Centralization of Federal Power Has Led to Coddling of Business

The relationship between the state and federal governments fluctuates, but the overall trend has been toward centralization, with a few blips. This came about in part because of the Civil War, which enforced centralization in order to achieve noble objectives. The 13th, 14th and 15th amendments enhanced federal power over the states, requiring states to recognize citizenship, right to make contracts, equal treatment under the laws and voting rights to former slaves and, for that matter, to all citizens. The states' reaction to the growth of the railroads in the late 19th century was to subsidize them, and they enhanced the natural advantages of economies of scale through land grants, rights of way and other subsidies. In turn, the new, complex corporations faced multiple regulatory regimes across the states. This raised their costs. In the 1876 Munn v. Illinois Chief Justice Morrison R. Waite, writing for the Court, held that states have the right to regulate railroads because railroads reflect the public interest. In the 1886 Wabash, St. Louis and Pacific Railroad v. Illinois, law concerning the Illinois Grange's clamoring for regulation of railroad rates was federalized. The court held that states could engage in indirect regulation like safety regulation but not direct burdens on interstate commerce like rate regulation. The following year Congress passed and President Grover Cleveland signed the Interstate Commerce, which established the Interstate Commerce Commission. The ICC's responsibility was to set maximum railroad rates and eliminate individual discrimination. Thus, the age of centralization was born.

The aim of centralization was regulation coupled with subsidization. The regulation part reflected the impetus of Populist movements like the Grange, social Gospel Christianity, fear of labor unions and socialism and pressure from Progressives like Walter Weyl and Herbert Croly who, in the early 1900s argued that European-style social democracy was more "progressive" than American laissez-faire.

The centralization of regulation helped big business because it established a stable, unitary source of regulation that made it easy to comply. Fifty states pose a fifty times greater compliance problem than a single federal government. Moreover, industry or what Williams calls "syndicalist" influence over government is easier to organize. Mancur Olson and George Stigler have written about the economic conditions for effective lobbying, and centralization of power makes lobbying considerably easier for large firms and gives them considerable advantages over small. Many small firms over a national market are far more difficult to organize than one fiftieth the number over a state-wide market. At the same time, it is far cheaper for a few large firms to lobby a single federal government than it is for them to lobby fifty state governments. Thus, in the name of "regulation" the Progressives tipped the political scale in big business's favor.

Theodore Roosevelt and other Progressives of the early 20th century believed that big business produced wealth. Historians such as Alfred Chandler argued that transportation and communication advances with respect not only to canals, railroads and then trucking and air delivery but also with respect to telegraph, telephone, and then fax, e-mail and Internet, expanded markets facilitating reduced costs and enhanced economies of scale. There were other subsidies to big business, specifically the creation of federally subsidized credit and banking through the Federal Reserve System, tariffs almost continuously to the days of Wilson and then after, cartels and price fixing during World War I, and a host of regulations that make it more expensive for small business to compete with big.

But has big business really delivered? Since 1980 manufacturing firms increasingly exited the United States. Hence, the subsidization of manufacturing through credit and protection did not yield permanent jobs to average Americans. Executive compensation, rationalized through artificially elevated stock prices due to Federal Reserve policy, has been an exercise in self indulgence and waste. Increasingly, Americans hanker after a few high-wage investment banking and celebrity jobs, and are unwilling to work hard in traditional crafts. The images of today's youth, rap singers since the 1980s, Beavis and Butthead in the 1990s, Paris Hilton today, suggest a culture of dim wittedness and sloth. These images are broadcast by subsidized big business concerns, the media conglomerates, who profit from popular music that advocates drug use and violence. Television shows like "Entourage" suggest that the way to succeed is to hang out with other self indulgent boneheads, as long as they are good looking.

The transition from decentralized to centralized federalism and from laissez-faire to statism altered incentives in the economy. The combination of centralized creation of credit and inflation of scale enhances returns to stock offerings, first because large firms are artificially profitable because of their subsidization and second because monetary expansion itself inflates the stock market by reducing interest rates. This inflation of stock returns makes investment and commercial banking far more profitable than they would be in a decentralized and laissez-faire system. In turn, firms are encouraged to maximize stock returns by minimizing costs in that low interest rates make stock returns more elastic with respect to increases in net profit. This does several things. First, firms are encouraged to move plants overseas, where labor costs are lower. Second, their incentive to innovate is reduced because ample returns can be obtained due to the reduced interest rates and the elasticity of stock prices to small gains. Why risk invention of a new technology, when you can, like the typical US CEO, simply think about reorganization or moving plants to another country and so earn $100 million? Third, the returns to initial stock offerings are enhanced. Thus, returns to investment banking exceed market levels. Because the manpower needed to issue and trade securities is small relative to the inflated returns, the high salaries divert human resources from manufacturing to investment and speculation.

