Risk Markets And Politics

Saturday, June 25, 2005

Kelo: What, Me Worry?

On Thursday the Supreme Court upheld a local government's authority to take ordinary, non-blighted homes for redevelopment, not just for "public use" as is traditionally the case with eminent domain. Now a municipality can seize property even if they just think they can generate higher tax revenue by doing so.

A lot of people are very disturbed by this outcome, which they say points towards a dissolution of all property rights. I am a bit more sanguine. Any municipality (or government for that matter) that abuses this power will see their housing prices fall as people migrate to places where their property rights are more secure. It will be more difficult for abusive cities to justify higher property taxes, and in the long run they should see these tax receipts decline. They will almost definitely see residential property tax income decline in the long run, even if it is bolstered in the short-term by incoming workers. Taking advantage of this ruling will be a serious gamble for any city to undertake. Essentially, they will be wagering that the new commercial taxes will offset the eventual decline in residential tax income, and what happens when nearby cities announce that they won't be taking advantage of the ruling?

Now I doubt this will be the case, but it would be interesting and instructive if we someday look back on all of this and find that this ruling was the straw that broke the back of the housing market. It's easy to underestimate the effect of such a marginal change because, as Robert Shiller and Charles Manski point-out in different ways, people tend to overestimate the probability of small risks.


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