Kelo’s Legacy: 21 Years of Economic Development Failures

This week marks the 21st anniversary of the Supreme Court ruling in Kelo v. City of New London. This landmark case allows local governments to take private properties by eminent domain, then transfer those properties to developers to promote economic development.

Urban planners describe eminent domain, if used correctly, as a tool that can promote blight abatement, job creation, and tax base expansion. The Court did not express agreement with this in its ruling, but it said that as long as a local government’s plan for economic development was crafted through an open democratic process, then using eminent domain for economic development serves the public and is therefore legal.

Taking homes and businesses by majority vote. If this strikes you as an idea ripe for unintended consequences, that’s because it is. Since Kelo, local governments across the country have advanced creative notions of public purpose.

In Freeport, Texas, local authorities invoked eminent domain in 2020 to take a historic neighborhood, even though they had no specific development plan lined up. The city said in deposition that it hoped to one day lease the site to a developer to create jobs. Last September, a Texas Appeals court ruled against the government, telling the city to come back with more specifics or pay the property owners’ legal fees.

In 2022, North Carolina officials brokered a deal with Vietnamese carmaker VinFast to build an electric vehicle plant. In addition to pledging $450 million in taxpayer funds, the state used eminent domain to seize dozens of homes and a local church to clear the site. VinFast prepared the site in 2023 and was reimbursed by the state. After delaying and cutting its projected job creation, VinFast never showed up. The state is now suing to recover $80 million from the company, but its press release did not mention the displaced property owners.

New York state has a long history of eminent domain, including the displacement in 1853 of 1,600 poor residents to make way for Central Park. Stretching the notion of public use to its limits, New York has, over the years, condemned properties for the New York Stock Exchange, Columbia University, the New York Times, IKEA, Costco, and wealthy developer Bruce Ratner. More than two decades later, the Atlantic Yards project still has not delivered in full, and the government is mired in cost overruns, fired development teams, and unbuilt affordable housing.

Proponents of eminent domain for economic development say it is useful for creating jobs, revitalizing communities, and expanding tax bases. But systematic studies on rich data sets tell a more nuanced story.

Economists Ronit Levine and Gary Wagner analyzed every taking at the individual parcel level in New York City between 1990 and 2019, finding no evidence of improved employment, business starts, or property values. 

Nor does it appear that restrictions on eminent domain discretion measurably harm economic development, as found by multiple quantitative studies (for example, here, here, and here).

In theory, eminent domain is supposed to correct a market failure known as the holdout problem. But in practice, as I show in this study, when authorities have too much discretion to use eminent domain, the result is government failure instead.

America’s constitutional framers were notably concerned about majoritarian tyranny. On this, the 250th anniversary of the United States, eminent domain continues to remind us of the unintended consequences associated with granting local majorities the power to take private property.

As my recent paper with co-authors Jon Murphy and Justice Pace has shown, today’s Supreme Court seems poised to revisit the Kelo ruling, siding in recent years with property owners in a handful of particularly egregious cases of eminent domain overreach. May this momentum continue. As I argued 20 years ago, it is still a good time to take eminent domain out of economic development.