Distorting the market with eminent domain

Wall Street Journal Editorial:

Does restricting "eminent domain" -- the power of government to seize private property -- harm economic growth? A new report from the Institute for Justice looks at the evidence and concludes the answer is no.

Since the Supreme Court sanctified eminent domain on behalf of private developers in the dreadful 5-4 Kelo ruling in 2005, 42 states have passed some restriction on the practice. Some reforms have been far-reaching, as in Florida, which barred public entities that seized property from transferring it to private hands for 10 years after the seizure. Other reforms are more modest, changing the definition of "blight" or throwing up other obstacles to overeager planners.

But one constant since Kelo v. New London has been the refrain, echoed by developers and politicians alike, that eminent domain is necessary for redevelopment. In 2006, Iowa Governor Tom Vilsack vetoed an eminent-domain reform, arguing that it would harm the economy if the state restricted the power to expropriate private property. Groups such as the National League of Cities make similar arguments.

So the Institute for Justice, which spearheaded the original campaign to save Suzette Kelo's home, decided to crunch some numbers. First, the report assigns each state to one of three categories according to the level of reform implemented after Kelo: "strong," "moderate" or "none." Then it compares the data for construction jobs, building permits and property-tax revenue before and after the effective dates of the reforms for each state. The verdict: So far, there has been no discernable hit to economic activity from the restriction of eminent domain, even in those states with the broadest reforms.

This result isn't surprising. Developers love eminent domain because it's easier to snap up land when government forces owners to sell -- no unpleasant dickering over price, etc. Local politicians likewise believe they are best positioned to pick winners and losers and to shape the future of their cities.

But private development went along very nicely for two centuries before politicians began seizing one person's property for the benefit of another private citizen. Sometimes the marketplace adapted in amusing ways, as when major building projects were forced to go up around, or even on top of, older buildings. But in the absence of the coercive state, buildings still got built.

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By interjecting government between the purchaser and the seller the market is distorted in favor of the purchaser. When looking a Kelo, the Greenway Plaza development in Houston is an example of what can be accomplished without government interference with the market place. In the late 1960s a developer made a tender offer to residence of a middle class neighborhood southwest of the posh River Oaks neighborhood. The offer was well above the current market prices for the homes which were to be torn down and replaced by an office entertainment complex. It turned into a win-win deal for both the purchaser and the sellers.

As most finance consultants can tell you in order to induce people to sell property that is not for sale you need to make an offer above the current market price. This happens routinely in tener offers for stock. It is not all that unusual in real estate transactions too, although the Greenway Plaza example is probably unusual. What makes these transactions work is that the value of the property for another purpose is sufficient to pay for the higher cost of persuading someone to sell. Interjecting the government in order to reduce that cost provides an undeserved windfall to the purchaser.