Publius on Localization of America

Let's do a thought experiment. Let's say the federal government agreed to download most of its responsibilities, such as social security, taxation, education (oh, I thought that was a state responsibility), medical care for the elderly, regulation of labor and industry and similar responsibilities onto the states. The states would have the power to reform or discard any or all of the progressive, New Deal and Great Society bureaucracies.

Continuing the thought experiment, under such a localization policy, some states might opt for greater freedom of enterprise and laissez faire. Other states might opt for subsidization of business, a central bank like the Fed, and eminent domain to subsidize real estate developers. Still other states might opt for governmental redistribution of wealth to enable the poor to contribute productively. It is likely that one of these models would be most successful. Would the successful states incur the unsuccessful states' wrath?

In the Federalist Papers number five (by Jay) and six and seven (by Hamilton) Publius, the pseudonym for Jay, Hamilton and Madison, addresses this question. Publius's argument is that decentralization will create animosity among the states or local confederacies of states. In Number 5, Publius (Jay) argues that "they ...would in no other sense be neighbors as they would be borderers." In turn, border conflicts and hatreds leading to war would evolve.

In Number Seven Publius (Hamilton) argues that:

Competition of commerce would be another fruitful source of contention. The States less favorably circumstanced would be desirous of escaping from the disadvantages of local situation, and of sharing in the advantages of their more fortunate neighbors. Each State, or separate confederacy, would pursue a system of commercial policy peculiar to itself."

States, muses Hamilton, might pass laws that justifiably benefit their own citizens, but in so doing incur the wrath of other states whose citizens are not benefited. An example might be tariffs set by coastal states like New York that expense inland states like Ohio. The result might be civil war.

The Constitution resolved the danger of warfare among the states. A decentralized system that relies on a federal government to resolve conflicts concerning interstate commerce, to set tariffs and conduct foreign policy, would be in keeping with the Constitution and permit improvement and modernization of decision making. A nation united by comparable values need not have but one bureaucracy.

It is likely that the most successful states, which I would guess would be the ones that adopted laissez faire policies, would incur the wrath of other states. But the magnificence of decentralization is that the wrath could be converted into productive action. States could learn from other states through mimesis. Thus, better and more productive methodologies would lead not to hatred and warfare, but rather to the spreading of ideas throughout the republic. Publius Wealth is not the result of resource endowment, but rather of human capital and technology. Greater diversity of experimentation from decentralization will reap benefits that far exceed the costs of multiple bureaucracies.

Federalism and Elitism

The evolution of Hamiltonian Federalism and the American Constitution preceded the centralization of power that occurred in the 20th century. In order to understand why Americans have been ready to accede bureaucratic and money-creating power to the federal government, it is helpful to look at the country's earliest establishment. In that light, progressivism and post-World War II liberalism can be viewed as extensions of the Constitutional convention in 1787. The Constitutional convention reflected the federalist ideas of Hamilton and Madison and emphasized the importance of a central bank, federal support for business, and raising federal taxes. But this federalist impulse was rejected in 1800 by the election of Thomas Jefferson, and the America of the 19th century was not so much a Hamiltonian creation, was not so much federalist, as it was anti-federalist. Jefferson and then Jackson limited the federalist reforms. Thus, the Hamiltonian vision was very much a 20th century vision with respect to government and economics.

Hamilton was a close intellectual follower of the economic ideas of David Hume. Hume advocated a system that anticipated Keynesian monetary policy. Hume believed that a central bank should have the power to create money via credit and that allocation of the credit should be to a business elite. He believed that merchants, by which he meant bankers as well as manufacturers and traders, were more rational than the general public and could determine the best uses for created money. Hume, as well as James Madison, who wrote about the inflation that followed the Revolutionary War, did not believe in that expanding the money supply would be inflationary. Rather, Hume argued that if the productivity of assets in which the business elite invested exceeded their borrowing cost, then expansion of the money supply would not be inflationary and credit expansion would result in an expanding economy. Madison's argument followed Hume's. He argued that the inflation that followed the Revolutionary War occurred because of the public's expecations about the "redeemability" of the money. This is linked to the argument put forward today that inflationary "expectations" cause inflation.

