Property Destruction and Kelo : Further Thoughts

Will Baude rightly points to the ambiguity in my earlier reference to the relationship between property destruction and eminent domain.  Here is what I meant (though not obviously what I wrote.)

Suppose that a wealthy nihilist owns a Frank Lloyd Wright home and announces a completely credible intention to burn it down.  Should the state be able to condemn the property and, upon paying the nihilist fair market value, transfer it to the Frank Lloyd Wright Trust, a private entity that announces (again, completely crediby) an intention to turn it into a museum?

The holding of Kelo (and earlier cases like Berman v. Parker) suggest an affirmative answer, and I believe that the state should be able to use the eminent domain authority to condemn the home from the nihilist and transfer it to the preservationist.  There is a strong economic argument for liability rule protection in this hypothetical, as opposed to property rule protection.  There are probably enough people (neighbors and non-neighbors) who would derive substantial "existence value" from knowing that the home survives and value the option of being able to drive by it or take a tour to outbid the nihilist in a world of no transaction costs.  But high transaction costs will probably prevent those people from getting together and outbidding the nihilist for the home, even though they are the highest value users.  So unless there are a large number of nihilists out there who derive "non-existence value" from the home, it would seem that using the government's eminent domain authority to preserve the home is welfare maximizing. 

Now, I think Will is still going to object, which might make for an interesting discussion.  Where will he go with his objection?  Well, he might make a non-welfarist argument and say that the nihilist is trying to destroy the home for expressive reasons, in which case there might be a First Amendment problem with the government's actions.  If that's the basis for his objections, then I'll be sympathetic, since I'm on record as having articulated that precise concern in an earlier paper on the subject. (I'm not aware of any court case that invalidates an exercise of the eminent domain authority on First Amendment grounds, but maybe that will change one day.)  If Will tries to make a welfarist argument, then it strikes me that he will be defending more difficult terrain. (He might say that eminent domain is too cumbersome, but that sort of begs the question.  If we think that is the problem, then we can address it doctrinally, as some states have done with "quick take" provisions).

Two major problems with Kelo were the speculative nature of the government's use of the land (the government basically wanted to keep the land underneath Kelo's home in reserve for future uses), and the political corruption inherent in the governmental decision making (as my colleague Richard Epstein likes to stress, the politicos decided to spare their favorite watering hole from eminent domain, even though it stood near Kelo's home).  But in our Frank Lloyd Wright hypothetical, we take those concerns away.  Preserving the home is its higher value use, and the government is merely acting to transfer property to a higher value user.  Permitting eminent domain in this case is a lot like creating tort causes of action for nuisances or doctrines striking down unreasonable restraints on alienation -- they limit some property owners' rights somewhat in order to benefit neighbors and society as a whole.

My intuition is that if the Frank Lloyd Wright case had gone up to the Supreme Court and the exercise of eminent domain had been upheld, there would have been no public outcry.  I believe that thoughtful people tolerate eminent domain for the purpose of creating roads or airports because they recognize that these types of uses will usually enhance social welfare, and they resisted the use of eminent domain in Kelo based on skepticism about whether the government was a good agent for the public's interests there.  Ordinary uses of homes (living in them) are valorized and antisocial uses of homes (burning them down or letting their facades fall into disrepair) are viewed with great skepticism.  This account certainly explains why Justice O'Connor was quite troubled by Kelo, but not by similar earlier cases like Midkiff (in which she wrote the opinion of the Court upholding the exercise of eminent domain to upset a land oligopoly) and Berman v. Parker (which authorized eminent domain for the purposes of slum clearance).  So please tell me where I'm wrong.

UPDATE: Will has an interesting response here. His gist is that our approaches to this issue ought to depend on our baseline view of government competency, compared to “market competency.” Agreed. But then he says the government should still have to buy out the nihilist if it wants to transfer the property to the preservationist. I guess I’m still not sure why he comes out the way he does on these facts. We are dealing with a hypothetical in which the government’s ability to identify a higher (though perhaps not highest) value user is assumed. We’re also dealing with nihilistic preferences that most citizens would deem antisocial, so “counting” them at all in the welfare calculus is controversial, as is making the government pay to compensate the owner for frustrating his antisocial preferences. Where people have antisocial preferences of this kind, we might worry about whether they’ll negotiate optimally, particularly if a deep-pocketed government is on the other end of the table. That is, transaction costs prevent Will’s auction from working properly in the face of dispersed existence values, and bounded rationality combined with strategic behavior can prevent efficient bargaining between the government and the nihilist.  Surprisingly, Will goes on to accept government regulation to prevent destruction (albeit with compensation).  I don't see why, from the nihilist's perspective, that's better than a forced transfer of the property to the Frank Lloyd Wright Trust (again, with compensation).  The nihilist wants to destroy the house, and he's just as thwarted by the anti-destruction regulation as he is by the exercise of eminent domain.  So let's step back.  Why does my hypothetical matter?  Comparing my hypothetical with Kelo allows us to pinpoint why Kelo might be troubling (or not). This in turn allows us to construct an account of the circumstances under which eminent domain should be tolerated, and the circumstances under which it should be curtailed. 

