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

[slevmore]

Quite right, I think, and certainly so as a predictive matter. We wmay quibble about the correct amount of compensation, but let's set that aside.
Most governments will not be so generous, but will instead come up with historic preservation or environmental laws that force the property owner to keep properties with high and dispersed existence values in a certain fashion. We then face the question of whether these regulatory partial takings (assume the owner can charge admission to to see the architectural masterpiece) should generate compensation. People who distrust the government normally worry more about uncompensated takings than about compensated ones, and for good reason.
Even post-Kelo I don't think there would me much outrage if the government condemned not to develop but to leave alone, to maintain the historic use. And that's really the Strahilevitz claim.

[JohnLopresti]

This reply is three part and somewhat societal. My recollection from a very long time ago is the Kelo area was likely in need of a taking, having endured numerous decades as a shoreside venue for sailors; so, your point about historical value has bearing, albeit obliquely.
For some reason, perhaps because it is in public news a lot in recent years, I drew the FL Wright analogy to the WTC, the latter locale, where I would see great reasonableness in a declaration of eminent domain and keeping the site without a building, lest we reconstitute that block with another target; I could even conceive of a case to bring against the city for Not declaring eminent domain, to protect the citizens from future blight.
Your nihilist gone wild postulate, sadly, reverberates with great truth, and I defer to your sensibilities there; having seen a few of his inspired structures, I would wager that an assemblage of architects could be convened selectively to conduct a sincere debate over whether the world would be improved by the absence of one more excessive use of concrete and cement, regardless of innovative form imparted by FLW.
As for the non-taking of the saloon, perhaps that is politics at its nadir, but we should rejoice that so many politicoes fit within that room, sparing the community a more dispersed distribution of politicians. In countervailing argument, one might observe that with a new shoreline shopping center New London is improved, and even a venerable old bar would remain an attraction to the curious and thirsty; but saving an old wooden house would be more unsightly, unless restored according to landmark status.
Perhaps this is stretching Kelo farther than the Justices intended, though I was glad they took that bold step, regardless of the unusual alliances which produced it; and in later years we will have the new shorline in New London to assess, to see if the Kelo decision actually was as far-sighted as it appears at present. But I will check your caselaw references for elucidation.

[Brett Bellmore]

I must admit to being at something of a loss as to why having long been a venue of sailors would render an area "in need of" a taking. I suspect the area itself has no "needs" to speak of, and the area's inhabitants do not self-evidently "need" to have their property rights compromised.

Why, one might even suspect that sailors "need" shoreside venues.

[David Sucher]

"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?"

Well unless I am missing something the answer is certainly "yes." (And I don't mean "yes" in that I necessaril;y agree with the result but simply that I believe that that is the law.)

Right now the government can prevent destruction of the house i.e. it can require preservation _without_ compensation, if it has some historical value, which a FLW house certainly would. So if the condemnation were part of some sort of overall municipalplan for preserving architecturally/historically significant structures, then I cannot imagine the issue. Government would be doing what the right wing wishes -- _compensating_ for a taking.

Transferring the structure to an entity which has competence in preserving such valuable structures seems totally reasonable.

I write this as a person totally ourtraged by Kelo and the facts of the case which underlay it. The distinction is the purpose of the taking. Eminent domain is misused if it put government in the role of market participant rather than market regulator. That's the gist. Economic development, especially neighborhood planning, is not a function in which government has any proven competence as a market participant and so should stay out of it (except as a market regulator though building & zoning codes.)

And answering a further hypothetical about how I would feel if government did indeed have such proven competence is to me like wondering if I would take a pig to Paris if pigs could fly.

[Kimball Corson]

Or Milton Friedman's repeated comment that if we had bacon and if we had eggs, we could have bacon and eggs.

[Kimball Corson]

More seriously, what is really interesting about Kelo is our reaction to it. From the vantage point of economic efficiency, Kelo is sound economically. We can maximize tax revenues and put property to its highest and best use, as such efficiency requires. However, our reaction to Kelo would suggest that there is more to property ownership than just economic efficiency (or, for the die hards, at least the model needs to be altered) and that something else is going on here. If this is true and especially true more generally, is this not a chink in the armor of the Chicago School? We need to better identify and understand what is going on in these situations in order to know.

