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Tuesday, June 28, 2005

Diminishing Property Rights Will Lead to a Higher Rate of Mortgage Defaults

by Eric Englund

With respect to property rights, 1913 was a terrible year. This was the year when the Sixteenth Amendment to the U.S. Constitution was ratified – allowing the federal government to directly tax its citizens. To add insult to injury, the Federal Reserve was established and the fiat-banking cartel was born. Therefore, in 1913, the federal government was empowered to tax its citizens in two ways. One way, of course, is via direct taxation. The other, and more pernicious method of taxation, is through inflation – by the Federal Reserve debasing the dollar. In essence, Americans became slaves to the state, via taxation, as they do not fully own the fruits of their labor (i.e. money) and what fruit they are allowed to keep is debased by central banking. The long-term effects, of the federal government’s assault on money (as private property), have certainly spilled into the arena of real property as well. For it is a logical progression to go from not fully owning the fruit of one’s own labor to not truly owning one’s own real property. The U.S. Supreme Court’s June 2005 decision, in the Kelo vs. City of New London case, has seen to this. Incrementally, Americans have been conditioned to believe that the state decides which rights, including property rights, are granted to the people. Such conditioning will prove to be disastrous when America’s housing bubble collapses.

Slowly, but surely, private property rights have been eroded. In cities and counties all over the U.S., Americans are being subjected to real estate fascism. County commissioners, city councilmen, and other public officials have literally gained dictatorial powers over real property. Homeowners are being told that trees cannot be cut down from one’s yard, that soil may not be imported to establish a new garden, that a small structure may not be built in a back yard, that a home remodel must meet certain arbitrary standards, and the list goes on and on. Even worse is the use of the powers of eminent domain where local government seizes property and, often times, hands it over to politically-connected companies. Accordingly, the Fifth Amendment has become a mockery. When summing all of this up, one must ask if individuals and businesses really have private property rights?

What is so alarming here is that Americans, in general, see no problem with this creeping real estate fascism. I have some friends (a married couple) who live in a Seattle suburb and have blindly accepted the dictates of the local city planners. Five years ago, I helped my friends build a storage shed in their back yard. As it turns out, the cinder-block foundation upon which we built the shed was deemed inadequate by the building inspector – he stated that city code required a concrete-slab foundation for such a sizable shed. Consequently, we literally sawed off four feet of the structure in order for the shed to meet the city code pertaining to using a cinder-block foundation (as a side note, a neighbor tipped off the city inspector, prompting this unpleasant alteration to the structure). My friends just shrugged their shoulders and have unwittingly accepted the fact that they share their property’s ownership with the local government.

Since the New Deal, the federal government has massively intervened in the private housing market – which, in many ways, has lead to the aforementioned real estate fascism. The Federal Housing Authority (FHA) was established in 1934 with the objective of rescuing a housing industry that "...was flat on its back." The following lame reasons were given for the creation of this federal monstrosity during the Great Depression – as found on the Department of Housing and Urban Development’s website:

Two million construction workers had lost their jobs.
Terms were difficult to meet for homebuyers seeking mortgages.
Mortgage loan terms were limited to 50 percent of the property’s market value, with a repayment schedule spread over three to five years and ending with a balloon payment.
America was primarily a nation of renters. Only four in ten households owned homes.
In 1965, the FHA became a part of HUD. On a combined basis, the "FHA and HUD have insured almost 30 million home mortgages and 38,000 multifamily project mortgages representing 4.1 million apartments, since 1934." Undeniably, the federal government’s intervention into the housing market has been enormous.

Since 1934, an alphabet soup of government agencies and government sponsored enterprises (GSEs) have intervened in America’s housing market with the objective – as stated on Ginnie Mae’s website, using this agency’s statement as a proxy – to " make affordable housing a reality for millions of low-and-moderate-income households across America by channeling global capital into the nation’s housing markets." In addition to Ginnie Mae, other federal agencies involved in the housing market include the Department of Veteran Affairs, the Department of Agriculture’s Rural Housing Service, and HUD’s own Office of Public and Indian Housing. Not to forget the GSEs, Fannie Mae and Freddie Mac have become behemoths in providing liquidity to the housing market.

When combining the Federal Reserve’s current (and reckless) low interest rate policy with the housing-market interventions perpetrated by the above-mentioned governmental and quasi-governmental housing entities, millions of otherwise unqualified Americans now "own" homes. Members of Congress and even President Bush are taking credit for helping Americans realize the American dream of home ownership. What these politicians fail to recognize is that they have enabled a circumvention of the customary route to home ownership – in which Americans saved enough for a 20% down payment in order to qualify for a traditional 30-year mortgage. Hence, Americans now have very little "skin" in the game as the mortgage lending system has been so distorted, by the government, that literally anyone with a pulse can qualify for a mortgage loan – including loans that require minimal to absolutely no down payment. Millions of households have interest only, reverse amortization, or adjustable rate mortgages and typically depend upon having two wage earners in order to afford the monthly house payment. Indeed, with federal involvement, mortgage credit is easy to secure. Thanks to Uncle Sam, never have so many people, with so little at stake, been able to borrow so much money.

