that’s helpful. (laughing) And I think what we saw in the room is reflective of general opinion. I think that more people tend to think of neoliberalism as a pejorative term than the Washington Consensus
as a pejorative term. Though it’s interesting, and it might be a reflection of our own sort of naval gazing myopia, that they’re pretty
much the same policies. It’s just when you call it
the Washington Consensus, you’re saying other people should abide by these policies. When you say neoliberalism, you’re saying we should be
abiding by these policies. They come with a certain
amount of freight. They are descriptive, but they are normatively loaded. And the three components
that I’ve mentioned several times to you, one is the idea of getting
rid of regulations, cutting back on government
regulation of the economy, the second is privatization, that we’re talking about today, and the third is free trade. And these were the main components of the neoliberal agendas of the Reagans and the Thatchers and the
Blairs and the Clintons. And they were also the main components of what came to be called
the Washington Consensus. And they were part of my message here, is that they were hegemonic until the financial crisis. After which, they began to fray. And we have mostly been
in this class so far talking about the run up
to the financial crisis, when neoliberalism at home and the Washington Consensus abroad did enjoy virtual hegemony. We’ll see as the course goes on, that they fray, that the component pieces actually fray at different rates. That after the financial crisis, the first on the chopping
block, so to speak, was deregulation and we got
significantly new legislation to regulate the economy,
the Dodd Frank bill. He has similar legislation in the UK and in many other countries. So there was a certain, there was a backlash against
the deregulatory agenda of the early post Cold War period. Right after the financial crisis. Privatization has always been messier and more contentious as we will see today. But the backlash against privatization, and we’re gonna see some
of it setting in actually even before the financial crisis, in the rest of today’s discussion. But free trade doesn’t really
get its comeuppance until 2016 when you get the resurgence of protection. Frankly, avowedly protectionist economics. There are many countries which
say they’re for free trade and surreptitiously have protections, but the idea that governments should really protect their
own infant industries, at least, and perhaps more, gains real currency much later. So those are some of the upcoming topics. But let’s start by observing what’s been implicit in
what I’ve just been saying. That even when an ideology is hegemonic, such as neoliberalism or
the Washington Consensus, hegemony is never complete. The most subtle philosophical reflection on this subject is Michael
Walzer’s Tanner lectures, which he gave at Harvard in 1984, and appeared as this
excellent little book, Interpretation and Social Criticism, published by Harvard University
Press three years later, in which he makes the case that however hegemonic a
system of ideas seems to be, there are always internal
resources within it that enable criticism of
it and the possibility of changing it into something different. His phrase is imminent criticism. And there was always gonna be room for imminent criticism of
the Washington Consensus. So, another thing to say is that, and this is, I think,
reflected in different reactions to the ideological valence of neoliberalism and the
Washington Consensus, when I said we tend to think of the Washington Consensus as what other people should do. And of course, we don’t know how those other people necessarily think of it. So let’s get a bit of
a grip on some of that. (horns beeping) – [Narrator] When Bolivia
sought to refinance the public water service
of its third largest city, the World Bank required
that it be privatized. Which is how the Bechtel
Corporation of San Francisco gained control over all
of Cochabamba’s water. Even that which fell from the sky. (speaking in foreign language) (yelling) (speaking in foreign language) (chanting) The press this beleaguered country paid for World Bank loans was the privatization of
the state oil industry and its airline, railroad,
electric, and phone companies. But the government failed
to convince Bolivians that water is a commodity like any other. (speaking in foreign language) (yelling) (speaking in foreign language) Bolivia was determined to
defend the corporation’s right to charge families living on $2 a day as much as one quarter of
their income for water. The greater the popular resistance to the water privatization scheme, the more violent became the standoff. (yelling) – So, this was privatization of the water in Cochabamba, Bolivia, in attempted, at the end of the last century, by this corporation, Bechtel,
out of San Francisco. And this is just to
give you a sense of how squarely in the mainstream
of Washington Consensus privatizations this was. That water privatization
had been occurring in much of the developing world since the early 1990s. And as was said in the video, it was one of the standard things that was urged upon, which urged upon developing
