The Kelo Case, Public Use, and Eminent Domain--Posner Comment

The Fifth Amendment permits the use of eminent domain, in which government takes private property without negotiation but must pay the owner the market value of the property, only if the taking is for a "public use." (The Fifth Amendment is applicable only to action by the federal government, but the Fourteenth Amendment, which applies to state and local government action, has been interpreted to incorporate the "public use" limitation on eminent domain.) In Kelo v. City of New London, which the Supreme Court decided on June 23, the city took private residential property as part of a redevelopment plan under which the property would be turned over to private developers for office space and parking. Whether the case was "correctly" decided depends on one’s theory of constitutional adjudication, which might in turn point one to the origins of the "public use" provision and to the Supreme Court's precedents. I want to abstract from the legal questions and ask three practical questions: When if ever is eminent domain proper? Is it ever proper when the private property taken is going to be transferred to another private entity rather than being kept by the government for some governmental use, such as a post office or an army base? And is the power granted local municipalities by the Kelo decision likely to be abused? Generally, government should be required to buy the property it wants in the open market, like anyone else. If it is allowed to confiscate property without paying the full price, it will be led to substitute property for other inputs that may cost less to society to produce but that are more costly to the government (a private rather than social cost) than land because the government has to pay the full price for them. This assumes that government in its procurement decisions tries to minimize dollar costs rather than full social costs, but the assumption is realistic. When the government does take property by eminent domain, it has to pay the owner the market value of the property, but that value will be less than the owner values the property--otherwise he would sell it to the government at market value and there would be no need for the government to incur the cost of eminent domain proceedings. Generally, property is worth more to the owner than the market price (which is why it's owned by him rather than by someone else), because it fits his tastes or needs best as a consequence of its location or improvements (which is why he bought it rather than some other piece of property) or because relocation costs would be high. Real estate is a heterogeneous good and so a particular parcel in the hands of a particular owner will generally yield him an idiosyncratic value that is on top of the market value. Eminent domain operates to tax away that value; if market value is $X and total value (including idiosyncratic) is $1.2X, then if the government takes it by eminent domain it pays for it in effect by spending $X out of the government's own coffers and $.2X out of the owner's pocket. This is an arbitrary form of taxation and one that, as I said, creates the illusion that an input is cheap because its money price is less than its social cost, and as a result causes a misallocation of resources. The only justification for eminent domain is that sometimes a landowner may be in a position to exercise holdout power, enabling him to obtain a monopoly rent in the absence of an eminent domain right. The clearest example is that of a right of way company, such as a railroad or a pipeline, which to provide service between two points needs an easement from every single one of the intervening landowners. Knowing this, each landowner has an incentive to hang back, refusing to sell to the right of way company except for an exorbitant price. Each hopes to be the last holdout after the company has purchased an easement from every other landowner--easements that will be worthless if it doesn't obtain an easement from that last holdout. Most right of way companies are private, which answers my second question: the rationale for eminent domain is unrelated to whether the party exercising the eminent domain power is the government or a private firm. Right of way companies are not the only private enterprises that can make an argument for the use of the eminent domain power. The argument is available in other cases in which a large number of separately owned contiguous parcels have to be acquired for a project that will create greater value than the parcels generate in their present use. It is impossible to tell from the opinions in the Kelo case whether that was such a case. Pfizer had decided to build a large research facility adjacent to a 90-acre stretch of downtown and waterfront property in New London and the City hoped that Pfizer's presence would attract other businesses to the neighborhood. The plaintiffs' residential properties were on portions of the 90-acre tract earmarked for office space and parking, and it might have been impossible to develop these areas for those uses if the areas were spotted with houses (the plaintiffs owned 15 houses in all in the two areas). The Court, however, did not discuss whether there was a holdout problem; it thought it enough to justify the taking that the City had a bona fide and reasonable belief that the planned redevelpment would generate net benefits for the City and its residents as a whole, although the plaintiffs of course would lose any idiosyncratic values that they obtained from their property. However, in the absence of a holdout problem, there is no need for eminent domain—private developers will rush in without need for City assistance if indeed the property would be worth more in a different use from the present ones. The Court was mindful of the possibility of abuse of the eminent domain power; it made clear that there would not be a public use if all a municipality did was take property from one person and give it to another, with no showing of an increase in overall value. But the Court did not consider whether development plans such as New London's actually on average increase value for the municipality that undertakes them, or rather are usually the product of rent-seeking political deals. Thus the actual impact of the Court's decision on economic welfare cannot readily be determined. It is possible that what really motivated the Court was a simple unwillingness to become involved (or to involve the lower courts) in the details of urban redevelopment plans; a flat rule against takings in which the land ends up in the hands of private companies would, as I have explained, be unsound. Another practical defense of the decision is that the more limitations are placed on the private development of condemned land, the more active the government itself will become in development, and that would be inefficient. If the City of New London had guilt office space, parking, etc. on land condemned from private owners, a challenge based on the "public use" limitation would be unlikely to succeed--unless the Court confined public use to holdout situations and was prepared to try to determine, case by case, whether a genuine holdout situation existed.