Now the big question becomes what will happen to the real estate market when long-term interest rates (and, most likely, unemployment) begin to rise? One must look at how Americans have become conditioned, by the federal government, to uncritically view the issue of private property rights. We have a draconian tax system which makes it clear that Americans do not fully own the fruits of their own labor (i.e. money earned via hard work). We have local governments – now emboldened by the U.S. Supreme Court – which decide for themselves what real estate property rights may or may not exist. We have federal bureaucracies that provide shortcuts allowing Americans to purchase homes without having to work and save for a meaningful down payment – essentially, home mortgage credit has been socialized. We have a fiat-money system that steals our wealth via the pernicious tax of inflation. Thus, we have a society in which the meaning of private property ownership has been debased by the federal government itself. So when long-term interest rates begin to rise, I see massive mortgage defaults ahead. Heck, I can hear the mantra now: "I can’t afford my house payment anymore, so it’s the government’s problem now, not mine." Consequently, hugely expensive bailouts of the GSEs, and other federally backed institutions, lay on the horizon. Of course, this will mean higher taxes (both directly and via inflation) and, therefore, further violations of property rights. Does anyone care anymore?

June 28, 2005

Eric Englund who has an MBA from Boise State University, lives in the state of Oregon. He is the publisher of The Hyperinflation Survival Guide by Dr. Gerald Swanson. You are invited to visit his website.


A Defeat Bred in Deceit

by Paul Craig Roberts

“Anyone who has proclaimed violence his method inexorably must choose lying as his principle.”

~ Aleksandr Solzhenitsyn

When Bush decided, prior to September 11, to attack Iraq, he committed himself to lies and deceit. As his British co-conspirators realized, only victory could save them from the consequences.

On June 27, General George Casey, US commander of the “multinational coalition” in Iraq, told morning TV audiences that the conflict in Iraq “will not be settled on the battlefield.” On June 26, Defense Secretary Donald Rumsfeld told TV audiences that “coalition forces, foreign forces are not going to repress that insurgency.” The insurgency, Rumsfeld said, might “go on five, six, eight, 10, 12 years.”

These admissions give the lie to Vice President Cheney’s claim that the insurgency is in “its last throes.”

Would Congress have let Bush invade Iraq if Congress had known that it would not be a 3-week war but a 12-year war?

What kind of fantastic lie or gross incompetence caused a 12-year war to be marketed as a 3-week war?

How can any people, no matter how deceived and deluded, support a government capable of such miscalculation or deceit?

Would the Washington Post and the New York Times have been such willing conduits of neoconservative propaganda against Iraq it anyone on either paper had enough education to realize the catastrophe that hubris was creating? What if either paper had possessed enough of a reporter’s skepticism to ask a question?

General Casey’s and Secretary Rumsfeld’s remarks make it clear that the Defense Department has given up the prospect of military victory: The situation in Iraq, Gen. Casey said, “will ultimately be settled by negotiation and inclusion in the political process.” Rumsfeld says the US troops are being killed and maimed in order to “create an environment that the Iraqi people and the Iraqi security forces can win against that insurgency.”

After three years of fighting, Rumsfeld still doesn’t understand that the Iraqi people are the insurgency. Is Rumsfeld still clinging to the myth that the insurgency is an outside element injected into Iraq?

When will the moronic Bush administration realize that it is creating the environment in which the insurgency is prevailing?

Many readers write to me that Bush and his neocon crazies are Israel’s patsies. An equally good case can be made that Bush and his crazy neocons are Osama bin Laden’s agents. In a recent speech at the American University in Cairo, Egypt, Secretary of State Condi Rice repudiated America’s 60-year-old policy of Middle East stability and declared: “Now, we are taking a different course.”

Rice, being completely ignorant of the Middle East, believes that the path to democracy is through instability. But, of course, instability is exactly what bin Laden wants. The instability that the Bush administration is creating will unseat our puppets in Egypt, Pakistan, Jordan, and Saudi Arabia. Bin Laden intends to pick up the pieces.

The Bush administration has squandered America’s diplomatic, economic, and military power and is heading for defeat in Iraq, Afghanistan, and throughout the Middle East. Bush’s invasion of Iraq is fast becoming one of the greatest strategic blunders in history.

June 28, 2005

Dr. Roberts is John M. Olin Fellow at the Institute for Political Economy and Research Fellow at the Independent Institute. He is a former associate editor of the Wall Street Journal, former contributing editor for National Review, and a former assistant secretary of the U.S. Treasury. He is the co-author of The Tyranny of Good Intentions.


A Libertarian Defense of ‘Kelo’ and Limited Federal Power

by N. Stephan Kinsella

The recent U.S. Supreme Court case Kelo v. City of New London, which permitted a Connecticut city (New London) to condemn private property that was to be transferred to another private party as part of an economic redevelopment plan, has provoked the predictable howls of outrage from libertarians. On the Liberty and Power blog, for example, libertarian Aeon Skoble (a friend of mine) commented, "More bad news: there’s no such thing as private property." The Internet seethes with apocalyptic, hyperbolic libertarian sky-is-falling predictions.

