The Economics of Eminent Domain

Jacob Sullum | January 31, 2007

An article in the January issue of The Regional Economist, a publication of the Federal Reserve Bank of St. Louis, explains why "the likely result" of using eminent domain to foster economic development "is that the costs and benefits will average out to be the same, thus creating a zero-sum gain." Local officials may think they know the best use for any given parcel of property, write Federal Reserve Bank economist Thomas A. Garrett and Washington University economist Paul Rothstein, but "even the most well-intentioned policymaker cannot comprehend or replicate the complex interactions of buyers and sellers that occur in free markets."

Worse, the government's attempt to plan prosperity by reallocating property rights invites spending aimed at influencing its decisions. "This rent-seeking by opposing groups," write Garrett and Rothstein, "results in a net economic loss because both groups will expend resources to ensure a particular outcome, but only one outcome will occur." They also note that taking land from one private owner and handing it over to another in the name of economic development undermines the security of property rights, which may discourage investment.

In sum, the net economic impact of Kelo-style eminent domain will be zero—if we're lucky. That conclusion, of course, does not take into account the equity issues raised by forcing people like Susette Kelo to sell their property. But Garrett and Rothstein's analysis reinforces Sandra Day O'Connor's point in her Kelo dissent that "the beneficiaries [of eminent domain] are likely to be those citizens with disproportionate influence and power in the political process, including large corporations and development firms."

[Thanks to John Kramer at the Institute for Justice for the link.]

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The Greek|1.31.07 @ 11:18AM|#

Cue Joe in 3....2....1....

|1.31.07 @ 11:28AM|#

I've never seen anyone claim that Kelo-style ED fosters overall economic growth.

Addressing specific market failures in certian locations - the blight phenomenon, for example - sure, but I've never seen anyone argue that the economy as a whole would benefit from centralized redistribution of land based on government's opinion of what constitutes a better use.

This paper is like arguing that we'd have had more economic growth if the money spent on defense was left with taxpayers. Well, yes, allowing money to circulate through the economy is more efficient that big building projects. However, sometimes you've got a problem - say, Japanese submarines - that needs a government intervention to solve.

And just to be clear, I don't think the New London case is a good example of such problem solving.

|1.31.07 @ 11:31AM|#

"the beneficiaries [of eminent domain] are likely to be those citizens with disproportionate influence and power in the political process, including large corporations and development firms."

And the politicians they pay off.

|1.31.07 @ 11:36AM|#

How's that economic development project in New London coming along, anyway?

|1.31.07 @ 11:39AM|#

-joe

Then what was the argument, in your opinion, or from what you have heard?

|1.31.07 @ 11:47AM|#

"even the most well-intentioned policymaker cannot comprehend or replicate the complex interactions of buyers and sellers that occur in free markets."

BULLSHIT!

|1.31.07 @ 11:48AM|#

Let's leave aside the question of distribution - whether economic development in a poor city does more good for society than the same dollar value of economic development in a booming suburb.

The writers assume that the redevelopment of private property can only serve a private good. This isn't surprising, because the City of New London and the majority decision both identified private goods (as defined in standard economic terms) as the public purpose that justified the takings.

But that is not always so. If the new owner was to clean up some pollution that was migrating off of his property, and the old owner was not, then there is a public good achieved, as well as the private goods produced by the new, typically more profitable use of the land.

|1.31.07 @ 11:53AM|#

steve,

Did I answer your question?

1. Better - in a normative sense - distribution of resources, through the fostering of more economic activity in an area that needs it.

2. The provision of a public good that is achieved as an outcome of the new owner pursuing his own private goods. This would have to go beyond merely more localized econmic growth to be an overall, as opposed to local, public good, and include some other accomplishment.

Aren't zoning laws an example of Eminent Domain? Some governmental board has decided to take away that which is yours and allow you to only do with it what they have decided.

Warren|1.31.07 @ 11:58AM|#

If the new owner was to clean up some pollution that was migrating off of his property, and the old owner was not, then there is a public good achieved, as well as the private goods produced by the new, typically more profitable use of the land.

As if ED was the preferred way to address pollution. Oh and it looks like someone's claiming "Kelo-style ED fosters overall economic growth" after all.

There is nothing joe won't say in defense of an elitist oligarchy.

ed|1.31.07 @ 12:00PM|#

I've never seen anyone claim that Kelo-style ED fosters overall economic growth.

Well, proponents claim among other things that tax revenues will increase, benefiting all. You don't get increased tax revenues without increased property values and an overall increase in business activity. So proponents of Kelo-style ED are indeed promising eventual economic prosperity and good times for all by stealing other people's property.

