Arnold Kling  

Eminent Domain and Property Rights

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Don Boudreaux and David Barron in a WSJ Celebrity Death Match. Boudreaux says,


eminent domain is unnecessary. The fact that housing developers routinely acquire large contiguous plots of land without eminent domain -- that is, by buying individual plots from private owners -- suggests that government doesn't need eminent domain to build roads and to do whatever else it does.

To which Barron replies,

The government could build a statewide highway by just bargaining with landowners along the route? What about the owner of the last parcel in the road's path?

To which Boudreaux comes back,

ingenious strategies exist to avoid the hold-up problem. For example, a buyer can negotiate sales contracts contingent upon the buyer acquiring all necessary parcels of land. With such contracts, no one landowner is ever in a position to hold-out strategically for the full value of the project.

And Barron goes on

But we've generally recognized that regulation also can create value in property, and for many decades constitutional law has proceeded from that premise. That's partly why zoning generally raises no constitutional problem. And why eminent domain shouldn't either.


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TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/260
The author at The Dead Parrot Society in a related article titled Eminent Domain Grudge Match writes:
    Don Bordeaux at Cafe Hayek engaged Harvard Law Prof. David Barron in a Wall Street Journal blogmatch. The debate soon referenced Kelo, bringing me to read -- and cringe -- at the oral argument. If you compare Don's (or Scalia's) clear thinking on the i... [Tracked on May 19, 2005 12:15 PM]
COMMENTS (26 to date)
Randy writes:

The key is that "generally recognized" in the last quote from Barron. It has indeed become "generally recognized" that the right of the state to seize property is greater than the right of the individual to own property - and the arguments are becoming more specious.

spencer writes:


In the 1950s I lived north of Atlanta when they were building the interstate system through Atlanta. There was one parcel of land they could not seem to get hold of and so for years there was about a one mile gap in the interstate just north of downtown Atlanta. I was a kid, so I do not remember the details, but someone held the system up in the courts for years because they did not want to sell the land.

So there are historic examples where it is possible to prevent developers from getting the land, even with eminent domain.

Bernard Yomtov writes:

I don't understand why Boudreaux's strategy is supposed to work. Is the idea that the other owners will pressure the holdout because of the contingency? That might work, though I'm dubious, if the contingent price is at a premium over fair market value, but then all you're doing is moving the overpayment around, not avoiding it.

James writes:

Bernard,

It's one possibility that the willing sellers will pressure the holdouts. They want to sell but the developer won't buy unless it can buy all of the land it needs. So they could conceivably take part of their producer surplus and use it to pay off the holdout. At the very least, the developer doesn't wind up buying 99 lots only to discover later that the 100th lot isn't for sale. But in one sense you're right to be skeptical about Boudreaux's strategy. At the end of the day, without invoking force there is always the possibility that someone won't be willing to let go of their land at any price.

Mark Horn writes:

I think another possibility is that if they can't get the one parcel of land that's keeping them from going where they want, but they can get some other parcel to route around that problem, then that's an option. By not being committed to everyone until everyone agrees, then they have the option of re-routing to a set of land that they can own.

Bernard Yomtov writes:

James,

Yes, you're right.

But part of my point was that this doesn't necessarily save the developer anything. Instead of paying a huge premium to the holdout he pays a smaller premium to each of many earlier sellers. If that small premium, when pooled and paid to the holdout, is enough to get the holdout to sell, then where's the savings?

Another point is that sellers may be more obstinate in dealing with the government than with a private buyer, on the basis that the government has more money than the private developer. Also, the private developer's plan may be more flexible, so it can be modified if that last parcel is not available at a reasonable price.