My own view is that although the Court’s reasoning was flawed, the right result was reached, namely: the Court did not overturn New London’s condemnation action or the decisions of Connecticut State courts that upheld this action. Most libertarian criticisms of Kelo are, I believe, flawed in legal-constitutional analysis as well as in libertarian considerations of federalism and decentralization. Let me briefly summarize my view here before elaborating. The Fifth Amendment’s provisions on eminent domain limit the federal government only. The argument that it now applies to the States because it was incorporated into the Fourteenth Amendment is flawed. It is not part of "substantive due process" and the argument that it is part of "privileges or immunities" is not persuasive. Therefore, the federal Constitution neither regulates State takings, nor empowers the federal courts nor government to review or overturn State takings practices or laws. For the Court to overturn a State eminent domain law, it would have to assume power not granted to it in the Constitution, which means it would be ignoring the Constitution’s limits and thus, acting like an unlimited government. Which is a bad thing.

Libertarianism and Takings

The one uncontroversial aspect of this case is that takings of private property by governments – whether at the State or federal level – are unjustified. Period. Takings are flat-out theft. States claim to have the power to seize private property under so-called "eminent domain" or condemnation proceedings. However, such power is usually conditioned on or limited by at least two other requirements: (a) that the taking be for public use (and not merely to benefit some private party); and (b) that the taking be compensated by paying the "fair market value" for the property to the owner. If the taking is uncompensated, or not for public use, it is viewed as illegal.

What is the libertarian view on takings? In my opinion, anarcholibertarians and minarchists alike should all oppose the state’s power to condemn private property, by recognizing that it is theft and therefore unjustified. But given that states do claim the power to expropriate, we also should favor rules that minimize the harm or make its occurrence less likely. Requiring states to pay helps minimize the damage to some victims (indeed, some are probably secretly glad they were robbed, because their payment is more than they might have actually received in a private sale – determination of fair market value is not a rigorous science, after all). And if states have to pay for property, it reduces the occurrence of condemnations – the state might as well just use tax dollars to purchase land, in many cases, rather than stealing and then paying for it.

And the requirement that the taking be for a public use also reduces the total number of takings, since not every condemnation can be characterized as a taking "for a public use" with a straight face. But of course the opposite requirement – that only takings for private use are permitted, but not takings for public use – would also reduce the number of takings.

For the libertarian, the main concern is to reduce the number or likelihood of such acts of theft; and to minimize the harm done when it does occur. But once a person’s land is taken, it is hard to see how he suffers extra harm due to the way the state uses the property – whether they use it to build a road, or military base, or sell it to Costco. In fact, some libertarians might prefer that their land be transferred to private hands for peaceful purposes such as a mall or strip center or condo instead of being used by the inefficient state.

Our Federalist System – the Presumption of Unconstitutionality

But that is not the main point. The main question for the libertarian here is what is the role of the federal government with regard to State eminent domain laws. First let’s take a look at how our federal system was supposed to work. The States pre-dated the union and are regarded, like other states in the world, as sovereign (in international law, "states" means a country; the US is a state). They are said to have "plenary police power," which does not mean they are unlimited but means they have general legislative and executive power.

American States, it happens, have written constitutions that place various limits on the exercise of power by the State government or its subsidiaries (like cities). In fact, Connecticut’s Constitution says, in Sec. 11: "The property of no person shall be taken for public use, without just compensation therefor." For whatever reason, the Connecticut Supreme Court, according to the Kelo case, held that the transfer of the expropriated property for purposes of the economic development plan "qualified as a valid public use under both the Federal and State Constitutions."

Unlike American States and other states around the world, however, the federal government does not have general legislative or plenary police power (though it has done a good job inventing this power by stretching the "interstate commerce" clause). Rather, it is limited by having only the powers enumerated in the Constitution – the powers delegated to it. This scheme is made clear by the very existence of the Bill of Rights, the Ninth Amendment, and especially the Tenth Amendment, which provides: "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people." This purpose of this provision is to make it clear above all that the new federal government – the dangerous central state – has only the powers granted ("delegated") to it, and no others. The others may be reserved by the people, or by the States, whatever – regardless of who has these powers, the people or the States, these powers are not delegated to the feds. (Note: the Bill of Rights includes the first ten Amendments to the Constitution. The Constitution was ratified in 1789; the Bill of Rights two years later, in 1791. The first eight amendments contain various rights; the ninth has the provision saying the listing of rights in the first eight should not be construed to deny or disparage others retained by the people, and the tenth has the federalism provisions noted above.)