[David Sucher]

Kimball,
I wonder about your central point concering the effectiveness of govt intervention. There is no evidence at all that Eminent Domain for economic development purposes works. On what basis do you suggest that Kelo is "sound economically"? Do you know of any neighborhood planning efforts in which ED was both seen to be essential at the outset and also can be shown to have been effective after the fact?

[Kimball Corson]

David,

I think Kelo, if used correctly by governments, can work to assure real property is put to its highest and best use, as adjudged by markets. Accepting that point is true for purposes of argument (and like you, I really wonder), I think we still have a big problem with Kelo. Why, I am not sure. Perhaps because real property can mean more to us than just its financial value. But why and how, I ask?

[David Sucher]

But Kimball, your point
-- " ...Kelo, if used correctly by governments, can work to assure real property is put to its highest and best use, as adjudged by markets. --
is precisely the problem with Kelo and a point which I do NOT accept. In fact, if you trust markets to work at all, you don't need Kelo.

Kelo is a shortcut to avoid market mechanisms. It allows the developer to skip the normal market process of bidding for property and to use governmental coercion to force a sale. It gives results which are anything but market-driven -- that's it's very purpose: to allow government to force development where the market is, at best, ambivalent. If you have an area with development activity there would be absolutely no excuse whatsoever for Kelo-backed eminent domain because you'd already have development happening. So you wouldn't need to subsidize development with coerced sales.

[Kimball Corson]

Yours is a fair take, David. The problem is one of valuation, as I see it. An individual may fairly value his or her home at a price much higher than the market does and not sell when the market thinks he or she should. Absent Kelo, high rise office buildings can come to surround a shack (ignoring the effects of property taxes). Alternatively, the owner, knowing his or her property is needed to complete a block purchase, may seek a monopolist price by being a hold out to the last. That all real property is unique entails this prospect. What then?

[David Sucher]

"What then?"

It's called capitalism, Kimball, and the prospective developer simply doesn't get to buy unless he pays the hold-out price or his plan must be adjusted to take into account a smaller site. That's the way it works. And it works fine.

On an emperical basis, Kelo-type eminent domain is simply not needed. Do you think Manhattan developement relies on Kelo? Not at all.

[Kimball Corson]

David, we can call it the Maphisto waltz, but it is still not socially optimal in the situations I describe. The hold out ought not to get a monopoly price because of a lack of fungibility, just as Kelo ought not to be used in neutral situations to force a taking where the seller does not want to sell at or near market for personal reasons. I am no real fan of Kelo or government intervention, but there are screwy situations that the market does not handle too well in my view.

[David Sucher]

What I fail to understand, Kimball, is why you think the hold-out should be forced to sell to, say, a developer of an office building? Because the office building will pay more taxes and therefore produce greater "social welfare?" We are talking about a private economuc venture -- not an essential road or power-line etc etc. Why do you think that the office building developer should be given the powert of eminent domain to force the sale of another private owner? All you are doing is favoring one vision over another.

Have you ever actually woreked for government, btw? Anyone who has would be quickly disabused of the idea that there is some special wisdom there.

[Kimball Corson]

It is a question of the interests of many being pitted against the unreasonable, opportunistic interest of one, where others have behaved reasonably. The lack of fungibility creates these negative externalities and becasue of the uniqueness of the real estate parcel at issue, the owner is exercising monopolistic power. I am not saying Kelo is not subject to tremendous abuse. It is. I am just pointing out a reasonable use of it. By the way, I never worked for a government, unless a summer stint with the American Law Institue counts; was always in a large firm law practice until the end when I joined a Harvard boutique a few years before retiring.

[David Sucher]

Ah! The god of rationality trumps capitalism.

