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A Cautionary Tale About Claims of Economic Benefits

2009 November 13
by Brad Humphreys

More than 10 years ago I read an economic impact study claiming that a new football stadium in Baltimore would create thousands on new jobs and increase local income by hundreds of millions of dollars each year. I didn’t believe it for a minute, and spent quite a bit of time and effort over the past decade demonstrating that sports facilities do not generate tangible economic benefits. Despite the research that many of us here at TSE, and other economists have done, many people continue to believe claims of huge economic impact from many different local economic development projects. For example, just a few weeks ago a press release from the office of California Governor Arnold Schwarzenegger claimed that a new football stadium in Los Angeles would “generate 18,000 jobs and $760 million in annual revenue.”

In 2005, the Supreme Court of the United States, on a 5-4 decision in the Kelo v. City of New London case, ruled that local governments could use eminent domain to transfer private property from one person to another if the takings served the public interest by promoting economic development. The case emerged from the desire of New London, CT, to tear down an existing residential neighborhood in order to create a mixed use commercial/residential “urban village” anchored by Pfizer, a big pharma corporation. Last week, Pfizer announced that it was leaving New London. What is the legacy of the Kelo takings?

Pfizer said it would pull 1,400 jobs out of New London within two years and move most of them a few miles away to a campus it owns in Groton, Conn., as a cost-cutting measure. It would leave behind the city’s biggest office complex and an adjacent swath of barren land that was cleared of dozens of homes to make room for a hotel, stores and condominiums that were never built.

At the time that New London began using eminent domain to take private property, the city claimed that the new development around the Pfizer facility would have a huge positive economic impact on the surrounding community. A majority of Supreme Court justices believed these claims. The opinion can be found here. It’s one of the worst decisions the court ever made, in my opinion. Here’s a quote from the opinion

The City has carefully formulated an economic development plan that it believes will provide appreciable benefits to the community, including–but by no means limited to–new jobs and increased tax revenue. As with other exercises in urban planning and development, the City is endeavoring to coordinate a variety of commercial, residential, and recreational uses of land, with the hope that they will form a whole greater than the sum of its parts. To effectuate this plan, the City has invoked a state statute that specifically authorizes the use of eminent domain to promote economic development. Given the comprehensive character of the plan, the thorough deliberation that preceded its adoption, and the limited scope of our review, it is appropriate for us, as it was in Berman, to resolve the challenges of the individual owners, not on a piecemeal basis, but rather in light of the entire plan. Because that plan unquestionably serves a public purpose, the takings challenged here satisfy the public use requirement of the Fifth Amendment.

So much for the careful economic development plans of New London. The important lesson here is that it is relatively easy to make seemingly credible claims about future economic benefits from an urban “revitalization” project. Five justices of the Supreme Court were so convinced by the purported economic benefits that would flow from the planned New London “urban community” that they let the government use eminent domain to take private property from local residents to make it happen. But realizing those benefits is a much more difficult accomplishment, even if the planners mean well. The final outcome in New London should serve as a warning to those who swallow claims of future economic benefits hook line and sinker.

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