What this means is that there ought to be a presumption that any action or law the federal government takes is unconstitutional unless the power to take the action or enact the law is found in the Constitution. This idea is behind the push for requiring Congress to specifically enumerate its authority to enact a given statute in the preamble to the statute itself (see H.R. 2458, the Enumerated Powers Act, introduced into the House in the 109th Congress). And as Professor Randy Barnett notes, the federal government claims

to have the rightful or justified power to force those within its jurisdiction ... to obey its laws. ... What (if anything) exactly gives [the federal government] this justified power? Normativity has now entered the picture, not because I have introduced it, but because those who claim the Constitution as their "authority" for their actions also claim the justified power to coerce others to accept their commands. It is then perfectly appropriate to ask whether this normative claim is warranted or not.

In other words, requiring the federal government to show a given law or action is constitutional does not mean that one is accepting the legitimacy of the government or the law. It is simply holding the federal state to standards it claims to be bound by.

Federal Review of State Action: an Exercise of Power

Now what is crucial for our purposes is to recognize that for the U.S. Supreme Court to overturn a given State law, this is an exercise of power. This means that the power to review and nullify State legislation must be enumerated in the Constitution. If this power is not found in the Constitution, then the Supreme Court simply has no jurisdiction and no authority to even question the State law. It would be akin to the New London landowners appealing the Connecticut law to, say, Canada’s high court or the American Arbitration Association or the local Rotary Club. These entities would dismiss the complaint outright (or ignore it), since they have no jurisdiction or authority over the City of New London. It is clear that when a court refuses to hear a case because it recognizes it has no jurisdiction, then it is not "allowing" the challenged action to happen, any more than we libertarians "let" "poor people starve" by refusing to endorse a welfare system; any more than the Rotary Club is "letting" Memphis enforce blue laws.

If the federal government does not at least make an effort to abide by the limits place on it in the very document that authorizes its existence, then it has become unlimited. And this is something libertarians clearly ought to oppose. When the U.S. Supreme Court is asked to review the law of a jurisdiction over which it has no authority or power – be it the city of New London or the Vatican – then it has a choice: to review the law and pronounce it good or bad, which very review requires it to assume power that it was never granted; or to abide by constitutional oaths and obligations and refuse to assume power it was not given. If it makes the latter choice, then in some cases it may fail to nullify unlibertarian laws of other states. This is something similar to the idea that the U.S. should not invade every less-libertarian country in the world, even though this means some less-libertarian countries exist and do bad things. But if the Court makes the former choice, and assumes the power to review the State’s law, then it is acting on the principle that it is in fact not limited by the Constitution. Which means it is unlimited, or at least a lot less limited than the Constitution would require.

The Bill of Rights as Limits on the Federal Government

So the question then becomes: does the Constitution in fact empower the Court to review State eminent domain laws? What the dissent would have done is strike down the Connecticut city’s law for violation of the Fifth Amendment, which prohibits takings unless they are for public use and compensated. But are they right? Does the Fifth Amendment empower the federal government to review and nullify State eminent domain laws? It is clear that at least until the Fourteenth Amendment was "ratified" in 1868 (scare quotes because it was ratified unconstitutionally and illegally, and therefore not really ratified; but it has unfortunately become a de facto part of the constitutional landscape, so I leave this point aside), the Fifth Amendment – like the other rights listed in the first eight amendments, applied only to the federal government. A bit of context helps illustrate why.

American States, like other states in the world, have general police power – the power to legislate in general. In theory this gives them the power to violate rights. Therefore it is important to specify limits on the exercise of this power, i.e., rights that "trump" the power the states have. Now during the constitutional debates, the Antifederalists insisted a bill of rights be added to the Constitution to ensure the new central state would not trample rights (see pp. 761–64 of this article for more background on this). The Federalists resisted, claiming it was not needed since the federal government was one of enumerated powers, and simply would not be able to violate rights since it did not have the power to do so. Worse, they worried that listing rights would imply the federal government did have power to legislate in that area (else, why specify a right?), or possibly even general legislative power. For example, if a provision says Congress may not censor speech, it could be argued Congress must have general power to legislate, at least in this area, otherwise the listing of this limitation on Congress’ power would be pointless. But the Antifederalists insisted, and the Federalists’ solution was the Ninth Amendment, which says "The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people." This allowed them to list some rights – like the right to freedom of speech, etc. – without worrying this would imply a general federal legislative power that would imperil other rights not listed. The Tenth Amendment, as noted above, added an exclamation point to this by making it clear that the federal government is one of enumerated powers.

In any event, what is clear is that the first eight amendments of the bill of rights specify limits on what Congress can do, while the ninth makes it clear that this listing is not exhaustive (for example, so that the listing of rights can’t be used to infer general federal powers were granted, that could be used to infringe these other, unenumerated rights), and the tenth emphasizes again that the feds have only the powers delegated to them, and no others. Now Amendments 1 through 8 limit the federal government either by saying "Congress shall not..." do something (like make a law abridging freedom of the press) or by listing a "right" that the people have (which would trump any exercise of federal power and thus also serve as a limit).

