Eminent domain is a risky strategy
The latest edition of Regional Economist, a publication of the St. Louis Federal Reserve Bank, contains an excellent primer on the economics of eminent domain. Authors Thomas A. Garrett and Paul Rothstein conclude that any government using eminent domain as an economic-development tool is embarking on a risky strategy. They write:
Those who approve of eminent domain as it was used in Kelo (a Supreme Court case decided fin 2005) fail to recognize the difference between what economists call âprivate goods” and âpublic goods.” They also fail to see the inefficiencies often generated from government intervention in private markets.
Garrett, a St. Louis Fed economist, and Rothstein, an associate professor at Washington University, also note the well-established fact that economies with less government intervention outperform those where the government plays a bigger role. That applies at the local level, too, the authors argue.
Rather than use eminent domain or other tools to target individual economic development projects, local governments should ask the fundamental question as to why the desired level of economic growth is not occurring in the local area without significant economic development incentives. For example, are taxes too high, thus creating a disincentive for business to locate to the local area? Do current regulations stifle business creation and expansion? All of the targeted economic development in the world will not compensate for a poor business environment.
I’ve heard civic leaders talk about a long list of St. Louis projects, from the 1960s incarnation of Busch Stadium to the Galleria shopping mall, that wouldn’t have happened without at least the threat of eminent domain. But maybe they’re answering the wrong question. According to Garrett and Rothstein, “economic theory certainly suggests that eminent domain used for private economic development will likely result in a zero-sum gain and may actually hinder economic development in the local areas, as well as the region, rather than help.”
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David Nicklaus has covered St. Louis business for more than 25 years. His column appears three days a week on the Post-Dispatch business page. 
Economic theory is based on the way that typical, “rational” people act. Most people in this category will sell their property for a price that not only allows — but rewards — them for moving to another home that the vast majority of people regard as being “better.”
So, if all property owners met this test of “rationality,” it would be practical for developers to utilize the free market to purchase dilapidated real estate in the rotten cores of urban areas and develop it for uses that deliver substantially more value to society in general, while also improving the lot of the people displaced by the development.
The fly in this ointment is the “holdout” — the individual who won’t, by God, sell his little shack on a 5,000 square foot lot in the middle of a proposed urban renewal project for ANYTHING. It is probably true that this individual is not being completely irrational in believing that they are happier where they are than they would be in moving to some new home (however “nicer” by everyone else’s standards). However, that same individual is, in reality, denying an improved standard of living to their neighbors and many others in the community.
The whole point of the eminent domain principle — as implicitly acknowledged by the Fifth Amendment of the U.S. Constitution — has been to allow the public interest to override very limited private interest of this sort. Anybody who thinks that private property rights should be inviolable regardless of the public interest can’t logically be very concerned about poverty and urban decay.