February 22, 2005

What it all means

I'm watching Kelo vs. City of New London closely. The outcome of this case, should Ms. Kelo lose, will have negative and lasting repercussions, far beyond what a Kerry victory this past November would have brought. Professor Bainbridge puts it best:

After news of Napoleon's victory in the Battle of Austerlitz was conveyed to British Prime Minister William Pitt's, Pitt pointed to a map of Europe and said: "Roll up the map; it will not be wanted these ten years." If the Supreme Court sides with New London, we might just as well roll up the Bill of Rights, for we won't need it any longer.

Posted by: Physics Geek at 08:38 PM | Comments (8) | Add Comment
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1 Real estate has many failings when it comes to our collective belief in the free market. Are you in favor of externalities and market failures?

Posted by: Fluffy Bunny at February 22, 2005 10:10 PM (4m7UP)

2 I'm not certain that I understand your point. Please try and clarify.

Posted by: physics geek at February 23, 2005 02:19 AM (lFYIM)

3 Real estate is intrinsically different than personal property. Its value is dependent not only upon the materials that are present on the property, but also upon its location. What is the relevancy of location with respect to this discussion? The most obvious example is access. We want to be able to gain access to our property. We want to travel to other property. Thus, we have public roads. That's right, public roads. Public roads are antithetical to the free market, are they not? But I dare say that no one who has posted comments would say that we should get rid of public roads. In addition, location is not something that can is easily replaceable. If I need some steel, it doesn’t matter from where or from whom I get the steel, it only matters that I get the steel. But if I need a 32 acre piece of land for a factory, it does matter where I get that 32 acres. 32 acres in the Outback of Australia ain’t the same as 32 acres in New London, CT. The response may be, well if you pay enough money, the free market will provide you with the 32 acres. But that is obviously not true, is it, because New London is in the Supreme Court. Another intrinsic difference between real and personal property is that our uses of real property have lots of externalities. Both statutory and common law are replete with well-established property conditions/uses that are nuisances and thus impermissible. And uses/conditions that were not nuisances when they were first created can become nuisances because of other encroaching users. (i.e. a rooster breeder that has become surrounded by suburban homes, see also http://www.cortland.edu/polsci/boomer.html). Third, and finally, a healthy, vibrant, livable community requires different uses. You wouldn't want a community with only homes or just gas stations. Many people make the argument, that the free market will correct those uses. And to a certain degree, yes, the free market will work towards a balance. But not always. The free market makes mistakes, lots of mistakes. And mistakes made regarding real property are not easily corrected by the free market. For example, a shopping mall built in a location that cannot sustain it and is doomed to failure, will sit vacant, because it is too expensive to operate. And the owner, having sunk millions of dollars into it, will hold it for years if not decades waiting the best time to reopen it or sell it. Meanwhile, the community is left to suffer the effects of carcass that is the shopping center. In addition, some uses or improvements to real property are not mistakes at the time they are made, but there failure to be updated becomes a failure. For example, houses that were built in the 1930s, 40s, & 50s are completely different in design than houses constructed today. But those houses will not be renovated or demolished and rebuilt until the neighborhoods have become completely bombed out. So, what does this have to do with the Kelo case. Because of externalities and market failures, the Kelo's use of their property cannot be viewed in a vacuum, isolated from changes in the economy, surrounding land uses, building standards/construction. For society to effectively deal with externalities and the market failures of real property, eminent domain may have to be used when all other land use regulations (i.e. zoning, nuisance, etc.) have failed. Frankly, all of the issues that I've discussed are the underpinnings of zoning, nuisance, urban renewal/community redevelopment programs. If you accept the legality/necessity of eminent domain for those land use programs, making the leap to the economic development program put in place by New London is not that hard. I feel that much of the backlash against eminent domain comes from the failure to understand that real property is not like personal property. That doesn’t mean I don’t think that the Kelo’s aren’t entitled to substantial compensation. I want to make clear, I'm not for government supported real estate, or tax subsidies, and I think governments are really bad being real estate developers. But I do think that governments are, in many instances, the only instruments that can correct market failures.

Posted by: Fluffy Bunny at February 23, 2005 03:03 AM (qHZfH)

4 "If you accept the legality/necessity of eminent domain for those land use programs, making the leap to the economic development program put in place by New London is not that hard." I believe that you've made a non sequitur here in that a) the area in question is not blighted or in need of demolition b) there is no public use in question here The fact that the local government can extract more tax dollars from a business than from property taxes does NOT constitute a public use. Also, but entirely beside the point, the private entity that desires the property has no concrete plans on its usage as yet. It merely believes that the land in question is a prime location; I don't even question that assertion because the case is wending through the courts. Public roads, highways, perhaps public schools: these would all constitute decent public reasons for the use of eminent domain. Taking property from one private entity and giving it to another private entity based solely on the possiblity of increased tax revenues from the second party does NOT constitute a valid public use. Essentially, if this case is decided in New London's favor, the concept of private ownership of real estate will have ceased to exist. Any government entity(local, state, federal) can almost always find another tenant that will provide it with more revenue. Eminent domain is not meant to apply in these cases.