Comments

[Corey]

"I also think that market price is, economically, the appropriate threshold for defining a "holdout," even if it is not "a fair price" vis-a-vis the owner's subjective value"

The problem with that is, you are using the term "economically" in a way that excludes the very notion of a "fair price" or an idiosyncratic value. If unique value is deemed subjective and dismissed simply because it is difficult to quantify, then what is the point of even asking?
Many economists (even Posner sometimes) would say that idioscyncratic values must be considered.

Respecting this value may be an incentive to bad faith holdouts, but taking away people's right to consent to sale is an incentive for exclusionary zoning and development in the interests of $$$ alone.

"Economic development will come at the end of the development phase after $70,000,000 is spent to clean, reshape and redesign, 90 acres of land all for the public benefit."

Sounds like a really good deal for the construction industry and any city lawyers who happen to invest in the project. You forgot to mention the new affordable housing project you were building for the 15 displaced families! Will that be near the new park then?

Oh... you mean there aren't comparably priced new housing units in the plan? Ok, then you should add, "filled with no-tax-paying poor people" to your qualifications for developing the area.

[Corey]

"1. Your home must be situated in commercial/industrial zone that has performed poorly with 80% commercial vacancy rate and 20% residential vacancy.
3. Your neighborhood has roads built and designed over 150 years ago"

OK, so if the neighborhood is 150 years old then it predates zoning. So who zoned it commercial/industrial when the commercial vacancy was 4 times as high as the residential one? Was it you Londregan? Maybe your predecessor.

Either way, some of those residents you are booting have been there longer than the zoning laws have existed so its a bit silly to imply that they somehow chose to live in an inappropriate zone.

[RWS]

Palooka:

Maybe there should be a line drawn as to when a project is insufficiently public in nature. However, redevelopment projects spur many, many public benefits. Curing urban blight around a downtown can reap great external benefits to the surrounding area and the city as a whole, given how people tend to judge cities by how their centers look and feel. Likewise with waterfront areas. Moreover, a major redevelopment can help be sort of an "anchor tenant" that gives security to other investments coming into the city. A city bears many similarities to a corporation, and, of course, they are often chartered as "municipal corporations."

This is so very different from the national government. There is no discernable original meaning to the "public use" clause in the context of local governments, and so the question then becomes who should define the term in its 14th Am. context. It's not that we shouldn't have zero check on local govts. or that there should be no line between public and private emoluments, just that these matters are best left to state law and courts, given that the states charter the municipalities in the first place.

[zeppenwolf]

David: In a democracy, all takings by the government are in some sense for a "public use."

Well there's a democracy I don't care to live in. A "democracy" which can seize anything you have and give it to someone else because (by definition!), what the government does is in the public's best interest will not be much of a democracy in the long run. A reasonably inviolable right to property is essential to freedom. What we have now, (unless states move to curtail), is the right to lease property from the gummint until some developer wants it.

Kelo is not necessarily a "liberal" decision

If you say so. But with liberal judges in favor, and conservatives dissenting, the inference is clear-- if you think property rights are important, vote conservative.

Tom: The local gov'ts consist of elected officials who will lose their jobs if they abuse this power

Another winning utopia. Councilman Stalin kicks grandma out of her home to put up a Starbucks, and her recourse is to vote him out of office in two years? What a great check on government power. I wonder if Starbucks' campaign contributions to the Councilman will make up for that lost vote.

I can't find it now, but someone said, "I don't see what difference it makes who the recipient is, private or 'public'", or something like that. The difference is that you're throwing gasoline on the unholy alliance of private money and public politicians. It's like saying that there's nothing wrong with giving whiskey and car keys to a teenager because he won't necessarily do anything wrong.

It should be abundantly clear that the framers had in mind things like roads. What the framers didn't explicitly say, but which I think or hope they meant, is that land would not be taken without a compelling and otherwise unanswerable need, which a railroad might satisfy but Pzifer most certainly does not. Could we add that stipulation to the flag burning amendment, please?

