Saturday, April 24, 2010

The Dodd Bill Weakens Federalism

As Justice Brandeis pointed out many years ago, “It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of country.” So long as state legislation is limited to regulation of firms incorporated within the state, as it generally is, there is no risk of conflicting rules applying to the same corporation. Experimentation thus does not result in confusion, but instead may lead to more efficient corporate law rules.

In contrast, the uniformity imposed by [the Dodd Bill] will preclude experimentation with differing modes of regulation. As such, there will be no opportunity for new and better regulatory ideas to be developed—no “laboratory” of federalism. Instead, we will be stuck with rules that may well be wrong from the outset and, in any case, may quickly become obsolete.

... Competitive federalism promotes liberty as well as shareholder wealth. When firms may freely select among multiple competing regulators, oppressive regulation becomes impractical. if one regulator overreaches, firms will exit its jurisdiction and move to one that is more laissez-faire. In contrast, when there is but a single regulator, such that exit by the regulated is no longer an option, an essential check on excessive regulation is lost.

Worse than that, the Dodd bill will actually unleash the worst elements of corporate law on the federal government, and therefore the entire country. States that would otherwise successfully inhibit corporate corruption will be unable to. As a result, corporations will actually be even more incentivized to corrupt the federal government in their favor, especially when the prevailing view is for the federal government to give tons of goodies and freebies to its backers. The congressional-corporate complex will fit the very definition of fascism: rule by the wealthy.

Corruption is the result of centralization of power. Put that much power in one place, and it draws corruption like moths to a flame. The only way to limit it is to decentralize our government by repealing the 17th Amendment, so the Senate would once again serve its original Constitutional function.

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