Inside the Vault - Spring 2007

8/9/2019 Inside the Vault - Spring 2007

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An Economic Eucaion Newlee om he Feeal reeve Bank o s. Loui

Eminent Domain: Should Private Property Be Taken for Public Use?

Volume 12, Iue 1 sing 0

THE

The U.S. Supreme Court has long recognized the federalgovernment’s power to acquire private property for publicuse. This is true even though “eminent domain” does not

appear in the Constitution. The power of eminent domain islimited, however, by two restrictions. First, as with any federalaction, the use of eminent domain must be “necessary and proper”in accordance with the congressional powers enumerated in Article

1, Section 8, of the Constitution. Second, the use of eminentdomain must obey the final clause of the Fifth Amendment, whichstates, “Nor shall private property be taken for public use, with-out just compensation.” The states’ use of eminent domain mustbe consistent with federal interpretations of public use and justcompensation.

The U.S. Supreme Court’s 2005 decision in Kelo vs. New London resulted in public outrage, although the ruling didn’t overturn anyearlier decisions; it merely affirmed an earlier decision by the Con-necticut Supreme Court. That decision allowed the city of NewLondon, which was officially designated as “distressed,” to useeminent domain to acquire 15 properties, one of which belongedto homeowner Susette Kelo. Neither Kelo’s house nor any of the

other properties was in poor condition despite being located ina “distressed” city. The city acted under a state statute declaringthat the taking of land for purposes of economic development wasa taking for public use. The city’s economic development plandesignated the parcels for office space, parking and retail services.This scenario highlights the central issues of the Kelo case: Whatis a “public use”?

In its 5-4 majority opinion, the U.S. Supreme Court stated inKelo that the government can never take property from one privateparty for the sole purpose of giving it to another, even if just com-pensation is paid. On the other hand, the government can alwaysdo so if the general public acquires some actual use of the property.The court has been defining the ground between these extremes

since the late 1800s. From the start, “it embraced the broader andmore natural interpretation of public use as ‘public purpose,’” thecourt said in Kelo, and deferred to legislative declarations aboutpublic use and purpose.

The Public Good vs. Public GoodsEconomists recognize a difference between “private goods” and

“public goods.” Private goods are both “rival in consumption”and excludable. Rival in consumption means that one person’sconsumption of a private good denies others the opportunity toenjoy the good. The price of a private good is essentially a resultof the good’s scarcity, and some individuals will be excluded from

consuming the good because they are not willing to pay the priceof the good. Unlike a private good, a public good is both non-riva

in consumption and non-excludable. The textbook example of a pure public good is national defense because if one U.S. citizenreceives the protection of national defense, then others will neces-sarily benefit from that protection. One person’s consumption of apublic good does not deny others from consuming the good, andpeople can use the public good without paying for it. Because theadditional cost of providing the good to another person is essen-tially zero (since all people can use the good once it is provided toone person) the market price for additional users would be zero,which would not be practical for profit-making firms, and thegood would tend to be undersupplied in the market.

Who Wins? Who Loses?

Transferring property from private to public use, however,requires government intervention in private markets. Anecdotalinformation and formal academic research show that, in general,countries with less government involvement in private marketsexperience more economic growth than countries with moregovernment involvement in private markets. Of course, certaingroups do benefit from the taking of private property, such asdevelopers, property managers and local politicians. Developersand property managers gain income from developing the prop-erty. Many local politicians favor targeted economic developmentbecause of what they see as the immediate benefits from develop-

Continued on back cove





Labor Markets, Wages and theFactors that Affect Them

• What is a Labor Market?• What Factors Aect Wages in Labor Markets?

• Who Works, Who Doesn’t and Why?

