By Tom Lehman
The Supreme Court ruled on June 23 that the Constitution does not prohibit cities from taking privately owned land to make way for commercial developments. The decision has led to widespread criticism and even a proposal to take revenge on Justice Souter, who joined the majority opinion, by building the "Lost Liberty Hotel" over his childhood home.
While the constitutional merits of the Kelo v. New London decision may be up for debate, the ruling's implications give no reason for concern. Critics attack the decision on the grounds that it reads out the constitutional requirement limiting takings to public use, and that may be. But from a policy perspective, this provision does nothing to ensure that a taking be justifiable.
Kelo's detractors are right to be skeptical of all exercises of eminent domain. The consent of both parties to a sale ensures mutual benefit. When the state transfers ownership of property without its owner's consent, it risks giving the property to someone who values it less than the original owner.
For example, suppose Bertrand owns his childhood home, valued at $5 on the open market. However, Bertrand is sentimental, and so he privately values the home at $10. Kurt, one of Bertrand's neighbors, would like to extend his yard onto Bertrand's land, and so it is worth $6 to Kurt. Kurt contributes 50 cents to the campaign of a prominent government official; in exchange, the official uses the state's eminent domain power to "buy" Bertrand's land for $5 and sell it to Kurt for $5. Thus, Bertrand loses $5, and Kurt and the official each gain 50 cents, for a net social loss of $4.
This sort of scenario worries most critics of Kelo. However, if one wants to avoid such a situation, he should advocate banning takings altogether — not limiting them to public works projects. The public use provision of the Constitution does nothing to ensure that land will not be taken from one party and given to another who values it less.
Again, let's look at Bertrand. Suppose a highway constructed though Bertrand's property would be worth $6 to motorists (excluding construction costs). Since the state knows it only has to pay Bertrand $5 for his house (though he still values it at $10) it does so and builds the highway. Motorists gain $6, society pays $5 in taxes, and Bertrand loses $5, for a net social loss of $4.
Circumventing the market is dangerous regardless of the purpose of the taking. It is unclear why using a public use provision as a litmus test is at all attractive. After all, no one would argue it should be permissible for the state to take anything besides land to provide a public good. Building highways requires cement, and highways are surely for "public use," but this alone does not authorize the state to take the cement and pay market value. The state buys cement when it builds a highway, why shouldn't it buy land? It most cases, it should. The mere existence of a potential public good should not give the state a blank check to use eminent domain at every turn.
So why not ban takings altogether? Because eminent domain is sometimes necessary, albeit for a reason orthogonal to the public-private use distinction. In some cases, eminent domain is needed to avoid transaction costs, specifically holdouts. These arise whenever a large plot of land needs to be purchased in small parcels sequentially from several owners, irrespective of the land's intended use.
Suppose, for example, that building a certain highway is worth $10 to motorists, but requires building over the land of three individuals, each of whom values his land at $1. Clearly it is socially efficient for the highway to be built. However, once the state has purchased the first two parcels of land, the third owner will hold out for $9.99, knowing that unless the state purchases his land, it forfeits the $10 surplus the highway generates. Therefore, before beginning the project, the state anticipates spending $11.99 ($1 + $1 + $9.99) on a highway worth only $10, so it will not undertake the project in the first place.
Of course, these same transaction costs can arise when a private entity needs to purchase a large contiguous plot of land. A company could value a manufacturing plant at $10, and each owner could value his plot at $1, and the company still would not build the plant, despite the potential social benefit.
Since the distinction between public and private use is irrelevant, it should not be disturbing (from a policy perspective) that the Supreme Court read it out of the Constitution. But given our analysis above, should we replace it with a more relevant restriction, perhaps some sort of "transaction cost minimization" provision? If the answer is yes, then the core of what the Kelo critics argue, that there must be some judicial oversight over takings, is correct. However, adding such a provision to the Constitution would be absurd; judges have neither the expertise nor the resources to appraise the possibility of holdouts.
That courts should not be in the business of policing eminent domain should not be too hard to swallow given that most matters of economic policy are rightly left to legislatures. The empirical questions surrounding economic policy are simply not within any court's capacity to answer. No one would argue that it should be unconstitutional to enact a protectionist trade agenda, even if he believes such an agenda to be wildly inefficient. Those who support limitations on eminent domain must rely on the democratic process to see their preferred policies enacted, just like those who support free trade.
Of course, by and large, this is what is actually happening: many states have passed constitutional amendments and statutes limiting takings power. Some would call the democratic anti-Kelo backlash evidence that the ruling was a disaster, but it is in fact confirmation that when it comes to eminent domain, legislatures are capable of self-regulating.
Yale Daily News: www.yaledailynews.com
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