Kelo's hype and the economics of eminent domain

Sorry about the lack of posts lately. I debated this weekend and have been busy packing and enjoying doing nothing, but my idle state is not more. Lets get into it:

The topic of eminent domain has become a particularly popular one of late. Almost every inch of the political spectrum has come out against the Kelo v. New London decision this spring. Finally property rights loving libertarians are hand in hand with the urban poor against whom eminent domain is often used to "rebuild their blighted areas" (translation, they get kicked out and a J. Crew is put in). All these groups have also taken out much of their anger against the Supreme Court, which they felt was read far too much into the constitution.

Via Balkanization, I found this interesting defense of the Supreme Court's decision by Columbia Law Professor Thomas Merrill. According to Marty Lederman, Merrill's amicus brief had an obvious impact on three of the Justices opinions.

Regardless, Merrill spoke in front of the Senate Judiciary Committee and here are some of the interesting things he said.

Merrill starts by dismissing many of the common misconceptions about the Kelo decision (condensed for your pleasure):

Myth One: Kelo breaks new ground by authorizing the use of eminent domain solely for economic development.

Echoing Justice O’Connor’s dissenting opinion, it is widely asserted that Kelo is the first decision in which the Supreme Court permitted the use of eminent domain solely for economic development. By giving its approval to this new use of eminent domain, it is asserted, the Court has provided a roadmap for an unprecedented – and frightening – expansion in the use eminent domain.

...The universe of prior precedent...includes numerous Supreme Court decisions upholding “takings that facilitated agriculture and mining” because of the importance of these industries to the economic welfare of the states in question. And it includes Ruckelshaus v. Monsanto Co., upholding the condemnation of trade secrets in order to promote economic competition in pesticide markets. Moreover, in none of these previous decisions (or even in Berman with respect to the parcel of property before the Court) could it be said that the property was being taken because of some “precondemnation use” that inflicted “affirmative harm.” Justice Stevens concluded that “[p]romoting economic development is a traditional and long accepted function of government” – surely an irrefutable proposition – and that there was “no principled way” of distinguishing what the petitioners characterized as economic development “from the other public purposes that we have recognized.”

Myth Two: Kelo authorizes condemnations where the only justification is a change in use of the property that will create new jobs or generate higher tax revenues.

The possibility that eminent domain could be justified solely on the ground that it would increase the assessed valuation of property was raised at the oral argument in Kelo. Justice O’Connor’s dissenting opinion, which is based largely on a slippery slope argument, makes much of this possibility, building to her famous line – “Nothing is to prevent the State from replacing any Motel 6 with a Ritz-Carlton, any home with a shopping mall, or any farm with a factory.”

The Court in Kelo did not have to decide whether an isolated taking to produce a marginal increase in jobs or tax revenues satisfies the public use requirement. The New London Redevelopment Project before the Court was designed to do much more than achieve an “upgrade” in the use of one tract of land. A Justice Stevens’ recounted, the project was also designed to generate a number of traditional public “uses”: a renovated marina, a pedestrian riverwalk, the site for a new U.S. Coast Guard museum, and public parking facilities for the museum, an adjacent state park, and retail facilities. Later in his opinion, in discussing the petitioners’ argument that the Court should draw a bright line prohibiting takings for economic development, he noted that the “suggestion that the City’s plan will provide only purely economic benefits” was “unpersuasive” as applied to the taking before the Court.

Myth Three: Kelo dilutes the standard of review for determining whether a particular taking is for a public use.

...[Kelo] suggests that courts should carefully review condemnations that result in a private retransfer of property, or are not carried out in accordance with some planning exercise, in order to determine whether the government is taking property “under the mere pretext of a public purpose, when its actual purpose was to bestow a private benefit.” Justice Kennedy’s concurring opinion makes explicit that the Court’s decision upholding the condemnation in Kelo “does not foreclose the possibility that a more stringent standard of review than that announced in Berman and Midkiff might be appropriate for a more narrowly drawn category of takings.”

