October 1, 2020 Reading Time: 6 minutes
store closing

Whether or not you agree on the efficacy of lockdown orders, the economic damage is undeniable. From a macro perspective, Q2 GDP dropped 32.9% in the course of three months. That’s the worst contraction in modern American history, undeniably due to Covid-19 and the resulting lockdown measures. 

For comparison, Taiwan, a country that did not lock down and controlled the virus, saw a mere Q2 GDP decrease of 0.72%. It shouldn’t take an education in economics to understand why closing down businesses for months and freezing society with anxiety will be disastrous for the economy. However, the problem with thinking of things through the lens of GDP calculations is that it dehumanizes the consequences of lockdown policies for their victims.

The focus should be on individual families and business owners whose lives have been absolutely ruined by policies that in the end may not have been necessary. Perhaps the hardest hit are restaurant owners and those in the service industry. People who have dedicated their lives to making social life possible. 

According to Yelp, 53% of restaurants in a June survey have permanently closed. Businesses large and small have been ravaged, lives destroyed, dreams dashed, communities crushed. Much with any victim of government policy, there should be monetary reparations granted to businesses that were undoubtedly harmed by the effects of lockdowns despite not committing any criminal activity. 

The Legal Case

In a previous article, I examined the general mechanics of litigation regarding lockdown measures; here I will specifically focus on the legal issues regarding just compensation. The basic issue at hand is the 5th Amendment which is commonly invoked as the right to remain silent but the relevant text is at the end which reads that no one shall be

“Deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.”

The key component of the rights guaranteed in the 5th Amendment that applies to business closures is the last two lines. The government must compensate private individuals for depriving them of life, liberty, or property for public use or without due process. For example, if the state would like to take your house because it wishes to build a park to further the public interest, it must compensate you in return. Rights such as this are essential to the notion of the consent of the governed. We allow the government to exercise certain powers because in return it promises to protect our rights. 

Although issuing stay at home orders and closing down businesses are not as clear cut as taking someone’s house to build a park. It can be interpreted that the financial damage and disruption of contracts can be seen as a government taking. Such behavior may be governed through the Takings Clause which according to the Legal Information Institute

“Many types of government action infringe on private property rights. Accordingly, the Fifth Amendment’s compensation requirement is not limited to government seizures of real property. Instead, it extends to all kinds of tangible and intangible property, including but not limited to easements, personal property, contract rights, and trade secrets.”

However, legal scholars are not sure about the success rate businesses will have taking this route. 

Professor F. E. Guerra-Pujol is an optimist who believes businesses can sue for compensation. The professor’s main conclusion emphasizes Kelo v. City of New London an infamous case for many advocates of limited government that mainly deals with eminent domain. An excerpt from the Supreme Court opinion reads as follows,

“When this Court began applying the Fifth Amendment to the States at the close of the 19th century, it embraced the broader and more natural interpretation of public use as ‘public purpose.’” 

According to Professor Pujol, the court’s broadening of the definition of takings for the public purpose in the Kelo case allows it to encompass lockdown orders that closed businesses. 

He also cites another case, Penn Central Transportation Co. v. New York City. Pujol writes that 

“In that case, the Supreme Court set forth an indeterminate three-part test that lower courts must follow to determine whether a challenged government action constitutes a “taking” under the Constitution. Broadly speaking, a government action is a taking if (1) the economic impact of the action is sufficiently severe; (2) the owner suffers a great loss of “investment-backed expectations” when the government acts; and (3) the “character” of the government action physically occupies or damages the property.”

Alongside Kelo, which outlines a broadened scope of what constitutes a government taking, this case established explicit criteria in which such claims should be evaluated. In many, if not all cases of lockdown-related business closures, such claims could satisfy this test.

Although this legal argument may sound convincing, the only way to be sure is to actually engage in litigation. Many judges will take a widely deferential view of state power and the case law cited may fail to be convincing under more scrutiny. 

Such scrutiny was handed down by prominent libertarian legal scholar, Ilya Somin, who comments on Pujol’s legal theory regarding Kelo v City of New London when he writes

“I admit Guerra-Pujol’s theory took me by surprise. It’s definitely a creative and original idea. But, unfortunately, it has no basis in the Court’s decision.”

Somin goes on to challenge and dismantle all the arguments that Pujols makes in his article. Somin writes that 

“From the outset, I have emphasized that there is a strong moral case for compensating at least some victims of shutdown orders. But the Takings Clause is unlikely to be an effective vehicle for getting it.”

