The Electric Commentary

Friday, June 24, 2005

Kilos of Kelo

Now that I've finally read the whole thing I can offer some insight. First of all, it should be noted that takings, in general, are bad. The framers of the Constitution realized this, which is why the government can only take land for a "public purpose" and why they must pay just compensation. Occasionally the government may have to build a road or a dam or a school, but these instances are rare, and it is good that they are rare. This is the policy espoused by the Constitution, and expanding the states ability to seize property is in conflict with that policy.

Second, a taking is always a poor economic transaction. As Stephen Bainbridge writes:

Unfortunately, the requirement to pay fair market value is a grossly inadequate safeguard on government power for two reasons. First, it fails to take into account the subjective valuations placed on the New London property by people whose families have lived on the land, in at least one case, for a 100 years. In other words, the government now will be able to seize land at a price considerably below the reservation price of the owners. Indeed, as Will Collier explained:

"... the price even a willing seller would be able to get from his property just took a huge hit. All a developer has to do now is make a lowball offer and threaten to involve a bought-and-paid-for politician to take the property away if the owner doesn't acquiesce."

Second, unlike the prototypical eminent domain case, in which the land is seized to build, say, a school or road, in this case the city is using eminent domain to seize property that will then be turned over to a private developer. If this new development increases the value of the property, all of that value will be captured by the new owner, rather than the forced sellers. As a result, the city will have made itself richer (through higher taxes), and the developer richer, while leaving the forced sellers poorer in both subjective and objective senses.

Whenever you force a transaction, you destroy wealth.

Third, this decision creates yet another incentive for expanded crony capitalism. Corporate welfare is already a big problem in this country, but now instead of concentrating on tax breaks corporations can lobby to acquire real estate. Increased lobbying is bad enough. This particular type of lobbying is terrible.

Fourth, this decision is subject to abuse. In the comments section of yesterday's post, Rashid Muhammad wrote the following:

Essentially this gives the cities the right to say: "We can make more money if Developer X uses your property so we are hereby relieving you of it." Before the municipality itself had to have some sort of project planned that would benefit the community as a whole. Now the "benefit" to the community is more tax revenue which "rewards" the community most substantially with even bigger and more inefficient government.

It is sad because developers aren't even talking to the people who live in the areas that they want to "revitalize," they are going directly to the city and the cities are redefining their standards for blight just to accommodate these projects. This has been going on in minority communities that weren't quite ghetto, but were old for a while. Now it's hit the mainstream.

If you think this is an overstatement, take a look at this conversation between Justices Scalia and O'Connor, and the city of New London's attorney during oral arguments (via Stephen Bainbridge):

"Justice Antonin Scalia ... describes [City of New London lawyer] Horton's position as: 'You can always take from A and give to B, so long as B is richer.' And O'Connor offers this concrete example: What if there's a Motel 6 but the city thinks a Ritz-Carlton will generate more taxes? Is that OK?

"Yes, says Horton." (Link)

Finally, there was no good reason to make this ruling. The Supreme Court has now ruled that purely intrastate commerce is interstate commerce, and that private is public. The language of the Constitution exists for a reason, and that reason is specifically to limit the power that the government has over individuals. The Raich decision and the Kelo decision fly in the face of this ideal. I eagerly await the case of Gonzales v. Gravity, in which the government will assert that up is down, followed closely by Gonzales v. Math, in which they will argue that 2+2=5.

The Volokh Conspirators have been prolific. Don't miss Orin Kerr, Randy Barnett, and Todd Zywicki.

Stephen Karlson makes several good points.

Ann Althouse has more here, and she notices an embarrassing spelling mistake here.

Will Baude and Raffi Melkonian chime in.

OK, back to work. I wonder if I could get the Tennessee government to seize the Instapundit site for me if I promised to turn it into a pornographic website. It would bring in increased revenue, increased tax revenue for the state, and it would create jobs. Who could be against that?


  • Neal Boortz has a pretty good writeup on this today as well and makes a number of good points. This thing stinks so much that I can barely breathe.

    The while thing about creating jobs is bullshit too since ultimately that's still just a way of generating more tax revenue. Kennedy's remarks make it clear that he understands the potential abuses here, but depending on state legislators to address this seems - to me at least - to be myopic at best.

    By Anonymous Rashid Muhammad, at 1:33 PM  

  • There is a pretty funny Australian movie called the Castle which deals with this issue; a stubborn man doesn't want to let big business cloaked as the Australian govt take his house according to their similar if not identical eminent domain clause, which they claim is justified because they want to expand an airport.

    Regarding a forced transaction destroying wealth, is that true? What if the person's reservation price is so inflated from misinformation (perhaps in truth his great grandfather would have loved to been able to sop farming and move into a condo) or seeing dollar signs because he wants to hold out for a million dollars for his 1950's ranch home?

    Whose (subjective) wealth is increased or decreased is seems to be a distributive policy question, one that economics is ill-equipped to answer in the face of what is likely a net wealth and allocative efficiency when the huge gains from the city and developer are factored in. Besides, an individual owner has some bargaining power, lobbying and greasing politicians takes a lot of time and money.

    that being said I don't like the decision, seems a little too open-ended and ripe for abuse to me. But so is everything the govt does I suppose. I would feel warmer and fuzzier if the homeowners got something like a big buy-out package, or perhaps a profit-sharing type deal in the added tax revenue and property tax value.

    By Anonymous Phil, at 3:07 PM  

  • "...he understands the potential abuses here, but depending on state legislators..."

    It's interesting that conservatives are up in arms because the federal court is leaving something up to the local government. I'm up in arms, too, but I'd like to think I'm consistent enough not to spout the kind of nonsense that so many conservatives spout about how the federal judiciary should never get involved in the actions of local governments.

    By Blogger MDS, at 3:40 PM  

  • That is a nice article Rashid. Sorry I didn't get it until Monday morning. I got stuck in a meeting until the end of Friday, and I had no internet access this weekend.

    Phil, as for wealth being destroyed in an involuntary transaction, many economists would disagree with me there (especially law-economics types that hold to Caldor-hicks efficiency, which states that a transaction is good so long as the good done to one party outweighs the bad done to the other party, and in also in instances of high transaction cost deals). However, I think the best and most accurate way to determine something's value is through an open market transaction. When some higher power has to force a transaction it generally means that one side was unwilling to partake. This means that the other side was not willing to offer enough to the hold-out, which means that the hold-out has a higher value of the asset than the potential buyer. Therefore, you partially destroy the value of the assett in question when you force a sale for less.

    The way I think of it is as follows. Money used to be backed by gold. Now it is backed by literally everything in the US. When you artificially decrease the value of that which backs the dollar, you also decrease the value of he dollar itself. In small doses this doesn't matter, but in large doses it can have a profound effect.

    MDS, good point. They've certainly used such rationale before. I think this case can be distinguished from some "state's rights" cases because the conflict in the case was between individuals and government, while many state's rights cases deal with a state v. federal issue. But there are certainly other cases (Roe in particular) where conservatives would have been happy to achieve a similar outcome.

    By Blogger PaulNoonan, at 8:24 AM  

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