Working Paper No. 06-01:
Controlling the Grasping Hand: Economic Development Takings after Kelo


Ilya Somin

Date Posted: 2006

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The Supreme Court's controversial recent decision in Kelo v. City of New London upheld the condemnation of private property for purposes of economic development. This Article argues that Kelo was wrongly decided and that courts should forbid condemnations for economic development.

Part I analyzes the flaws of economic development takings generally. Such condemnations allow politically powerful interest groups to capture the condemnation process for the purpose of enriching themselves at the expense of the poor and politically weak. Economic development takings are especially vulnerable to abuse because their rationale can justify almost any condemnation that transfers property to a commercial enterprise. Several other aspects of economic development takings also exacerbate the danger.

This Part also shows that the need to eliminate holdout problems that could block desirable assembly projects cannot justify permitting economic development takings. In most cases, private developers can prevent holdouts by such noncoercive methods as assembling property in secret and adopting precommitment strategies that prevent holdouts from using their bargaining power.

Part II considers the major alternatives to a categorical ban. While these proposals are not without merit, none can prevent eminent domain abuse as effectively as forbidding the economic development rationale altogether. The first such alternative, adopted for a time by courts in Michigan and Delaware, is to require heightened scrutiny in cases where the condemnation power is used in a way that benefits identifiable private interests. Unfortunately, the heightened scrutiny test is not an adequate bulwark against the dangers of economic development takings, and may in some cases actually exacerbate those risks. The same weaknesses bedevil academic proposals to impose means-ends scrutiny on takings, which bear a considerable resemblance to the heightened scrutiny test.

Increasing the compensation awarded to property owners targeted for condemnation is another possible alternative to a ban. While this idea has some merit, it is almost impossible to accurately calculate the appropriate amount of compensation for subjective value. Moreover, even a perfect compensation formula cannot offset the damage inflicted by economic development takings on taxpayers and the community as a whole.

Many defenders of the Kelo decision advocate procedural protections for property owners as an alternative to vigorous judicial enforcement of public use limitations on takings. Though such protections have real value, they are unlikely to be an adequate substitute for a judicial ban on economic development takings.

Lastly, it is possible that strong judicial review of economic development takings is unnecessary because localities that abuse their eminent domain powers will be disciplined by interjurisdictional competition in a federal system. While exit rights are a valuable tool for forcing governments to respect the needs and interests of citizens, they have only limited utility in protecting property rights in land because real property is an immobile asset that owners cannot take with them when they vote with their feet.

In Part III, I consider the Supreme Court's decision in Kelo. In advocating broad deference to local governments on public use issues, the Kelo majority unfortunately ignored the serious defects in the political processes that control economic development takings. The Court's analysis of history and precedent also has significant weaknesses, particularly in its heavy reliance on early twentieth century precedents that were based on substantive due process rather than on the Takings Clause of the Fifth Amendment. Nonetheless, Kelo actually represents a modest improvement on the Court's previous public use decisions, by holding out the possibility of at least slightly greater judicial scrutiny.

A final important aspect of Kelo is the strong political reaction against it, which has led Congress and numerous state legislatures to consider legislation restricting the use of eminent domain. Unfortunately, my analysis shows that most of the proposed legislation is likely to have little or no effect and may simply represent position-taking intended to mollify public opinion without actually constraining the use of eminent domain.

Part IV strikes an additional note of caution, showing that even a categorical ban on economic development takings is not a comprehensive solution to the underlying problem of eminent domain abuse. A ban on economic development takings can potentially be circumvented in several ways, most notably because such bans still permit condemnations to alleviate blight. Courts in many states have already defined blight so broadly that the definition could encompass virtually any property. The blight exception to the ban on economic development condemnations must be carefully limited, lest it swallow the rule.