[zeppenwolf]

AND FURTHERMORE.... (hee)

"Public" means the public gets to use the land, not Pfizer gets to use the land. The public gets to drive there, or barbeque there, or catch a plane there, or hear a symphony there, etc.

The "extra tax revenue" which is the nominal justification here is not really in the public's use in the first place-- that revenue will only allow the local government to spend more. Hey, maybe even a pay raise for the mayor, eh? If that revenue, (let alone Pfizer's profit!), were directly distributed back to the local citizenry, then at least we could see a direct benefit to the public.

And that's the least prerequisite which an ED seizure should have.

[David]

To respond to Will - I should correct myself regarding Scalia: he finds history as important as plain text in constitutional interpretation. In statutory interpretation, however, he prefers to read the dictionary than the legislative history. There is some inherent inconsistency there, but then again, consistency is too much to expect of any mere mortal.

In my "absurd plain text" posting, I did not address the 3 non-legal questions on which Judge Posner asked us to focus. For what it's worth, I agree with him about the Court's motivation: to stay out of local land-use matters. That seems like a prudent jurisprudential choice, for the most part. There might be grave abuses in the future where the federal courts should and will intervene.

Is eminent domain ever appropriate? Only a property-rights absolutist would say no. Practically, it would be impossible to build roads, parks, airports, subways, etc. or to manage the design of cities without eminent domain. I think the costs of eliminating eminent domain would vastly outweigh the benefits. The "victims" of condenmation are always compensated, and I agree with Posner that they should receive a bit more than the market value (though I would not try to compute their "personal" valuation of the property - this seems almost like Marx's "labor theory of value" to me). The sum above the market price will pay for the owners' relocation expenses and also deter the state from using its takings power too often.

I cannot say that the government must itself use every bit of property that it condemns. What if it condemns land to build a private toll road, a privately-run airport, or a ballpark that will be owned by the team but will add value to the city? All of these seem to be appropriate "public" uses of eminent domain. Again, the "victims" must be compensated, and if a private entity ends up with the property, then it ultimately will pay the cost.

Finally, will the Kelo power be abused? Tough question. O'Connor has a legitimate worry about undue influence in politics. But politicians ultimately want votes, and if the voters rebel against extensive use of eminent domain, it will stop. I would guess that wide-scale abuse will be stopped at the polling place. But maybe I'm too idealistic..

[RWS]

David:

In fairness to Justice Scalia, the two types of interpretation (statute and constitution) are more consistent than they might first appear. I used to be confused about that, as well. The reconciliation lies in the fact that Scalia uses historical context around the framing to demonstrate what the accepted meaning of the terms was at the time of the framing. In a real sense, accurate history serves the same purpose as our modern dictionaries do--modern dictionaries being merely excellent scholarly compilations of the contemporary meaning of words.

While he sometimes is inconsistent in how he refers to this stuff, the idea is not that you look to the minds of the constitutional framers to divine *intent*, but rather to determine the accepted meaning of the terms at the time the phrases were constructed and ratified.

[N.E.Hatfield]

All these issues about takings and compensation. Just one question, were the aboriginals of North America properly compensted for their property? There is something about "superior dominion" that transcends equity and right. Even when the Ordinance of the Northwest Territories spelled it out cleanly and clearly. Opp's! Perhaps I shouldn't have raised this issue.

[Corey]

"I would guess that wide-scale abuse will be stopped at the polling place."

I think not. So long as the development plan is likely to increase the tax base, citizens who aren't directly affected will have reason to approve of it. There will always be orders of magnitude more citizens who stand to benefit from trickle down development benefits than citizens being forced to move at their own cost.

[Palooka]

RWS wrote: "While he sometimes is inconsistent in how he refers to this stuff, the idea is not that you look to the minds of the constitutional framers to divine *intent*, but rather to determine the accepted meaning of the terms at the time the phrases were constructed and ratified."

Yes, it's a common misconception that textualism ONLY refers to text. A constitution, which must be read broadly from vague language cannot be read that way. Scalia's textualism is closer to run of the mill originalism than either Scalia or his detractors realize. He is right to emphasize the extraction of the meaning of the text rather than intent, however.
But sometimes, where vague and imprecise language is used, the "intent" or more recently "the public understanding" of a given clause is the only way to extract what that text means.

