23.6.05

CORPORATE WELFARE IN THE PUBLIC INTEREST? Lots of reaction to the Supreme Court's ruling in favor of New London, Connecticut using its eminent domain powers to redevelop its waterfront. Paul at The Electric Commentary, who does not like the ruling, provides numerous links to other objections. The Insta Pundit (who is a law professor) has a quick reaction here with links to the first set of reactions, additional links here, and an extended commentary at his MSNBC site. Key observation:

It used to be that tax revenues were to be spent promoting the public good. Now, apparently, they're a public good in and of themselves.

To be fair, today's decision isn't a huge departure from previous law, which has been creeping in this direction for nearly a century.

That appears to be Nathan Newman's point as well.
The Supreme Court once again did its job by doing nothing, upholding a local eminent domain action in New London, CT. As the five Justices in the majority noted, "It is not for the courts to oversee the choice of the boundary line nor to sit in review on the size of a particular project area."
An elaboration from an earlier post brings in one dimension of the welfare economics of eminent domain.
But we don't want a legal standard that poor people can lose their homes to eminent domain (as happened without legal protest during the age of "urban renewal"), but middle class people have a key to the courthouse to overturn local planning decisions. You can bet that if the Supreme Court jumps into this game, planning decisions to create jobs for poor people will be struck down in the future.
On the other hand, Professor Bainbridge identifies another dimension: although takings under eminent domain must be compensated at market value, those takings, by definition, are displacing extramarginal sellers.
First, it fails to take into account the subjective valuations placed on the property by people whose families have lived on the land, in at least one case, for a 100 years. In other words, if the Supreme Court rules for the city, the government will be able to seize land at a price considerably below the reservation price of the owners. Second, unlike the prototypical eminent domain case, in which the land is seized to build, say, a school or road, in this case the city is using eminent domain to seize property that will then be turned over to a private developer. If this new development increases the value of the property, all of that value will be captured by the new owner, rather than the forced sellers. As a result, the city will have made itself richer (through higher taxes), and the developer richer, while leaving the forced sellers poorer in both subjective and objective senses.
There is one additional dimension to the use of eminent domain, something economists refer to as the hold-up. Put simply, if somebody holds assets that are instrumental in making a project successful, that holder can extract all the rents of the project by holding out for a price in excess of the equilibrium price. That is a behavior one would also expect of the extramarginal seller. How, then, to distinguish a genuine extramarginal seller from a hold-up artist? Does eminent domain exist to eliminate that information cost? But ... should it be used to augment the tax increments a city government seeks, or to move people around in accordance with the aesthetic preferences of that government, as was the case with much of the urban renewal Mr Newman alludes to?

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