country governments as conditions for getting aid in addition to other kinds of privatization. But you can see that even in countries like Britain and France, we’ve seen increased privatization of things like water
supply during this period. And interestingly, there
were very considerable efficiency gains from this privatization. In Cochabamba, there
had been a lot of people who were without water, or had water one or two days a week. And the Bechtel Corporation
put together a big consortium. They bid for this contract. It might have been wise
for them to become nervous when they discovered nobody else was bidding for this contract. But they didn’t, they
went ahead and did it. And as you saw, what basically happened was as the water came on stream, that produced more demand for the water, and the part of the deal
with the Bolivian government was that they were going to earn back their revenue from selling the water. And of course, the price
of the water then went up because there was increased
demand for the water. And this, Oscar Olivera,
who you saw in the video, he didn’t look so
charismatic in that video, but in fact, he is an
extremely charismatic and dynamic labor leader. He pretty much single-handedly led the fight against Bechtel. As you saw, the government started out trying to protect the company. And this led to massive confrontations with these farmers and peasants and others who thought they, as
was said in the video, they thought, we have
a right to this water. The notion that people can make money out of selling us our own water became an incredibly
effective rally and cry. To the point where the government finally gave up and backed down and
renationalized the water supply. And what happened with Bechtel was the Bolivian government just called them up one day and said, “We really don’t think we
can protect your people “and your property anymore. “So you better act accordingly.” And they packed up and left. They then spent the next five
or six years in litigation over 50 million dollars, which they were hoping to get back to compensate them for their sunk cost. Finally, they gave up. There’s a wonderful New Yorker article, which I should’ve put on the syllabus, called Leasing The Rain, which I will, I’ll post in case anybody is interested, that goes through this story. But so, here you have people thinking that even though this was an efficiency
enhancing privatization, the costs of it were not worth having. And indeed, some people thought it was something obnoxious
about the very fact of privatizing control of water. Reminds, you might say, it reminds one of John Locke’s definition of domination in the first treaties on government, where he defines domination
as being in a position to take advantage of another’s necessity. Water is a necessity. And so, clearly, people
like that felt this way. And interestingly, it’s not just Bolivia. The week before last, the former Tory MP, Rory Stewart, kicked out of the party by Boris Johnson as one of the 21. Very interesting man, by the way. He once walked across Afghanistan. Wrote a book about it. But in any event, he was
here giving a lecture. And he talked about the privatization of water supply in the UK. And he said exactly what
I just said to you here. He said that actually, it’s
been efficiently enhancing. In this case, it’s even, it’s not more expensive
than it was before, and the delivery is better, but there’s still huge opposition to it among many British voters on the grounds, that they don’t believe
that water should be some, supplying people water to drink should be something out of which money can be made. So we’ll come back to public opinion about privatization when we’ve considered a few more examples. But let’s move on to talking
about eminent domain. What is eminent domain? Somebody, what is eminent domain? As opposed to non-eminent domain. (student mumbling) Yep. (student mumbling) Exactly, so the right of the government to take private property
for a public good. You said a public good. We’re gonna have to spend a little time digging into what counts as a public good. In keeping with my idea
to avoid theorizing, before we’ve got some empirical
things out on the table, let’s start in India now. And we will talk about
privatizing eminent domain. This use of government power to actually do things
that are a little more in the direction of what Donald Trump was being accused of by Jeb Bush in that opening debate. So in India, in 1984, they had something, they had a almost century
old Land Acquisition Act, which took this term public purpose and broadened it to include promoting exports, investments,
and public infrastructure. So this starts to broaden the idea. And then in 2007, they widened it further by saying any purpose useful to the general public will be counted as allowing
the use of eminent domain. And then they set up a rule
that worked the following way because the difficulty with India from the point of view
of development is that there are millions of very tiny plots. Land ownership is highly, highly divided up into very
small pieces of ground. And obviously, that
means if you’re gonna use the power of eminent domain, you’re gonna have to deal
with a lot of land owners. A lot of homeowners. Millions maybe, even. For some of the more ambitious ones. And part of what was going on in the early post Cold War period was that governments were trying to create special economic zones. And we’re gonna talk more about them in other parts of the
