The Economics of Eminent Domain

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.]