The Federalists' Error: National Size and the Evolution of Faction: Progressivism's Hamiltonian Root

Montesquieu had argued that only small republics are possible, but Madison and Hamilton argued the reverse. Their claim was that small republics lead to conflict among factions, but that large size reduces factional conflict. In the Federalist No. 10 Madison argues:

"The question resulting is whether small or extensive republics are most favorable to the election of proper guardians of the public weal; and it is clearly decided in favor of the latter by two obvious considerations..."

The first, in Madison's view, is that because there is a greater absolute number of capable representatives in a large than in a small republic but because legislatures are limited in size, "the number of representatives in the two cases not being in proportion to that of the constituents, and being proportionally greatest in the samll republic, it follows that if the proportion of fit characters be not less in the large than in the small republic the former will present a greater option and consequently a greater possibility of a fit choice."

Also, in Madison's view, "as each representative will be chosen by a greater number of citizens in the large than in the small republic, it will be more difficult for unworthy candidates to practise with success the vicious arts by which elections are too often carried; and the suffrages of the people being more free, will be more likely to center on men who possess the most attractive merit and the most diffusive nad established characters."

However, Madison tempers his argument in the next paragraph by noting that "by enlarging too much the number of electors, you render the representative too little acquainted with all their local circumstances...as by reducing it too much you render him unduly attached to these, and too little fit to comprehend and pursue great and national objects.."

The second factor favoring large scale or size, in Madison's view is "the greater number of citizens and extent of territory which may be brought within the compass of republican than of democratic government; and it is this circumstance principally which renders factious combinations less to be dreaded in the former than in the latter. The smaller the society, the fewer probably will be the distinct parties and interests composing it; the fewer the distinct parties and interest, the more frequently will a majority be found of the same party; and the smaller the number of individuals composing a majority, and the smaller the compass within which they are placed, the more easily they will concert and execute their plans of oppression. Extend the sphere and you take in a greater variety of parties and interests; you make it less probable that a majority of the whole will have a common motive to invade the rights of other citizens."

In the Federalist No. 27, Hamilton argues:

"Unless we presume at the same time that the powers of the general government will be worse administered than those of the State governments, there seems to be no room for the presumption of ill will, disaffection or opposition in the people. I believe it may be laid down as a general rule that their confidence in and obedience to a government will commonly be proportioned to the goodness or badness of its administration. ..the general government will be better administered than the particular governments: the principal of which are that the extension of the spheres of election will present a greater option, or latitude of choice, to the people...And that on account of the extent of the country from which those, to whose direction they will be committed, will be drawn, they will be less apt to be tainted by the spirit of faction, and more out of the reach of those occasional ill humors or temporary prejudices and propensities which in smaller societies frequently contaminate the public deliberations, beget injustice and oppression of a part of the community, and engender schemes which, though they gratify a momentary inclination or desire, terminate in general distress, dissatisfaction and disgust."

First, notice that Hamilton's argument in favor of the expertise of the federal government is precisely the one used by the Progressives from the 1890s through the 1930s in arguing for enhancement of federal power. Hamilton argued that central government would be more rational, and the Progressives argued that centrally placed experts would be able to administer anti-trust and other regulatory systems more rationally.

Naturally, the federalist system works much better than the Anti-Federalists of the 1780s feared. However, it is also true that as the Progressives' centralizing strategy of enhancing the federal government has developed, faction has played an increasing role. Not necessarily the kind of faction about which the Federalists and the Progressives through Herbert Hoover were often concerned such as agricultural versus manufacturing interests, or labor versus management, i.e., broad social groupings, but rather special interests.

