Grazing for Dollars

A privatizing proposal that can reduce the budget deficit, too.

The worst thing that can happen to a good cause is not to be skillfully attacked, but ineptly defended.
—Frederic Bastiat, Economic Sophisms, 1845

My purpose is to defend a good cause. The particular case and its defense are made easy, since the facts are clear and the violation of first principles is flagrant.

The cause is the privatization of our public lands. The problem is not new. For example, Adam Smith specifically gave advice on this issue over two centuries ago:

In all the great monarchies of Europe, there are still many large tracts of land which belong to the crown. They are generally forest; and sometimes forest where, after travelling several miles, you will scarcely find a single tree; a mere waste and loss of country in respect both of produce and population. In every great monarchy of Europe the sale of the crown lands would provide a very large sum of money, which if applied to the payment of the public debts, would deliver from mortgage a much greater revenue than any which those lands have ever afforded the crown.…When the crown lands had become private property, they would, in the course of a few years, become well-improved and well cultivated.…It would, in all cases, be for the interest of society to…divide the lands among the people, which could not well be done better, perhaps, than by exposing them to public sale.

Land, like all other resources, is most productive when in private hands. The empirical evidence, both in time and space, that supports this proposition is overwhelming. All of the other alternatives, or so-called progressive ideas, are nothing more than expensive games. As a tragic example, we only need to be reminded of the abysmally low and erratic productivity of the Eastern countries' collectivized lands.

Without attempting to be pedantic with yet another quotation, I must emphasize that privatization, or what is now referred to as supply-side economics, is neither new nor a gamble. Already, Louis XII of France—a great king, statesman, and implementer of modern finances—liked to say: "The money of my subjects multiplies better in their hands than in mine." And it did.

At home, grazing lands in our western states are primarily owned by the federal government. There is, however, an easy way to privatize these holdings. Until the passage of the Taylor Grazing Act in 1934, the public domain had been operated as a large commons. Since the act, a more orderly method of utilization has been in effect. For the right to use public grazing lands, which cover approximately 155 million acres, ranchers must acquire grazing permits. To obtain these permits, ranchers must pay annual rents to the Bureau of Land Management. By custom, the grazing permits, which number approximately 20,000, are attached to specific parcels of private land. (The owner of private parcel A acquires the right to graze his herds on public parcel B.)

The linkage between public permits and private land has had a profound impact on the market for private land. The annual public grazing fees have been set below market-clearing levels; that is, given the price, there are more buyers than there are permits. As a result, the grazing permit market has been cleared—supply and demand equalized—not through the grazing permit market itself, but through the market for private land. So the difference between market-clearing public grazing fees and those actually charged has been capitalized into the value of private lands that public permits are attached to. (The value of an asset, such as land, reflects the flow of net benefits—gross benefits minus costs—that is expected to be generated by the asset. Converting this flow of net benefits into an asset value is referred to as capitalizing.)

The linkage, through capitalization, between the market for public permits and that for private land, has important implications. It means that, with the exception of those who obtained the original permits, all ranchers have had to pay two prices for their public grazing permits—a public price, in the form of an annual grazing fee, and a private price, in the form of a premium for their private lands.

To privatize public grazing lands and transfer public grazing permits (surface rights in fee simple) to private ranchers on an equitable basis, we must charge a lump-sum amount to ranchers. This charge should be for that portion of the grazing permits' value that has not already been paid for through premiums for private land.

Privatization can be accomplished in the following manner. Each rancher could be given the right to purchase, on a first-refusal basis, the public grazing permits that he now rents from the Bureau of Land Management. The first-refusal price would be set by capitalizing (at a one percent real rate of interest) the annual fees (in 1982 dollars, averaged over the past five years) that the rancher has paid. (Note that one percent is an estimate of the real long-term interest rate paid by the US Treasury and that the five-year average of annual fees is an estimate of future annual fee payments.) If the rancher refused to purchase his permits at this price, then they would be sold at an auction to the highest bidder.

This privatization proposal would benefit us all, with the possible exception of the bureaucrats who manage the public lands and those who derive their power from their leverage on the arbitrary level of public grazing fees.

First, the productivity of western ranches would increase. Ranchers would no longer have to receive lessons from Bureau of Land Management bureaucrats on how to husband land, raise cattle, and prepare environmental impact statements.

Second, an objective of the "New Federalism" would be achieved: a tax base would be transferred from Washington to state and local governments.

Third, federal revenues would be generated. These would equal approximately $1.5 billion. Instead of receiving annual grazing fee revenues, the federal government would receive an equivalent amount as a lump-sum payment.

Finally, since the federal grazing lands create negative cash flows for the federal government, unfunded federal liabilities would be reduced. For example, in 1981 total receipts from grazing fees were $24.9 million, while outlays for program management were $41.6 million and payments to local governments in lieu of taxes were $16.9 million. In effect, the federal taxpayers had to pay $33.6 million in 1981 to permit ranchers to use the taxpayers' federal grazing lands! (The real economic costs to the taxpayers, in terms of opportunities forgone, are even greater than the negative cash flows, because the federal government does not count as costs capital carrying charges on the assets it holds.)

We all know that the defense of private property is right. All we must do is take Bastiat's advice and properly defend our position. Then a clearly informed citizenry will naturally demand what is in everyone's best interest.

Steve Hanke is a senior economist on the President's Council of Economic Advisers. This article, adapted from a presentation at Manhattan Institute Policy Forum, represents the views of the author and not necessarily those of the council.