[Palooka]

I haven't had time to read over Kelo and each dissent, but I came across something Thomas wrote. He wrote that the Court has replaced the traditional "public use" test with a "public purpose" test. I think that is a very apt description of what the Court has done. And I do not think public benefit is a very practical way to limit the power of eminent domain. It seems government action will only be limited if their actions are irrational. That is, they cannot conceivably advance some public purpose or benefit.

[eddie]

When eminent domain is used to force someone to sell at a price less than they would voluntarily accept, no matter how much value "the public" thinks they will get from the project they can only get that value by extracting it from the previous owner. As Posner points out, it is a peculiar form of taxation.

The holdout case seems to be an exception. Here the holdout owner is extracting value from the proposed project. Even if the property would normally find a buyer at $100K, and even if the owner had sentimental reasons to value it at $150K, and even if the developer were willing to give the owner $200K for it, the owner still might hold out for, say, $300K simply because the project will be stuck without his land and he therefore has a strong negotiating position. Here the owner's price includes not just the property's value to the owner but also a premium representing his ability to extort value from the developer.

Posner states that the holdout problem is a justification for eminent domain and otherwise devotes his post to showing (using economic reasoning) that in the absence of a holdout there is no other justification.

I would go even further. The holdout problem can be solved without the force of government. Land purchase contracts can be created such that each sale is conditional upon all required plots being sold. This way, there is no "last" seller who can use the developer's sunk investment as leverage to extract a higher price; if there is one seller whose price the developer can't meet, the developer isn't forced to pay for any of them and won't lose his investment. All sellers now have an incentive to bargain collectively in good faith with the developer.

In this day and age of modern finance and agile capital, the only purpose of eminent domain is to give politically connected developers larger profits at the expense of existing landowners.

The notion that eminent domain is a necessary evil is a relic of the past that our progressive founding fathers were not progressive enough to eliminate. It is in fact not necessary, and as the constitutional limits on its exercise become looser and looser, it is becoming a greater and greater evil.

[Hummer]

Coase's Theorm and this case:

1. He sought to show how transactions costs (or unclear property rights) prevented efficiency by interferring with what willing economic, profit maximizing person would do. NOT included in his theorm as I recall was the idea that the rules should "force" unwilling participants to engage in the market. In the case of a farmer with cows eating the other farmers' crops, the assumption is that both farmers want to participate in the market. Even if inefficient, Coase never suggested making one farmer keep growing crops.

2. Coase's Theorm has not a thing to do with the definition of Public Use in the 5th Amendment. So it is nice to explain how Coase is applied after the fact. It should not be relevant to the Supreme Court's decision making process.

[N.E.Hatfield]

eddie, Really? Eminent Domain as a non-progressive relic? How would you explain Meig's Field. This was a conversion of a Public Airfield, but dominated by private use (read: a few wealthy users)converted to a public park during the dark hours of the night. ;)

[TRC]

Thanks for the comments, Hummer. Below are my replies.

Your comment: 1. He sought to show how transactions costs (or unclear property rights) prevented efficiency by interfering with what willing economic, profit maximizing person would do. NOT included in his theorem as I recall was the idea that the rules should "force" unwilling participants to engage in the market. In the case of a farmer with cows eating the other farmers' crops, the assumption is that both farmers want to participate in the market. Even if inefficient, Coase never suggested making one farmer keep growing crops.

My reply: I am not sure I agree with your analysis. I believe that Coase can be applied to property rights for certain types of property (e.g., radiofrequency waves) when two or more parties disagree about property ownership and when, through the litigation process, one or both parties are forced to abide by court-sanctioned rules (whether they want to or not).

Your comment: 2. Coase's Theorem has not a thing to do with the definition of Public Use in the 5th Amendment. So it is nice to explain how Coase is applied after the fact. It should not be relevant to the Supreme Court's decision making process.

My Reply: I agree Coase has little to say with respect to the definition of public use. But it does have implications for the just compensation clause of the 5th Amendment, and some jurists may (unwittingly) rely on Coase to decide cases. For example, Coase could argue that just compensation is achieved when the government, working as an arbitrator between two parties that disagree, assigns initial property rights to the party that produce maximum utility (e.g., Google Coase and radiofrequency waves). New London believed (or implied it believed) ? correctly or not ? that assigning property rights to Pfizer and private developers would produce maximum utility for the community of New London, which had been in steady decline.