In truth, therefore, Kelo intimates that the Court in the future may impose a higher standard of review in public use cases than has prevailed before. Before Kelo, courts merely had to ask whether the use of eminent domain is “rationally related to a conceivable purpose.” After Kelo, courts are instructed to investigate the factual circumstances to determine whether the invocation of a public purpose is a “mere pretext” to justify a transfer driven by “impermissible favoritism to private parties.” In terms of the formulation of the standard of review, Kelo was a significant victory for property rights advocates, a development completely obscured by the widespread denunciation of the decision.

Myth Four: The original understanding of the Takings Clause limits the use of eminent domain to cases of government ownership or public access.

Myth Five: Takings for economic development pose a particular threat to “discrete and insular minorities.”

...Justice Thomas’s preferred position would restrict eminent domain to takings for government use or actual use by the public. Any other type of real estate development would have to use market transactions. Consequently, one way to test his prediction about the impact of eminent domain on poor communities would be to compare the benefits poor communities receive from real estate projects that rely solely on market transactions with the benefits they receive from projects facilitated by eminent domain. Because of the high transaction costs of assembling large tracts of land in developed areas, market-based development projects tend to be concentrated in greenfield sites at the perimeters of urban areas, far from most poor communities. Thus, unless one believes that new real estate development is inevitably bad for poor communities, there is reason to doubt that leaving all commercial real estate development to market transactions would improve the welfare of poor communities.

Justice O’Connor’s position is even more bizarre. Her position is that “public purpose” takings are permissible, but only if the taking is designed to overcome some “precondemnation use” that inflicts “affirmative harm on society.” Translated, this means that eminent domain can be used for economic development only if there is a finding the property is “blighted.” Would requiring a determination of “blight” reduce the danger of poor and minority communities being targeted for economic development takings?

Hmmm, so where does this all leave us. Well first it means that as Public Enemy once told us over and over, "Don't Believe the Hype". I find it interesting how so many people get outraged about Supreme Court decisions without actually reading the rationale behind the decisions. I honestly doubt that these wackos understood the constitutionality of John Paul Stevens' opinion which Souter signed on to (not that I do, but at least I don't pretend to).

But while Merrill really establishes why we should all chill about the Kelo decision he has some interesting things to say about what, if anything, should be done. He dismisses the use of Congress to establish what should and should not be public use. Arguing instead that federalism is far more efficient at what determines justice and efficiency in such cases. For example, the rules governing eminent domain would be very different in New York City, where the challenge is just collecting the tracts of land. Compare that to rural Arizona, where the challenge is usually finding access through other tracts of property to your newly purchased property.

What Merrill does not dismiss is a couple of nifty ways to make the compensation for victims of eminent domain truly "just" (this is also a topic that my favorites Gary Becker and Richard Posner discussed this summer: here and here). The problem with providing evicted citizens with only the fair market value of their house is that that is obviously not the amount they value their house, otherwise they would have just sold it to the state for that much. I will let Merrill contemplate solutions to this predicament:

...Congress could require that when occupied homes, businesses or farms are taken, the owner is entitled to a percentage bonus above fair market value, equal to one percentage point for each year the owner has continuously occupied the property. This would provide significant additional compensation for the Susette Kelos and Wilhelmina Derys who are removed from homes they have lived in for much of their lives.

Alternatively, Congress could require that when a condemnation produces a gain in the underlying land values due to the assembly of multiple parcels, some part of this assembly gain has to be shared with the people whose property is taken. Under current law, all of the assembly gain goes to the condemning authority, or the entity to which the property is transferred after the condemnation.

Obviously these are not well developed policy proposals, but they are more than all of the chatter post-Kelo have produced. Also, they are great case ideas for debate (by the way, T-Bone rocked the Williams debate, seventh place novice, it was a great weekend and a pleasure to debate with him again).

-Mr. Alec