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Sunday, December 17, 2017

Infringements on Property Rights

The right to property is one of the foundations of Capitalism and economic freedom. Unfortunately, with the gradual expansion of the welfare state during the 20th century, taxation and regulatory incursions into the private sector have eroded the meaning of the property right. Income, the most common form of property, has lost some of its meaning: in extreme cases, government takes more than half of all income earned, either directly as income taxes or indirectly as taxes on consumption, i.e., the spending of income.

There are taxes on other types of property, such as real estate and financial savings. In each case, the tax erodes the economic meaning of the property; the higher the tax burden, the more the ownership of property becomes a vehicle for taxation - and less for the furtherance of individual wealth. This has serious economic consequences, as economic incentives weaken, workforce participation is less rewarding and entrepreneurial risk taking becomes less attractive, while sloth and indolence seem like a better proposition.

Beyond the immediate perversion of economic incentives, the infringement on property rights changes our common perception of market-based interaction between private citizens. Once it is firmly established in our economic culture that one person's property can forcefully serve the needs and wants of others, i.e., provide for non-owners without the property owner's explicit consent, that notion assigns rights to people in private settings that are alien to the very freedom of the market itself. We will refer to this as redistributive infringement on the property right.

Two recent stories in the news illustrate this process. The first is the court ruling in Indiana earlier this month, where Starbucks was forced by a judge to keep 77 of its Teavana stores open:
Simon Property Group Inc. has won a significant victory in its bid to stop Starbucks Corp. from closing 77 Teavana stores in its malls across the country. Indianapolis-based Simon, the country’s largest shopping mall operator, sued Starbucks in August seeking temporary and permanent injunctions to prevent the coffee giant from breaching its leases—some of which extend as far as January 2027. A Marion Superior Court judge has sided with Simon and granted the company’s request for the temporary injunction until the case is decided at trial, which is likely to occur next year. “If the court were to allow Starbucks to close down its stores, abandoning obligations in the lease agreements, the court would be relieving Starbucks of the failed risk it took merely because Teavana has now proven to be unprofitable to Starbucks,” Judge Heather Welch wrote in her Nov. 27 decision.
Without knowing the details of the ruling, it is entirely possible that Teavana signed leases for their stores that mandated a commitment to the landlord for years and years on end, without any opportunity for the tenant to bail out in the event of financial hardship. However, it would seem unlikely that any business would enter into any contract where it is forced to make payments to someone else regardless of its own revenue.

Therefore, this could be a case of redistributive infringement. There is one aspect of the ruling that supports this suggestion. According to the New York Post, the judge in the case
found that the very profitable Starbucks could absorb the financial hit — estimated by Starbucks to be $15 million over five months — better than Simon [the landlord company] could. The mall operator did not provide an estimate of how much the closings of the Teavana stores would hurt them.
If this were a simple case of breaking a lease, there would be no mention of who is the more profitable party. Apparently, the disputed lease contract between Teavana and Simon contains a financial hardship clause of some kind, and the case is therefore essentially an interpretation of this clause.

However, if the ruling is based on a judgment of what party is the most profitable, the hardship clause actually goes beyond a simple determination of whether or not the tenant is making enough money to honor its lease. The wording in the New York Post article - given that it accurately reports the ruling - explicitly considers which of the two parties is more profitable.

While this ruling is an injunction to "freeze" the situation until a trial can begin, its reliance on the relative profitability of the two parties is an expression of redistributive thinking. The consideration by the judge is not based on the word of the law, but on what party is financially stronger. That party, in turn, is now forced to temporarily redistribute money to the other party.

Since I am not a lawyer, I cannot speak to what precedent this sets for the actual trial. However, the very fact that a judge can use economic redistribution as a key argument in a ruling is important for the future. At least in theory, other contractual disputes could be solved based on the same line of thinking. Can a bank make a negative report on a consumer's credit if that consumer suffers financial hardship and can no longer pay his mortgage? Is not the bank profitable enough to absorb the loss without griping about it?

Admittedly, the mortgage example is a stretch from the Teavana case - but it is only a stretch. It is not irrelevant.

Another example of redistributive infringement is the case with the Colorado baker and the gay couple, in which the Supreme Court is now going to have a say. A gay couple asked a baker to make their wedding cake, and the baker said no, with reference to his religious beliefs. The gay couple then sued him, claiming that he violated their rights to equal treatment.

If the gay couple wins in the Supreme Court, it means that government can force a person to use his property - his business - to provide for people whom he does not want to provide for. In this case, the forced redistribution is not about money, but about time. A property owner is no longer free to decide how he wants to dispose of his property, and the time that goes into productive use of that property. 

The obvious analogies to this case are those of a gay baker being forced to provide cake for an anti-gay Islamist, or a muslim baker being forced to bake a cake with a so-called Muhammed Cartoon. Those aside, though, if the court verdict is that the baker was indeed obligated to bake the case, then government also says that a business owner can be forced to prioritize among his customers. He can be forced to provide a certain percentage of his business services to certain constituencies, which inevitably forces him to cut down on services to other constituencies. He can be forced to sell, for example, three percent of his wedding cakes to gay couples, fifteen percent to black couples, two percent to Jewish couples, and one or two cakes per year to Nazi couples. 

This mandated distribution of business services may seem immaterial so long as the baker makes the same amount of money on each cake. However, even if we remove the hypothetical customer quotas from the picture, the distribution problem remains. Staying focused strictly on the interaction between customer and business, a ruling by the Supreme Court in favor of the gay couple would mean that government still has the authority to tell any business owner what his customer base has to look like. 

In doing so, government also assumes the authority to dictate what products a business owner produces. If government has jurisdiction to adjust a business owner's customer base, then it also has jurisdiction to define the product that the business owner provides. Suppose, for example, that the baker wanted to specialize in cakes that contain an ingredient not allowed under certain religious preferences. His motive may not at all be religious - he may have discovered that such cakes are cheaper to make or have a higher-paying customer base. By no intention of his; solely by the very design of his product; the baker now comes at odds with government preferences of equal treatment. 

To put more meat on this example - or, in this case, cheese - can a pizzeria be forced by government to bake pizzas for lactose intolerant customers? Such pizzas would likely cost more to make. Can they then charge more, or would that be a further violation of equal treatment laws? Could the pizzeria, or the bakery, be forced to sell a product that is more expensive to produce, at the same price as its similar products?

Once the consequences are taken to this level, a business owner's right to maximize profit is eliminated. He may or may not choose to operate a business on profitability terms (though businesses who disregard or play down the role of profits will sooner or later have to close its doors) but even there, government dictates as to the composition of his customer base can get in the way of whatever maximization criteria he applies. This has far-reaching consequences for his ability to expand, finance investments and expansion, and to create jobs.

Again, it remains to be seen how the Supreme Court will rule in the Colorado baker case. If they rule against him, it is valid to ask what the practical economic meaning is of a property right. If, on the other hand, they rule to the baker's favor, it is not an infringement on the right of gay couples to get married; in fact, it would be an encouragement to entrepreneurs to open bakeries that cater exclusively to gay couples. A "Gay Wedding A-Go-Go" franchise could cover a market niche and could certainly refuse to serve heterosexual couples. It would be their right to do so, just as it would be the Colorado baker's right to decide to whom he wants, and does not want to, sell wedding cakes. 

Redistributive infringements on property rights are troubling, yet not surprising as a corollary to the egalitarian welfare state. Once the idea of economic redistribution is codified into law, it has the same tendency to expand as any other measure that brings work-free perks to chosen segments of the population. 

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