It is likely for these reasons that the innovation level of late nineteenth century laissez faire America was far greater than during the Progressive twentieth century. The most innovative Americans have been attracted to investment banking and law rather than manufacturing. Firms like Intel need to recruit engineers from overseas in order to compete. This misallocation of human resources leads to lower growth and less innovation in the economy than there would have been in a decentralized, laissez-faire economy.

The coddling of business results in a trade off between risk and return. In a laissez faire economy credit is difficult to obtain, profits are reduced and stock returns are reduced because interest rates are relatively high. This results in considerable discomfort to business executives, who in the nineteenth century complained about "overproduction" and "depression". However, the decreasing prices resulting from slow monetary growth increase real gains to labor. Real wages rise because firms are forced to think carefully about productivity given the intensely competitive milieu. Moreover, innovation is stimulated because that is the only way to earn large profits. Thus, the laissez-faire economy is rocky soil in which only the hardiest firms can grow, and they grow by extending roots that crush even the largest competitive rocks. Workers, the soil in which these competitive plants grow, benefit from the nutrients that the innovative stems produce. But the weaker plants, the firms that thrive in politically driven, low-innovation "Progressivism" complain endlessly about depression, the need for subsidization, the need for a central bank, the unfairness of the competitive economy. They are, of course, backed by feudalists and socialists, who similarly yearn for stability at the price of innovation.

The Progressive economy does not reward achievement. It rewards potential. Investment banks hire from the ranks of Ivy League students, who are in turn admitted to Ivy League schools on the basis of SAT scores. But SAT scores are not achievement, they are just potential, and they do not explain the majority of what might explain achievement. Americans are rewarded for ability, and this reduces their risk. But this also has the effect of draining men and women of ability from the ranks of the innovators into the ranks of transfer recipients. There may indeed be economic gains from stock offerings and trading, but they are minute compared to the potential gains from innovation. A single Tesla is worth all of the investment bankers in history times 10. Yet of all of the thousands of potential Teslas, only a handful will succeed. Why risk failure, when a certain career in investment banking has a far greater probability of significant success. Thus, elite Americans have become increasingly risk averse. They have chosen the way of relatively certain but high returns, but sacrificed the moral rectitude of economic creation and productivity. They have come to favor the sleight of hand that Wall Street capitalism offers, claiming to create efficiency but depending upon credit expansion and government largess.

Clinton Supporters for McCain

Bob Robbins just forwarded a link to Hillary Clinton Forum.net. What is intriguing about this site is that many of the posters are saying that they support McCain. The mainstream media is likely to downplay this phenomenon.

One poster who uses the nom de guerre "Hillary Clinton Rules" writes:

MANY OF US ARE NOW VOTING FOR MAC AND PALIN!!! IT IS WORKING!!!!
Obama and the DNC are going down this November!
the Democratic Party is going to be railroaded on Election Day by it's own party base -- that they disowned!!! LOL
Keep using our posts for reference
The Clintons and the DLC are COMING BACK

Another named "Expat4Hillary" writes:

"They've got my vote in November as well! A war hero and a working mother who each have children in the armed forces deserve my complete respect!"

However, not all agree. A poster named Muzza writes:

"Please only speak for yourself. The forum does not have a collective conscience whereby everyone does the same thing. You are supporting McCain/Palin and that's your choice. Not everyone in here will be doing that."

And someone named joeysky18 adds:

"It probably is the majority opinion, but not all members will vote Republican. Some will vote 3rd party. And some haven't made their decision."

One of the downsides of the World Wide Web is that almost everyone prefers anonymity. We are turning into a nation of academics who feel that they need to remain anonymous (the academic review process is often anonymous).

However, I am gladdened to hear about their choices.

Obama Gets Negative Bump From Democratic Convention

Usually presidential candidates get a statistical bump from the party conventions. This is normal. What is happening to Senator Obama is unusual. He is has received a negative bump following the convention and Senator McCain's announcement of Governor Palin as his running mate. Zogby (h/t Bob Robbins) now finds that McCain/Palin is leading Obama/Biden by 47% to 45%, and the Republican convention has yet to convene.

I think part of the reason is Mr. McCain's excellent choice for a running mate. Although Governor Palin's experience is somewhat light, it is better than Senator Obama's. Governor Palin has comparable experience to other vice presidents who were forced to assume office, such as Theodore Roosevelt and Calvin Coolidge. The sudden fixation of the media on her experience, while it has ignored Senator Obama's light endowment, is another laughable example of our clownish media's somersaults.

Democrats' Reality Warp On Sarah Palin

Democrats smear Republicans. It's part of the democratic process. Smearing goes back to Federalist days. I can't prove this, but my guess is that the volume of smearing directly relates to the quality of the candidate. The better the candidate the more the smearing volume. In the case of Sarah Palin, the volume has been high. Oddly, the Democrats chose to emphasize Ms. Palin's experience. But the Democratic nominee, Senator Obama, has experience at most slightly greater than Governor Palin's. But she is running for the number two, not the number one spot. Moreover, Mr. McCain has evened the age difference, attracted conservatives and likely attracted women.

