January 6, 2009 | Special Report on Legal Issues
Our Constitution places the ownership of private property at the very heart of our system of liberty.... The result of this business culture has been a prosperity that's unmatched in human history.... Our greatest asset has been our system of social organization, a system that for generations has encouraged constant innovation, individual initiative and the efficient allocation of resources.
--Barack Obama, The Audacity of Hope.
President-elect Obama, you have been a strong and eloquent defender of property rights and the rule of law, recognizing that they undergird Americans' freedoms and protect us from unjust government actions. These protections may be most important to those of modest means, who are the disproportionate victims of government takings of property. As explained by the NAACP and other civil rights leaders, the poor are also affected more profoundly by takings that upset their communities and ways of life. Any approach to governing that is premised, at least in part, on empathy for the weakest among us must therefore include strong protections for private property.
Pragmatism counsels the same focus. Government policies that place property rights at risk and upset reasonable investment-backed expectations discourage all investment, innovation, and beneficial risk-taking and dampen economic growth. When property rights are uncertain, neighborhoods are consumed by blight, entrepreneurs suffer for lack of credit, and those who are well connected appropriate the resources of those who lack financial means and political connections--what is known as "crony capitalism." Strong legal protections for property rights are therefore a necessary condition for our continued economic and civil prosperity
But as Americans have learned in recent years, and especially in recent months, their valuable property rights are under assault from all levels of government by seemingly well-meaning public officials who fail to consider the long-term consequences of their actions. Most strikingly, the Supreme Court's 2005 decision in Kelo v. New London sparked widespread public outrage. The Court's conclusion that the term "public use" in the Takings Clause of the U.S. Constitution does not limit the purposes for which the government may take a citizen's home caused Americans of all social stripes to recognize that their own property may be at risk of expropriation for transfer to more influential private parties for their own private ends.
In the wake of Kelo, and in response to the massive political backlash that it generated, legislators in 43 states enacted laws of varying degrees of strength to curb the abuse of eminent domain. Similar legislation passed the U.S. House of Representatives but failed in the Senate. Though President George W. Bush did issue an executive order on eminent domain abuse, its loose drafting appears to do no more than to reaffirm the standard in Kelo and provides no further limitations on takings.
Recent financial crises have also raised the specter of counterproductive government interventions in the economy that endanger property rights. In particular, the government has intervened in the financial markets by taking ownership stakes in corporations through both voluntary and involuntary transactions. When conducted without the consent of the corporation, government purchases of preferred shares in banks may constitute a "taking" of private property, in the constitutional sense, from these corporations. Though the government has provided some compensation for these takings, difficulties in valuation that are worse than those that usually arise in the forced-sale context complicate the assessment of whether that compensation has been "just," as required by the Constitution; and whether or not there has been a constitutional taking, investors' shareholdings have been diluted and subordinated by the government stake. Similarly, government-backed loans that subordinate pre-existing priority debt may also constitute takings, in this case without any compensation.
These policies have severely upset the expectations of investors. In one instance, the government, operating through the Federal Reserve, effectively seized ownership of a major insurer over the objections of some of its largest shareholders rather than let the firm enter bankruptcy, sell off assets, or otherwise reorganize. This was done without a shareholder vote, as would ordinarily be required to protect shareholders' property rights in a control transaction.
Important contractual rights are also being undermined by government action. The government's asset-purchase program, for example, requires participating corporations to abrogate the vested contractual rights of executives whose compensation packages are inconsistent with new government regulations. In certain instances, these corporations may also be required to "claw back" compensation already awarded to executives. In some cases, the government has sought to subordinate the debts of priority lenders--taking, in effect, a portion of the financial instrument that they negotiated with the borrower. As a result, lenders are even more reluctant to make loans to the ailing firms that need them most.
The mortgage market is suffering similar turmoil. Building on the Depression-era Supreme Court decision in Home Building & Loan Association v. Blaisdell (1934), many state governments have been forcing mortgage holders to alter the terms of their agreements with borrowers, accept lower or no payments for periods of time, and delay foreclosures. Courts in some states have imposed unusual procedural burdens on lenders who are seeking to enforce lending agreements, thereby delaying justice.
