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January 14, 2006

On Kelo: Barking up the wrong tree

Anderson on Political Economy, Elizabeth Anderson: January 14, 2006

After a semester hiatus, I resume my series of posts on the political economy of a free society.  Let's take up the issue of eminent domain, through the controversial Supreme Court case, Kelo v. New London  268 Conn. 1, 843 A. 2d 500, which affirmed the constitutionality of compulsory state transfers of private property to other private owners for the purpose of promoting economic development.  The case has sparked a lot of outrage, spurring many states to draft laws banning state-enforced private-to-private transfers of property.

I think the outrage is misplaced.  The problem with the current construction of the power of eminent domain is not that it permits states to force private-to-private transfers.  The problem is rather that current law undercompensates property owners for such takings.

First, some background:  The city of New London has been suffering from what the Supreme Court described as "decades of economic decline," including the loss of its major employer.  It decided to try to revive itself by authorizing a private nonprofit organization, the New London Development Corporation, to draw up economic development plans.  The NLDC's plan for redeveloping several parcels of land integrated public and private functions, including a park, museum, parking, residential, retail and office space.  Finely appointed private homes would be condemned to make room for the new development.  The homeowners sued to prevent the condemnation, arguing that the 5th Amendment permits states to take property for "public use" only, whereas parts of the plan would involve merely "private use."  New London successfully argued that "public use" should be construed as including any "public benefit," including economic revival of the city.  The plaintiffs argued that "public use" should be limited to either public ownership of the property, or, if it is transferred to private ownership, uses that are open to the public, such as railways.

I want to abstract briefly from this constitutional question to consider the underlying political values at stake in the power of eminent domain.  There are lots of bad arguments against New London's exercise of eminent domain in this case that need to be cleared away before we can get to the  issues that matter.  Such as:

The notion that compulsory private-to-private takings are ok if the taking eliminates a "harm to the public," such as blighted property, but not if the property in its current state poses no harm.  (This was Justice O'Connor's claim in her Kelo dissent.)  So, a city has to wait until it is utterly blighted before it can undertake a recovery effort?  One may as well argue that it's ok to give medicine to a person who has collapsed from disease, but wrong to administer it in earlier stages of the disease, so as to prevent utter collapse.

The notion that allowing state compulsion of private-to-private transfers for generic economic benefit "guarantees" that the "losses will fall disproportionately on poor communities," as Justice Thomas objected in his dissent.  Thomas' complaint is ironic, given that a central precedent for Kelo was Hawaii Housing Authority v. Midkiff, 467 U.S. 229 (1984), which transferred property from wealthy landlords to poor tenants in order to break up an oligopoly in land and thereby increase competition.  More importantly, that poor communities would suffer net losses at all depends on acceptance of a miserly standard of compensation, a point to which I shall return below.

The notion that New London's taking violates the rule of law.  This objection would have us view the Kelo case as akin to the lawless seizure of private oil wells in Shaanxi, China, which I condemned in an earlier post.   The rule of law is being flouted in the Shaanxi case, where the state's decisions were taken in an unaccountable and secretive way. It hasn't offered even a pretense of justification that the taking serves any public interest.  The officials who seized the property are not subject to election or recall by people dissatisfied with their actions.  They are suspected of corruption, seizing the wells so they can skim the profits.  The revocation of rights to private prospecting was not publicized until after the state decided to take the wells.  Oil development contracts with the plaintiffs have been summarily breached, plaintiffs' access to the courts and the press has been systematically threatened, and plaintiffs have not been compensated for anything close to the market value of their wells.  In New London, by contrast, the city's development plans were publicized in advance.  The city development commission undertook a careful study justifying the project in terms of the public interest:  it would produce more jobs and economic development in a severely depressed city.  Voters had the power to kick out city officials if they disapproved of their plans.  There was no evidence of corruption by public officials.  No contracts with private parties were breached; plaintiffs enjoyed full access to the courts and the press; and were offered compensation for their property in accordance with current law.  City officials acted under a Connecticut statute explicitly authorizing their taking.  Bracketing the constitutional question, then, they did not act arbitrarily, but in accordance with the rule of law.

The notion that New London violated "the sacred and inviolable rights of private property," as Justice Thomas objected, quoting Blackstone, in his dissent.  On the Blackstone/Thomas reasoning, one should deduce the proper scope of eminent domain by scrutinizing the concepts of private property and the powers inherent in sovereignty, perhaps with some reference to the development of common law a couple of centuries ago.  This methodology is flawed from the start, since the concepts of private property and sovereignty are utterly empty apart from judgments of what ends are to be served by these institutions, along with empirical assessments, which may change with circumstances, of how these institutions should be designed so as to best serve these ends.  There is no immutable concept of private property:  at various times, people have claimed that it includes purportedly sacred and inviolable rights to own slaves, to rape one's tenant's brides, to dictate to one's tenants how they shall worship, to throw one's defaulted debtors into prison, to prevent others from constructing buildings on their property that are tall enough to cast a shadow on one's own property, to maintain a monopoly on public transport across a river, and on and on.  Each of these purported inviolable rights has been defended with an intensity and conviction at least equal to those who take Kelo's side today.  Look at the libertarian literature today, and one can see right libertarians such as Robert Nozick develop their harshly inegalitarian views from their arbitrary notion of natural property, and left libertarians develop their surprisingly egalitarian views from their equally arbitrary notion of natural property.  This is why testing a property claim against one's intuitions about "natural" property rights is worthless--not so much, as Bentham complained, because such claims of right are "nonsense on stilts," but rather because they are forms of what he called "ipsidixetism": passing raw assertion of opinions off as arguments.  It doesn't help to pluck out a random date--Justice Thomas seems to favor property rules that preceded the full development of industrial capitalism--and claim that the common law rules recognized then constitute our sacred rights to private property.  Private property rules are in continuous development, because the flourishing of capitalism requires this.