Btw, you are mischaracterizing the "monopolistic power" of the hold-out, which it is not. It is only "monopolistic" with regard to ONE particular buyer; there are many other parcels available for sale and in fact the developer's project can adjust to the hold-out. So I don't see the need for society to come to the aid of one private project. Or are you suggesting that any developer anywhere for any project can go to his local government and ask it to condemn a property he wants to purchase?

[Kimball Corson]

Say a developer needs a city block for his project and buys all lots in the block except for the hold out whose property is necessary. Another parcel elsewhere won't do. The putative seller is exercising monopoly power in holding out. If his and other sellers' properties were not location specific, they could be fungible. This parcel is not. It si needed, not others elsewhere. Many are harmed if he does not sell by negative externalities and he is not if he sells at market or even a bit above. Kelo should apply for the sake of everyone else. The seller would not be hurt, especially if given a slight premium.

[David Sucher]

Mr. Corson, one of the basic truths of real estate development is that there is never an essential or "necessary" property. There is always a design solution to the holdout. And if there isn't, there is always another site for some "essential" (said with the greatest of sarcasm) shopping center or office building.

I am speaking above of discrete projects on one site.

Where eminent domain is essential (because of the problem of transaction costs even more so than the hold-out problem) is in corridors for road, rail lines, bridges, piplelines etc etc where there is often one or very few uniquely superior corridors. (There may indeed be only a few excellent sites for a bridge in a hundred miles of river and in that circumstance there is a real argument, I'd even agree social necessity, for eminent domain.)

But you don't have such nesessity with an office building. If you buy a the nineteen lots on a block but the last homeowner refuses to sell, there is no problem: you simply build on the 19 lots you have been able to acquire. I mean, do you think Manhattan was built with eminent domain?

[Kimball Corson]

Manhatten was not built with eminent domain. Hold outs were paid a monopolist price or the project did not got forward. There was no Kelo then. Either way, all suffered, directly or indirectly, exceot the hold out. There is to the necesary property with which the project fails (although possibly a lesser project is done elsewhere instead). I have heard of it happening. Some parcels really are necessary. Empire state buildings are not constructed with holdout houses or walkups in the middle of them.

[David Sucher]

This is getting way out of hand, Mr. Corson.
I am to understand that you believe that any (or most? or many?) real estate developments should be able to acquire the "necessary" site through the use of eminent domain?
Where do you draw the line between private projects which can use eminent domain and those which can't?

[Kimball Corson]

I think Kelo is way too broad. Off the top of my head, I would limit it to large projects requiring many subpacel acquisitions where there is a hold out and where the project offers increased tax base, jobs for many and offices or residences for many more than were there, and where there is zoning approval. There may be other situations where Kelo should apply, but I am not aware of them just now. But I would look for the exercise of monopoly power unreasonably causing problems for many other potiental end users. That is a pretty rare circumstance I think. Increased tax base is a deficient standard, by itself, I think.

[Kimball Corson]

Appropos of David and my conversation, a newservice today reports that:

'more than 30 state legislatures are considering limits on the power of local governments to condemn private property and transfer it to real estate developers under Kelo in order to spur economic growth.'

[David Sucher]

"I would limit it to large projects requiring many subparcel acquisitions where there is a hold out and where the project offers increased tax base, jobs for many and offices or residences for many more than were there, and where there is zoning approval."

The larger the project the less sensitive it is to acquiring any one particular parcel. Putgtging that technical flaw in your argument aside, what you suggest doesn't sound like much of a limitation at all. You have opened the door for literally tens of thousands of projects.

[Kimball Corson]

We disagree on large high rise projects. Acquisition of the last parcel can be very crucial. We also disagree on your flood gates argument. There are not that many one block high rise projects around. I am not talking about high acreage residential developments where build around is easy.

[Bob]

"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."

To consider the non-owners of the property to be "highest value users" doesn't even make sense. Why are they the "highest value users?" How are their rights more important than the actual owner's rights? Please explain.

[Bob]

"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."

Why do you consider the owner a nihilist? Just because he wants to tear down something you value? Anyone who disagrees with you is a nihilist?