Greg|1.31.07 @ 12:01PM|#

There is a good recent debate on the topic for you to listen to here:

Here

|1.31.07 @ 12:06PM|#

Blight is not a market "failure". It is the market at work. Real estate developers do not refuse to fix blight because they're uncaring jerks. Blight will get fixed eventually, either because the price difference between blighted and non-blighted areas becomes so large it invites private investment because the blighted area is seen as a place to buy bargains (see East Palo Alto CA), or when the political and regulatory environment that's currently inhibiting investment (affordable housing advocates are often the worst offenders) is removed.

Warren,

Nope. Read gooder.

Or, if you can ask someone more decent than you how to be polite, I'll be happy to clear up your confusion, if asked. Politely. Otherwise, screw off, deluded jerk.

ed,

"Benefitting all" in that city. The economic effect were always intended to be localized.

crap-action-jackson|1.31.07 @ 12:06PM|#

Its a transfer...

Like crime, the transfer itself has no net effect on the greater good.

But the rent-seeking and rent-defending activities are net losses.

Didn't Gordon Tullock point this out many moons ago?

crap-action-jackson|1.31.07 @ 12:07PM|#

like theft I meant...

|1.31.07 @ 12:10PM|#

Bob Smith,

That's not how blight works. In many cases, properties in blighted areas have negative economic values - a buyer would have to put money into them in order for them to be given away. The other aspect of blight is that it effect whole areas. The owner of Parcel A can't make money by developing his land because the presence of Parcels B though Q, also blighted, make it impossible for any enterprise on Parcel A to make money.

It's not just a question of individual properties' values decreasing.

|1.31.07 @ 12:11PM|#

-joe

I think its a little clearer. It is my understanding that the usual ED (i.e. to build a highway, or whatever) was the process of redistributing property from a private party to a public one, for obvious reasons. In the Kelo case, what stuck out was the private to private asspect, under the assumption that one private party's use of the land would benefit the public more then the other's. And of course this is a local action with local affects.

Is that what you are also saying?

If so then it is my understanding that the article was arguing that if you added up all of the Hypothetical Kelo-style decisions, that the aggregate benefit to society as a whole (at whatever level I guess), would be zero.

Of course I could still be misinterpreting you and the article.

|1.31.07 @ 12:18PM|#

In other words, I thought the kelo decision was based on the desire for local economic growth, and was therfore justified as a public good. And that the argument against it, in this case, was that on average the government, local or otherwise, was going to get it wrong enough times to that the average benifit would be weighted to zero.

|1.31.07 @ 12:21PM|#

steveintheknow,

I'm not saying that, in the Kelo case, the new owner's use benefitted society more than the old owner.

I'm saying that in some cases such a transfer could produce a net benefit to society, but only under specific conditions:

1. when the new owner will accomplish something through his redevelopment that produces a public good (by the Econ definition of the term - I keep repeating this to avoid confusion with the legal terms "public use" and "public purpose.")

2. When the purely private goods (usually economic activity, but I could come up with others) produced by the new development are substantially greater than those produced by the old, and in an area that is in significant need of those private goods. Even so, to find a net benefit to society, you would have to conclude that satisfying this localized shortage achieves some substantial public benefit that the same level of private goods provided in other places would not achieve. Of course, whether the social value of goods varies based on geography or human need is a normative judgement.

|1.31.07 @ 12:23PM|#

Doesn't "kelo-style" imply "not about blight"?

The Kelo plot was distinctly non blighted.

|1.31.07 @ 12:24PM|#

-joe

Got ya.

|1.31.07 @ 12:26PM|#

Jason L,

I was using the term "Kelo-style" to mean that the taken property went to a private party.

I guess I could have been clearer.

|1.31.07 @ 12:44PM|#

-joe

So you do agree that Kelo was about fostering economic growth (not any of the other public use reasons you described)?

And if so do you think the Federal Reserve Bank of St. Louis was wrong in their analysis that this kind of ED (private to private, for econimic growth) will ultimately not achieve its goals?

I also thought that the Kelo decision was basically an "unfair" decision decided by the Supreme Court in the way it was because State laws were written the way they were. Deciding any other way would have been going against already written law.

Do you guys want the courts to be "activist" or not?

|1.31.07 @ 12:48PM|#

steveintheknow,

Kelo was about fostering economic growth IN NEW LONDON AND IN CONNECTICUT. The St. Louis Fed's article was about overall economic growth.

I think the authors are largely correct about the effect of ED on overall economic growth, but with a couple of caveats.

|1.31.07 @ 12:50PM|#

And just to be clear, I don't think the New London case is a good example of such problem solving.

And just to be clear, I don't think Hitler or Stalin are a good example of Totalitarian Problem Solving. Just because dictators have been harmful in the past, doesn't mean we shouldn't pursue dictatorship as a powerful way to address social problems.

