The Volokh Conspiracy - Is More Money the Answer to the Public Use Problem?

My final post responds to the common suggestion that more money is the "answer" to the public-use problem. (Many thanks, again, to Eugene for inviting me to guest blog this week. It's been great fun!)

First, The Relationship Between Compensation And Deterrence Is Uncertain

"More compensation" proponents frequently argue that above-market compensation will deter inefficient takings. The difficulty with this argument, however, is that Takers tend to respond to political incentives rather than economic ones. And, in the economic development context, political incentives may favor overinvestment in questionable projects. For example, the fact that Takers n frequently give away property as part of an "incentive package" may suggest that the deterrent effects of increased compensation will be limited.

Proposals to limit Takers ability to spend state and federal funds on economic development takings offer a more promising way to deter inefficient projects. While Takers may well perceive that the political costs of spending someone else's money are very low, local officials spending local money are constrained by the political need to keep taxes low. They also operate underlegal constraints that disfavor an aggressive takings policy, including debt- and tax-limitations. Were local Takers forced to internalize the costs of their takings, it is reasonable to assume that eminent domain would become a much less attractive economic development tool. (One potential pitfall of this approach is that it might increase the risk of undercompensation, as many state relocation assistance laws limit protection to projects funded by state or federal funds.)

Second, Higher Compensation May Impede Political Resistance

If higher compensation levels will not deter inefficient government takings, then effective political resistance becomes all the more crucial. Yet, Takers may use high compensation levels to limit resistance. Both Kelo and Poletown illustrate this phenomenon. In Kelo, only seven property owners objected to the project, which involved the acquisition of 115 parcels. The other owners' willingness to sell may have reflected the fact that the State of Connecticut guaranteed residents and small business up to $250,000 for downpayment assistance and business reestablishment. Similarly, William Fischel has observed that in, Poletown , the City's generous compensation offers were quickly accepted by the younger residents, leaving behind a relatively small cohort of older Polish residents to fight the GM project. While Poletown was a relatively integrated community, most of the African-American residents moved voluntarily. This created the impression that the resistance was a racial issue, a fact which made it virtually impossible for local politicians in the majority-black city to oppose the project.

Third, Private Takings May Generate Unique Dignitary Harms

Undercompensation is frequently used to justify public-use review, but proponents of judicial intervention (including, admittedly, myself) tend to gloss over the precise connection between the amount of compensation and the purpose of a taking. Market-value compensation might be "unjust" because owners are systematically undercompensated when their property is taken by eminent domain. But, the question of what level of compensation is "just" applies to all eminent domain takings. When confronted with a property owner's assertion that they could accept their fate if the government had taken their land for a traditional public use, an economist might "impatiently exclaim, 'but you've lost your home in either case!'"

There are, however, a number of reasons why the size of the uncompensated increment might vary with a taking's purpose. First, "private" takings may generate collective anxieties that public ones do not. Recall, for example, Justice O'Connor's warning that, after Kelo, "[t]he specter of condemnation hangs over all property. Nothing is to prevent the State from replacing any Motel 6 with a Ritz-Carlton, any home with a shopping mall, or any farm with a factory." Or consider the Becket Fund for Religious Liberty's warning, discussed in Ilya's recent post, that Takers might condemn churches, which do not pay property taxes, in order to transfer the property to for-profit entities, which do.

Second, the government's decision to take property from one private owner and give it to another may generate what might be called "expressive" harms. Owners may perceive the taking as an insult—tantamount to a government declaration that their property would be put to a more socially beneficial use by someone else. Indeed, some owners sound as if they were motivated to file public-use claims in part because they are so offended by the message sent by the taking.

Third, in the economic development context, an exercise of eminent domain almost always generates assembly gains that raise the value of the property. Because the fair market value determination is made before the condemnation, however, the original owner does not share in any increased of that value. The allocation of the "condemnation bonus" entirely to the private beneficiaries of takings may demoralize property owners.

Kelo moved the debate over the proper scope of the eminent domain power out of the courts and into the legislatures, where owners' dignitary interest in their property—and the collective anxieties generated by the knowledge that owners are not afforded property-rule protection from private takings—rightfully make up part of the case for substantive limits on the eminent domain power.