Mark Horn writes:

I read the full article, and at the end of it I think the participants were talking past each other. And it's best captured by this comment from Barron:

That's partly why zoning generally raises no constitutional problem. And why eminent domain shouldn't either.
I don't think that Boudreaux is saying that there's a constitutional problem. Clearly there isn't. The constitution included eminant domain. I think what Boudreaux is trying to say is that the framers got that part wrong. To wit:
David's right that the framers of the U.S. Constitution were "no slouches when it comes to property rights." By and large, I admire their handiwork. But I do wish that they would have rejected eminent domain.
And that comment can't be answered by saying there's no constitutional problem with eminant domain. The problem isn't with the constitution. It's with whether or not eminant domain is constitutionally protected theft.

Randy writes:

Just a thought; what if eminent domain did not require fair compensation, but was instead accomplished, by force, at the discretion of a judge. Example; all but one person has sold at a mutually agreed price. The state sues the holdout under eminent domain. If the holdout loses, the state simply seizes the property without compensation. This would force the state to make a very good case, thus limiting the use of eminent domain. But it would also make clear the true nature of eminent domain.

Victor writes:

James At the end of the day, without invoking force there is always the possibility that someone won't be willing to let go of their land at any price.

I disagree. The reason there is the possibility that someone will hold out is because people are not forced to confront the economic costs of their actions. If you change this, then the "sky is the limit" attitude will, by necessity, change.

To whit: if the land can be put to a $10,000,000 use, but right now there is a $100,000 home on it, that person can indeed sit on it until forced out. But, instead, if the rules were designed so that the home owner were forced to pay taxes based upon the true value of the property, the result might be quite different. If the government came along and offered $5,000,000, the homeowner refused, but then had to pay taxes as if the land was worth $5,000,000, most would have no choice: they would have to leave and accept "only" $5,000,000 in compensation.

With the rules as they are today, it is awfully easy to say that I as a homeowner value the property at some extraordinarily high amount. If we make people put their money where their mouths are, however, I suspect that most would behave differently.

Bernard Yomtov writes:

By not being committed to everyone until everyone agrees, then they have the option of re-routing to a set of land that they can own.

Again, Mark, I agree. But.

Buying a piece of land contingent on everyone else selling is not the same as just buying it. It is more expensive. Suppose I have some property that I am willing to sell for $100,000. You come along and offer me $100,000 and I will sell it to you.

But suppose you say, "I'm willing to buy your property, but only if all these other owners also sell to me." Then I'm not going to accept $100,000, because that would, presumably, require me to hold the property off the market for some length of time to give you a chance to finish your deal. It's not a lot different than giving you an option. So I'm going to want more, and again the savings from Boudreaux's plan may disappear.

The general problem here is that the buyer is not just trying to buy the land. He's trying to buy it with some contingencies. and however you structure a deal, buying land, or anything else, with contingencies costs more than just buying it.

cb writes:

Victor,

I disagree. My family owns land that is not for sale, at any price. Assuming I was a wealthy person, I would pay the increase in taxes (unhappily) that you propose, but I would not sell, ever.

Your assuming that the $ value of what the land could be used for is the equivalent of what I value the land, which may have nothing to do with money. There is more to value than economic value.

Pedro Bento writes:

cb hit it. You guys need to remember that there's another reason, besides the holdout problem, that people might not sell - they value their property more than the developer/government does. Anytime the government pays fair market value for a confiscated property, you can be sure of one thing - that price is less than the owner's valuation. Otherwise, she already would have sold.

Barron keeps forgeting to include the property owner in the "society" he keeps refering to. For the transfer of a property to be beneficial to society, the value of the property to the rest of society must be greater than the value to the owner.

Timothy writes:

Barron's problem is that he thinks "society" exists as some sort of cohesive entity.

Randy writes:

Pedro,

Re; "Barron keeps forgetting to include the property owner in the "society" he keeps refering to."

Well said!

mcwop writes:

Timely post as intergalactic eminent domain plays out in the "The Hitchhiker's Guide to the Galaxy".

The results are not pretty.

