- 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)
