Property Rights Fight

October 14th, 2009 - No Comments

New York’s highest court today is hearing arguments in a case to decide whether the state constitution prevents the government from seizing private property, including homes and small businesses, to turn it over to a private developer. About a dozen property owners in Brooklyn are fighting to protect their properties, which the New York State Urban Development Corp., a government agency, wants to confiscate and turn over to the owners of the New Jersey Nets to build a new arena for the NBA team.

The case mirrors the 2005 U.S. Supreme Court case Kelo v. City of New London, which resulted in a 5-4 decision stating that the U.S. Constitution allows the government to seize private property and turn it over to redevelopment companies.

In a 2006 op-ed, Smeal’s Austin Jaffe wrote about the Kelo case and weighed in on the importance of private property rights:

Susette Kelo purchased a home in Connecticut in 1997 and the next year the city of New London decided to allow the New London Development Corp.—a private organization—to condemn Kelo’s and six other families’ homes for the purpose of “economic development.”  The plan was to assemble these sites as part of a $270 million global research facility to be built by Pfizer, which had a plant nearby.

Kelo argued that her property rights were violated because eminent domain is a power reserved only for government and only when it meets the public use requirement in the Fifth Amendment’s takings clause. Ultimately, the court decided that local governments have the right to take private property and give these rights to other private parties in the interest of economic development. The decision outraged spectators across the political spectrum, and for good reason.

Private property is a vital part of our economy. Without the protection of property and the rights associated with it, families are uprooted, small businesses are bankrupted, and entire communities are destroyed in favor of newer, more profitable enterprises that benefit wealthy investors and enrich public coffers. Even worse, our entire economic prosperity becomes vulnerable.

Ironically, at the same time the U.S. high court is weakening property rights at home, the developing world is now discovering the prosperity that accompanies a respect for private property.

In 2000, Peruvian economist Hernando de Soto argued in his book The Mystery of Capital that there exists a structural problem in the developing world: While real estate assets exist and have value, the inability to convert these assets into capital places severe limits on the opportunities of nations to grow and develop. In these economies, market transactions are precluded due to the absence or high cost of ownership titles and legal systems that slow down or stop basic property transactions. De Soto now counsels leaders of the developing world, urging that by recognizing property rights, citizens of developing nations can borrow against what they own and in doing so, increase their own income and grow the national economy.

Further evidence of the importance of property rights can be found in Gerald Scully’s famous 1988 study that found that in some 130 countries, societies with strong support for political and economic freedom, an independent legal system, and a reliance on private property allocations tend to grow at more than twice the rate as those societies where such virtues are denied or constrained. Since this study, there has developed an entire literature about the relationship between economic growth and private property rights. And the relationship is significant, to say the least.

One would think that in the United States we would now recognize the importance of such effective institutions and nurture them. Perhaps the Kelo verdict is a painful wake-up call to remind us of how well-established, cultural institutions—in this case, the right of private property against competing interests—are often taken for granted. The United States would look a lot different without such a right, and our economy and social structure can certainly still be drastically altered if legal protections for property continue to be watered down. 

Private ownership of real estate has always been vital to economic development both here and abroad and it continues to be one of the most important institutions in our society.  It’s a lesson the developing world is gradually learning and one that those of us in the United States ought to remember.

Tags: Business Law, Jaffe, Real Estate

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