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Inside the Vault - Spring 2007

Inside the Vault - Spring 2007

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Published by: Federal Reserve Bank of St. Louis on Aug 12, 2010
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An Economic Eucaion Newlee om he Feeal reeve Bank o s. Loui
Eminent Domain:
 
Should Private Property Be Taken for Public Use?
Volume 12, Iue 1 sing 07
THE
T
he U.S. Supreme Court has long recognized the federalgovernment’s power to acquire private property for publicuse. This is true even though “eminent domain” does notappear in the Constitution. The power of eminent domain islimited, however, by two restrictions. First, as with any federalaction, the use of eminent domain must be “necessary and proper”in accordance with the congressional powers enumerated in Article1, Section 8, of the Constitution. Second, the use of eminentdomain must obey the final clause of the Fifth Amendment, whichstates, “Nor shall private property be taken for public use, with-out just compensation.” The states’ use of eminent domain mustbe consistent with federal interpretations of public use and justcompensation.The U.S. Supreme Court’s 2005 decision in
Kelo vs. New London
 resulted in public outrage, although the ruling didn’t overturn anyearlier decisions; it merely affirmed an earlier decision by the Con-necticut Supreme Court. That decision allowed the city of NewLondon, which was officially designated as “distressed,” to useeminent domain to acquire 15 properties, one of which belongedto homeowner Susette Kelo. Neither Kelo’s house nor any of theother properties was in poor condition despite being located ina “distressed” city. The city acted under a state statute declaringthat the taking of land for purposes of economic development wasa taking for public use. The city’s economic development plandesignated the parcels for office space, parking and retail services.This scenario highlights the central issues of the Kelo case: Whatis a “public use”?In its 5-4 majority opinion, the U.S. Supreme Court stated in
Kelo
that the government can never take property from one privateparty for the sole purpose of giving it to another, even if just com-pensation is paid. On the other hand, the government can alwaysdo so if the general public acquires some actual use of the property.The court has been defining the ground between these extremessince the late 1800s. From the start, “it embraced the broader andmore natural interpretation of pub
l
ic use as ‘public purpose,’” thecourt said in
Kelo
, and deferred to legislative declarations aboutpublic use and purpose.
The Public Good vs. Public Goods
Economists recognize a difference between “private goods” and“public goods.” Private goods are both “rival in consumption”and excludable. Rival in consumption means that one person’sconsumption of a private good denies others the opportunity toenjoy the good. The price of a private good is essentially a resultof the good’s scarcity, and some individuals will be excluded fromconsuming the good because they are not willing to pay the priceof the good. Unlike a private good, a public good is both non-rivalin consumption and non-excludable. The textbook example of a pure public good is national defense because if one U.S. citizenreceives the protection of national defense, then others will neces-sarily benefit from that protection. One person’s consumption of apublic good does not deny others from consuming the good, andpeople can use the public good without paying for it. Because theadditional cost of providing the good to another person is essen-tially zero (since all people can use the good once it is provided toone person) the market price for additional users would be zero,which would not be practical for profit-making firms, and thegood would tend to be undersupplied in the market.
Who Wins? Who Loses?
Transferring property from private to public use, however,requires government intervention in private markets. Anecdotalinformation and formal academic research show that, in general,countries with less government involvement in private marketsexperience more economic growth than countries with moregovernment involvement in private markets. Of course, certaingroups do benefit from the taking of private property, such asdevelopers, property managers and local politicians. Developersand property managers gain income from developing the prop-erty. Many local politicians favor targeted economic developmentbecause of what they see as the immediate benefits from develop-
Continued on back cover 
 