James writes:

Victor,

To whit: if the land can be put to a $10,000,000 use, but right now there is a $100,000 home on it, that person can indeed sit on it until forced out. But, instead, if the rules were designed so that the home owner were forced to pay taxes based upon the true value of the property, the result might be quite different. If the government came along and offered $5,000,000, the homeowner refused, but then had to pay taxes as if the land was worth $5,000,000, most would have no choice: they would have to leave and accept "only" $5,000,000 in compensation.

Would this be a voluntary tax?

Bob Knaus writes:

Here's what the Seattle cityscape looks like when a few property owners hold out while the rest agree to have Denny Hill regraded.

Nicholas Weininger writes:

Victor: you're essentially proposing Georgism, right? Owners are taxed based on the unimproved site-value of their land, and the tax is seen as payment for the right to exclude others from the possession of something they did not create.

A supporter of Georgism would, I suppose, use this as more evidence for its desirability. Under a Georgist regime, they'd say, you'd need no eminent domain; just buy from everyone except your holdout, build 90% of the highway, then argue that the value to be added by that last 10% is so great that the site-value of the holdout's land is extremely high. So either the holdout gives in, or he pays a huge property tax which you then use to help cover the cost of building around him.

An opponent would respond that this actually demonstrates a flaw in Georgism, or anyway a devilish detail: if the government gets to make those sorts of decisions about site value changes, it can effectively take anybody's land anytime it wants by taxing them off of it; the Kelos of New London would long since have been forced to sell out to the developers, since the developers' intent to build their shiny new commercial stuff would raise the site value of their land until they couldn't pay the tax.

But maybe I'm misunderstanding Georgism here. Any Georgists out there want to set me straight?

Mark Horn writes:
and however you structure a deal, buying land, or anything else, with contingencies costs more than just buying it.
And you're arguing that this resulting increase in cost is inefficient. Why? Shouldn't there be some sort of premium price on getting a contingous chunk of land in comparison to the equivalently sized non-contiguous chunks?
Solyom writes:

But we've generally recognized that regulation also can create value in property...

Uhm...mhhhhwaaahahahahahahahhahahahhahahah. Moron.


Any 'value' that is 'created by regulation' is derived from a loss in consumer surplus.

Lauren Landsburg writes:

Nicholas Weininger wrote:

A supporter of Georgism would, I suppose, use this as more evidence for its desirability. Under a Georgist regime, they'd say, you'd need no eminent domain; just buy from everyone except your holdout, build 90% of the highway, then argue that the value to be added by that last 10% is so great that the site-value of the holdout's land is extremely high. So either the holdout gives in, or he pays a huge property tax which you then use to help cover the cost of building around him....
But maybe I'm misunderstanding Georgism here. Any Georgists out there want to set me straight?

I'm not a Georgist, but when Econlib added George's Progress and Poverty [1879] last autumn, I actually read much of the original. Based on that, I can see that there could easily be two versions of Georgism with differing recommendations: one grounded on modern economic theory, the other based on George's own (pre-marginal-revolution) arguments. So, if anyone answers you, I hope he'll describe where he's coming from!

[For those who aren't familiar with Henry George: George famously argued in favor of a single tax on land rather than the plethora of other taxes. This argument can possibly be supported in modern economic theory on grounds of minimizing distortions and reducing collection costs. But George's own argument was quite different! He argued that private ownership of land was the primary deterrent to economic growth. (Contrast modern economic views of property rights as a necessary foundation for growth, and as a specific popular example, Hernando deSoto's recommendations to title squatters to land/property ownership, with Peru as an example.) However, (George continued), as a practical matter, the consummate abolishment of private land ownership would be too difficult to achieve because of politics and customs. Taxing land, he argued, could get around the practical concerns and approximate the goals. See Book VIII for his actual recommendations.]

Henry George has one historical example of eminent domain in Book VII, Chapter 4, par. VII.IV.29. Some additional references, definitions, and materials can be found at Econlib books searched for the phrase "eminent domain".

