June 26, 2005 to June 27, 2005
On Eminent Domain
On Eminent Domain-BECKER
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's 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's 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
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.