Comments

[Bob]

"But in our Frank Lloyd Wright hypothetical, we take those concerns away. Preserving the home is its higher value use, and the government is merely acting to transfer property to a higher value user."

Why is preserving the house a higher value use? Just because you like it? Just because many people like it? Again, I ask, "Under what circumstances is it moral for a group (the state) to do that which is not moral for a member of a group (a citizen) to do alone?"

"Permitting eminent domain in this case is a lot like creating tort causes of action for nuisances or doctrines striking down unreasonable restraints on alienation -- they limit some property owners' rights somewhat in order to benefit neighbors and society as a whole."

Ah, I see. You are for limiting property rights. So, citizens can "own" property, they just have no control over it. Then why allow ownership in property at all? Let the state own it too. Or would that infringe on the "right of the state" to collect property taxes? Sounds to me like you want to let the state have its cake and eat it too!

[Bob]

"thoughtful people tolerate eminent domain"

So, you are thoughtful?

"nihilist is trying to destroy the home for expressive reasons"

And anyone who disagrees with you is a nihilist bent on destruction just for the sake of destruction?

[Bob]

Kimball,

"It is a question of the interests of many being pitted against the unreasonable, opportunistic interest of one"

I see that you believe any individual that does not conform to the interests of the many is obviously an unreasonable and opportunistic individual.

But then you believe that majority rules because might makes right, even if the majority is wrong.

[Kimball Corson]

Bob writes, quoting me to start:

"'It is a question of the interests of many being pitted against the unreasonable, opportunistic interest of one'

"I see that you believe any individual that does not conform to the interests of the many is obviously an unreasonable and opportunistic individual.

"But then you believe that majority rules because might makes right, even if the majority is wrong."

I respond:

Bob makes good points here, especially in light of his and my recent discussion under A Law Barring Junior from Holding His Breath Until He Turns Blue in the Face? Let’s see if I can make some sense of myself.

I would not say the holdout individual is unreasonable, but he is clearly opportunistic. As Bob and I have discussed, majorities are often wrong about matters, especially when members of the majority reinforce a common delusion that is key to the majority’s actions. Aside from delusion, the majority could be wrong for other reasons as well, e.g., misinformation or simply being unreasonable. But to bring the discussion down to earth in this situation, the issue here is whether the reasonable and expressed wishes and financial and benefiting interests of a majority which are affect by the externalities of the opportunistic holdout’s efforts to do so, should yield to those efforts or should the majority prevail with a hand from Kelo? I think the good of the social order, as reflected by the majority’s reasonable wishes, should prevail and the holdout should be given a reasonable premium for his house. That way, he gets a sight bonus, though not what he wants, and the reasonable concerns of the majority are met.

In a collective or social order, where clear externalities are involved and where peoples’ reasonable wishes impinge on each other, property rights should not always be absolute, but sometimes need to be restricted in one or another aspect for the good of everyone else. How far this may go before a taking requiring compensation by the social order is necessary, is a matter to be judged in each situation, depending on the facts, as is the amount of the compensation. At some point, the social order must pay to acquire the positive externalities sought from the proposed change. That is why the holdout should be give a reasonable premium on the purchase price of his house, but not the monopolistic price he wants and the developer would have to pay.

Now to argue against myself, as David and Bob would like to hear, the contrary market-oriented answer of those believing in absolute property rights is different in this situation. It is that the holdout should get his monopoly price and the developer will price that into the rents he charges to some of those who are externally benefited. The higher taxes the development then pays will go to compensate non-tenants who, through the government, had to pay part of the holdout’s monopoly price for his house and were injured by that. Do all still come out smelling like roses? Who knows?

Neither system is perfect. Which is better is why Kelo is so debatable, even in my high-rise, house holdout example which strongly favors it.