Posted by: physics geek at February 23, 2005 05:44 PM (Xvrs7)

5 Just for some perspective. I am an attorney in New York. I work with communities across the State on community redevelopment issues, and many of them are suffering severe economic distress. They are on the verge of financial collapse after decades of declining property values. (This leads into an ancillary discussion of whether property taxes are the best way to fund local governments, but that's a discussion for another day.) Also, in New York State, a local government could not do what New London did, because there is not statutory authority. "Economic condemnation" in New York is limited to urban renewal or community redevelopment programs that are carried out according to the statutorily defined procedures. In addition, the State's Municipal Redevelopment Law has some built in safegaurds to protect property owners. In addition, there are Industrial Development Authorities that have condemnation powers. Frankly, I think that IDAs are ineffective. As for the argument that this development was solely for increasing the tax revenue, I think the record is clear that this is not the sole purpose, or even the main purpose, but a recognized and welcomed benefit. From the CT Supreme court opinion, the development plan's "goals were to create a development that would complement the facility that Pfizer was planning to build, create jobs, increase tax and other revenues, encourage public access to and use of the city's waterfront, and eventually "build momentum" for the revitalization of the rest of the city, including its downtown area." New London's plan is quite extensive. It's not just speculative and with the goal of increasing tax revenue. How are New London's remedial actions different from zoning a barren strip of land? Or what if New London had rezoned the area of land in question? The Kelo's property would have been grandfathered in under the doctrine of vested rights, but over years or more likely decades, the properties would probably slowly be converted to the comply with the new zoning requirements. That's a very inefficient way of regulating land use. I'm not arguing that "economic condemnation" could not be abused. I'm sure that it can. I'm just not sure that it has been abused in this situation.

Posted by: Fluffy Bunny at February 23, 2005 07:04 PM (4m7UP)

6 What is a "market failure?" "Market failure" is whatever the person making the argument needs it to be. In reality, there is no such thing. One cannot justify an action due to "market failure", because it does not exist. "Market failure"="a result I am not happy with" and nothing else.

Posted by: Xiaoding at February 24, 2005 06:12 PM (sQKTc)

7 I'm not arguing that "economic condemnation" could not be abused. I'm sure that it can. I'm just not sure that it has been abused in this situation. No offense, but if you're not certain that this case constitutes abuse, then I don't know what'd you consider a case of abuse. Maybe if it were your house on the chopping block for a new Wal-Mart. Let me be clear: if the government can seize your private property and give it to another private owner solely because the 2nd owner will generate more tax revenue, then there will be no property rights in this country. None. The government will now recognize no restraint when it comes to the issue of eminent domain. Heck, maybe I should move into Wal-mart. They've got food, clothing, beds, toys. What more could I need? I doubt that the local government would declare eminent domain against such a large tax contributor. The bastards. Xiaoding: your last comment made me laugh. I ignored the term market failure because it's an oxymoron. The market doesn't fail. Rather people incorrectly anticipate what the market will do.

Posted by: physics geek at February 24, 2005 09:49 PM (Xvrs7)

8 physics geek, I believe that your statement that the purpose of the condemnation was "solely because the 2nd owner will generate more tax revenue" is inaccurate. While increased tax revenue was one of the justifications for the project, it was only one. As I noted in my previous post the trial court found that the project's "goals were to create a development that would complement the facility that Pfizer was planning to build, create jobs, increase tax and other revenues, encourage public access to and use of the city's waterfront, and eventually 'build momentum' for the revitalization of the rest of the city, including its downtown area." The list contains several public purposes: 1) rectifying incompatible land uses (one of the justifications of both zoning and urban renewal/municipal redevelopment laws) 2) job creation, and 3) to give the public access to the waterfront. All three of those justifications have a long history of being recognized as a public purpose. Just today, I met today with a group of property owners in a struggling downtown. Their biggest problems are 1) adjecent properties that have buildings that are sitting vacant because the structures are outmoded and there is no demand for outmoded buildings or 2) incompatible adjacent property uses or 3) current business models require higher quality commercial space that cannot be created without assembling smaller parcels of property. In their current condition, the private sector is rejecting these properties and going elsewhere. Meanwhile, the properties continue to deteriorate, along with the municipal infrastructure. And mind you, I wasn't meeting with municipal officials, I was meeting with SMALL BUSINESS OWNERS who are having to struggle to survive because of the negative impacts the adjacent properties are having on their business. There problem is that they can't get the local city officials to act. I've heard a lot of individuals argue that urban redevelopment to remedy blight is o.k., but what New London is doing is not. And I guess the reasoning there is that once a location gets really run-down, and looks like Dresden at the end of WWII, well then it is o.k. for the municipaltiy to go in and condemn the properties, but not until it is a wasteland. Until that happens, 5, 10, 20 years from now, the community will just have to suffer. Let me pose another question, let's say that New London isn't allowed to condemn the Kelo's property and subsequently becomes so economically run-down, that to support the water, sewer, and roadway infrastructure, to provide for fire and police protection, to pay for the basic operations of the municipality, the City has to raise property taxes 7,000 percent, which the Kelos then could not pay. New London then levies a tax lien on the property and forecloses. Would that be o.k.? Because, I can tell you, that is exactly what is happening in many communities across this country. As for local government's having no restraint, I don't think that there is a basis for that statement. This project was not undertaken willy-nilly and without jumping through considerable procedureal hoops. I admit I am not a professional economist, but DUDES, your defintion of market failure would not earn you a very good grade in economics 101. A generally accepted definition of market failure is a case in which a market fails to efficiently provide or allocate goods and services (in this instance, real estate). The two main reasons that markets fail are (1) sub-optimal market structures and (2) the lack of internalization of costs or benefits in prices and thus into microeconomic decision-making in markets. Although you may not think so, I am a BIG fan of property rights, but I'm not in favor of externalities, are you?

Posted by: Fluffy Bunny at February 25, 2005 03:04 AM (qHZfH)

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