It is nonsense to read the Bill of Rights as anything other than further limitations on federal power, and a reiteration and emphasis of the federal structural scheme of enumerated powers (for more discussion of this latter topic, see this article by Thomas McAffee). The point is that the listing of rights in the Bill of Rights, ratified in 1791, do not serve as any delegation of power to the federal government, but only as an emphasis that it has only the powers delegated to it in the 1789 Constitution.

I belabor this point because it seems to confuse many well-intentioned libertarians, who see that the Constitution lists a right, and scratch their heads at the idea that this does not mean the federal government can swoop into Texas and enforce this right. As they see it, it is simple: individuals have, say, a right to free speech (true); it is listed in the Bill of Rights (true); so "of course" the Supreme Court should be able to strike down state laws that censor speech. But this does not follow at all. The recognition of a right in the document that grants powers to – indeed, creates – the federal government serves only to make it clear that this government may not violate that right; that it either does not have this power in the first place, or, even if it does, it is trumped by the right. It does not serve as a grant of power to the feds; just the opposite. But for the feds to be able to review and overturn state laws, this would mean they have the power and authority and constitutional right to enforce these judgments. It would mean they have a power. But recognizing a right does not grant a power.

This was, I believe, fairly universally recognized for a long time after the founding. Until the Supreme Court began to construe the Fourteenth Amendment years after its "ratification" to incorporate selected rights in the Bill of Rights, it would not have been a violation of the federal Constitution for a state to establish a religion or censor speech, for example. This confuses many libertarians who are so used to the federal dominance of the states and the routine practice of federal court review of state laws. But this is an innovation by the Supreme Court early in the Twentieth Century – about fifty years after the Fourteenth Amendment was "ratified." Until that time, the rights and limits specified in the Bill of Rights were limits on the federal government only. States were limited by their own constitutions. The federal government simply had not been delegated the power to review state laws for compliance with fundamental rights and liberties. Consider, for example, that there were established state religions (Congregationalism in Mass., e.g.) in effect in 1791, when the Bill of Rights was ratified. As constitutional scholar Akhil Reed Amar notes in Some Notes on the Establishment Clause (notes omitted):

The Establishment Clause did more than prohibit Congress from establishing a national church. Its mandate that Congress shall make no law "‘respecting’ an establishment of religion" also prohibited the national legislature from interfering with, or trying to disestablish, churches established by state and local governments. In 1789, at least six states had government-supported churches. Congregationalism held sway in New Hampshire, Massachusetts and Connecticut under local-rule establishment schemes, while Maryland, South Carolina and Georgia each featured a more general form of establishment in their respective state constitutions. And, even in the arguably ‘non-establishment’ states, church and state were hardly separate; for example, at least four of these states, in their constitutions no less, barred non-Christians or non-Protestants from holding government office. According to one tally, eleven of the thirteen states had religious qualifications for officeholding. Interestingly, the federal Establishment Clause, as finally worded, most closely tracked the proposal from the ratifying convention of one of the staunchest establishment states, New Hampshire: ‘Congress shall make no laws touching religion’ – a proposal that of course would immunize New Hampshire from any attempted federal disestablishment.

Now the point here is not that these state laws were good or libertarian, but only to illustrate that it is quite clear that the Fifth Amendment, standing alone, even though it specifies compensation and public use requirements for eminent domain, does not limit the states because it does not provide any power to the federal government to require compliance. The Fifth Amendment was merely redundant with the enumerated-powers structure of the Constitution: the Constitution nowhere specifies Congress has the power to take property for a non-public use or without compensation; therefore, Congress has no authority to do this even without the Fifth Amendment saying they do not.

The Fourteenth Amendment and the Incorporation Doctrine

But the Fourteenth Amendment, it is now held, "incorporates" most of the rights in the Bill of Rights, and applies them to the States, including the eminent domain provisions of the Fifth Amendment. The Fifth Amendment was held to apply to the states by "incorporating" it into the Fourteenth Amendment in 1897. As I’ve argued elsewhere, the incorporation doctrine of the Fourteenth Amendment is flawed (Federalism and Libertarians on Eminent Domain; On Takings and Public Use; Supreme Confusion, Or, A Libertarian Defense of Affirmative Action, Barnett and the 14th Amendment; Happy Bill of Rights Day – The Problem with the Fourteenth Amendment; Federalism, In Defense of Evidence: Against the Exclusionary Rule and Against Libertarian Centralism; Sandefur and Federal Supremacy; Supreme Confusion, Or, A Libertarian Defense of Affirmative Action; Healy on States’ Rights and Libertarian Centralists, Thomas on Marijuana; Libertarian Centralists). The notion that it is part of the "due process" clause of the Fourteenth Amendment is ridiculous. Due process has to do with process, not substantive rights. The whole doctrine of "substantive due process" is ridiculous. Even legal scholar Roger Pilon, who holds that the Fourteenth Amendment does apply fundamental rights to the states, agrees that the Due Process and Equal Protection Clauses of the Fourteenth Amendment were not intended to provide federal protection for citizens’ fundamental rights.

