This month marks 20 years since the U.S. Supreme Court ruling in Kelo v. City of New London. This 5-4 ruling upheld the Court’s rational basis deference to legislatures in determining whether economic development (jobs, tax revenue, etc.) satisfies “public use”, even when the government conveys the seized property to other private parties.
Although Kelo was pretty controversial at the time, interest in it has naturally waned over the years. Under this diminishing spotlight, governments have gotten ever more creative in the ways they exercise eminent domain.
In Richmond, California, for example, the city tried to seize upside down mortgages to protect residents from foreclosure. In Atlantic City, eminent domain has been used without specific plans for how the seized properties would be used. In Minnesota, when an elderly woman fell behind on her property taxes, the county seized her condo, sold it, settled the tax bill, and kept the proceeds. And in my home state of North Carolina, dozens of homes and a local church were seized to make way for a new electric vehicle assembly plant, only for the company (Vinfast, headquartered in Vietnam) to back down by delaying construction for years.
These kinds of cases count as abuse of eminent domain power. Not only do these “Grasping Hand” abuses waste taxpayer dollars and valuable resources, but they needlessly violate fundamental, constitutionally protected rights to property.
Yet economists have shown that eminent domain does have its legitimate uses. Namely, economic development takings can promote the public interest (economic efficiency) when used against strategic holdouts standing opportunistically in the way of development.
Herein lies a classic question that Kelo raises. How can takings powers be regulated to avoid abuse, while still preserving eminent domain’s legitimate uses? Clearly leaving things up to legislative majorities is not the answer — it’s actually the reason for the abuses in the first place. Instead, better regulation of government regulators can help.
In a new paper* forthcoming at the Review of Law & Economics, co-authors Justin Pace and Jon Murphy and I dig into the long-term dynamics of how to regulate eminent domain authorities. The first thing is to recognize that government officials, even those with the best intentions, will devise ways around existing eminent domain restrictions. Following the financial regulation and campaign finance literatures, we call this loophole mining. It becomes especially powerful over time as the public spotlight on abuse wanes. Second, loophole mining necessitates ongoing adjustments to eminent domain restrictions. So, when looking at the long-term dynamics of the problem, the effectiveness of restrictions depends not only on their initial design but also on ongoing vigilance against regulators’ becoming overly creative in satisfying the rational basis test.
This makes for a complicated dynamic policy dilemma. Tighter restrictions may beget more creative forms of loophole-mining and necessitate ongoing regulatory adjustments, creating a cycle of regulation and circumvention. Much simpler, and arguably more efficient as well, would be for the Court to abandon its rational basis deference and instead close the door to takings for economic development.
Closing the Kelo loophole amounts to saying yes to holdout problems. Of course, central planners and development authorities would howl and double-down on claims that eminent domain is critical for economic development. But in fact, a large body of literature shows that developers are pretty effective at handling holdouts even without resorting to eminent domain.
Better for the law to let entrepreneurs deal with holdouts than to keep encouraging governments to hone their loophole mining skills. After 20 years, it’s past time to revisit Kelo.
* “The Long-Term Impact of Kelo v. City of New London: Comparing State Legislative and Judicial Responses” and is available for PDF download here.
Edward J. Lopez, is Professor of Economics at Western Carolina University, Executive Director of the Public Choice Society, and author of numerous articles and books including Madmen, Intellectuals, and Academic Scribblers.