world later in the course, including in Africa. But the idea of a special economic zone would be an area in which, it was essentially to
be a magnet for capital. So they would say, well,
if you come and invest in our special economic zone, we’ll give you regulatory breaks, we’ll give you tax breaks, we will protect you
from strikes by unions. They are often, therefore,
criticized on the left. But just to give you a sense. Since the late ’80s, the special economic zones
have just taken off worldwide, as attempts to jumpstart economies by creating these, if you like, islands that are supposed to magnetically attract capital. Very popular with governments. They’re sometimes called
development zones in the US. Very popular often with governments. Not so much with economists. Most economists think that
special economic zones don’t really work, for a variety of reasons
that needn’t concern us. Perhaps the biggest exception is China, where the special economic
zones are enormous. And they are essentially sort of integrated mini economies, and as I mentioned in
my lecture about China, the original idea behind the
Chinese special economic zones was actually islands of
experimentation with capitalism. They wanted to try out
capitalist economies without transforming the
whole Chinese economy. This was part of their experimentalism. And of course, in China, there was not much of a problem about moving people around, if they were disinclined to move. So if you look at the difference between, in the red box here on this slide, the Chinese and the Indian
special economic zones, you can see that the
Chinese ones are enormous, 300 square kilometers, whereas the typical Indian
one was 1.4 square kilometers. So, India has this basic problem that if they want to create
special economic zones and they want to use
eminent domain to do that, and it’s a democracy where
there’s strong tradition of citizen opposition to
things that they don’t like, how are you gonna do it? So they came up with this 70% rule. And the 70% rule basically
said the following. It said if a private developer can buy up 70% of the land
for a perspective development, whether it’s for a single company, plant, or for a special economic zone, then the local government will come in and compulsorily
purchase the other 30%. And then sell that 30%, that 30% would be sold to the company. And so, you can see what
the logic would be here. That in order to buy the first 70%, the company would have had to have done a lot of work on the ground
with the local people and gotten enough very
significant showing of support for what they were going to be doing. But then there’s the
obvious problem of holdouts that the more you become the veto player or the possible veto player on the decision of this
project to move forward, the more you can ransom the whole project by demanding a very high price
for a market transaction. And so, the thought was, didn’t seem crazy at the time, the thought was the 70% rule will do it. It sort of splits the difference. It forces the companies
to do a lot of work with the citizenry, but it also solves the
problem of holdouts. So, this is what came to a head in the province of Singur in West Bengal early on in this century. And so, the Tata Corporation wanted to build something called the Nano. Anyone know what the Tata Nano was? Yeah. (student mumbling) The world’s cheapest car. And this was their marketing ploy. They wanted to build the
world’s cheapest car. It was gonna cost about $2500. And they thought this would be, I guess it was sort of the VW
Beetle for the 21st century. Though when we see what
happened to the VW Beetle in the run up to World War II, that might have been a cause for worry, at least for Tata. But in any event, they decided they were going to build this world’s cheapest car for the Indian mass market. And then the next question
was where to build it. And so, they decided they
would build it in West Bengal. West Bengal was interesting
for a number of reasons. And they’d had bids from other parts of the country as well. But the area of West Bengal in which they were planning to build it, very consistent with the
themes of this course, was governed by a communist party that had got the zeal of a
convert about capitalism. And so, even though it was governed by a communist party, they wanted to get this plant. They wanted to get Tata to come and build this plant. And so, they worked with the company and the company
began buying up land. And when they passed the 70% threshold, the single government of West Bengal compulsory purchased the rest, and the project began. So, just to give you a
sense of how it played out. – [Narrator] In the
countryside outside Calcutta, the electoral battle has
turned decidedly nasty. Highlighting some of the problems of India’s industrial expansion. Five years ago, the communist
government of West Bengal moved thousands of farmers off their land to make way for a giant car factory, owned by the Indian conglomerate Tata. Some of the farmers, like Mahadad Dass, weren’t even compensated. (speaking in foreign language) Sensing a political coup, the opposition party backed the farmers. – So there, you see democracy at work because it turned out that this plant was in a very marginal constituency. It had been won by literally a handful of votes by the communist party