The real problem is the lack of BENEVOLENT dictatorship, just like the problem with eminent domain is that it is being used to benifit the rich and powerful. However, those failures would never have anything to do with the systems that spawned them! It is not like giving politicians the power to arbitrarily take property away from some people to give it to their friends is prone to abuse or anything.

|1.31.07 @ 1:01PM|#

I like blight to stay right where it is so I can keep an eye on it. It's when blight starts shifting around that I get worried.

|1.31.07 @ 1:06PM|#

-joe

Ok, all cool now. I swear. :)

|1.31.07 @ 1:30PM|#

"This rent-seeking by opposing groups," write Garrett and Rothstein, "results in a net economic loss because both groups will expend resources to ensure a particular outcome, but only one outcome will occur."

Can someone explain why one kind of spending is better for the economy than another? If I donate money to my representatives and still don't get my way, how is that a net economic loss? I understand it's a loss for me--I paid for something I didn't get. But for the economy, what does it matter where I put my money? It's not like my rep is going to burn the money if he doesn't give me what I want. Regardless of how my rep votes, the money keeps moving through the economy in one way or another.

We hear these types of arguments all the time--namely that reducing taxes will stimulate the economy because we'll all have more money to spend. Now as much as I want to spend more of my money, I don't see how it matters (in economic terms) whether I spend it or the government spends it. Even if they spend most of it on crap I don't want, it's still being spent.

Jennifer|1.31.07 @ 1:48PM|#

Now as much as I want to spend more of my money, I don't see how it matters (in economic terms) whether I spend it or the government spends it. Even if they spend most of it on crap I don't want, it's still being spent.

I'd guess that enriching an already-wealthy corporation like Lockheed Martin or Northrop Grummun does less overall good for the economy than allowing a bunch of little guys like you to start your own businesses, or buy more stuff from the businesses you choose to patronize.

|1.31.07 @ 2:03PM|#

If it doesn't matter who or how your money is spent, meet me at the local school tonight and we'll break windows, thereby creating prosperity.

|1.31.07 @ 2:16PM|#

well jimmy, that would create prosperity--for some people. Namely the janitors who have to clean up the mess, the window installers, the people who manufacture windows, the people who make glass etc. And then these people will in turn use their newfound prosperity to create more prosperity--by paying their mortgage, buying groceries, and cars and so on. So your sarcastic remark doesn't really address the original question.

I'm not suggesting that certain spending is better than other kinds, but it all depends on your perspective. If you're training to be a police officer, you benefit from all the money we spend fighting the drug war. If you're a chemist, you benefit from NSF and NIH funding. I may not benefit from either, but somebody does. So in net economic terms, as long as I don't stash my money away under the mattress, what does it matter how it gets spent (again, in economic terms).

|1.31.07 @ 2:24PM|#

-John

If blind spending is all that matters, communism in the 20th century would have worked out.

More to your question "in economic terms", Jimmy made an allusion to Parable of Broken Windows, which discusses hidden costs.

|1.31.07 @ 2:25PM|#

Since labor is a scarce commodity doesn't replacing the broken windows divert resources from making goods that people would be willing to spend their own money or in lieu of money their own time pursuing those other things that make them happy. The original argument was who owns the property/resources? You do, your taxes are you, created by your efforts. I own my body and all those things I create. Taking my property, be it through Eminent Domain or taxes precludes me from investing that same effort in something more worthwhile. If Eminent Domain is so great we can follow the example we have seen in the old Soviet Union, where Eminent Domain precluded private property. Central planning has always been a success!!!

|1.31.07 @ 2:31PM|#

Can someone explain why one kind of spending is better for the economy than another?

I was mulling over your question about the finer points of rent-seeking and whether your intuition may be right in this example. Is the rent-seeking itself a loss to the economy if what is being fought over is zero-sum? When we think of rent-seeking, it's usually to achieve a result that is decidedly negative-sum for the economy -- such as tariffs on imports -- but positive for the rent-seeker. But if the result is zero-sum, is rent-seeking a loss?

Then you go and say that the broken window fallacy is not a loss? It clearly is! At the end of all the accounting of all the recipients of all the transactions, the economy is poorer the equivalent of one window.

|1.31.07 @ 3:11PM|#

|1.31.07 @ 3:58PM|#

Is the rent-seeking itself a loss to the economy if what is being fought over is zero-sum?

Consider the simple example: A representative of the city shows up at your door to take your house. You decide to fight it, costing you $100,000. You win. Is this a loss to the economy?

I would have to say it is.

Consider the simplest case: You stop working for one year to fight the taking, forgoing $100k in salary. It is absolutely and totally clear that the economy is out $100k. That money was spent for a desired result, the desired result was achieved, and the total accounting of the wealth of the world shows a big fat $100k loss, most obviously in your savings or debt.

