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Kelo, stadium subsidies, and economic development

Thursday's Supreme Court decision in the Kelo case triggered a flood of insightful blog commentary. Given that the substance of the decision obviously has an impact on things we've been discussing here, I'm a bit late to the party. But having read the decision and the opinion of legal scholars, I should be better prepared to discuss the connection between Kelo and the building of sports stadia.

Kelo makes it clear that a broad interpretation of the term "public use" remains acceptable to the court in eminent domain proceedings. In particular, "economic development" can be used as a public use rationale for takings. Specifically, it's ok to condemn people's homes for the purpose of building offices & parking lots on land transferred to new owners. That's what happened in Kelo, and it is permissible since jobs and tax revenue will increase as a result.

As readers of this blog well know, the "economic development" claim is a routine ploy in the political jousting over stadium subsidies. What then, does Kelo mean for the stadium subsidy game, and what can we learn from the study of stadium subsidies as to the likely impact of Kelo on takings?

The direct effect of Kelo on stadium finance is minor. Sports stadia have long been recognized as having a public use, along with the transport which enables people to get there. Kelo thus won't lead to an increase in takings for the building of stadia per se. But Kelo does have the potential to expand the scope of these projects. Houston attorney Tom Kirkendall put it this way in an email, "When do you expect the first "Wrigleyville"-type redevelopment project to emerge?" Prior to Kelo, you could condemn land for transport and for the stadium. Now it is clear that neighborhoods adjacent to the stadium are fair game, as long as the case is made that the intended "economic development" is in the public interest.

Although Kelo has only minor implications for stadium finance, the reverse is more interesting. Lessons from the politics of stadium subsidies actually have a bearing on interpreting the decision and the likely effects of the ruling.

The use of an economic development rationale to justify stadium subsidies has a long history. This history has been extensively studied by sports economists. Here is what we know: (i) Every case for a stadium subsidy is accompanied by an "economic impact analysis" showing that investment in the stadium will help develop the local economy. (ii) Scholars view these studies as political propoganda, not as objective analyses. (iii) Objective evidence that such development actually takes place is meager at best - virtually every published study fails to find a significant economic impact from sports stadia.

The economic literature on stadium subsidies is thus very clear: economic development provides no basis for justifying public investment in stadia. Yet peddlers of fantasy under the economic development banner make their living aiding and abetting major league owners in their quest for public handouts. In Kelo, the Supreme Court had the opportunity to ban this tripe from the courtroom in takings cases. But the decision gives these same peddlers the license to aid and abet developers in tearing down neighborhoods.

Justice Kennedy's warning that future economic development claims will be carefully scrutinized strikes me as foolish. Courts do not have the expertise to judge these claims on a case by case basis. Hence, much flim flammery can be expected as the local development boards gear up. And they already have - witness the plans for a marina in Freeport Texas (scroll down), and the new D.C. stadium's environs (where Mayor Williams reportedly "praised the ruling.")

The Kelo case will result in the forceful eviction of homeowners - voluntary exchange is ruled out because the "development board" couldn't meet the valuation residents placed on living in their homes. Absent strategic negotiation (which is apparently not present in the Kelo case), the legitimate case for economic development thus boils down to an externality argument: other property is made more valuable if these people and their property are severed. In a nutshell that's the economic development justification for the taking.

An externality argument that justifies forceful eviction had better be a strong one. Stadium subsidies provide a case study of the strength of the economic development argument: it's weak. All too often the economic development argument is more fanciful than real. Hence it is not a legitimate foundation for government-mandated seizures of property.