The Takings Clause
posted by Gerard Magliocca
One interesting feature of the Sotomayor hearing was the number of questions she was asked about Kelo. I am not a property scholar (I find that blogging often requires me to qualify comments by saying “I’m not an expert on this”), but I find the policy debate over Kelo perplexing. Let us assume that Kelo was right in holding that a constitutional “public use” if a state or local government takes property (say, somebody’s house) for a private development project such as a shopping mall. Should state law be amended to bar that practice?
Well, the ongoing foreclosure crisis suggests that the answer is no. There are many cities that now have swaths of empty homes (including the house next to mine.) And this is imposing significant costs on communities, including a loss of tax revenue, declining property values, and higher levels of crime. If a private developer wants to use a block of these houses to build a commercial project, why should the use of eminent domain to facilitate that be prohibited? Put another way, which is more problematic — the harm that results when people who live in homes are forced to move against their will (and might be cheated on the value of that property, as often happens when “just compensation” is awarded) or the harm that results from empty houses that just sit there when a transaction cost solution (i.e. eminent domain) would bring them back into productive use?
July 21, 2009 at 12:54 pm
Posted in: Property Law
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Responses (8)
Patrick S. O'Donnell - July 21, 2009 at 2:03 pm
On the expertise disclaimer: don’t worry about it, that’s one of the advantages of blogging, for you should have the freedom to speak to subjects you’re not necessarily an “expert” on, assuming of course one has something meaningful or intelligent to say on the subject. The experts will be sure to chime in anyway should you make any egregious errors or, from their vantage point, outrageous claims.
Dave - July 21, 2009 at 8:17 pm
I think the objections to Kelo include at least two strains:
1. Property rights, like other individual rights enshrined in the constitution, are if not sacrosanct, at least due particular deference that takes them out of a traditional cost/benefit calculus. We often say that rights of bodily integrity trump social interests in violating them, even if we are confident that society would be better on-balance if the rights were disregarded (e.g., Rochin v. California; see Dworkin’s notion of rights as trumps).
2. The government is not to be trusted with reallocation because they are at least inefficient (subject to interest group pressure, which appears to have been the case to an extent in Kelo) and possibly even corrupt (susceptible to self-dealing, which appears to have been the case to an extent in Didden). So even if you’re a utilitarian about such things, you may still be a takings skeptic if you don’t have faith in the government as an economic actor.
TJ - July 21, 2009 at 8:49 pm
I think you are understating the costs and overstating the benefits of eminent domain.
1. You frame the cost as someone being cheated out of the value of their homes. Implicit in this framing is that it is an occasional or accidental thing. But it must be recognized that every condemnation situation involves undervaluation. If the compensation being offered were not less than what the property owner’s subjective value, then the house would have been sold already, without requiring condemnation.
2. You suggest that the benefit is removing “empty houses that just sit there”; and suggest that a voluntary transaction is being precluded by transaction costs. But condemnation is highly unlikely to reduce transaction costs when only one single property is involved–it creates more transaction costs to go through all the bureaucratic formalities of condemnation than to execute a voluntary sale. What condemnation really allows is the ability to force an unwilling owner to sell and thereby bypass owner choice. In other words, houses don’t usually “just sit there” because it is too hard to find the owner, or too expensive to hire real estate agents. Houses sit there unsold because the owner is asking for $1 million, and condemnation forces him to sell it for $100,000. Lowering the sale price is not a reduction in transaction costs.
Brett Bellmore - July 22, 2009 at 4:36 am
\” Let us assume that Kelo was right in holding that a constitutional “public use” if a state or local government takes property (say, somebody’s house) for a private development project such as a shopping mall.\”
In other words, let us assume away what pisses off almost everybody who was outraged by the Kelo decision: That it was, in fact, wrongly decided, and blatantly so.
JP - July 22, 2009 at 8:30 am
I think some of your assumptions regarding the costs of not having eminent domain are not supported by your example of the foreclosure crisis.
First (to nitpick a little), I think it is more accurate to describe eminent domain as a solution to a collective action problem (specifically, the holdout problem), not a transaction cost problem.
Second, I don’t think the collective action problem prevents the productive use of foreclosed homes. I may be wrong, but I don’t imagine that banks are typically holdouts; they don’t attach much (any) subjective value to a specific property.
Also, foreclosures are certainly higher in some areas, but for the most part they appear randomly within neighborhoods and are not highly concentrated on a specific piece of land (e.g., your neighbor’s house, but not yours). There are exceptions, such as Detroit, but even there it seems unlikely that eminent domain (for private purposes) will be a solution. Nobody is going to develop those neighborhoods in Detroit–even if the City hands over the land for free–because of the shortage of human capital and/or potential customers: nobody lives there, and nobody wants to.
Gerard N. Magliocca - July 22, 2009 at 1:50 pm
Just a few quick thoughts –
1. I don’t know enough about the underlying materials in Kelo to comment on the opinion. My understanding it that it was just applying existing precedent, but I’m not clear about the original understanding of the Taking Clause.
2. A bilateral monopoly (or holdout) is often described as a transaction cost issue, but I have no quarrel with calling it a collective action problem.
3. Th harm to the property owner from a taking is just as severe if the government takes their house for a park or bridge. So there must be something about a taking for private development that is different.
4. Perhaps the answer is that allowing developers to benefit from takings opens the door to more corruption (as already occurs with zoning or permits).
5. I’ll concede that Detroit or Stockton may not get many offers for the development of empty housing developments (or they may not want to spend the money buying up the empty lots.) But if they did have an offer and the money, could they really do worse by trying it out?
TJ - July 23, 2009 at 2:02 am
If the question is the difference between using eminent domain for government projects versus private development, there are many responses. I will just mention one here. In general, there are three ways to get around the problem of opportunistic holdout that arises when multiple properties must be bought for a single project, and the last seller gains considerable leverage due to sunk costs: (1) eminent domain; (2) collective action; or (3) secret purchase so that the seller does not know about his own leverage. Since collective action is usually not feasible, the choices are eminent domain and secret purchase. The government is not usually able to secretly purchase blocks of land to build a park or bridge, due to our open-government norms. Private developers, however, have no such constraints.
JP - July 23, 2009 at 9:22 am
Gerard,
Thanks for responding. With regard to # 2, you are completely right. Re-reading my comment, I realize it implies that you were inaccurate to describe the problem as a transaction cost, which was not at all my intention. I just hoped to clarify the issue, because some comments (e.g., TJ’s 2nd point) seem to address a different kind of transaction cost issue.
I think # 4 is exactly the issue. The Didden case (which I’m not at all familiar with, other than Sotomayor-related commentary) seems to highlight this kind of corruption. (This is not to say that public-use takings don’t invite corruption. It is fairly common for local governments to use eminent domain to e.g., create a park that just happens to create a right-of-way or extra parking for the business of a political supporter.)
Maybe the issue is a line-drawing problem. Eminent domain invites corruption, but is sometimes necessary. If you are creating an a priori rule that authorizes but regulates eminent domain, when should it be allowed? Only for actual public use? Any clear public benefit? Any potential public benefit?
I think an actual public use requirement is a fairly easy-to-apply standard that intuitively seems likely to allow eminent domain when truly necessary, and also to substantially limit corruption. [I would also argue that this is right as a matter of Constitutional interpretation, but then I would be fighting the hypothetical, so I won't.]
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