in the previous election. And the opposition saw
this as an opportunity to unhorse the government. And so, they got behind, and just as with in the Bechtel case, there was a very charismatic
opposition politician who got behind this cause, and the farmers began
not only complaining, but actually attacking the plant. (dramatic music) (yelling in foreign language) – [Narrator] It’s a word
from the Indian Tata Motors that caused this violence. While Ravi Kant was in the
plant assessing its progress, outside the plant, 200
villagers strike and storm in. Police and the protesters engaged in flashes for over an hour, as tear gas shells were fired, which injured two policemen
besides some farmers. Even as the situation was
brought under control, the protestors made it difficult for them to leave the area, setting up blockades along the highway. (yelling in foreign language) – According to the villagers, this kind of sporadic
violence will continue in and around these borders. Many farmers are adjudicated because they didn’t get
jobs as they were promised. – [Narrator] The tension in Singur is unlikely to end soon. (speaks in foreign language) Times Now. (yelling in foreign language) – And so, it played out very similarly to the efforts of Bolivia. It turned out that even
though the government became more and more repressive, there came a point where
the cost was too great. There was something of a standoff. And finally, Tata said,
“We’ve had enough”. And they announced that they
were leaving West Bengal, and as you can see, it’s not one of the
poorest parts of India, but they moved to right
across the country to Gujarat, which is significantly more developed. And they built the Tata Nano there. The whole issue that became the flashpoint was this idea of just compensation. And you might wonder about
how it was conceived of and why it became such a flashpoint. Because of 70% of the farmers had actually already sold their property, and it was only the remaining 30 who were being forced to sell, you would think that the politics of this could have been managed. But here are some inconvenient facts that got in the way of this transaction being successful. And one is that, India’s a relatively weak state, and one of the ways in which it’s weak is that people avoid taxes by when they transfer land, they have an official price
and an unofficial price. And the unofficial price is
higher than the official price because the official price is used to calculate the taxes. But of course when, when the government
compensated people for the land they were taking, they would use the official price. And so, people felt like
they were not getting the value of their land. To make matters worse, once Tata announced the project, that the project was going forward, the price of land immediately
started to skyrocket. And so, the people who had
sold their land earlier felt like they were now getting screwed because they had sold it
for a much lower price than was available on the open market once the project had been announced. And to exacerbate that problem, some people who figured
out what was coming down, sort of became middle man and ran around buying up lots of land, so that they could bid up
the price and sell it later. This really meant that the moral, the 70% rule created
a kind of moral hazard because it meant that people could hold out for a higher price, even though it was intended
to defeat the holdout problem. And then finally, and perhaps as you saw from the interview with that farmer, many of these farmers who
were being thrown off the land were not gonna get jobs
working in the Tata plant. That was semiskilled
work, these were farmers. And so, what were they
actually going to do? Even if they had been
compensated for their land. Rajat Tata, that’s him there, CEO of Tata, actually
a very well respected and well liked company in India. So this was quite an unusual catastrophe for them. Even though he left 350
million dollars on the table in West Bengal, he decided he’d cut his losses. And here, you can see the
plant opening in Gujarat. A footnote to this story is that this is the first Nano
being produced in Gujarat. But it turned out that it was not a successful car, by the way. The reason being that people don’t want to be driving
the world’s cheapest car. (laughing) They think, well, this is a status economy as well as an economic economy. So, they’ve done many back flips to try and rescue the Nano. But it hasn’t been an economic success. Unfortunately though, this is what’s left of the defunct plant in West Bengal. The land continued to belong
to the Tata Corporation, and most of it has not
gone back to farming. So here again you see a case where the losers from a privatization effort, using the concept of eminent domain as a vehicle for promoting
economic development, backfires because the
people who are gonna be harmed by it or who believe they’re gonna be harmed by it get mobilized, and incidentally, the opposition party did knock off the communist government in the next election. So, it worked to that extent. So these are some cases, the Bolivia and the Indian case, to remind us that when we talk about neoliberalism and the
Washington Consensus, we should always remember
