5/23/2005

Debate Pits Private Property Against Powers of the State: Online Wall Street Journal, 5/19/05

Later this spring, the Supreme Court is expected to issue an opinion on the power of governments to seize private property.

The closely watched case centers on a New London, Conn., economic development plan. The city wants to use eminent domain to build offices, a hotel, condominiums and parking where houses now stand, arguing that its plan has economic benefits in new jobs and property-tax revenue. But opponents maintain that the project isn't a legitimate public use, saying it unjustly takes private property for a project that will benefit other private interests.

As a warm-up to the court's decision, which is expected sometime before the end of term June 30, economist blogger Don Boudreaux and Harvard Law professor David Barron debate the theories underlying eminent domain and public use of private property.



Don Boudreaux writes: Secure private property rights are the foundation of liberty and commerce — the chief pillars of our civilization. Such rights give each of us the elbow room necessary to develop our unique talents and to think and act in whatever peaceful ways we like, even if others find our thoughts and actions to be disagreeable. Security of these rights also encourages the mutually beneficial exchanges upon which economic prosperity depends, in large part by preventing property transfers that aren't mutually beneficial.

Suppose I think that I value my neighbor's car more than he values it. The only way for me (or anyone else) to be sure is for the law to require me to secure my neighbor's consent to sell his car to me. If I could simply take his car without his consent as long as I agreed to pay the car's blue-book value, there's no guarantee that this property transfer is mutually beneficial. My taking my neighbor's car without his consent is thievery, pure and simple. No economy rises above subsistence without a widespread, hard and fast requirement of mutual consent for property transfers.

Contrary to much modern mythology, nothing about government renders its violations of property rights less objectionable than those of common thieves and vandals. If the city of New London, Conn., is permitted to confiscate property belonging to others, even if it is required to pay fair market value to the former owners, ordinary people will be less secure in their persons and possessions.

And the general populace, if not the local government, will be poorer than otherwise. How could it not be so? If government is permitted to confiscate property rather than purchase it, the presumption must be that government values the property less highly than it is valued by the private owners from whom it is taken. Even if in a particular case this presumption doesn't hold (although we can never know when such a particular case arises), the policy of permitting government to take property without the consent of its owners inevitably encourages thievery by the state.

David Barron writes: Thanks, Don, for getting us going — and in such sweeping terms. It's hard to know what to make of grand claims about the importance of the right to property necessarily conflicting with the government's power to take it — given that the right to property grew up along with the government's authority to exercise the power of eminent domain. The very same Constitution that precludes the government from depriving people of their property without due process of law makes it perfectly clear that the government can take that property for a public use so long as it pays just compensation. The founders were no slouches when it came to property rights. The American historian Charles Beard made a career making that point. But you make them sound like the outspoken leftist John Reed (played by Warren Beatty in the movie "Reds") and his fellow travelers.

So, is it the case that we can't have secure property and permit eminent domain? If so, what's the evidence for that? Seems like we are doing pretty well economically without the constraint. And, in fact, as the Supreme Court has set forth an ever more deferential approach to the government's assertions of authority to engage in eminent domain — in cases such as Hawaii Housing Authority v. Midkiff and Berman v. Parker — economic growth hasn't seemed to falter. Nor, from what I can tell, has a general sense of being secure in one's property taken much of a hit. If anything, market fetishization is on the upswing.

That doesn't mean there are no hard questions when it comes to eminent domain. The Supreme Court is presented with a potentially difficult one at the present moment. The case concerns whether the city of New London can take private property (while compensating) and then make it available for private development. That action at least raises an issue about whether the government is conforming to the Constitution, which requires takings to be for a public use. I think the court should uphold the exercise of eminent domain in that case. I am quite confident you don't. But from your first post, it seems like you think that the government couldn't take the property even if it was going to build a public road or an airport or any number of clearly public uses.

Does our tradition of respect for private property really mean that the government can be held hostage to any holdout who wants to preclude the development of a government highway? Perhaps you think the Constitution should be amended to preclude the government from exercising eminent domain in all cases. If so, I think the "empirical burden" ball to show that would do more harm than good is in your court.

Don writes: Fortunately, while the security of property rights is reduced by decisions such as Midkiff — which gives enormous deference to legislative maneuvers that forcibly transfer property from Private Citizen A to Private Citizen B — property rights remain, by and large, secure in the United States. Indeed, I'm sure that even a Supreme Court victory for the city of New London won't cast us into the dark ages.

As Adam Smith wisely observed upon learning some bad news, "There is a great deal of ruin in a nation." A society as civil and as dynamic as the U.S. can endure and even prosper despite instances of corruption, malfeasance, and petty tyranny.