In England in the 1690s, King William III of England was waging war against Louis XIV of France and needed financing. William Paterson and a group of merchants lent 1.2 million pounds to the king, and in exchange received a charter to found the Bank of England, which gave them the power to issue notes. As the British government borrowed money, it grew and established a bureaucracy. In the early 18th century, Sir Robert Walpole developed a system of allocation of patronage to provide incentives for those in power to cooperate with the king. As Stanley Elkins and Eric McKitrick point out in The Age of Federalism* Walpole's allocation of patronage assured "government of dependable majorities for its policies". English aristocrats in the country opposed the increasing power of the king's court. As Elkins and McKitrick point out, a similar process occurred in America. The Federalists, especially Hamilton, advocated centralized government power, the establishment of a central bank and the use of credit to create a strong economy. The country aristocrats were the Virginians who disliked speculation and finance and did not trust a strong central state.

*Stanley Elkins and Eric McKitrick, The Age of Federalism: The Early American Republic 1788-1800.

O'Reilly and Hannity and Colmes Drop the Ball on Oil Speculation

Dick Morris was on Hannity and Colmes tonight to discuss oil speculators' influence on oil prices. Last night, O'Reilly claimed that high oil prices are due to "greedy speculators" This is spin. If speculators are causing high oil prices, then the mechanism needs to be clarified.

For a subject this important, Hannity and Colmes and O'Reilly should have economists from the CATO institute and perhaps the Brookings Institution debate regulation of commodities speculation. Part of the discussion would explain what makes this situation different from the rest of the 300-year history of commodity speculation. Who are these shadowy speculators? What is the mechanism by which they supposedly drive up prices? Why doesn't real demand by consumers drive down the speculators' inflation of oil prices? Unlike the coverage on Fox heretofore, the debate would need to be specific, clear and avoid double talk.

Dick Morris is a nice fellow but he lacks understanding of economics or of futures markets. I don't doubt that markets can become inflated as we saw with the tech bubble and housing, but such asset holders risk a crash. There is every reason to think that this would happen and, if so, there would be no need for regulation.

Regulation is the wrong idea, but there is nothing wrong with debating it. In particular, such a debate would clarify why speculation has or has not caused the price increase in oil and why the market will not correct on its own. Morris did not explain this. He could barely say the word "futures contract" and I doubt if he could define the term. There has been futures trading since tulip bulbs went through a price bubble in 17th century Holland and then crashed.

Futures holders must sell their oil when the future contract expires. If consumer demand has been reduced because of high prices, when the contracts expire the oil price will decline.

If this basic pattern is to be violated, O'Reilly, Hannity and Colmes owe it to their viewers to explain the reason clearly instead of putting spin on it like saying "greedy speculators" or having an economic illiterate like Morris say that "paper trading" is causing price increases.

Obama v. Hyperion

In ancient Greece the Sun god was known as Helios or Hyperion and later associated with light and so called Apollo. The Anchoress (hat tip Larwyn)provides evidence that Hyperion is a Republican for, alas, he does not believe in global warming. According to Anchoress:

"Some scientists think the “warming trend” which (despite the fact that we’re having our usual early-June heatwaves) has stalled out over the past few years was helped along by sunspots. And lately, there aren’t any...It continues to be dead,” said Saku Tsuneta with the National Astronomical Observatory of Japan, program manager for the Hinode solar mission...Today’s sun, however, is as inactive as it was two years ago, and scientists aren’t sure why...In the past, they observed that the sun once went 50 years without producing sunspots. That period, from approximately 1650 to 1700, occurred during the middle of a little ice age on Earth that lasted from as early as the mid-15th century to as late as the mid-19th century."

The Anchoress wonders: "It’s not like we can do anything about it. Either old Sol will spot and flare or he won’t."

But the Democrats know what to do. Sue. Send the Trial Lawyers Association to civilly enforce global warming. I can see it now, Obama v. Hyperion, with Ron Kuby representing Obama.