Mancur Olson* posed the argument that small rather than large factions or groups are effective in the regulatory process. Large size stimulates special interest involvement in the legal and regulatory process to the benefit of small factions. The is counter-intuitive, and Hamilton and Madison did not have the advantage of as much historical evidence as Olson had. The reason is that as the scope of the republic gets larger, the benefit from special interest lobbying also gets larger. The larger the benefit, the greater the incentive for specific firms and industries to form factions and lobby. Larger size reduces the cost per citizen of rent extraction. Large size makes the formulation for scattered and poorly coordinated factions difficult, but corporations are compact. Corporations did not exist in the Federalist era. Thus, history revealed the opposite trend: the centralization of power in the Federalist era led to special interest factions having greater power than they had in the more decentralized nineteenth century. Of course, the corporate form of organization, which flowered in the late nineteenth century contributed to this, but so did the Progressives emphasis on expertise in a centrally situated state. The economic incentives are powerful enough that special interests are able to overcome the best efforts (if there are indeed such efforts) of centrally placed experts. Moreover, the factions are able to employ experts that are superior to the government's resulting in all too fequent cases of regulatory capture by corporations.

Decentralizing the economy would reduce the incentives for lobbying and raise the costs of lobbying. As a result, the advantage that corporations and small groups that face high benefits from lobbying gain in a more centralized federal system is likely to be reversed. First, the benefit will be on average 1/50th the size it currently is for each lobbying episode. Second, the costs of lobbying will be 50 times greater because there are 50 states. Clearly, lobbying will become more expensive and more complex, making regulatory influence more difficult.

Although Hamilton and Madison may have been right in the environment in which they lived, where there were no large corporations, where the entire US population was less than four million and where benefits from lobbying were negligible by today's standards, in today's world lobbying functions like a competitive auction. To the extent that it interferes with democracy, raising the transaction costs of lobbying and reducing the benefit from each lobbying episode will enhance democracy and limit the private gains at public expense that lobbyists can accrue.

Following the Money in the 08 Elections

Open Secrets.org has a useful chart that reviews the 100 largest political contributers since 1989. Some of these, such as Enron, are no longer as important as they once were.

Of the top ten contributors, six are labor organizations: the American Federation of State, County and Municipal Employees (AFSCME, rank number 1), the National Education Association (5),the International Brotherhood of Electrical Workers (7), the Laborers Union (8), the Service Employees' International Union (9), and the Carpenters and Joiners Union (10). AT&T Corporaton is two, the National Association of Realtors is three, the American Association of Justice (formerly the Trial Lawyers' Association) is four and Goldman Sachs is six. Given the pain that the financial community has or will have caused in the next ten years, it is surprising that only Goldman is in the top ten. As well, given the limited success of labor organizations in securing their legislative goals, it is surprising that they dominate the top ten.

Taking the full 100 into account I counted the following categories:

Unions and labor organizations: 28
Large corporations: 53
Professional associations: 7
Small business associations: 7
Special and Public interests: 5

The large corporations include several leading commercial and investment banks. These include Morgan Stanley, Citigroup, American Bankers' Association, JP Morgan Chase, and Merrill Lynch. The special and public interest groups include Emily's list, a feminist lobbying group that has contributed $18.2 million and ranks number 25. According to the Emily List website:
"our grassroots network has helped elect 69 Democratic pro-choice members of Congress, 13 senators, and eight governors." AFSCME has contributed $39.1 million since 1989. No wonder state governments are booming. At the bottom of the list BP Amoco has contributed $5.7 million.

It would be interesting to know explicitly what these organizations expect from their sizable donations. Some, such as the American Medical Association or the National Education Association would seem fairly obvious. Others, such as the Carpenters and Joiners seems less so. Are they looking for additional projects? General workplace regulation? Special laws that are beneficial to carpenters?

Likewise, it would be interesting to know the degree to which the banking lobbies have pressured for the monetary expansion that has benefited banking, the stock market and the hedge industry in the past quarter century.

Congressman John M. McHugh--Republican at the Trough

The Federal Election Commission permits review of all the Political Action Committee contributions to Congressional candidates for the Senate and Congress. One can trace the sources of influence on our elected officials through this site.

One Congressman who outshines all the others from New York's delegation is Congressman John M. McHugh a Republican from northern New York, New York’s 23rd district. McHugh received $384,126 in campaign contributions through August 23, 2006.