These actions directly undermine the enforcement of voluntary contracts, increasing transaction costs across the economy and further increasing the cost of borrowing while, over the long term, reducing the availability of credit through secured transactions. As a result, unable to enforce the terms of their loans, lenders will be less willing to extend credit in the future, and many responsible individuals of limited means will be excluded from the mortgage market and, in the end, homeownership. This will reduce economic opportunities and income mobility for years to come.
Most ominously, the bailout legislation enacted in October and the Administration's unilateral auto bailout in December raise the specter of widespread contravention of fundamental constitutional principles that protect entrepreneurs and investors. Responding to a perceived crisis, Congress and the President agreed on policies that raise serious constitutional concerns because they appear to violate the Constitution's separation of powers and exceed the scope of the federal government's enumerated powers.
These acts may serve as a precedent for future "power sharing arrangements" that threaten the individual rights of citizens that the true separation of powers was designed to protect. With such vital walls breached, there is the real risk that, should financial markets continue to falter, the government will build on this precedent, enacting "emergency" measures that interfere further with Americans' property and other rights. This may be a self-fulfilling prophecy if investors, fearful of government interference, choose to sit on the sidelines as the economy collapses for lack of liquidity and credit.
To prevent that eventuality and to restore Americans' faith in the security of their private property, you and your Administration should take the following steps:
Property rights are that rare area of strong agreement between individuals of different political affiliations, ideological commitments, and visions for our society. Reflecting this consensus, upwards of 80 percent of Americans believe that the Supreme Court got it wrong in Kelo and that no American should be turned out of his or her home so that the land it occupies can be turned over to a commercial developer. On the other side of the issue are some politicians who view abusive takings as an inexpensive way to accomplish certain political ends on the cheap and narrow, concentrated special interests, such as property developers, that benefit directly. The result has been deadlock at the federal level.
More surreptitious forms of takings, while less understood by the public, are no less damaging to Americans' rights and prosperity. They also threaten your agenda. Uncompensated regulatory takings and, more broadly, government interference in investment-backed expectations rarely accomplish the ends for which they have been dispatched and far more often result in unexpected, negative consequences. Thus, coercive capital infusions meant to unfreeze markets have frightened lenders and investors, and regulations meant to protect endangered species have caused the preemptive destruction of their habitats. And still the government regards these tools as affordable, solely because their costs are shunted onto others.
This does not befit the rights that, as you so elegantly put it, are "the very heart of our system of liberty" and have been the cornerstone of achievement for all who have struggled to win civil rights. Americans cherish both their property rights and the rule of law that protects them. Whether for reasons of compassion, pragmatism, or a combination of the two, your Administration should strive to do no less.
Andrew M. Grossman is Senior Legal Policy Analyst in the Center for Legal and Judicial Studies at The Heritage Foundation.
 Barack Obama, The Audacity of Hope: Thoughts on Reclaiming the American Dream (New York: Crown Publishers, 2006), pp. 149-150.
NAACP et al., Brief in Support of Petitioner, Kelo v. City of New
London, 545 U.S. 469 (2005). See also Mindy Fullilove,
Eminent Domain & African Americans: What Is the Price of the
Commons? Institute for Justice, at http://www.castlecoalition.org/pdf/pu
Castle Coalition, Enacted Legislation Since Kelo, at http://www.castlecoalition.org/index.php?
option=com_content&task=view&id=510&Itemid=107(December 23, 2008).
 H.R. 4128, 109th Cong. (2005); S. 3873, 109th Cong. (2005).
Exec. Order No. 13,406, 71 Fed. Reg. 36,973 (June 23, 2006), at http://www.whitehouse.gov/news/releas
es/2006/06/20060623-10.html. See Ilya Somin, "Another Failure of the Kelo Backlash: President Bush's Executive Order on Takings," June 23, 2006, at http://www.volokh.com/posts/1151111493.shtml.
See Stephen M. Davidoff, "The AIG Bailout Takes Shape," New
York Times DealBook, September 24, 2008, at http://dealbook.blogs.nytimes.com/2008
 See Jonathan Adler, Money or Nothing: The Adverse Environmental Consequences of Uncompensated Land Use Controls, 49 B.C. L. Rev. 301 (2008).
 See Hans A. von Spakovsky and Andrew M. Grossman, "Promoting the General Welfare Through Civil Justice Reform: A Memo to President-elect Obama," Heritage Foundation Special Report No. 38, January 6, 2009, at http://www.heritage.org/Research/LegalIssues/sr38.cfm.