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Saturday, February 06, 2016

Flint and Minoritarian Fiscal Illusion: Will Republicans and Libertarians Stand Up and Cheer for Governmental Liability?

There has been a longstanding debate in legal academia about whether government is really afflicted by "fiscal illusion" -- that is, the illusion that governmental officials care mostly or only about costs affecting the fisc and, therefore, will impose inefficiently large private costs on individuals if these private costs are not reflected in budgetary outlays. The theory was initially championed by advocates for a robust doctrine of regulatory takings, and it was rooted in a simple political economy of majoritarian politics (set forth, for instance, by Blume's, Rubinfeld's, and Shapiro's 1984 article): If most voters benefit from a regulation that imposes costs on a small number of landowners, then politicians responsive to the majority will ignore the costs to gain the benefits.

Since Daryl Levinson's classic 2000 article, Making Governments Pay, however, scholars have been going short on fiscal illusion. As Daryl notes, damages against private organizations might deter their officers, because officers care about maximizing stuff like share price, and shareholders can sell in a liquid market. But why should anyone believe that a majority of voters can overcome collective action problems to force politicians and bureaucrats to protect the public treasury or maximize majority-benefiting regulations? Why will not these public agents betray voters by paying off influential landowners, public employee unions, or contractors at public expense? Efforts to confirm empirically the existence of a fiscal illusion have not been especially encouraging. (See, e.g., Y.C. Chang's sophisticated empirical study of Taiwanese officials' decisions regarding compensation and property assessment and Bethany Berger's a more recent argument that politicians' incentives to increase the yield of ad valorem property taxes will protect against fiscal illusion).

Fiscal illusion, however, need not be based on a majoritarian theory of politics in which a mob gangs up on the lone landowner -- a theory that is perhaps unrealistic outside of a smallish suburb homogeneously populated by Bill Fischel's "home-voting" homeowners -- but rather in minoritarian politics.

Consider, as an example, the City of Flint's crisis with lead-contaminated water as Exhibit A of presumptive fiscal illusion. Darnell Earley, the emergency manager appointed by Governor Snyder to run Flint, had a bureaucratic mandate to save money and no electoral incentive to protect non-fiscal goals like voters' health. By switching Flint's water supply from the expensive Detroit water system to the cheaper and more corrosive Flint River, Earley maximized the first goal and ignored the second, with the result that Flint's residents now have elevated lead levels in their blood.

An easy case for presumptive fiscal illusion, right? If you have been a champion of liability for regulatory takings on "fiscal illusion" grounds, then should you not support Mike Pitt's lawsuit for damages against the city and state under a theory of municipal and/or state liability? And yet I have not heard many of my fellow Republicans and libertarians calling for a weakening of Eleventh Amendment and state sovereign immunity defenses or for a broadening of Monell "custom-and-practice" liability. Perhaps I just have not been paying attention (in which case, readers, alert me to the conservatives cheering on lawsuits for damages against Flint). Or perhaps conservative jurists have generated mutually incompatible doctrines on takings liability and sovereign immunity for decades, leaving conservatives ambiguous about expansively construing governmental liability for torts as opposed to takings. It seems to me, however, that, whatever the case for fiscal illusion in the context of zoning, the case for such fiscal illusion here looks pretty strong. Why are not damages the needed antidote?

Posted by Rick Hills on February 6, 2016 at 02:05 PM | Permalink


My libertarian colleague Tom Bell has argued against governmental immunity on essentially the grounds outlined in those post. In my scholarship, I have argued that the problem with using governmental damages liability to promote efficient government policy stems from the fact that damages liability is externalized to the taxpaying public. An award of damages against Flint, for example, would have little effect on the emergency managers who under-invested in safe drinking water, but would make it even harder for Flint to finance essential governmental services. A damages award against the state would leave it less able to bear the cost of aiding Flint. Perhaps a damages award would impose political costs of public officials and in that sense deter them from under-investing in safety, but ordinary processes of political accountability already produce what may well be adequate incentives to invest in public safety, without the adverse effects on innocent third parties such as taxpayers and those dependent on government services that flow from damages liability. Surely governors who appoint emergency managers likely to trifle with the public safety are likely to be held politically accountable for the decisions of their appointees -- this seems to be happening in Michigan. Accordingly, in my judgment, even if one accepts fiscal illusion as a reality, the case for using damages liability as an antidote is often fraught with difficulties, especially in cases like this one in which the ordinary processes of political accountability are likely to produce about as much deterrence as one could realistically expect.

Posted by: Larry Rosenthal | Feb 6, 2016 3:23:30 PM

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