So if the Fifth Amendment is not applied to the states by the Fourteenth Amendments Due Process clause, by what means is it applied? Some libertarians, such as Roger Pilon, would say that the Privileges or Immunities Clause is a broad category that includes fundamental rights such as those in the Bill of Rights. That provision states: "No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States." It is argued by some that the rights listed in the Bill of Rights are part of the "privileges or immunities of citizens of the United States." In my view, this is untenable and in any event has never been firmly established.

The Fourteenth Amendment cannot be exhaustively analyzed here. Let me just note a few things. First, if the Fourteenth Amendment "incorporates" the rights specified implicitly or explicitly in the Bill of Rights, then it incorporates not only the eminent domain provisions of the Fifth Amendment but also the "due process" provisions of the Fifth Amendment. The Fifth Amendment states: "nor shall [any person] be deprived of life, liberty, or property, without due process of law." If this is one of the "privileges or immunities" specified in the Fourteenth Amendment, then the privileges or immunities clause inherently already contains due process rights. It is thus a mystery why the Fourteenth Amendment provides: "nor shall any State deprive any person of life, liberty, or property, without due process of law." Why would it list due process rights in addition to the privileges or immunities clause, if the latter incorporated the Fifth Amendment’s almost identical due process clause?

Clearly, in my view, the framers and ratifiers of the Fourteenth Amendment did not regard the privileges or immunities clause as incorporating the Bill of Rights; they would not have needed to include a separate due process clause if they did. So it seems to me that the theory of incorporation – not even invented until about 50 years after the Fourteenth Amendment was illegally ratified – is especially absurd in the case of the Fifth Amendment.

Second, it is useful to consider what the reaction would have been of most of the framers and ratifiers of the Fourteenth Amendment if they had been asked if it would permit the federal courts to review state laws for compliance with most of the provisions of the Bill of Rights. It seems to me clear that they would overwhelmingly deny it; and that they would not have ratified the amendment if it had clearly specified this. If the Fourteenth Amendment does incorporate the Bill of Rights, for example, it apparently implies that federal courts can strike down state laws such as those prohibiting homosexual sodomy. Does anyone seriously think the framers or anyone at the time thought the Fourteenth Amendment meant that?

Third, the word "rights" does not appear in the murky expression "privileges or immunities." Much less is the Bill of Rights mentioned. Given this, it is certainly not perfectly clear that the Privileges or Immunities clause meant to incorporate fundamental rights and apply them against the states. It is at the very least arguable that much less was intended; the work of Raoul Berger – much derided by incorporationists from Akhil Reed Amar to Michael Kent Curtis to Roger Pilon and Randy Barnett – shows as much (see, e.g., Berger’s Government by Judiciary: The Transformation of the Fourteenth Amendment, as well as other works by him, including his debates with Michael Kent Curtis). But in a constitutional system in which the central government was feared and states’ rights were jealously guarded, one would expect any radical change in this system – and the Fourteenth Amendment as interpreted by Barnett, Curtis, et al. surely imposes radical changes on federalism – to be made explicitly, clearly, expressly, in writing. After all, we require contracts to sell land and real property to be in writing. Surely a sweeping grant of power to the feds and a seismic shift in our federalist system ought to be recognized only if it is explicitly and clearly stated in an Amendment.

Read the Fourteenth Amendment for yourself. It seems to be to be almost self-evident that the words "privileges or immunities" do not clearly claim all the rights in the Bill of Rights. To my mind, the most likely meaning of those words – as understood by most of the ratifiers in 1866 – was a narrow set of rights having to do with national citizenship only (it was a term tracing its ancestry to a previous bill), but not the full panoply of natural rights or those listed in the first eight amendments of the Bill of Rights.

In any event, it is clearly arguable that the privileges or immunities clause had a narrow meaning, just as it is arguable that it had a broader meaning. Given that its meaning is not clear, why would it serve as an effective and legitimate substantial grant of power to the feds and a fundamental change to the federalist system constitutionally established in 1789? If the Constitution said, "Congress shall have power to stop truly offensive actions," would libertarians argue that this unclear, vague wording justifies a massive legislative power grab by Congress, or would they say that this wording is not sufficiently precise to give Congress wide powers?

Some libertarians would say, shouldn’t we favor a reading that expands rights? There are two responses to this. First, we should favor an honest reading. Where the Constitution is unlibertarian, we ought not to hesitate to say so, nor to dishonestly pretend it is really libertarian where it is not. Second, one must realize that given the federal scheme of enumerated and limited powers, expanding the category of rights that apply to the states simply means an expansion of the scope of the power granted to the federal government. In other words, saying the Court has the authority to stop bad state laws means the Court has the power. It means power has been shifted upwards, in a centralizing direction.

What all this means is the Constitution has not clearly granted to the feds the right to review state laws for compliance with the Fifth Amendment. Federal court review of state eminent domain laws thus requires the Court to seize jurisdiction and power not granted to it, i.e., to disregard the limits it claims to be bound by, in its foundational document. There is a term for governments that do not abide by the constitutional limits placed on them: unlimited government. Is this something libertarians should favor? I think not.