Victor writes:

cb -- I shouldn't have implied that *all* people will sell out if confronted with higher direct costs of remaining on their land; my main point was that many would. In those cases where they wouldn't sell, we can be assured that the costs of the project exceeded its benefits. This is a check that the current system doesn't have.

James -- Interesting. I suppose so; those who turn down the government's offer are volunteering to pay more in taxes so you can retain the rights to your land (which, of course, we can now observe to have a higher external value).

Nicholas -- You and Lauren are taking this discussion to a new level. I can't speak for Georgism, per se, but you have accurately nailed what I was thinking.

I will point out, however, that your third paragraph is no worse than the current situation. In fact, the residents of Kelo would be strictly better off since their remuneration is no longer limited to "fair market value" as determined a priori. It is true that government could "misuse" their power to raise property values just as governments could "misuse" the power of eminent domain. But at least they would not be able to misuse their ability to remunerate people based upon an arbitrary, previously determined lower-bound to the societal value of their property. Further, to the extent that some people exercise their option to decline and pay higher taxes instead of lose their property, we can be assured that overall welfare is higher under this schema than under eminent domain, as I noted above.

As a caveat for fairness, I will also point out that we do have a smorgasboard of taxes out there that make this somewhat impractical. I perhaps need to read up on Georgism myself. Politically this would be a nightmare since the benefit of wealth to avoid "eminent domain" would become obvious (whereas that effect is currently shrouded by the political process).

It is just an idea, and perhaps not that new of one, eh? ;)

cb writes:

Victor,

I don't have time to figure out who George is and what he's saying, but your proposal sounds like you're punishing me because I place value on my land that is beyond economic. Also sounds like a policy that would be abused by officials. If a tax entity needed more funds, they could just propose a bunch of projects, and just like that, taxable base went up.

cb writes:

Er, I meant tax authority, not tax entity

Victor writes:

If a tax entity needed more funds, they could just propose a bunch of projects, and just like that, taxable base went up.

The government would have to offer *more* for their property than current market values for their taxes to increase. The government can't willy-nilly (this is a technical econ. term) offer to buy all sorts of property at above market value ... someone might actually agree to sell their land and take their profits. It's hard to see how this would turn into a revenue raiser overall for the government.

As a result of this problem, the gov't would have to know quite a bit about private valuations and also be able to target specific individuals for what would quickly be seen as nefarious reasons. If the gov't has that much knowledge and has purposes that are that dark, the current eminent domain law itself would be disfunctional, especially if Kelo goes to the gov't (e.g., find buyers B with high valuations for land from persons A. Force A to sell to B at discounted rates with a portion of the difference to line the pockets of government administrators or raise additional taxes.).

What I'm talking about is forcing both parties to the transaction to realize economic costs and consequences of their professed desires. This should form checks on both sides against inefficient distribution. Right now, the government -- by law -- doesn't have to pay the full social cost to acquire a property, nor does a property owner have to pay the full social cost of retaining a property.

I'll be the first to admit I haven't thought this through a ton. It was just an idea that hit me after reading the extremely frustrating oral argument in Kelo. The current eminent domain law has absolutely no safeguards to guarantee or even encourage efficient property allocation, and that seemingly should be addressed somewhere by someone. If we roll back eminent domain precedent to pre-1954, then I won't worry. But if this is decided in favor of the gov't, something will have to be done to prevent people from simply using the government to acquire cheap property from people otherwise unwilling to sell.

James writes:

Victor,

I suppose so; those who turn down the government's offer are volunteering to pay more in taxes so you can retain the rights to your land (which, of course, we can now observe to have a higher external value).

This doesn't sound very voluntary to me. If I gave you a choice between selling your things to me or paying me a special premium to respect your right to own them, would you see your participation in one of those arrangements as voluntary? Suppose I were a governmnet and did the same...

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