that it’s important to think about how these things look from other parts of the world, and not just as they articulated by policy wonks in Washington or in the World Bank or among Western academics. So, let’s talk about the US. Privatizing eminent domain in the US. Now we have something
called the Takings Clause in the Fifth Amendment, and the Due Process Clause
of the Fifth Amendment, for the lawyers here will know, the Due Process Clause of
the 14th Amendment applies the Fifth Amendment to the States, and it says that people shall, the last clause of it, “nor shall private property
be taken for public use “without just compensation”. So we’ve seen that in India, they had this very capacious
definition of public use to enable economic
development in West Bengal that produced a certain
amount of backlash. But how should we think about public use? What is a public use? Many people would say, well, Donald Trump’s casinos
aren’t public use either. So what is a public use? How do we know a public use when we trip over it? – [Student] Benefits the public. – Pardon? – [Student] It benefits the public. – Benefits the public, okay. Well. That could be part of it, but presumably, economic growth benefits the public. And this was the argument for what was being done in West Bengal. What more can we say about public– – [Student] Clear public entity. Clearly a public entity. – A public entity. Like? – [Student] School. A school. – A school. Well, there are a lot of
private schools but yeah. Okay. So one place one might start, we shouldn’t always start
with the economists, but the economists have a
definition of a public good. Can anyone tell me what would an economist tell us is a public good? Yeah. – [Student] Non-competitive,
non-excludable. – Okay, so you said non-excludable. Was your second criteria. And what does that mean? – [Student] One person
having it doesn’t exclude another person from having it. – If we create clean air for you, we can’t exclude the person
next to you from having the clean air as well, right? So that’s one feature of the definition of a public good. If you provide it, everybody’s
gonna get the benefit of it. So that obviously creates
incentive to free ride because if I’m gonna
get the benefit anyway, why would I pay for it? If somebody else is
gonna pay to provide it. So that’s one element of a public good. And then you said, the other element? – [Student] Non-competitive. – Right, sometimes non-rivalrous. And what does that mean? What is non-competitive or
non-rivalrous mean, somebody? Some economist. Have I frightened every
economist out of here already? (student mumbling) Yeah, it’s basically the ideas that my having it doesn’t stop you enjoying it. So, sunshine. My consuming sunshine doesn’t
stop you consuming sunshine. We don’t need, we’re not rivals for the sunshine. So, that’s the idea of a public good. But notice that even
if you start with such this narrow technical
definition of a public good, of things that are non-rivalrous
and non-excludable, they’re still gonna be
politically charged. Why are they gonna be politically charged? One is because there are alternatives. So if we think about building a road. If you build a road, anybody can use the road. And if you build the road, my using it doesn’t, it doesn’t use up the road. You can also use the road. We can’t exclude you and
it’s non-competitive. But of course, rather than
building the road here, we could’ve built the road someplace else. So, there’s still, there are always gonna be
alternative courses of action that might have been taken. There is now a plan to
build a high speed rail, which I’m sure will never be built, (laughing) from Washington to Boston, and the current plan goes to
Hartford, bypassing New Haven. 60 billion dollar enterprise. And of course, the negative externalities of that for Yale would be huge. It would be much better
if the high speed rail went through New Haven. So even when you’re providing what is technically understood
as a public good, there’s always gonna be more
than one way to provide it. And there’ll be winners and losers, depending on which way is chosen. Then secondly, there are
gonna be externalities. What economists call externalities. There are gonna be costs,
wherever you put it, that some people will have to bear. So even if it had been the case that the Tata plant in West Bengal would have jumpstarted the economy, brought lots of employment, would have brought other
industries to the region, would’ve been a net benefit
by just about any definition, these farmers would still have paid a substantial price
because they were getting kicked off their land, and they were not likely to be employable in the new industries. So even if our net, we say that providing a public good is desirable, it’s still gonna have externalities. And you have to worry
about the externalities. And then finally, you’re gonna have the
problems of valuation that we talked about before. When you do eminent domain, it’s compulsory purchase, and so, you have to decide, what is the right value? And of course, there are various
mechanisms for doing that. Looking at the value of houses around the house that you’re
gonna compulsory purchase. But there may be problems with the market, or at least, the people living in
the house may perceive problems with the market, or it may be that I
