This month marks two decades since the landmark U.S. Supreme Court decision in Kelo v. City of New London. This narrow 5-4 ruling underscored the Court’s inclination to grant deference to legislative bodies regarding economic development, allowing for property seizure under the banner of “public use,” even when such property is handed over to private entities for their benefit.
While Kelo sparked considerable debate upon its release, public interest has inevitably waned over the years. In this dimming spotlight, governments have ingeniously expanded their use of eminent domain.
Take Richmond, California, for instance, where city officials attempted to seize underwater mortgages in a bid to shield residents from foreclosure. Meanwhile, in Atlantic City, eminent domain has been exercised with scant consideration for how the appropriated properties would be utilized. In Minnesota, an elderly woman found herself stripped of her condo after falling behind on property taxes; the county seized her home, sold it, settled her tax bill, and pocketed the remaining funds. And in my own state of North Carolina, numerous homes and a local church were taken over for the construction of an electric vehicle assembly plant, only for the Vietnamese company VinFast to postpone the project for years.
These instances illustrate the misuse of eminent domain authority. Such “Grasping Hand” abuses not only squander taxpayer funds and valuable resources but also trample on fundamental, constitutionally protected property rights.
Yet, it has been shown that eminent domain can serve legitimate purposes. Economists argue that economic development takings can, under certain conditions, enhance the public interest (think economic efficiency) by countering strategic holdouts that obstruct development.
This raises a quintessential dilemma presented by Kelo: how do we regulate the powers of takings to prevent abuse while still preserving the legitimate applications of eminent domain? Clearly, relying solely on legislative majorities isn’t the answer; in fact, it’s what facilitates the abuses in the first place. Instead, we need more robust oversight of government regulators.
In a forthcoming paper* in the Review of Law & Economics, my co-authors Justin Pace and Jon Murphy and I delve into the long-term dynamics of regulating eminent domain authorities. A key takeaway is recognizing that even well-meaning government officials will devise ways to circumvent existing restrictions on eminent domain. This phenomenon, which we term “loophole mining,” gains momentum as public scrutiny diminishes over time. Consequently, it becomes essential to continuously adapt eminent domain regulations to counteract this trend.
This creates a complex policy conundrum: tighter restrictions may lead to more inventive loophole mining, necessitating ongoing regulatory adaptations and resulting in a cycle of regulation and evasion. A more straightforward, and arguably more effective, solution would be for the Court to abandon its rational basis deference and prohibit takings for economic development altogether.
Closing the Kelo loophole equates to acknowledging the challenges posed by holdout problems. Naturally, proponents of central planning and development authorities would express outrage, staunchly defending the notion that eminent domain is indispensable for economic progress. However, a significant body of research indicates that developers are quite adept at navigating holdouts even without resorting to eminent domain.
It’s better for the legal framework to empower entrepreneurs in dealing with holdouts rather than incentivizing governments to refine their loophole mining tactics. After two decades, it’s high time we reconsider Kelo.
* “The Long-Term Impact of Kelo v. City of New London: Comparing State Legislative and Judicial Responses” is available for PDF download here.
Edward J. Lopez is a Professor of Economics at Western Carolina University, the Executive Director of the Public Choice Society, and the author of numerous articles and books, including Madmen, Intellectuals, and Academic Scribblers.