Q.
Who is Milton Friedman?
 A.
Milton Friedman (1912-2006),received the 1976 Nobel Memorial Prizefor Economic Science and was a seniorresearch fellow at the Hoover Institution,Stanford University. Alan Greenspan,former Fed Chairman praised Friedmanas one of the 20th century’s major intel-lects. An adviser to many governmentleaders and a prolific writer, Friedman isperhaps best known as an outspoken pro-ponent of political and economic freedomand as the leader of the Chicago School of monetary economics, which stresses theimportance of the quantity of money asan instrument of government policy andas a major influence on business cyclesand inflation.
Q.
What were Friedman’s key proposi-tions regarding monetary policy?
 A.
He may be best known for hisstatement that “inflation is always andeverywhere a monetary phenomenon.”Friedman believed that changes inmonetary growth affect only prices—notoutput—in the long-run. Although mon-etary policy affects output in the shortrun, this effect wears off in the long run.The rate of monetary growth matters forinflation, but not for output. In the long-run, what happens to output depends onmany other factors, such as enterprise,the productivity and inventiveness of people, the extent of thrift, and the struc-ture of industry and government.
Q.
What was Friedman’s view oprice controls?
 A.
When the Johnson administra-tion continued emphasizing wage-priceguidelines to restrain inflation, Friedmanspoke out. “Price control by exhortationand threat and use of extra-legal powersnever has worked and never will, exceptto disrupt the economy,” he said.
What is personal saving?
Economi efne aving a ha a o ae-ax income hai no conume. Houehol, heeoe, have ju wo choicewih hei income ae axe—o conume o o ave.
Why would economists be concernedabout low saving rates?
saving i ue o fnance invemen in eal caial, ucha machiney, equimen an new conucion. theeoe,aving i ciical o an economy’ ae o caial accumulaion,which, in un, i elae o economic gowh, labo ouciv-iy an ana o living.
What are the consequences or a countrythat has a low saving rate?
some combinaion o he ollowing i likely—he counywill have a euce invemen ae o, i i inve a a aeexceeing i aving ae, i will have o boow moe omohe counie.
What has happened to the personalsaving rate since the early 1990s?
I ha become negaive, which mean ha he U.s. economyi uing he aving o ohe counie o fnance eal caialevelomen.
Fourth Quarter 2006
Q1-06 Q2-06 Q3-06 Q4-06Growth rate —Real Gross Domestic Product 5.6% 2.6% 2.0% 2.2%*Infation rate —Consumer Price Index 1.9% 5.0% 3.1% –2.1%Civilian Unemployment Rate 4.7% 4.6% 4.7% 4.5%
*preliminary estimate 
Economic Snapshot
Personal Saving Rate
SOURCE: U.S. Department of Commerce: Bureau of Economic AnalysisShaded areas indicate recessions as determined by the National Bureau of Economic Research.
1510051970–51980199020002010
       P     e     r     c     e     n      t
Q.
Did Friedman believe that usingscal policy to stabilize the economywas eective?
 A.
Reaffirming his skepticism aboutthe effectiveness of fiscal policy, Fried-man once asked an interviewer, “Howcan the government stimulate the econ-omy by taking money out of one pocketof the public and putting it into anotherpocket?”
Q.
How did Friedman dene an idealinfation rate?
 A.
Friedman described the ideal rateas “a level that would make it irrelevantto individual and business decisions.”This description became prevalent amongpolicymakers in the 1990s.
The content for Q & A was largely adapted from
Milton Friedman and U.S. Monetary History:1961-2006, Working Paper 2007-002A
, byEdward Nelson, assistant vice president andeconomist at the Federal Reserve Bank of St. Louis.For more information, go to http://research.stlouisfed.org/wp/2007/2007-002.pdf.
 
Labor Markets, Wages and theFactors that Affect Them
What is a Labor Market?What Factors Aect Wages in Labor Markets?Who Works, Who Doesn’t and Why?
 
H
ave you uen eve ake you wha you ean? Ake viio wha hey ean?do hey alk abou he income o amou muician an ahlee? Why no uehei inee o you avanage? Aen hi ogam o lean om a Fe econo-mi abou labo make an he aco ha aec hem. Ue hi ineeing anelevan inomaion o enich you claoom inucion. All eache ae welcome,bu he claoom alicaion ae geae o gae 4-12.the ogam inclue eenaion by a Feeal reeve economi, han-on acivi-ie o you claoom an ee eaching maeial. Coninenal beaka will beeve a 8 a.m., an lunch will be ovie. the ogam will ajoun a 3 .m.the coneence will ake lace in 2007 in he ollowing Eighh diic ciie:
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Little Rock – Billy Britt 501-324-8368Louisville – David Ballard 502-568-9257Memphis – Jeannette Bennett 901-579-4104St. Louis – Dawn Conner 314-444-8421St. Louis – Mary Suiter 314-444-4662
BankContacts
Little Rock, Ark.
July 30-Aug. 1, 2007
Fayetteville, Ark.
 Aug. 2-3, 2007
K-12 grade teachers
June 19-21, 2007
Millsaps College, Jackson, Miss.
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Deadline or registration is Friday,June 1, 2007.
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