was born in this house, my grandmother was born in this house, I value this house differently than I could sell it for on the market. And so, you’re gonna get
those sorts of problems, and the sorts of, if you try and get around
the holdout problem with something like India’s 70% rule, you’re not going to persuade the holdouts. In fact, what you’ve just, what you basically do is you shift the holdout problem near the 70% threshold rather than near the 100% threshold. So there’s gonna be, even if you start with
a very narrow definition of public purpose, it’s always gonna be politically charged. And in reality, there’s almost no government in the world that sticks to such a narrow definition of a public purpose as a technically what
counts as a public good. So, this all came to
a head in Connecticut, here in Connecticut 14 years ago, in a case called Kelo versus
the City of New London. And it was a very interesting and controversial case because it was exactly the use of eminent domain to facilitate a purely
private transaction. Basically, the City of Kelo, which was not a blighted area, there had been some previous
Supreme Court decisions which had said if an
area is truly blighted, then compulsory purchasing can be done, if there’s some plan to revitalize it. This was not an area of blight, and by the way, anyone who knows about
the history of debates about urban renewal will know that even compulsory purchase of blighted areas, go take a look at their remains of the Oak Street Connector
in downtown New Haven. Or read Douglas Rae’s
brilliant book called City: Urbanism and Its End if you want to know about urban blight as not being eradicated successfully through eminent domain purchases. In any event, this went way beyond blight, and the City of New London had an offer to build a shopping mall. And they used the eminent domain power to force that transaction through. And they compulsory purchased some homes, forced people out of them, and compensated them, and justified, of course, they were sued. It worked its way up through the courts in Connecticut. But the defense of it
was that it would bring economic growth, employment, and higher tax revenues
for the City of New London. And what was remarkable about this was it went all the way
to the Supreme Court and the City of New London won. They won in a five to four decision, and the decision, interestingly, was written by what we think of as the less Conservative wing
of the court in those days. So, it was Justice Stevens with Kennedy, Souter, Ginsburg and Breyer. They all said, well, if
careful studies have been done and it’s clearly going
to bring economic growth and employment and higher tax revenues to the City of New London, it can go forward. And so, it actually survived. And it was the Conservatives
who we tend to think like capitalism and like
economic development. Sandra Day O’Connor, then
Chief Justice Rehnquist, Scalia, and Thomas dissented with a strong defense of property rights. As O’Connor put it in
her dissent, she said, “To reason, as the Court does, “that the incidental public
benefits resulting from “the subsequent ordinary
use of private property “render economic development
takings for public use “is to wash out any distinction between “private and public use of property, “and thereby effectively
to delete the word “for public use from the Takings Clause “of the Fifth Amendment.” And she basically is saying once you can do it for this, you can do it for anything. And so, the Takings Clause
really doesn’t offer much in the way of real protection. So, that was a pretty dramatic occurrence. It’s more dramatic than
the 70% rule in India. It’s actually saying if
a local city government can convince itself and perhaps some fact finding body that this is gonna be good for the city, they can compulsory purchase land. And though we didn’t have riots the way that we saw riots in Bolivia and we saw riots in West Bengal, there was huge backlash to this decision. And interestingly, it was a coalition of strange bedfellows that were opposed to this. It was groups like the AARP, the NAACP, the Libertarian Party, and Conservative think thanks
all came out against it. And president then, George W. Bush, announced an executive order that federal funds could
not be used to facilitate private use of eminent domain in this way. And before the Kelo decisions, only eight states had had
limitations of this sort on the use of eminent domain power to facilitate private transactions. As of April of this year, 45 states had enacted curbs upon it. So, as you can see, the forward use of the
eminent domain power actually triggered backlash. And as with the Tata Nano
plant in Singur, West Bengal, it turns out the
development never occurred. And you can, there’s now a movie about this whole episode,
which you can watch. So the upshot of this
discussion so far is that neither efficiency, as in the
case of water privatizations, nor just compensation, even if it’s effectuated in terms that an economist would approve of, might be sufficient to grease
the wheels of privatization. In fact, you might run into problems. Loss aversion might be
more important to people than just compensation. They may not want to give up their home, or they may not want to
retrain to learn how to work in a car factory. Unanticipated externalities can trigger very effective opposition, particularly when there’s
