The eminent domain clause of the Fifth Amendment of the U.S. Constitution states that "Nor shall private property be taken for public use, without just compensation". This clause allows private property to be taken for public use, but requires "fair" compensation. The clause raises three major questions: what is "public use", what is "fair compensation?", and is the principle of eminent domain desirable in a modern economy? I briefly discuss all three questions.
PUBLIC USE. The recent 5-4 Supreme Court decision in Kelo v. City of New London elaborated on the court's interpretation of "public use". The majority argued that it meant "public purpose", even if the project is undertaken primarily by private companies and individuals, as long as it produces general benefits in the form of increased economic development, greater tax revenue, and the like. The minority opinion written by Justice O'Connor considered this interpretation to be excessively broad, and argued for a narrower interpretation, but her opinion did not provide a clear criterion for narrowing it. The Institute of Justice, representing the 15 homeowners who opposed the city‚Äôs plan to raze their homes, wants to limit the clause to situations with actual ownership or use by the public. Examples acceptable to the Institute include construction of roads or public utilities, although courts in the past have allowed a much broader interpretation of the right to eminent domain.
It is difficult to establish a simple dividing line between what is and what is not a public use. Since private companies are involved in building roads, running electric power plants, and other public use projects, why is that fundamentally different from using eminent domain to authorize construction of private baseball stadiums, or private business redevelopment in a poor neighborhood?
Although the majority opinion by Justice Stevens argues the reasonable position that the decision-making power in specific instances should be left to state and local governments, the power to condemn property allows a government to avoid the need to demonstrate that a planned development will actually raise economic value or other benefits. The best judge of this is the market test of whether the new owners could fully compensate the old owners and still benefit, yet the right to eminent domain means that a public project can avoid having to pass this test.
FAIR COMPENSATION. To me, the only reasonable interpretation of "fair compensation" is the worth of property to the present owners. This often is greater than the highest bids for the property in the marketplace. For example, one of the 15 homeowners who objected to selling her home to the city of Bridgeport was born there 87 years ago. Clearly, the house was worth more to her than the city‚Äôs assessment. Why should she be forced to sell at a price that could be way below its full value to her?
A second problem with the fair compensation test is that large property owners usually do better in the litigation over compensation than do small owners. The reason is that larger owners hire better attorneys and spend in other ways to increase their compensation. In the Kelo case, the Institute of Justice, a non-profit libertarian NGO, came to the defense of the 15 small property owners, but that usually does not happen. A PhD study years ago by Professor Patricia Danzon of Wharton showed that smaller property owners generally receive lower compensation relative to market assessments of value than do large owners. The true picture is probably much worse since she did not have data on the subjective value of having lived in a home for a long time.
IS EMINENT DOMAIN DESIRABLE? In addition to analyzing where to draw the line in deciding what is legitimate "public use", we should ask whether the line should be allowed at all. Is eminent domain a desirable principle in the 21st century? In the 18th, 19th, and early 20th centuries, governments did rather little, so there was not much to fear from great abuse of the eminent domain constitutional clause. In fact, the first real eminent domain case was not decided until 1876. Now, however, government at all levels do so much that the temptation is irresistible to use eminent domain condemnation proceedings to hasten and cheapen their accumulation of property for various projects, regardless of a projects merits.
Without the right to eminent domain, governments would have to buy property in the same manner that private companies often accumulate many parcels to create shopping centers, factory campuses, and building complexes, like Rockefeller Center. There are difficulties involved in combining separate parcels into a single more extensive property, but whey should that be made too easy, as through a condemnation proceeding?
To be sure, property owners may have incentives to free ride and hold out, particularly when their homes or businesses help complete a larger property, as in the property needed to construct a road. But usually a road can take competing paths, a power plant can be built in different locations, and so forth, so that buyers, government or private, can use the leverage from competition among sites to reduce the advantage of holding out. And sometimes they can build around stubborn holdouts, as happened when the property to build the privately accumulated Rockefeller Center was put together
I am not claiming that a system without eminent domain would work perfectly--it would not. But modern governments have more than enough power through the power to tax and regulate. Although eminent domain can be considered just another (but highly intrusive) form of regulation, condemnation is too powerful and easy a regulatory form. "Power corrupts" is an old saying, which explains why condemnation has indeed been frequently abused (see Martin Anderson's classic study, The Federal Bulldozer). It allows governments to avoid the market test of whether a proposed project adds value in the sense that a project is worthwhile even after owners of property are bought out through regular market proceedings.
Eliminating the eminent domain clause from the Constitution is obviously not feasible in any foreseeable time frame. But it is still useful to discuss the benefits and costs of this clause, or to question whether it is desirable. A negative answer might help provide guidance to judges, legislatures, and voters in determining how far they want to push the privileged position of property accumulation for an alleged