This goes to show how legal minds can disagree on the law even if they want the same outcome. However, that does not mean that the arguments put forward by Pujols and Somin don’t create a compelling case for lockdown measures to be governed through the Takings Clause and a structure of private property more generally. 

The Civic and Economic Case for Reparations 

Although it is unclear whether or not businesses are legally entitled to lockdown reparations, that doesn’t mean that they shouldn’t be compensated. There are obvious moral arguments to reparations but doing so will also further create civic as well as economic goals.

As Somin articulated in response to Pujol’s argument, it is unclear, if not unlikely that compensation will be granted through the Takings Clause. That doesn’t mean the Takings Clause shouldn’t serve as a model for administering lockdown policies. Somin writes 

“The people in question haven’t done anything wrong. They simply own and operate businesses that—in normal times—are not only innocent but actually make important contributions to the community.

I am not sure what the best way to compensate them is. But I do think there is a strong case for providing at least some substantial relief. On that score, I agree with much of what co-blogger Keith Whittington says here. As he points out, “The government itself has ordered businesses to stop operating” and “[i]n such circumstances, the government should compensate individuals for the damage it has wrought and relieve individuals from the unforeseen burdens that they have been asked to assume.”

The first civic benefit to compensation is some sense of justice. A government shouldn’t be able to impose this much disruption and damage on its innocent citizens without some sort of compensation; that’s only fair. If a government gets away with such actions then that is a step towards tyranny. 

Another important benefit is that such compensation protects and furthers the concept of private property rights, which are essential for a prosperous and civilized society. Basic economics tells us that private property rights are necessary for sound decision-making. Lockdown reparations will affirm and highlight the damage done not only to private enterprises but also the disruption to contracts in the name of the public interest. The government certainly has the right to interfere in such matters but there is a process to do so, part of which is compensating the victims. 

Perhaps it may be difficult to make rational decisions when employing lockdown policies because decision-makers don’t have an idea of how much economic and social disruption they are causing. Emphasizing private property rights through reparations will actually allow some sort of calculation to take place. 

The great economist Ludwig Von Mises wrote extensively on the need for price mechanisms in economic calculation. Prices and market mechanisms play an essential role in everyday society. They are part of the reason supermarkets in the United States have endless variety and those in North Korea are empty. Reparations will introduce these essential economic mechanisms into the policymaking sphere so government actors can actually understand and make informed decisions on the tradeoffs between public safety and economic disruption. 

As Mises once said: “Economic knowledge necessarily leads to liberalism”. What he meant was that understanding the market and its functions will lead to fewer interventionist policies. If governments actually had to calculate and be held accountable to lockdown policies via a system of reparations, it would probably be far more careful. 

Closing down the entire country would prove to be prohibitively expensive and would only be a method of last resort. As a result, the government would be forced to actually come up with evidence-based and tailored solutions that maximize overall well-being. Not only will governments be better equipped to conduct sound policymaking but reparations will also act as a useful check on authoritarian tendencies. Those who think they can simply impose their wills on society as many governors are doing now will be met with a hard reality check when they are presented with the price tag.

Key Takeaway

Lockdown policies have undoubtedly devastated society, especially the business community. If left unchecked, it is possible that the freedoms we have lost and the livelihoods of many former business owners will never be retrieved. Those with the resources should certainly lawyer up and seek just compensation. However, the legal theory surrounding that process is uncertain at this time.

Although it is unclear whether existing law guarantees a pathway to lockdown reparations, the principles enshrined in the 5th Amendment as well as basic economics provide an attractive case to implement reparations. Not only would it be the moral thing to do but lockdown reparations may also lead to a productive policy framework that protects individual liberty and enables more informed decision-making.

Ethan Yang

Ethan Yang

Ethan Yang is an Adjunct Research Fellow at AIER as well as the host of the AIER Authors Corner Podcast.

He holds a BA in Political Science with a concentration in International Relations with minors in legal studies and formal organizations from Trinity College in Hartford Connecticut. He is currently pursuing a JD from the Antonin Scalia Law School at George Mason University.

Ethan also serves as the director of the Mark Twain Center for the Study of Human Freedom at Trinity College and is also involved with Students for Liberty. He has also held research positions at the Cato Institute, the Connecticut State Senate, Cause of Action Institute and other organizations.

Ethan is currently based in Washington D.C and is a recipient of the 13th Annual International Vernon Smith Prize from the European Center of Austrian Economics Foundation. His work has been featured and cited in a variety of outlets from online media to radio broadcast.

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