	[Nicole Garnett (guest-blogging), February 16, 2007 at 3:57pm] Trackbacks Is More Money the Answer to the Public Use Problem? My final post responds to the common suggestion that more money is the "answer" to the public-use problem. (Many thanks, again, to Eugene for inviting me to guest blog this week. It's been great fun!) First, The Relationship Between Compensation And Deterrence Is Uncertain "More compensation" proponents frequently argue that above-market compensation will deter inefficient takings. The difficulty with this argument, however, is that Takers tend to respond to political incentives rather than economic ones. And, in the economic development context, political incentives may favor overinvestment in questionable projects. For example, the fact that Takers n frequently give away property as part of an "incentive package" may suggest that the deterrent effects of increased compensation will be limited. Proposals to limit Takers ability to spend state and federal funds on economic development takings offer a more promising way to deter inefficient projects. While Takers may well perceive that the political costs of spending someone else's money are very low, local officials spending local money are constrained by the political need to keep taxes low. They also operate underlegal constraints that disfavor an aggressive takings policy, including debt- and tax-limitations. Were local Takers forced to internalize the costs of their takings, it is reasonable to assume that eminent domain would become a much less attractive economic development tool. (One potential pitfall of this approach is that it might increase the risk of undercompensation, as many state relocation assistance laws limit protection to projects funded by state or federal funds.) Second, Higher Compensation May Impede Political Resistance If higher compensation levels will not deter inefficient government takings, then effective political resistance becomes all the more crucial. Yet, Takers may use high compensation levels to limit resistance. Both Kelo and Poletown illustrate this phenomenon. In Kelo, only seven property owners objected to the project, which involved the acquisition of 115 parcels. The other owners' willingness to sell may have reflected the fact that the State of Connecticut guaranteed residents and small business up to $250,000 for downpayment assistance and business reestablishment. Similarly, William Fischel has observed that in, Poletown , the City's generous compensation offers were quickly accepted by the younger residents, leaving behind a relatively small cohort of older Polish residents to fight the GM project. While Poletown was a relatively integrated community, most of the African-American residents moved voluntarily. This created the impression that the resistance was a racial issue, a fact which made it virtually impossible for local politicians in the majority-black city to oppose the project. Third, Private Takings May Generate Unique Dignitary Harms Undercompensation is frequently used to justify public-use review, but proponents of judicial intervention (including, admittedly, myself) tend to gloss over the precise connection between the amount of compensation and the purpose of a taking. Market-value compensation might be "unjust" because owners are systematically undercompensated when their property is taken by eminent domain. But, the question of what level of compensation is "just" applies to all eminent domain takings. When confronted with a property owner's assertion that they could accept their fate if the government had taken their land for a traditional public use, an economist might "impatiently exclaim, 'but you've lost your home in either case!'" There are, however, a number of reasons why the size of the uncompensated increment might vary with a taking's purpose. First, "private" takings may generate collective anxieties that public ones do not. Recall, for example, Justice O'Connor's warning that, after Kelo, "[t]he specter of condemnation hangs over all property. Nothing is to prevent the State from replacing any Motel 6 with a Ritz-Carlton, any home with a shopping mall, or any farm with a factory." Or consider the Becket Fund for Religious Liberty's warning, discussed in Ilya's recent post, that Takers might condemn churches, which do not pay property taxes, in order to transfer the property to for-profit entities, which do. Second, the government's decision to take property from one private owner and give it to another may generate what might be called "expressive" harms. Owners may perceive the taking as an insult—tantamount to a government declaration that their property would be put to a more socially beneficial use by someone else. Indeed, some owners sound as if they were motivated to file public-use claims in part because they are so offended by the message sent by the taking. Third, in the economic development context, an exercise of eminent domain almost always generates assembly gains that raise the value of the property. Because the fair market value determination is made before the condemnation, however, the original owner does not share in any increased of that value. The allocation of the "condemnation bonus" entirely to the private beneficiaries of takings may demoralize property owners. Kelo moved the debate over the proper scope of the eminent domain power out of the courts and into the legislatures, where owners' dignitary interest in their property—and the collective anxieties generated by the knowledge that owners are not afforded property-rule protection from private takings—rightfully make up part of the case for substantive limits on the eminent domain power.