Kelo: the Decision and the Reasoning

Back to Kelo – the right decision (from both a constitutional and federalist perspective) would have been to reject the complaint for lack of jurisdiction, just as the Court would have done if it had received a petition to review a decision of a trial court in Zimbabwe. This would have not so much as upheld the Connecticut condemnation proceeding as refused to seize the jurisdiction needed to overturn it.

The Court here did end up upholding the law, so that the right decision was made, but for the wrong reasons. All nine members of the Court agree that the Fifth Amendment does apply to the States. So all nine proceeded to apply the standards of the Fifth Amendment to the New London eminent domain proceeding. Five found it complied with the requirement that takings be for a "public use," and four did not.

I find it interesting that those libertarians yelping loudest about this decision have to make the same mistake made by all nine Justices – that the Court has jurisdiction to hear this matter in the first place. Consider the position of these libertarians. They want the Court to be able to review state legislation, and to overturn it if the Court believes it is incompatible with the Bill of Rights. They want the Court to engage in this practice. Apparently they are ignorant – willfully or innocently – of the way the Constitution works or they just don’t care. And yet, here they are, now, bitching about the result in this case. They are upset, in part, that the Supremes have now expanded the category of "public use," and thus takings around the country will accelerate (one libertarian pointed me an article about a town near Houston that will now be able to condemn two seafood companies to build a private boat marina).

Sure, one bad result of the way the Court made its decision – by assuming it has jurisdiction and then proceeding to definitively construe what "public use" means – is that now some states may tend to interpret their own constitutional public use provisions similarly, since many of them are modeled after the federal Bill of Rights.

And yet the only reason that a "bad" decision from the Supremes can instantly propagate and become the standard followed nationwide is that the Supremes have arrogated to themselves this position. Those libertarians who whine about the Supreme Court’s rationale and reasoning are generally in favor of the system that permitted the Supreme Court to be in the position of making this bad decision and foisting it on the country. Some chutzpah.

It is quite inconsistent and confused for libertarians to kvetch and gnash teeth over the fact that the Kelo decision "lets" states have the power of eminent domain, and yet not mind the Supreme Court having all kinds of powers it was never constitutionally meant to have, including the power to review state eminent domain laws in the first place. They claim they don’t want states to have certain powers, but they don’t mind the feds having powers – especially the power to take away the States’ powers. And then they whine that this same Court has used its discretion and illegal power to "permit" a State to have a power they shouldn’t. It's utterly confused. It's like favoring socialized medicine but then complaining about the inefficiency of the resulting system.

If the Supreme Court acted with integrity and honesty, it would have rejected the case outright, without even bothering to declare what "public use" hereafter means for purposes of eminent domain statutes. It would have been a non-event. The battle over eminent domain and the standards regulating it would have been fought at the local level, instead of at the federal level. But the critics of the decision want to attack the symptom, not the disease. They symptom is the bad decisions made by the Court that are then applied to the country as a whole. The disease is giving the Court the power to make so many decisions that bind the country as a whole in the first place.

Public Use and Private Use

Although I believe Justice Thomas and his fellow conservatives Justices are usually better at constitutional interpretation, I am not so sure in this case (setting aside that all nine Justices mistakenly assume the Fifth Amendment does apply to the States). As a libertarian, I am in favor of as many limitations on the power of eminent domain as possible. International law requires that a taking be compensated, for a public purpose, and non-discriminatory (background for this can be found in chapter 3 of my 1997 book Protecting Foreign Investment Under International Law: Legal Aspects of Political Risk, pp. 58–59 and 77–85; see also the section "The Requirements of Nondiscrimination and Public Purpose: Concepts of Limited Significance," at pages 85–87; to be expanded in International Investment, Political Risk, and Dispute Resolution: A Practitioner's Guide, due out later this year). So I am all for any limitations on the power of states to steal property. A rule saying eminent domain can only be done in months with less than average precipitation would be fine with me. "Non-discrimination" would also be fine. Anything to slow the critters down.

But that does not mean all these restrictions are intellectually coherent. What is just compensation? For the Austrian and libertarian, just compensation is what the owner would sell the property voluntarily for. It is not the same as "fair market value." Cash paid to the expropriated owner does not make him whole, if he did not want to sell. But it is better than nothing, and at least reduces the harm done to him.

For similar reasons, a requirement that takings to be for a "public use" is also useful, since it reduces the overall number of takings, even if "public use" is not really that objective or rigorous a concept.

Nonetheless, I find the doom and gloom comments of libertarians in response to the Kelo decision to be a bit overwrought. First, the Court did not abolish the public use requirement. What they said – somewhat reasonably, given the operating assumptions – was that if property is taken to serve a public purpose then that can satisfy the "public use" requirement. The Court also held that "The public end may be as well or better served through an agency of private enterprise than through a department of government – or so the Congress might conclude. We cannot say that public ownership is the sole method of promoting the public purposes of community redevelopment projects."