Have you uen eve ake you wha you ean? Ake viio wha hey ean?do hey alk abou he income o amou muician an ahlee? Why no ue

hei inee o you avanage? Aen hi ogam o lean om a Fe econo-mi abou labo make an he aco ha aec hem. Ue hi ineeing anelevan inomaion o enich you claoom inucion. All eache ae welcome,bu he claoom alicaion ae geae o gae 4-12.

the ogam inclue eenaion by a Feeal reeve economi, han-on acivi-ie o you claoom an ee eaching maeial. Coninenal beaka will be

eve a 8 a.m., an lunch will be ovie. the ogam will ajoun a 3 .m.

the coneence will ake lace in 2007 in he ollowing Eighh diic ciie:

• July 31 (grades K-12) – Louisville

• Oct. 24 (elementary) and Oct. 25 (secondary) – Memphis

• Nov. 7 (grades 4-8) and Nov. 8 (grades 9-12) – St. Louis

thee i no ee, bu egiaion wih he Fe i equie. Fo moe inomaion, go owww.louie.og/eucaion/coneence.hml

Bulletin Board

Little Rock – Billy Britt 501-324-8368

Louisville – David Ballard 502-568-9257

Memphis – Jeannette Bennett 901-579-4104

St. Louis – Dawn Conner 314-444-8421

St. Louis – Mary Suiter 314-444-4662Bank

Contacts

Little Rock, Ark.

July 30-Aug. 1, 2007

Fayetteville, Ark.

Aug. 2-3, 2007

K-12 grade teachers

June 19-21, 2007

Millsaps College, Jackson, Miss.

to egie, go o www.mcee.og o call

Jeannee Benne a 901-579-4104. You

may alo e-mail Jeannee a [email protected] o moe inomaion.

Deadline or registration is Friday,

June 1, 2007.

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ublicaion in you claoom? do you nee a gea iea o uing aFeeal reeve ublicaion in you claoom? I o, vii www.louie.

og/eucaion/eouceool. A hi ie, you can a a i o ool ha you

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Economic and FinancialLiteracy Seminar

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Federal Reserve Bank of St. LouisP.O. Box 442St. Louis, Mo. 63166-0442

prsrt stdU.s. pOstAGE

PAIDst. LOUIs, MO

pErMIt NO. 444

ment, such as increased employment andtax revenue.

However, the greater economic costsof government intervention in privatemarkets outweigh presumed immediateand tangible benefits from taking privateproperty for economic development.The use of eminent domain for economic

development complements already existingeconomic development tools such as TIFs(tax increment financing), tax breaks, localdevelopment grants, etc. These tools, how-ever, probably won’t lead to more societalwelfare because each tool simply involvesa transfer of income from one group toanother, often resulting in a zero-sum gain. Justice Sandra Day O’Connor stated in herdissent to Kelo, “The beneficiaries (of emi-nent domain) are likely to be those citizenswith disproportionate influence and powerin the political process, including large

corporations and development firms.”

Private Property RightsHow can governments promote eco-

nomic development that yields economicgrowth? Rather than using eminentdomain or other tools to target individual

economic development projects, local gov-ernments can examine why particular areasneed significant economic developmentincentives to spur economic growth. Forexample, are taxes too high, thus making itless likely for business to move to the localarea? Do current regulations stifle businesscreation and expansion? Local govern-ments should focus on creating a business

environment conducive to risk-taking,entry and expansion rather than attemptingtargeted economic development througheminent domain. One requirement for astrong private market is secure propertyrights. Research shows that without prop-erty rights, individuals may not make thebest economic use of their property andeconomic growth will be limited.

This article was adapted from The Taking of Prosper-

ity? Kelo vs. New London and the Economics of

Eminent Domain, which was written by Thomas A.

Garrett, assistant vice president and economist at theFederal Reserve Bank of St. Louis, and Paul Rothstein,

associate professor of economics and associate director

of the Weidenbaum Center on the Economy, Govern-

ment, and Public Policy at Washington University in

St. Louis, and was published in the January 2007 issue

of The Regional Economist, a St. Louis Fed publication.

Classroom Discussion

For a lesson plan to accompany thisarticle, go to www.stlouised.org/publications/itv/deault.html.

Inside the Vault is written by

Dawn Conner, economic

education coordinator, and

Mary Suiter, manager of

economic education, at the

Federal Reserve Bank of

St. Louis, P.O. Box 442,

St. Louis, MO 63166. The

views expressed are those of

the authors and are not nec-

essarily those of the Federal

Reserve Bank of St. Louis or

the Federal Reserve System.

Please direct all comments

and questions about the pub-

lication to 314-444-4662 or

[email protected].

1. Identify the two restrictions underwhich the government mustoperate when exercising eminentdomain authority. Why are theserestrictions important?

2. Define the term “public good” and

give some examples besides thosestated in the article.

3. Why are private property rightsimportant?

Continued from front cover

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Inside the Vault - Spring 2007