But the fact that government confiscations of private property aren't so widespread in the U.S. to prevent economic growth doesn't justify such confiscations. To the extent that these seizures occur, they make us less free and less prosperous than we would otherwise be.

David's right that the framers of the U.S. Constitution were "no slouches when it comes to property rights." By and large, I admire their handiwork. But I do wish that they would have rejected eminent domain. As David correctly notes, government asserts that it needs this power in order to prevent its projects from being hamstrung by private owners "holding out" strategically for unjustly high payments.

While such problems are imaginable — and, no doubt, would occasionally occur — I doubt that they are significant enough to entrust politicians with the power to take private property (even if such takings require payment of fair market value). America is planted thick, for example, with private housing developments on large contiguous plots of land that developers manage to assemble without confiscating others' properties. If private developers can achieve such outcomes, there's no reason government officials can't do so.

For those who fancy that government's projects are uniquely important, or for those who imagine that holding government office makes someone unusually saintly or trustworthy, entrusting government with power that we would never entrust to our neighbors or other private citizens might seem sensible. To me, it's dangerous, unjustified, and unjustifiable.

David writes: Looks like our disagreement remains at the threshold — whether any exercises of eminent domain are ever justifiable.

Don suggests that they always result in social loss, and he points to the fact that developers manage to assemble master-planned communities with some regularity without resorting to the exercise of eminent domain. So, he suggests, why should the government be privileged to get land for less than it's worth? After all, it could always buy it at a price the seller would accept. Doesn't that mean that every exercise of eminent domain makes the world poorer?

Sounds plausible, but a few points in that regard:

The first is that these master-planned communities share a common feature — they are located near public roads, which exist only because the power of eminent domain exists. So it's actually not the case that these private developers acted without the aid of the government confiscating someone's property. Could we really have these developments if the private developers themselves had to assemble all of the necessary transportation infrastructure to get people from home to work as well? Indeed, even property that is taken is often property that itself benefited along the way from prior exercises of eminent domain — be they exercises of eminent domain that helped make it possible for the railroad to deliver the construction materials for the building of the home in the first place, etc.

The basic conceptual problem, in other words, seems to me to remain for those who oppose the eminent domain power simpliciter: Eminent domain and private property are more co-dependent than you'd think. So, in permitting eminent domain, we aren't just tolerating a drag on the system. We are upholding a practice that makes the system work as well as it does.

The second point concerns the fact that these master-planned developments are sprouting up further and further out into exurbia. One reason that places like New London occasionally resort to eminent domain is to revitalize a close-in city. It by no means clear that restricting eminent domain — insofar as it precludes cities from revitalizing themselves — makes us all better off if it just ensures that sprawling growth results. The literature on the costs of sprawl is itself sprawling, of course, and it is surely open to differing interpretations. But given the room for debate, why wouldn't we think that democratic processes are a good mechanism for making judgments about how to proceed when the best way of achieving social welfare is by no means clear? Seems to me we have a pretty deep tradition of looking to democratic processes to make such judgments all the time — even when they impose costs on private property owners. I don't think Don means to be calling all forms of property regulation into question, but I'm not sure I see how he isn't.

One final point. As a lawyer, now in dialogue with an economist, I am interested in your view as to whether there is anything to the distinction between takings for "public use" in the classic sense (say, for a public road) and takings in which the government gives the property over for private development (as in New London). Justice Kennedy at oral argument in the New London case kept suggesting the economists would think there is nothing to that distinction. Each kind of exercise of eminent domain is either equally good or bad. But is that right? Do you see a difference between the two — a difference that would make you even more hostile to what the city of New London is doing in particular than to what the framers of our Constitution authorized governments to do more generally?

Don writes: It's true that privately built housing communities depend upon road and sewer systems, which typically are built by government. But this observation doesn't address my argument that eminent domain is unnecessary. The fact that housing developers routinely acquire large contiguous plots of land without eminent domain — that is, by buying individual plots from private owners — suggests that government doesn't need eminent domain to build roads and to do whatever else it does.

Unlike David, I trust democratic mechanisms much less than I trust the rules of private property. If the city of New London, for example, can confiscate private property without the owners' consent, government officials have too little incentive to bargain in good faith with property owners to find out if mutually advantageous deals are possible. Government will confiscate property rather than pay market prices for it. And politicians will pander to special-interest groups eager to gain at the public expense.

