Special Report

Bailing Out Kelo

Why the mortgage bill will lead to more eminent domain outrages.

By 7.25.08

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Of all the unintended consequences of the housing bill that passed the House on Wednesday, the most ironic and far-reaching may be this: whatever security marginal homeowners have from foreclosures, their homes will be far less safe from being taken by bureaucrats through eminent domain.

The bill that emerged from the negotiations between House Financial Services Committee Chairman Barney Frank and Treasury Secretary Hank Paulson took the specific language protecting property rights from the housing bill that most recently passed the Senate and rendered those words almost meaningless.

Now, the billions of dollars in new grants the bill provides for "the production, preservation and rehabilitation" of housing units could stimulate a bonanza of state and local property confiscation of the type green-lighted in the Supreme Court's 5-4 decision Kelo v. New London.

That 5-4 decision in 2005 allowed states and localities to use eminent domain for the benefit of private parties, so long as the land confiscation served a "public purpose." The case generated mass outrage, and rightly so.

As the Institute for Justice, which represented the homeowners whose property was under threat in the case, has argued, the result meant that no one's home is safe. It would serve a "public purpose" to destroy almost any residence and put a retail store in its place to raise more tax revenue.

IN RESPONSE TO the decision, many states and towns have passed laws protecting property owners by barring eminent domain solely for economic development purposes. But many other municipalities have simply ignored public opinion and used the ruling to condemn land with even more abandon.

As property rights expert Don Corace puts it in his new book Government Pirates, "Despite the widespread fury from conservatives, libertarians and liberals, hundreds of cities throughout the country cheered the ruling and continued their assault."

And for the many areas that still utilize this practice, the federal government is often the source of funds for the projects that result in the use of eminent domain. Efforts to bar federal funds to be used on projects that make use of this type of eminent domain have stalled in this and the last Congress.

To their credit, the drafters of the Housing and Economic Recovery Act of 2008, which passed the Senate on July 11, at least recognized this danger of throwing billions in construction grants to state and local governments.

So they put in a clause stating, "No funds under this title may be used in conjunction with property taken by eminent domain, unless eminent domain is employed for a public use."

The clause then adds that "public use shall not be construed to include economic development that primarily benefits any private entity."

BUT THIS LANGUAGE has vanished from the House bill that passed Wednesday, replaced with phrasing that would give governments substantially more leeway to take land.

The nearly 700-page bill craftily replaces the Senate's prohibition on funds "used in conjunction with property taken by eminent domain" with a looser ban on using the funds for a "project that seeks to use the power of eminent domain."

This new language in the House bill would give property-grabbing bureaucrats an easy way around the supposed prohibition on using eminent domain. All they would have to do is take property for any reason that Kelo allows, then come up with another project for the specific use of that property.

If land were grabbed for general economic development, as Kelo permits, and then a new project were created for a city to sell this land to developers, this would likely not be a violation of the House bill. After all, the new project isn't "seeking" to use eminent domain, it is merely using land that had already been confiscated.

It is typical for governments to change the "project" or purpose of land use many times once it has been taken through eminent domain. In fact, this was the case in Kelo.

Justice Sandra Day O'Connor noted in her eloquent dissent describing the shifting justifications for the land grab in New London, Connecticut: "Parcel 4A is slated, mysteriously, for 'park support.' At oral argument, counsel for respondents conceded the vagueness of this proposed use and offered that the parcel might eventually be used for parking."

The Senate language isn't ironclad, but its broad ban on funds being used "in conjunction with" eminent domain for economic development would at least put some necessary burdens in using these new funds to help confiscate land.

All in all, if this new language is what ultimately passes, there will be virtually nothing stopping states and localities from using the federal housing grants to help themselves to confiscate housing.

HOW DID THESE property rights protections get removed? That's somewhat of a mystery.

Barney Frank may not be a friend of property rights, but then neither is Treasury Secretary Paulson, who, according to press accounts, convinced President Bush not to veto the bill. Just after Bush nominated Paulson to head Treasury, Competitive Enterprise Institute adjunct scholar Steve Milloy warned that Paulson "has demonstrated little respect for private property rights."

Milloy noted that as head of Goldman Sachs, Paulson spent shareholders' money to support environmental groups' efforts to stop forestry on a piece of land in Tierra Del Fuego, Chile. After this pressure, the Chilean landowner was forced to sell the land to -- who else? -- Goldman Sachs. For this reason and others, Milloy urged the Senate to reject Paulson's nomination, as did the Competitive Enterprise Institute.

Because of the House changes, the Senate has to pass the bill one more time before it goes to the President. This slighting of property rights from the earlier Senate bill cannot be ignored.

Otherwise, the U.S. may repeat the tragedy of '50s and '60s "urban renewal," where the "federal bulldozer" of government housing programs literally made people homeless.

If that happens, you ain't seen a meltdown yet!

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About the Author
John Berlau is Senior Fellow for Finance and Access to Capital at the Competitive Enterprise Institute and blogs at OpenMarket.org.