Don't Junk Property Rights — Forbes Magazine, 12/27/04

Fact and Comment

By Steve Forbes

In the coming months the U.S. Supreme Court will issue two critical rulings on property rights, which are the bedrock of a vibrant, free-enterprise economy. They are rooted in the principle of equality before the law, whereby the least of us can be protected from the most powerful. This is what enables an entrepreneur to start a business — not to mention create a whole new industry — that may challenge existing powerful business entities and not have it effectively seized or gobbled up by those already-existing bigcorporations. Under our Constitution the government can't seize what you own (even while providing "fair market" compensation) unless it is for a public project, such as constructing a highway.

In recent years, however, local and state governments around the country have been misusing this right of eminent domain. In essence, they're seizing individuals' homes and small businesses to aid developers or big companies. Governments say all this is done for the "public good" because the moves increase property values and, thus, government revenues. They also supposedly aid "job creation." In a Michigan case, for instance, Detroit and the state of Michigan seized private property to help General Motors build a new manufacturing facility. In Kansas the State Supreme Court approved of a locality's taking individuals' private property for the construction of a Target distribution center. Developers love this abuse of condemnation powers because they avoid having to negotiate with possibly recalcitrant business- and homeowners.

But the trashing of property rights ultimately means less economic progress and is a threat to our basic freedoms because it gives governments untrammeled powers that inevitably will be perverted for political favorites. Whoever has the power has the "rights." This is manifestly not what constitutes government based on the principles of liberty and equality before the law. Why should a small homeowner have his house seized for the benefit of a large corporation? More to the point, why should politicians take what you own — if you don't wish to sell — to help another private party get richer?

Too often in these cases the victims lack the political clout to protect themselves in the face of a raw exercise of political power. The Institute for Justice, a nonprofit, public interest law firm, has found that in recent years local governments have taken or threatened to take by force more than 10,000 homes or small businesses to further private economic development. And that apparently is the tip of the iceberg. (The best way to promote development, by the way, is to cut taxes and antigrowth regulations, as well as to improve local schools.)

Another abuse of even longer standing, of course, is local rent control. Capping what a property owner can receive in rent for an apartment or house decreases the market value of that building. Cities and towns proclaim that controls are a public good, yet they don't compensate the owners for their economic losses.

As with the misuse of condemnation powers, rent control perversely hurts the very people it is supposed to help. New York City, for example, is chronically short of housing, and rents are outrageously high. Many New York apartments are "rent stabilized." It's no surprise that developers prefer to build condominiums or cooperatives, which they can sell outright. Such sales give them real profits — or at least the prospect of gains — and none of the risks of politicians forcing them to charge rents that are not economical. Chicago, in contrast to New York City, has no rent control, and it has abundant housing for all levels of income earners. Free markets work when politicians allow them to.

The condemnation case the Supreme Court will be hearing is Kelo v. the City of New London (Conn.). There the government is aiding a private corporation to seize the homes of Susette Kelo and others to build a hotel, high-priced condos, an office building and other projects to complement a major pharmaceutical company. New London is strapped for cash and figures the project will help it out of its fiscal straits.

Fifteen state supreme courts have ruled on the issue of this perverse exercise of the power of eminent domain. Nine have decreed that government powers cannot be used to help private developers in this way; six have deemed it to be within the law's purview.

In the second property rights case, the state of Hawaii put a cap on the amount of rent that oil companies can charge their service stations. A federal court has recently ruled that form of rent control as being unconstitutional, saying that such a cap discourages investment and therefore leads to fewer independent dealers. If the Supreme Court upholds this finding, then rent control in New York City and elsewhere could very well fall by the wayside. Many politicians are up in arms, believing that the "public interest" should be whatever they want it to be. Voters may have a better understanding. Oregon, one of the bluest of the blue states, saw voters overwhelmingly pass an initiative that permits property owners to force government to compensate them for losses resulting from environmental or zoning rules.

The Supreme Court can strike a blow for liberty — and for our future well-being and progress — with these two cases.

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