a political entrepreneur to mobilize that opposition. And the most important takeaway is that there’s no technical
answer to this question. It’s not having the
right theoretical model. These are just political questions where there are distributive
benefits and burdens that are gonna be born, no matter what’s done or what’s not done. And so, it’s really, at the
end of the day, political. And in that sense, you can’t ring the
politics out of politics by trying to have a fancy model to tell you the answer. The answer’s gonna depend upon figuring out who’s going to benefit and who’s going to be harmed, and then making sure that the people who are going to be harmed are not mobilized to stop the project, possibly by compensating them or by finding out what else
you can do to help them. Let’s talk about privatizing
local government services. There’s a link to the
previous class in this that we talked about how the agenda of the anti-tax movement was to starve the beast, to reduce the amount of
money available to government on the theory that governments either waste it or further
their own nest with it. And if you look, if you go back to, I started with Proposition 13 last time, you can see, indeed, after Proposition 13 was enacted, local government revenues in
California just plummeted. And cities and counties where the same kinds of
propositions have been adopted have found themself increasingly
starved for revenue. So you can see in the second slide, it’s the right hand slide there, to extent, they can raise revenue. They’ve had to depend on things
other than real estate taxes because of the bars on raising money in the ways that they
traditionally had done. And if you look at California, the growth, this would make
the Proposition 13 crowd happy. The California has,
local government revenues have indeed grown more
slowly than elsewhere and contributed to many
of its fiscal woes. So, one of the ways in which local governments have
responded to this reality is by moving towards privatizing local government. And what do I mean by that? It’s basically they have
moved towards these things that Evan McKenzie writes about called common interest developments. What is a common interest development? Yeah. (student mumbling) Right, they’re sort of
giant condo associations. Where you own your unit that you live in. But you pay a fee to the association, and the association then delivers a lot of services. They arrange for a snow removal if it’s in New England, not in California. Most of California, not
Southern California. But they arrange for garbage pickup, sewage, some of them local policing, you can get your hot water through them. So you get a lot of services that would traditionally have been
provided by local governments from the common interest development. And this is obviously attractive to cash strapped local governments because they find the provision
of services expensive. And now it’s much harder, as we’ve seen, for them to raise revenue in the ways that they typically have done. And so, in a lot of these kinds of states, you find cities that actually, the only form of new
housing building they permit is common interest developments. And so, to give you some
sense of the numbers here, they’re really quite dramatic. Go back to 1964. There were fewer than 500
of them in the country. And you can see, after the anti-tax movement gets going, they just start to skyrocket. And this is now 10 years ago. I couldn’t find aggregate statistics more recently than that. But by 2009, we had 24 and a half
million housing units, 60.1 million people, and almost a fifth of
the American population is now living in these
common interest developments. And I’m sure that number is
significantly higher today than it was a decade ago. That’s more than the population
of many, many countries. 60 million people are living
in these developments. And as I said, a number of cities, particularly in California,
in Arizona, in Florida, will not allow any other
kinds of development. So it’s a big change. It’s a big change over
the last several years, in large part, driven by the cost savings for local governments. They get to double dip, if you like, because they get to, you still have to pay property taxes, but they don’t have to provide you with anything like the number of services that they have to provide to other homeowners. So what should we think about that? What are the consequences of
that for democratic politics? (student mumbling) Take the mic for him, yeah. (student mumbling) So they’re private, essentially, private governments in these developments. They’re usually boards. Sometimes, they’re elected boards. But typically, the way
it works is the developer creates a board when they’re building it. And that board will decide what type of housing they’re gonna build, is it gonna be a development
that permits animals, is it gonna be a retirement development, no children below a certain age. What the basic structure
and rules are gonna be is gonna be set by this board, and then people will have
to come in on that basis. And he’ll have essentially a charter, constitution, which will likely
be very difficult to change because the initial homeowners will not want the rules to be
changed on them in midstream. And so, you’re gonna essentially have private government of a
