Real Property Rights

By Humphreys, John | Review - Institute of Public Affairs, December 2012 | Go to article overview

Real Property Rights

Humphreys, John, Review - Institute of Public Affairs

People should be compensated when government diminishes their property rights, not just when they are taken away entirely, says John Humphreys.

There has never been a successful society that was not based on a system of private property rights. The reason is that private property encourages thrift, investment, sustainable management of resources and an incentive to use property effectively Countries that have protected private property rights have experienced strong economic growth, while those places that experimented with government control (Maoist China, North Korea, Australian aboriginal homelands) remained relatively poor, with shorter lives, worse health, and fewer life opportunities.

There is also a very powerful moral argument for private property rights. The freedom to own and trade private property is not just another freedom, but it is a necessary prerequisite for controlling your own life. If we believe in a peaceful and free society, then one of the first freedoms that must be recognised is the freedom to voluntarily trade with other people, and keep what we have fairly earned. The term 'property rights' is a misnomer, as the right to trade and acquire property is actually a basic 'human right'.

The first and most important role of a government should be to protect private property rights from violence, theft and fraud.

Under the Australian constitution, the commonwealth government has the power to compulsorily acquire private property, but they must pay fair compensation. In contrast, when the government passes regulation that negatively impacts on private property rights (called 'regulatory taking') there is no requirement for fair compensation. For the sake of equity, efficiency and good government, the government (including commonwealth, state and local) should be required to pay fair compensation for the costs of their regulation.

This has three clear benefits:

1) Regulations that decrease the value of private property without compensation are effectively theft, and are a significant injustice to the victim. Under current laws there is an inconsistency: if the government takes all the value of your property they must pay full compensation, but if they take part of the value of your property they aren't required to pay partial compensation. To make our laws more equitable and consistent, the government should compensate for the negative impacts of their regulation.

2) More secure and stable private property rights will allow people to make better decisions about the future use of their property without fear of changing government policy. Political risk adds a political risk premium to investment and business decisions, which creates significant long-term costs. Even a minor change in the political risk premium can lead to billions in lost production. The Centre for International Economics estimated that a five basis point reduction in political equity risk premium' could increase GDP by 0.4 per cent ($5.6 billion). In America, economist Mark Skousen has demonstrated that the S&P 500 Index grows slower when congress is in session because of the political risk that they may pass legislation with negative consequences. In other words, stable property rights encourage economic growth.

3) Requiring the government to pay fair compensation gives the government the correct incentive to only regulate when the benefits of regulation exceed the costs. Currently, the government is able to take the credit for the benefits of regulation, while making other people face the costs. Consequently, , there is a strong incentive for the government to over-regulate. If the government were forced to directly face the costs of their regulation, then there would be a better incentive to only pass regulation that it has more benefits than costs. This would lead to fewer bad laws and less ss red-tape.

Protecting private property rights does not mean that people are protected from a natural change in the value ofthat property. …

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