The fact that government is democratically elected might put some restraint on use of this power — or it might not. If a majority of voters in New London perceive that they can gain by directing the city fathers to confiscate private property owned by voters in the minority, why should we trust that the city will seize private property only if doing so yields significant benefits to the public at large?

By obliging all persons — including government officials — to pay voluntarily agreed upon prices for any properties acquired, we best ensure that worthwhile transfers of property rights occur and that transfers that aren't worthwhile are avoided.

David writes: The government could build a statewide highway by just bargaining with landowners along the route? What about the owner of the last parcel in the road's path? Is the market value of that parcel whatever that property owner wants to charge? Suppose the owner wants whatever the fair market value of the parcel was before construction on the roadway began plus the entire budget for the roadway's cost now that the owner knows the road is being built? Why is it socially efficient to make society pay that premium?

But even if a flat ban on eminent domain is inefficient, there are hard cases. Can a city take a $200,000 house to permit a developer to build one for a $1 million, claiming the move would be good for the local tax base? Once we dispense with a flat ban on eminent domain, though, our choice is either to have judges do the sorting between good and bad takings or to have the people themselves do it through their elected representatives. Our nation's past experience with judges second-guessing the legislature's economic policies has been pretty dim. So, on balance, I'd cast my lot with the people.

Don writes: You raise an interesting point — usually called the "hold-up problem" — in which a single property owner can hold a project hostage and extract maximum gain. But in reality, because there is almost always more than one way to build a road or to site a large development, there usually isn't any one property owner who can hold the project hostage. This is one reason why private developers commonly succeed in assembling large parcels without using eminent domain.

Moreover, ingenious strategies exist to avoid the hold-up problem. For example, a buyer can negotiate sales contracts contingent upon the buyer acquiring all necessary parcels of land. With such contracts, no one landowner is ever in a position to hold-out strategically for the full value of the project.

You ask, David, whether a legislature should be able to take a $200,000 house to build a $1 million dollar project that increases the tax base. My answer to that (and I hope the Supreme Court reaches the same conclusion in Kelo) is an emphatic no.

One reason is practical: If there really is such a discrepancy in value, the project will take place anyway, as I've argued above. But the second reason is my skepticism about of legislators' ability to dispassionately represent "the people." Which people, after all, are represented? Conflicts exist between those who would benefit from higher tax revenues (for example, developers who would be awarded lucrative contracts funded with these higher tax revenues) and those who lose — namely, property owners whose properties are seized. Politicians are simply too likely to pander to special-interest groups. The more unrestrained is government's power to use eminent domain, the more likely will our country be one marked by too many shopping malls and too few desirable, if not necessarily highly taxable, alternative uses of land.

David writes: Even the contingency contract you describe permits the landowner to extract a premium. If the contract price isn't more than the amount the government would owe as just compensation, then the government could just take and pay without complaint from the property owner. So the question for me is why society should bear the extra cost.

Absent evidence that net social welfare declines unless the government bears the extra cost, efficiency analysis simply can't prove that eminent domain is bad rather than good. And the necessary evidence just doesn't exist.

Our debate ultimately turns on differing views of government regulation. After all, there's no reason to trust government when it engages in zoning but not when it engages in eminent domain. Certainly zoning can "take" plenty of value from property owners. But we've generally recognized that regulation also can create value in property, and for many decades constitutional law has proceeded from that premise. That's partly why zoning generally raises no constitutional problem. And why eminent domain shouldn't either.

But to close on a point of (near) agreement, I grant that taking the $200,000 home causes real concern. Even John Reed might have a problem with that one, and the Supreme Court has long said that you can't take from A to give to B even if you can take for a public use. So I won't be at all surprised if the court makes some noises to that effect, even as it upholds New London's right to redevelop.



David Barron is a professor at Harvard Law School. His writings focus on the legal powers of local governments, federalism and the separation of powers, and he also researches property law and urban sprawl. Barron was a law clerk for Judge Stephen Reinhardt of the U.S. Court of Appeals for the Ninth Circuit and Justice John Paul Stevens of the U.S. Supreme Court. Prior to teaching, he was an attorney-adviser during the Clinton administration in the Office of Legal Counsel in the U.S. Department of Justice. Barron received his bachelor's in history and his law degree from Harvard.

Don Boudreaux is chairman of the economics department at George Mason University and has held the position since 2001. He previously was president of the Foundation for Economic Education and taught at George Mason and Clemson University. His research centers on the nature of law, antitrust law and economics, and international trade. Boudreaux blogs regularly (with fellow Econoblogger Russ Roberts) at Café Hayek. He received his doctorate in economics from Auburn University and his law degree from the University of Virginia.



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