There has to be a more principled way to assess rival private property rules than this battle of intuitions and feelings of outrage dressing themselves up under the guise of "sacred and inviolable rights." Disputes over property rights do not have to be turned into a Holy War, with rival sides thumping their respective holy texts, or advancing their fervently held dogmas about what is or is not sacred.  We can instead proceed as Hayek recommended we proceed, by judging property rules according to the value of the bundle of opportunities they provide to anyone at random:

Since rules of just conduct can affect only the chances of success of the efforts of men, the aim in altering or developing them should be to improve as much as possible the chances of anyone selected at random. . . . All the law can do is to add to the number of favorable possibilities likely to arise for some unknown person and thus to build up an increasing likelihood that favorable opportunities will come anyone's way. (Law, Liberty, and Legislation, vol. 2, 129-130).

The point of considering property rules from the point of view of a random individual is to ensure that one does not choose them solely with a view to how some particular person will fare under them, but rather with a view to how people generally will fare under them.  This exercise could be formalized in the way Rawls did, with people choosing rules of justice from behind a "veil of ignorance."  But I prefer to avoid the elaborate Rawlsian apparatus, which gets more questionable, the more details are packed into the "original position."  At the same time, Hayek's standard is ambiguous:  does it require, say, that we maximize average or median expectations from a property rule?  (Note that a focus on raising median expectations, as opposed to average expectations, would guarantee that an acceptable rule benefits those in the bottom half of the economic distribution.) 

Fortunately, in the particular case of the state's power of eminent domain, we have a stricter standard to which we can appeal in judging the justification of compulsory private-to-private transfers.  Eminent domain is, unlike ordinary taxation, a particularly disruptive form of property rule.  For such rules, it makes sense to insist that the "public benefit" be shared with those whose property is taken.  The narrow construal of "public use," which allows a compulsory private-to-private transfer, provided that the property is, like a railway, operated as a public accommodation, is designed to capture this idea that the benefits of a state taking redound to all, including those whose property is seized.  In other words, mere compensation--leaving property owners no worse off than before their property was taken--is not enough: in addition to having their losses compensated, they must share in the benefits achieved by the transfer.

It is evident that the current rule of compensation, which supposedly offers property owners "fair market value" for their property, is a cruel joke, leaving those whose property is taken net losers.  It does not even cover their moving costs.  Moreover, if the economic development project succeeds, property values may rise so much that those whose property was taken can no longer afford to live or operate their business in the city.  There is an easy remedy that ensures that owners share in the economic benefits of a compulsory private-to-private transfer.  The rule of compensation should be that owners receive the greater of:

(a) fair market value of their property prior to condemnation + reasonable moving costs (including possible net costs of refinancing, etc.), or

(b) fair market value of comparable property in the city after the economic development plan is undertaken.

(B) captures the thought that, if the transfer succeeds in promoting economic development, the benefits of this will be captured by all owners in rising property values.  The compensatory standard should ensure that those whose property is taken enjoy an equivalent increase in their compensation, so that they could, if they wished, afford to stay in the city living as they did before, enjoying the externalities of the new development.  (A) offers a hedge to owners in case the development plan fails.  At least they will not come out net economic losers from the taking.

I would also accept the following standard:

(c) fair market value of the seized parcel as zoned for its new use.

(B) says that an owner should be compensated enough to be able to buy an equivalent house/commercial building in the city without suffering any net economic costs.  (C) says that owners should share in the value added by and internalized in the new use of the property, not just in the positive externalities the new use offers to others.

When there are net expected economic benefits from compulsory private-to-private transfers,they would be allowed by the Hayekian standard.  The "public benefit" standard requires, beyond this, that owners whose property is taken are entitled to share in these benefits ex post, not just ex ante (before it is known that their property will be taken).

It may be objected that I am being too optimistic in assuming that net economic benefits can ever be expected from a rule of eminent domain that permits compulsory private-to-private transfers:  doesn't this leave politicians open to wholesale corruption and cronyism?  I observe that even corrupt mayors may manage to bestow great benefits on their cities from redevelopment projects--consider, for instance, Mayor Cianci's stunningly successful redevelopment of Providence, R.I.  However, I agree that there are dangers here.  The proper remedy, however, is not to ban such projects altogether.  The opportunity costs of an outright ban would be too high.  It would also give desperate, declining cities a perverse incentive to try running economic enterprises on their own, retaining public ownership of the property, rather than enlisting private entrepreneurs, who are likely to do a better job.  If the higher standard of compensation turns out, after trial, to be insufficient to deter corrupt and harmful deals, local governments could be required, upon petition from a significant portion of their electorate, to put their development plans up for public approval in a referendum.

Kelo's critics have been barking up the wrong tree.  The problem is not the principle of compulsory private-to-private transfers for public benefit.  It's that the current compensatory standard is too low to ensure that prior owners share in the benefits.

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Elizabeth Anderson at Left2Right, whos usually an insightful if somewhat verbose commentator, has posted a spirited defense of the Kelo decision. For those who dont know, Kelo v. New London was the somewhat-recent case where the Suprem... [Read More]

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Comments

Posted by: Jeff Childers

Great concept. Unfortunately, increasing compensation leads to the reverse problem: corruption based on *awarding* compensation to political insiders holding otherwise low-value or unmarketable property. In general though, I think I like your approach. Between the two models (the current one and yours), corruption is a potential problem for both. At least by your proposal, it is less likely that innocent individuals will be harmed. And I agree that current levels of compensation base are too low.

Posted by: Jeff Childers | Apr 7, 2006 9:07:01 AM


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