A year ago, the Supreme Court shocked the nation when it signed off on New London, Connecticut's, eviction orders against Susette Kelo, a low-income home owner, to make room for rich private developers. Since then, states have tried to beef up homeowners' rights by passing laws to limit the economic ends for which government can exercise its condemnation or eminent domain powers.
But states might be more successful in their efforts to protect property owners from arbitrary government takings if they restricted these powers only to instances of genuine "economic holdouts."
It is true, notes Steven Eagle, a law professor at George Mason University, that the Fifth Amendment gives little guidance on how to distinguish legitimate from illegitimate uses of eminent domain. But that's because whatever other abuses King George had perpetrated, he did not go around throwing people out of their homes to build mansions for the wealthy. Deployment of eminent domain powers for economic redevelopment projects—as New London is doing—was simply not something that the founders anticipated.
But regardless of what the founders thought, most people would acquiesce to the use of these powers in instances when a property is so strategically located that its owner could derail a project by demanding a perversely high price for it — or extract "monopoly rents," to use economics jargon. That theoretical justification for eminent domain, however, has become a front for cheap land acquisition — not to mention clobbering unwilling sellers into submission.
This was perfectly illustrated in Kelo, in which New London authorities were not trying to build a highway, pipeline, or railroad that required a vast tract of contiguous land. Rather, they were proposing a mixed use development that included commercial buildings, parks, and residential homes.
It was entirely possible for them to leave Susette Kelo in her ancestral home where she had lived all her life — and continue with their hare-brained economic redevelopment scheme, the likes of which rarely ever succeed. (Perhaps New London authorities should pay a visit to Detroit's Poletown.)
If Susette Kelo was not a classic economic holdout fit for the use of eminent domain, notes Jonathan Adler, law professor at Case Western University, neither are most other targets of these powers. Some people might demand a price beyond their appraised value as compensation for their relocation costs or their sentimental attachment to their homes. Indeed, in any instance when a property does not have a "for sale" sign outside, it has to be assumed that the owner finds the use of the house more valuable than its market price. Is it so outrageous to demand a better deal?
Real holdouts, people who exploit their position for indecent remuneration beyond making themselves whole, are a far bigger problem in theory than practice, ventures Adler. Nor is this surprising.
For starters, strategic holdouts face substantial risks. Individuals who hang on to their land in the hope of making a killing might well find themselves living next to a noisy freeway in worthless homes if the builder finds a way to go ahead without their cooperation.
Furthermore, notes Bruce Benson, an economist at Florida State University, individuals have been known to voluntarily give the right-of-way to part of their land for roads because proximity and easy access would increase the value of the rest of their property. "Holdout incentives for sellers are actually far weaker than often assumed," Benson points out. In fact, private developers who don't have condemnation powers are rarely stymied by holdouts. Often they simply find creative alternatives to their original plans if their acquisition costs become too prohibitive. But another reason is that they have found ways to counter strategic behavior with strategic behavior.
Many developers employ dummy purchasers to get people to reveal exactly what payment they would accept for their property before airing their own development plans publicly for fear that homeowners might up their asking price. Even more ingenious, notes Benson, are pipleline builders who sometimes actually come up with alternative routes and then negotiate with different groups of owners with the understanding that they would go with whichever group makes the first acceptable offer.
Eminent domain is tantamount to the nuclear option in land use decisions. Private developers get land for all kinds of projects through purely voluntary transactions. In fact, Benson points out, the land for the first two modern, privately provided highways in the United States — the Dulles Greenway in Virginia and SR-91 in California — was acquired without recourse to eminent domain.
So if states are serious about protecting property rights, they ought to hand over more government projects to the private sector. When they insist on doing things themselves, they at least ought to restrict their use of eminent domain to provable instances of monopolistic behavior — not to dispossess innocent homeowners like Kelo who are only seeking to hold on to what's long been theirs.