One never knows with certainty whether or not maximum utility will be achieved. Prospects of maximum utility are usually determined on a case-by-case basis using rational and empirical analysis. Moreover, many predictions by municipalities about future utility wind-up being wrong. In the present case, Pfizer could go bankrupt, or decide to vacate the property later. (That municipalities often issue wrong predictions ? while expressing such predictions with extreme confidence ? reminds me of a little known saying about Trotsky: ?As proof of his foresight, none of his predictions have come true yet.?)

It seems to me that a majority of the Supreme Court issued a decision that does (or could) comport well with the utility maximization aspect of Coase. They seemed to say that in the absence of clearly defined rules about public use, municipalities should be allowed to use eminent domain to assign property rights to the party who has the greatest prospect of producing the greatest utility. Whether SCOTUS meant to do this, or should have done this, is an entirely different matter.

[RWS]

I agree with TRC that Coase is readily applicable in this case. Hummer's distinctions do not mean that Coase somehow does not apply. In all externalities situations, there will be some party that is an unwilling recipient of the other's actions.

I think that transactions costs are higher than some property rights theorists think in redevelopment cases -- thus justifying the use of government reallocation of property rights to create more efficient results. Especially, the value to the community of a blighted area or underdeveloped area being redeveloped can be quite large, and yet the only way to capture all of these little bits of value is through the municipal corporation. I believe that people consent to the potential for a taking by the municipal corporation by locating within its jurisdiction. Different municipalities compete with each other for the optimal level of property rights versus propensity to condemn underutilized properties. The market for property rights (which absolutely exists) and not the federal courts should govern that line for defining "public use."

[Paul Deignan]

Well, I haven't heard this suggested yet:

Just compensation is amount of the worth of the property to the taker.

So, for example, in the case of Kelo (once the unconstitutional taking is done) the amount of compensation to Kelo should be the entirety of the tax revenue minus what the Kelo's were paying in perpetuity.

This condition might at least alleviate some abuse.

[Paul Deignan]

I should add:

or the market value, whichever is higher

[Roger Friedman]

As for public use, I am amazed that people think roads or public utilities are such pure examples. Here in Georgia, it's customary for a road to be routed through a politican's unproductive property, for which they receive a negotiated price, and then they develop the remaining adjacent land. Power companies condemn land for the lakes behind dams, some of which becomes waterfront property for favored executives and complaisant politicians. Any reader of Mark Twain knows about people bribing railroads to create routes through their townsites.

With respect to the valuation issue, we start with the market value -- willing seller, willing buyer -- which is like the opportunity cost. Then there is particular value, the contribution that the land makes to value consumed/produced by buyer/seller beyond the market value. Then there is the monopoly price, that which can be received by the buyer/seller as the result of the forced sale/purchase involving a single seller/buyer. I don't think there's any doubt we want to pay the market value and not pay the monopoly price. The law already is that the value to the seller under eminent domain is not to include value added by the project for which it is taken.

So the question is, how to value the often non-economic value particular to the seller. (Indeed, if we were talking about a theoretical firm, economic value is easily provable and compensable.) At a minimum, the cost of an eminent domain proceeding is available to satisfy the seller. And it is worth something to the buyer not to be seen throwing crippled war veterans out of the houses they've lived in for 88 years. But there is always someone irrational enough never to leave their house (several of them died when Mt. St. Helen's exploded). As always, irrational people end up with what the court gives them.

[Michael Martin]

Considering how the Court "decided" its cases this term, I find the suggestion that they simply didn't want to get involved with the details of local urban renewal projects highly plausible. They don't seem to want to get involved with the details of ANYTHING anymore! Maybe some new blood on the court will help solve that problem.

[erich]

oops...Bad example-- what Lucas shows is that the property was condemned ONLY because it was such a deal, and that public use restrictions DON'T eliminate all cases of abuse.

Also, I challenge anyone that sees urban renewal as desirable to give examples of sucessful projects w/o eminent domain. Public choice economists made a major contribution by pointing out that failure of markets does not imply that governments can do better. I suggest the corollary is also true, just because there is a governmental failure, does not imply that markets can do better. Sometimes, it's as good as it gets, and changes don't occur until we change inside.
Viewing physical development as a catalyst for building inner communities is development at its best and may be the best way left for lowering transaction/insitutional costs, IMHO. Rather than worry about how to define propert rights and set up markets ala Walras, perhaps we should be thinking of how to make public discourse efficient?

erich

[liberatina]

Eminent Domain Superme Court Decision = an oligarchy

[Anonymous]

Very nice site! cheap viagra

[Anonymous]

Very nice site!

[Anonymous]

enjoy your persuasive argumentation.