Congressman McHugh sits on the National Security, Emerging Threats, and the Energy subcommittees of the Comittee on Government Reform. He is also on the Readiness subcommittee of the Committee on Armed Services. He is also on the Intelligence Policy; the Technical and Tactical Intelligence; and the Terrorism subcommittees of the Permanent Select Committee on Intelligence.

Congressman McHugh's web page emphasizes that he is "recognized as a 'Champion of Dairy Farmers' for his aggressive approach to forcing Congress to address the needs of dairy farmers." The website also states that he is a "champion of education" but education interests do not dominate his list of contributors. Rather, a wide range of labor unions in the construction industy along with mail carriers and direct mail firms that likely have an interest in his postal reform proposals.

A clue as to why he receives such heavy contibutions from construction unions is in this statement:

"He believes that a good educational foundation allows children to reach their full potential and lead responsible adult lives. As such, Rep. McHugh has been a strong supporter of a bill that would subsidize $25 billion in zero-interest school modernization bonds..."

A flurry of school construction would not do much to improve education (that would require reinstatement of traditional teaching methods and discarding of the left wing ideology that dominates our education schools and the education establishment) but rather might benefit construction interests.

As far as his postal activities, his website indicates that:

"as a recognized authority on postal matters in light of his six years as Chairman of the Subcommittee on the Postal Service, Rep. McHugh was appointed to serve as the chairman of the Committee’s Special Panel on Postal Reform and Oversight in early 2003. In the 109th Congress, he has again introduced legislation to significantly reform the Postal Service for the first time in 35 years..."

In addition to the postal bill, Congressman McHugh has proposed bills to: promote the use of digesters by agricultural producers; amend the Internal Revenue Code to provide a tax credit to farmers in value-added agriculture; and exempt individual health insurance premiums from tax. He has been involved in several additional tax- and health insurance-related bills, which may explain the heavy presence of health insurance firms and health providers among his contributors.

What is fascinating about Congressman McHugh's long list of contributors is the wide range of business and labor interests who are helping McHugh get elected, some of which probably salivate at the thought of the needless construction of school buildings. Some of his contributors reflect local interests such as Fort Drum, dairy, other farming, paper mills, lumber and a General Motors plant. Other of his contributors appear to relate to projects whose purposes are unrelated to the needs of his constituents or of the United States.

Given the rural nature of McHugh's district one wonders why he needs so much money for his election campaigns---air time and newspaper space cannot be very expensive in the frozen north country of New York State.

McHugh's donors in excess of $5,000 since 2000 include:

Advo Inc. (direct mail company)
Agri-Mark (Dairy Farmer Cooperative)
Airline Pilots Association
American Chiropractic Association
American Federation of Government Employees
American Federation of State, County and Municipal Employees
American Federation of Teachers
American Hospital Association
American Maritime Officers
American Medical Association
American Postal Workers
Capital One Financial Corp.
Carpenters and Joiners
Committee on Letter Carriers Political Education
Con-Way (supply chain management and logistics services)
Credit Union National Association
Dairy Farmers of America
Direct Marketing Association
Electrical Contractors
Operating Engineers
Farm Credit Council
General Dynamics
General Motors
Health Net
Humana
Bridge Structural and Iron Workers
International Association of Firefighters
Bricklayers Union
Laborers' International Union
Lockheed Martin
Magazine Publishers of America
Retired Federal Employees
National Association for Uniformed Services
National Association for Postal Supervisors
National Association of Postmasters
National Association of Realtors
Beer Wholesalers
National League of Postmasters
National Postal Mail Handlers
National Rural Letter Carriers' Association
National Star Route Mail Contractors Political Action Committee
PMA Group (automotive products)
RR Donnelly (printing, brochures, direct marketing)
Service Employees International Union
Sheet Metal and Air Conditioning Contractors
Time Warner (magazine subscriptions)
Treasury Employees
United Auto Workers
Verizon
Wal Mart
HJ Heinz
Georgia Pacific Corporaton (paper)