For instance, on the Huffington Post, Warren Goldstein raises the issue of:

"Sarah Palin's qualifications to be president of the United States -- that's right, President."

and concludes

"We can hardly be expected to take seriously her track record: being mayor of a town of 9,000, and less than a year of being governor of a state with fewer residents than 19 American cities (if it were a city, Alaska would rank just above Baltimore, just below Charlotte)."

I checked Ms. Palin's biography on Wikipedia and learned that she assumed office in December 2006, so Mr. Goldstein is facutally inaccurate. She will have two, not one year of experience when her vice presidential term begins in 2009. 2007 + 2008 = two, not one year.

Let us compare Ms. Palin's experience to some other vice-presidential candidates in history. Let us start with a worst case scenario: twentieth century vice-presidents who assumed office because of a president's death. In 1900, Theodore Roosevelt ran as Vice President under William McKinley following exactly two years as governor of New York. Previous to that he had been assistant secretary of the navy and police commissioner of New York City. In other words, his experience was of the same order of magnitude as Ms. Palin's.

Let us compare Ms. Palin to a second vice-presidential candidate who later became president, Calvin Coolidge. Prior to running as vice-president in 1921, Mr. Coolidge had served for exactly two years, the same as Ms. Palin, as Governor of Massachusetts. Prior to that he had been lieutenant governor for three years. When he assumed the presidency in 1923 (following President Warren G. Harding's untimely death) he had roughly the same experience, excepting the three years as lieutenant governor, that Ms. Palin would have under similar circumstances.

A third example is Harry S. Truman. Truman had been US Senator for ten years. A longer term than both Palin and Obama.

When Franklin D. Roosevelt ran for president of the United States in 1932, he had been governor of New York for three years, one year more than Governor Palin, and like his cousin TR, had been assistant secretary of the navy for seven years and a member of the New York State Senate for two. From the standpoint of significant prior executive experience, his resume was not that different from Ms. Palin's.

Now let us look at Senator Obama. He would have four years as US Senator and seven years as an Illinois state senator. He has no prior executive experience and only four years of legislative experience at the federal level. He would be going into the president's job with slightly more experience than Ms. Palin. He would be among the most inexperienced presidential candidates of the twentieth century. With only two years' additional experience as vice president, Ms. Palin's experience level, emphasizing executive-level experience, would be comparable to most other vice presidents' who have assumed the office of president. In contrast, Mr. Obama's experience is among the weakest because he lacks executive experience. Moreover, Governor Palin is running for number two, whereas Senator Obama is running for number one.

The great presidents include Washington, Jefferson, Lincoln, Jackson, Cleveland, Roosevelt, and Roosevelt.

Of these,

Washington had no prior political experience (other than briefly as a member of the Continental Congress) but had been the commander in chief for seven years.

Thomas Jefferson had considerable experience, having been governor of Virginia for two years, delegate to the Second Continental Congress, United States Ambassador to France, and Secretary of State when he became Vice President under John Adams in 1797.

Andrew Jackson had been Congressman for one year and Senator for six months, as well as a military officer in the War of 1812 and the First Seminole War before running for president.

Lincoln had two years of legislative experience and no executive experience when he assumed the presidency. In other words, he had less experience than Governor Palin and Senator Obama.

Grover Cleveland had been Governor of New York for two years, and Mayor of Buffalo, NY for one.

Theodore Roosevelt had been Governor of New York for two years, assistant secretary of the navy and police commissioner.

Franklin D. Roosevelt had been Governor of New York for three years, assistant secretary of the navy for seven and a Senator for two.

The foregoing were among the best presidents that we have had, and only Jefferson and Washington had significantly more experience than Governor Palin. Lincoln had less even than Mr. Obama.

However, all of the foregoing had demonstrated competence at some executive position. In Andrew Jackson's case it was military leadership (albeit controversial military leadership). In all other cases except Lincoln there had been some executive experience. Mr. Obama has no executive experience whatsoever.

Larry Johnson of No Quarter USA is among the few Democrats who is willing to confront reality. The mainstream media, an organ of the Democratic Party, has chosen to emphasize the experience issue with respect to Governor Palin but not with respect to Senator Obama. Yet with four years of senatorial experience, Mr. Obama has less relevant experience than Ms. Palin, who has two years of executive experience. Johnson writes:

There is an unwillingness in many quarters, including the DNC, the MSM, the left wing blogosphere, Air America radio and others to acknowledge what is painfully obvious to those of us at No Quarter, which is that there are a lot of loyal Democrats who are seriously considering voting Republican in the fall.

I am not sure of why the mass media has gone ga ga over Obama. This is the same mass media that believed Walter Duranty when he thought that Stalin was a hero in the 1930s, that trusted Castro and that backed the overthrow of Diem in Vietnam. The American media has a proven record of blistering incompetence. The American public is wise to ignore the media's soap.