Kelo Still Here; Still a Disaster

Now that we are in the midst of a massive housing correction that is threatening banks and promises to bring our economy down – a bursting of the bubble that has also focused attention on stupid and destructive lending practices, perhaps this is also time to push harder to overturn or counter the horrendous Supreme Court decision on Kelo – a decision that stripped Americans of their private property rights.

As a Floridian, I keep harking back to a development here called Murdock Village, which illustrates perfectly what can happen when government blunderers substitute their wishes for the wisdom of the marketplace – and ends up displacing people from perfectly good homes while imposing a massive and never-ending tax burden on local tax-payers. Envisioned as a new community of mixed commercial and residential uses, Murdock had become a white elephant even before the housing market collapsed. No-one wants to develop it, and tax-payers in one small county are out $14,000 per day just on interest on the bonds that were floated.

Pols Remain Masters of Domain
By Steven Malanga June 25, 2008 RealClearPolitics

In her two great works--The Death and Life of Great American Cities and The Economy of Cities��"Jane Jacobs explained that effective economic development and urban renewal arise from the bottom up as the product of thousands of enterprises and people working on their own without a master plan, rather than from the top down, as planned by politicians or bureaucrats. The vibrancy and diversity of city markets and neighborhoods lie in “the creation of incredible numbers of different people and different private organizations, with vastly differing ideas and purposes, planning and contriving outside the formal framework of public action,” she observed.

This week, it is exactly three years since the U.S. Supreme Court’s Kelo decision, which endorsed a very different view of how local economic progress occurs. In that decision, the court said that it was okay for government to condemn and take private property and use it for new economic development if officials believed that the seizures would "provide appreciable benefits to the community, including…new jobs and increased tax revenue." The court’s decision expanded the so-called “takings” clause of the Constitution’s Fifth Amendment, which previously had been interpreted to mean that government could only take private property to create a public “good,” such as construction of a needed new highway or water pipeline.

The Kelo decision was enormously unpopular, with polls showing that between 80 percent and 90 percent of Americans disagree with the idea, even when property owners received market value for their land. Still, that hasn’t stopped the politicians and urban planners, who moved in quickly. In the first year after Kelo, according to a study by the Castle Coalition, which tracks eminent domain seizures, state and local governments condemned or threatened to condemn more than 5,400 properties, compared to slightly more than 10,000 such actions in the previous five years. In the eminent domain business, a threat to condemn is usually just as good as an actual taking, since a homeowner can’t sell a house under those conditions and a business would find it difficult to do things like get credit.

The homes and businesses targeted in the wake of Kelo ranged from a seafood restaurant in Freeport, Tx., whose property officials wanted so that they could expand a local marina, to a parking lot in Oakland, Ca., which the city wanted to take from a private owner and hand to an auto parts store, to single family waterfront homes in Long Branch, N.J., that the city wanted to see redeveloped into luxury condominiums.

Most Americans object to such takings because the intended uses of the land don’t justify violating property rights when the owner is unwilling to sell to government.

ut as Jacobs observed, another important objection is that government planners often do a lousy job of anticipating the marketplace when they take property to be developed into something new. What I call mega-project ‘state capitalism,’ the grandiose schemes of politicians and their planners to invest public money in big projects like stadiums, downtown super-malls, and subsidized entertainment districts, has been on the rise for years, often with disastrous results which should have given the Supreme Court justices pause before they gave their blessings to seizures that "provide appreciable benefits to the community."

Indeed, the very redevelopment project that sparked the Kelo lawsuit, an effort by the town of New London, Ct., to turn its Fort Trumbull waterfront into a haven for high-priced homes and 21st century jobs, has sputtered. The ground where Susette Kelo’s home stood is now barren, because the townhouses that the city-sponsored developer was supposed to build there have never gone up. Interest in the area isn’t very great and the developer hasn’t been able to get financing. In fact, what began more than a decade ago as an extravagant ‘public-private’ scheme to redevelop this whole area around tourism, research and development and luxury residential uses has produced little except ongoing construction on a $17 million Coast Guard station.

State capitalism provides more examples of losers than winners. Consider the convention center business. About 25 years ago urban politicians noticed that a few cities, notably Chicago, Las Vegas and Orlando, were cashing in on a booming convention and business meetings marketplace. Almost in tandem around the country, cities rushed to build convention centers or expand their current ones, investing billions in tax subsidized dollars. In some cases, such as facilities in Boston and San Francisco, officials also used eminent domain to take control of private property that stood in the way of the building of their new centers.

The result has been a disaster for the taxpayer. Dozens of new convention properties have opened around the country, creating a glut of convention space, and most centers are underperforming. In 1986 the country boasted 194 centers sporting about 32 million square feet of space, while today there are 322 featuring 66.8 million square feet, with about 40 million more square feet under construction, according to congressional testimony by Professor Heywood Sanders of the University of Texas. The building boom, coming at a time when the convention business has been flat, has turned many of these projects into money-losers. Projections that the new centers would create thousands of jobs to boost the local economy have rarely materialized, leaving taxpayers in Boston, Baltimore, St. Louis and Washington, D.C., among other places, on the hook for additional subsidies.

Public officials and planners continue to pursue such projects in the face of repeated failures in part because redevelopment schemes and ‘public-private partnerships’ help put enormous additional power in the hands of politicians and the private entrepreneurs who partner with them.. In California, for instance, 390 redevelopment agencies operate with the power to condemn property, tax and float debt. Collectively these redevelopment agencies, many run by municipalities and controlled by local politicians, own some $13 billion in property, generate nearly $9billion a year in revenues (mostly from dedicated taxes) and have racked up some $81 billion in debt "most of it paying tax-free interest thanks to the federal tax code.

Redevelopment authorities and public-private partnerships are especially common in places like California where government has created such a hostile environment for business that officials justify their work as necessary to jumpstart a sluggish economy. But as Doug Kaplan, a California developer, has observed in a piece he wrote for the Castle Coalition, local government would serve their communities better by simply cutting red tape for new development, reducing fees, and focusing on basic government services like public safety, while leaving the rest to the market. Asked by a local redevelopment officer to join a ‘public-private partnership” to open a restaurant in a depressed downtown, Kaplan told him,” If you really want to revitalize downtown, then light the sidewalks, fix the roads, take care of the police, support the schools.” That’s not a message most redevelopment types, or politicians, want to hear, however.

In the wake of public reaction against Kelo, officials in many states promised they would seek laws limiting local use of eminent domain, but although a few states have put in tougher restrictions, in many places there has been little reform because regardless of public sentiment, officials like the power of takings that the Supreme Court gave them. The League of California Cities and the California Redevelopment Association, for instance, undermined efforts by taxpayer groups to pass a referendum restricting eminent domain by putting their own competing, but much weaker referendum on the ballot, one which doesn’t prohibit condemnations against businesses, who are the most common target of seizures.

Today, three years after Kelo, the game of public sponsored economic development subsidized by taxes, tax-free bonds, tax-breaks for favored businesses, and the threat of eminent domain, is alive and well, supporting everything from mega-projects like the massive 22-acre Atlantic Yards in Brooklyn, N.Y., to the efforts by the tiny California town of Hercules to take land away from Wal-Mart because the town fathers objected to the big box retailer invading their domain. Kelo has allowed local officials throughout the country to remain masters of eminent domain, and private markets continue to suffer as a result.