The situation where you pay an agent $100k to fight the case for you is only a little more subtle. Yes, he spent the $100k just as you could, so that is a simple transfer of dollars. But after a year, what wealth was created by the dollars? Nothing. The opportunity cost is that the agent could have been paid $100k to actually produce something worth $100k to the economy.

The end result of the rent-seeking required to keep your house is identical to what would have happened had the city representative showed up at your house and simply broke $100,000 worth of windows.

|1.31.07 @ 5:23PM|#

Joe, 1 thing I've never heard from you is a case where eminent domain was used responsibly and to a positive effect, despite asking repeatedly.

|1.31.07 @ 5:55PM|#

Joe, if blight affects an entire area, the developer is going to want to buy the entire area. Even if he can't, he can develop part of it. All we need is for somebody to go first, and the area will be upgraded in stages. We even have a name for it: gentrification. One of the reasons it doesn't work are the "affordable housing" nutjobs who scream and yell that gentrification is evil, driving out the entrepreneurs that were responsible for it and leaving the job incomplete. Said nutjobs usually show their true colors by then demanding that tax money be used to "de-blight" the area. Somehow government action is moral while private action isn't, but they never give a cogent reason why.

|1.31.07 @ 6:27PM|#

These people seem to ignore how good the arbitrary use of eminent domain is for the political sector of the economy, ie, politicians' campaign funds.

|1.31.07 @ 8:15PM|#

Bob Smith,

You are missing the point. Evil land owners see more profit from holding on to areas they have allowed to become blighted than they possibly could by selling those areas to people willing to invest in them and make a profit.

In all seriousness, I'd love for someone to be able to either refute that point, or at best provide an example to show that someone would rather own a non-profitable shithole than sell it.

|1.31.07 @ 8:26PM|#

76,

I've answered you before. Look up the Acre Urban Renewal Plan in Lowell, Mass. In short, the neighborhood consisted of residential and small-scale industrial uses mixed together. The residences were suffering from severe disinvestment, because the proximity to the industrial uses made them unappealing. The industrial properties were also low-end and declining, because their position in a residential neighborhood meant they had lousy access, couldn't expand, and were in a "bad area." The city strategically bought up residential properties near the neighborhood's southern periphery, and industrial properties in the heart of the neighborhood, and then helped relocate the businesses and redevelop the residential properties for affordable housing. At the end of the day, both the residential neighborhood and industrial district are much more successful, desireable, and stable.

Bob,

"Even if he can't, he can develop part of it. All we need is for somebody to go first, and the area will be upgraded in stages." That's the point - after a certain stage of decline, no one is going to go first, because it isn't in their interest to do so. The blighted properties all around limit the developers' ability to make their investment back. This is especially true if, as so often happens, there are considerable amounts of land in the district that are owned by people who are quite happy to leave them as shitholes - dead storage in run-down industrial buildings, brownfields owned by corporations too big to care about the small-potatoes tax bills, or just plain deadbeat owners.

In theory, what you're describing sounds great. In practice, we end up with a Mexican standoff, with everyone realizing that it is against their interest to go first.

|1.31.07 @ 8:27PM|#

jf,

You shouldn't mouth off about subjects you clearly have no actual knowledge about.

You've never spent an hour of life looking at urban development patterns, have you?

Paul|1.31.07 @ 9:32PM|#

I've never seen anyone claim that Kelo-style ED fosters overall economic growth.

1. Better - in a normative sense - distribution of resources, through the fostering of more economic activity in an area that needs it.

Someone's been dipping into the crack jar, again.

It is PRECISELY economic growth that is supposedly behind ED takings for PUBLIC PURPOSE. Has any official muttered the words "economic growth"? I have no idea. But when a city identifies (even false identification including that of the Kelo sitch) a "blighted area", economic growth is the ultimate goal. One may call it "economic improvement" or whatever. I simply can't believe that a taking would occur where officials were referring to the "public purpose" as something other than an economic benefit, that being growth of what officials perceive to be a stagnant economy, even if localized to a neighborhood.

Paul|1.31.07 @ 9:34PM|#

My bad, someone HAS uttered "economic growth":

The International Economic Development Council, an organization of urban central planners, had high praise for the Kelo Court, saying "eminent domain is critical to the economic growth and development of cities and towns throughout the country."

from: http://www.independent.org/newsroom/article.asp?id=1757"

|1.31.07 @ 10:44PM|#

"That statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it."
Adam Smith - Wealth of Nations

I've been waiting for another ED thread to use that in.

|2.1.07 @ 7:55PM|#

jf,

You shouldn't mouth off about subjects you clearly have no actual knowledge about.

You've never spent an hour of life looking at urban development patterns, have you?

After careful consideration, I've decided to only state that your post shed more heat than light. I'd be more than willing to rebut an actual point you had made, but responding to my basic economic point with some arcane reference to "urban development patterns" leaves me clueless as to what you are trying to say.

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