From day one the Supreme Court's Kelo decision has raised a storm of opposition, now comes a new reason for those opposed to think they're right: A report published by the Federal Reserve Bank of St. Louis says that "economic theory certainly suggests that eminent domain used for private economic development will likely result in a zero-sum gain and may actually hinder economic development in the local areas, as well as the region, rather than help."

In Kelo et al v. City of New London, the Supreme Court ruled 5-4 that government could take your home if it believed such a taking was justified as a "public purpose." An acceptable public purpose under Kelo is the ability of government to simply collect more taxes.

In effect, Kelo overturned two centuries of laws, court decisions and common practice relating to the Fifth Amendment. The Fifth Amendment says that government can take property for "public use" and with fair compensation, meaning if a road is being built or land is needed for a school, then government can be justified in taking someone's property.

The beauty of the Fifth Amendment is that is creates a nice, fat neutral area giving government some room to take property while providing protections for property owners.

It doesn't take a crime lab to understand what's hidden within the Kelo term "public purpose." One way to raise taxes is to assemble land, change the zoning and let someone develop the property. Taxes will go up, but this goal will only obtained by awarding the land and its new income and profits to a fresh owner -- say a developer who's also a political contributor.

The reaction to Kelo has been universally negative. In the The Taking of Prosperity? Kelo vs. New London and the Economics of Eminent Domain, Thomas A. Garrett and Paul Rothstein point out that "34 states have taken action to limit eminent domain: 26 have passed statutes, five have passed constitutional amendments and an additional three have passed both." In addition, the authors say that "President Bush issued an executive order limiting the grounds on which the federal government can take private property."

So far, so good -- except that laws and executive orders can be changed. Now, however, Garrett and Rothstein have turned the Kelo decision upside down: Why, they ask, would an efficient government need to rely on the Kelo concept in the first place?

"Rather than use eminent domain or other tools to target individual economic development projects, local governments should ask the fundamental question as to why the desired level of economic growth is not occurring in the local area without significant economic development incentives.

"For example," they ask, "are taxes too high, thus creating a disincentive for business to locate to the local area? Do current regulations stifle business creation and expansion? All of the targeted economic development in the world will not compensate for a poor business environment. From a regional perspective, local governments should focus on creating a business environment conducive to risk-taking, entry and expansion rather than attempting targeted economic development through eminent domain or other means."

Buried in their careful language, Garrett and Rothstein nail Kelo for its fundamental flaw: Governments would not need to seize private property to promote private economic development if local communities were attractive places to do business in the first place.

Garrett and Rothstein get to the economic thinking which powers most opposition to Kelo: It deters private choices and options, things you need for a robust marketplace.

"One requirement for a well-functioning private market is secure property rights," say Garrett and Rothstein. "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. The Kelo decision essentially says that individuals can lose their property if the local government believes it needs the property to generate greater economic benefits. Potential residents and businesses may avoid communities that have a record of taking private property for economic development because of a greater uncertainty about losing their property to eminent domain."

The Federal Reserve Bank of St. Louis ought to be congratulated for publishing such a lucid bit of analysis -- and Garrett and Rothstein should be recognized for writing it.

For more articles by Peter G. Miller, please press here.

Published: February 13, 2007

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Peter G. Miller, also known as OurBroker®, is the author of six real estate books -- including The Common-Sense Mortgage -- and is the original creator and host of America Online's Real Estate Center. Peter's weekly columns appear in more than 100 newspapers nationwide, he is also published in a variety of other media outlets and he is a frequent speaker at national events and conventions. Peter welcomes your questions, comments, and news releases via e-mail at .