St. Louis Fed Analysis Suggests Eminent Domain Could Hinder Economic Development

ST. LOUIS — Eminent domainthe power of governments to acquire private property for public usetends to transfer income from one group to another and is unlikely to provide an overall benefit to a community.

That's one of the points offered in an analysis by economists Thomas A. Garrett and Paul Rothstein, writing in the January issue of The Regional Economist, a quarterly publication of business and economic topics published by the Reserve Bank.

In June 2005, the U.S. Supreme Court's decision in Kelo vs. New London provoked widespread outrage. The decision allowed the city of New London, Conn., which was officially designated as "distressed," to employ eminent domain to acquire 15 properties, one of which belonged to homeowner Susette Kelo.

Garrett and Rothstein cited one economic study which suggests eminent domain can improve market outcomes under certain conditions, but they said that any analysis of the Kelo decision "must recognize the tradeoffs inherent in giving local governments this kind of power over local economic development."

One point emphasized by Garrett and Rothstein is that inefficiencies often result when government intervenes in private markets. They said that that historical, anecdotal information and formal academic research show that, in general, countries with less government involvement in private markets experience greater economic growth.

"When governments interfere in the private market, whether it be a market for apples, cars or property," said Garrett and Rothstein, "the likely result is greater economic inefficiency and less economic growth. The reason is that even the most well-intentioned policymaker cannot comprehend or replicate the complex interaction of buyers and sellers that occurs in free markets."

Of course, several groups will benefit from the taking of private property: namely, developers, property managers and local politicians. The latter, said Garrett and Rothstein, benefit because politicians believe property development will result in increased employment and tax revenue. "Not realized, however," they said, "is that the supposed immediate and tangible benefits from taking private property for economic development are outweighed by the greater economic costs of government intervention in private markets."

So, if eminent domain and some of its "relativestax increment financing, tax breaks, local development grants, etc.aren't that effective, are there any other economic development strategies that governments can use to yield positive growth?

Garrett and Rothstein argue that local governments should ask the fundamental question: Why is the desired level of economic growth not occurring in the local area without significant economic development incentives? For example, are taxes too high, thereby discouraging businesses from locating or expanding in an area? Or, are current regulations stifling business development and expansion? "All of the targeted economic development in the world will not compensate for a poor business environment," they noted.

Moreover, Garrett and Rothstein said that communities that rely on eminent domain as a primary tool of economic development run a risk. "Research has shown that without property rights, individuals will no longer face the incentive to make the best economic use of their property, be it a business or home, and economic growth will be limited," they said.

Although they concede that there is not a great deal of research to test the economic effects of eminent domain, Garrett and Rothstein concluded that "economic theory suggests that using eminent domain for private economic development will likely result in a zero-sum game."

With branches in Little Rock, Louisville and Memphis, the Federal Reserve Bank of St. Louis serves the Eighth Federal Reserve District, which includes all of Arkansas, eastern Missouri, southern Indiana, southern Illinois, western Kentucky, western Tennessee and northern Mississippi. The St. Louis Fed is one of 12 regional Reserve banks that, along with the Board of Governors in Washington, D.C., comprise the Federal Reserve System. As the nation's central bank, the Federal Reserve System formulates U.S. monetary policy, regulates state-chartered member banks and bank holding companies, and provides payment services to financial institutions and the U.S. government.

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