I have to admit I am not quite sure what exactly a "public use" or "public purpose" is. The concepts seem to rest on economically flawed concepts – see on this Hans-Hermann Hoppe’s Fallacies of the Public Goods Theory and the Production of Security. As Hoppe points out, there is no objective way to distinguish "public" goods. If the state says it can expropriate things for a public purpose only, that falsely implies the state is limited – it implies that the standard of "publicness" is objective. But in fact it is not; it is just whatever the state decrees. Therefore under the guise of limiting itself, it really gives itself more power.

But given that some states have larger public sectors, some activities are regarded as public or private depending on the decrees of the state. In Canada, health care is socialized and thus public. If a Canadian province wants to condemn land to make a (state) hospital, presumably this is for a public use. In the US, health care is not yet completely socialized. This is presumably a good thing. So libertarians would presumably yelp if land were taken to sell to a private hospital. But what is the difference? Both the public and private hospital serve similar functions. Should we set in place an incentive for the state to enlarge the public sector, or not to privatize a given sector, because it can use eminent domain only for the "official" public sector?

Moreover, the cries of indignation by libertarians about the idea of a taking for a private purpose is a bit perplexing. First, once you are robbed, the damage is done (even if ameliorated to some extent by the payment of compensation). How are you harmed more if your stolen property is transferred from the state to a private company instead of to some state agency? And notice the Court said the issue at hand was whether the city of New London’s proposed disposition of the petitioners’ property qualifies as a "public use" within the meaning of the Takings Clause. In other words, the Court was concerned with what the state did with the property after it was taken. Why does transferring it to a private party cause any extra harm or offense to the expropriation victim? Why is the purpose or motivation of the taking of such great concern to libertarians? The problem is the taking itself. After all, we object to hate-crime laws, on the grounds that the criminal act that is committed is no worse just because of racist motives of the criminal; an act of murder or battery does just as much damage to a victim regardless of the perpetrator’s motivations.

Also – the rule that state takings should be for a public purpose and not for a private purpose seems to rest on the idea that if property is condemned and transferred to a private party, this might just be some kind of political favor being done for the recipient. However, notice that Kelo’s ruling stated, "the City would no doubt be forbidden from taking petitioners’ land for the purpose of conferring a private benefit on a particular private party." I.e., Kelo’s ruling was not open-ended; it only said that takings of property to be later transferred to a private party as part of "a ‘carefully considered’ development plan" can serve a public purpose and thus be for a public use. But the ruling would not permit takings of "land for the purpose of conferring a private benefit on a particular private party" or a taking of "property under the mere pretext of a public purpose, when its actual purpose was to bestow a private benefit."

My point here is that the alleged purpose of the public use requirement is to prevent taking of property to benefit private parties. However, as any libertarian knows, this is just what government is about – seizing private property for its private pals – taxing you for Lockheed, for example. Even takings of property for public use invariably benefit certain people, often the cronies of state officials. The Court in Kelo even acknowledges this:

Petitioners contend that using eminent domain for economic development impermissibly blurs the boundary between public and private takings. Again, our cases foreclose this objection. Quite simply, the government's pursuit of a public purpose will often benefit individual private parties. For example, in Midkiff, the forced transfer of property conferred a direct and significant benefit on those lessees who were previously unable to purchase their homes. In Monsanto, we recognized that the "most direct beneficiaries" of the data-sharing provisions were the subsequent pesticide applicants, but benefiting them in this way was necessary to promoting competition in the pesticide market. [...] The owner of the department store in Berman objected to "taking from one businessman for the benefit of another businessman," [...] referring to the fact that under the redevelopment plan land would be leased or sold to private developers for redevelopment. Our rejection of that contention has particular relevance to the instant case: "The public end may be as well or better served through an agency of private enterprise than through a department of government – or so the Congress might conclude. We cannot say that public ownership is the sole method of promoting the public purposes of community redevelopment projects."

So normal government operations – taxing and spending, takings for a public use – typically benefit private parties. Why the special moral outrage reserved for takings for a partially private use? I am not in favor of it, but I fail to see why it is any worse than the other crimes government commits. At least with this one they pay restitution.

And not only this: shouldn’t we as libertarians assume that a taking for a private use would be better than a taking for a public use? After all, one might prefer his land to be given to peaceful, productive capitalists than to bureaucrats, warmongers, and thieves. If the state takes my house and pays me for it, I would rather it be turned into a condo than a munitions factory or prison warehousing pot smokers.

Consider roads. Cities or other state entities can take property to make a public road. But sometimes private toll roads are also authorized. Why would the state be able to seize property for the former but not the latter? Note: I am not in favor of state theft for any purpose. My point is it makes no sense for libertarians to be more offended at takings that are for a private purpose than for those that are for a public purpose. If anything, they ought to prefer the former to the latter.

June 28, 2005

Stephan Kinsella is an attorney in Houston. His website is