lot of local activities. Now some might say, well,
so what’s wrong with that? People can pick and choose. I mean, you go to Fort Lauderdale. And you can see, by the water, these developments
go for millions of dollars. Then you go quarter of a mile
back and they’re cheaper, quarter of a mile back, they’re cheaper, and people could sort into just the kinds of housing that they want. The market is hunky-dory here. Everybody can, if you don’t like animals, go live in one that doesn’t like animals. If you, doesn’t allow animals. If you want access to a swimming pool, you go to one that has swimming pool and you pay a little bit more. So, you could say, one might say, there’s no problem with this. Yep. – [Student] One of the
bigger issues is the people who are elected to serve
on these elected boards might not have the expertise needed to properly run the different utilities or any of the different
elements of the government. Of the internal government. – So there can be accountability problems because the boards tend to be
run by amateurs, as you say, and they might be quite incompetent. They turn out not to be able to manage the accounts and so on. If we had a little bit more time, we could work our way through a number of those kinds
of issues that pop up. And which have caused a demand for regulating these boards and so on. It still could be a problem that your neighbor stopped
paying their condo fees and the thing goes bankrupt and it’s very difficult
for you to have redress in these situations. So there are a lot of those issues. Any other issues we
should be thinking about? Yeah, at the back. You have to yell or
wait for the microphone. (student mumbling) The microphone’s gotten to you now. (laughing) – [Student] I meant that no judges can overturn the decisions of the board, the courts, then not to be
involved with these CIDs. – So, you have to explain what you mean. – [Student] So that in the readings, there was a lot of people
who wanted to sue the boards and the judges that they didn’t want to become involved
with these associations. – Yeah, so there’s
potential for incompetence and corruption and related things. Those things are all true. However, there’s the same potential for all of those things
in local government. So I think that the things to think about that are gonna be
significant going forward is one, is the boards
can be quite undemocratic because they usually, as I said, the dice is loaded early on. But also, we talked earlier about Hirschman’s Exit, Voice, and Loyalty. There are problems here about entry because if all the housing in a part of the country is built in these developments that pick the markets
that they want to serve, what about homeless people? Where are homeless people gonna wind up? They’re gonna wind up on
the streets of San Francisco or somewhere like that. That because if you want to
buy into one of these places, of course you’ve gotta, they don’t want you unless
they’re sure that you can pay, so you’re gonna go through
financial screening, you’re gonna have to prove you can afford to live in the place. And people who can’t are going to be wind up not being served. There’s gonna be a big mark. If you try and do housing
through this kind of market, there’s gonna be a market failure that is gonna be probably quite costly for governments to attend to. A third difficulty. Two related things. One, I mentioned Douglas Rae earlier. But his book about urban politics. But he has an essay
called Tyrannies of Place where he points to the
fact quite prescient. He wrote this more than 25 years ago. That we’re increasingly
becoming a segmented democracy. That is, people tend to spend time around people like themselves. And this, of course,
greatly facilitates that because people will sort by income, if you go to the ones in Florida, often by ethnic groups, into these relatively homogeneous, certainly financially homogeneous, groups. And we know from Khaneman, who
I’ve mentioned to you before, and his research with Cass Sunstein, lately of the federal government and in the Obama Administration, now back at the Harvard Law School, but like-minded people, if
they just talk to one another, tend to become more extreme. And so, if we get an
increasingly segmented democracy of people only hanging around people who look and talk like themselves, this will reinforce a lot of the divisions that are contributing to
polarization of the electorate. And when we talk next week
about the segmentation of media markets, we’ll see that this reinforces that trend. That sort of out of sight, out of mind of people not like yourself. So, a final point I would make is that these organizations are here to stay. If you go back and look
at McKenzie’s first book, which he published in 1996, Privatopia, the tone of that book
is, this is terrible. The sky is falling. These things should be stopped. For all the reasons I’ve
mentioned and other reasons. But the chapter I gave you
from his book from 2011, the tone is completely different. There are 25 million of these things here that are here to stay, and figuring out how to manage them and manage with them is really the order of business going forward. Okay, on Thursday we will talk about prisons and the military. (soft music)

Maurice Vega

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