over 10 years on 2008-04-01


they need to be consolidated

i need to heavily caveat this post before i make it. 1. a lot of the thoughts in here are either not fully original, and/or the result of conversations with friends – i am not sourcing things because i am not writing an academic paper (and i don’t remember who gets credit for what), i just want to get some thoughts down with some general structure – this seems like a good medium for it 2. my favorite ‘book’ is a modest proposal, take this with a grain of salt. 3. put your blinders on and pretend the us is the only country in the world – almost all these thoughts/arguments apply to thinking internationally, but i am going to just focus on us states.

here is the pitch. right now in the us we have a flat out race to the bottom in all legal and regulatory issues driven by 50 historical divisions of one common marketplace. states made a ton of sense in 1776, because each had its own distinct and complete economy with meaningful natural barriers to entry and exit that gave them pricing power. expedited transportation and communication has ended this, turning basically all commerce into ‘interstate commerce’, and it is time for us to rebalance accordingly. at this point, having states is far more trouble than it is worth. they can no longer fulfill their mandate as laboratories for national policy, and they make mid to long term coordinated planning nearly impossible.

if i had to guess, i would say that before the railroads each state was an almost completely autonomous economy, with relatively high barriers to entry and exit. this means that if you cut off vermont from all the other states in the late 18th century, the state would survive. they would probably run out of certain non-indigenous goods like coffee, but i would gander that vermont probably had 80% - 90% of the industry needed to keep it going on its own. as importantly, back in the 18th century moving around was enormously expensive. if as a business or individual i wanted to relocate and leave vermont it would be quite costly and a huge hassle (not just in terms of transportation and time, but also in terms of personal relationships, lost localized professional knowledge, barriers to learning a new city and economy, etc).

now take any one state in the us today. i would guess that in a crisis where one state was cut off from all the others the state would completely implode in a matter of days if not hours. new york, i would guess, now has 5-10% of the core industries needed to sustain itself, everything gets imported… even forgetting about short term shock scenarios, in a longer term sense, i suspect that if you gave a state like new york 5 to 10 years warning before isolating it from the rest of the country it still wouldn’t even get close to achieving self sufficiency in time. moving is also a snap (relatively speaking). i could be out of new york and set up in a new state in a matter of days at a miniscule fully baked expense (even with $4 gas). with tools like local search and social networking you don’t even lose a beat in a new city, and could easily be set up with restaurant recommendations and contact with good friends. there are no barriers to entry or exit.

it is obvious that this is simply a function of nationally scaled transportation and communication - interstate highways, and clearly now the ‘internet’ in the broadest sense - . first, regarding physical transportation, i am guessing that in the 18th century it would take someone 24+ hours to cross clear through every state in the nation. in that same 24 hours i can now drive a good chunk of the eastern seaboard and fly back and forth to san francisco 4 times. regarding the communications shift, i don’t think it necessary to say much. ever since deregulation we have been on a course to flat/barrier less communication, and even the relative flatness has become ludicrous in the last few years.

i vaguely recall that the us interstate highway system was built by the federal government under the pretence of national security via some sort of nuclear evacuation plan, and i can only imagine that there was at the time some outcry about the federal government making a play for greater power and attacking states rights/power… the reality is that, obviously, a consolidated highway system needed to be built, and power over a larger market did need to be consolidated. the same with the federal government/ the fcc ‘regulating’ the internet at the national level.

why does this matter? because regulating a single corner of a busy commoditized market is a powerless position, and that is exactly what states now do. without barriers to entry or exit and without any power as an autonomous market they have no ability to do anything other than slash pricing as quickly as you possibly can (before someone else does). states can’t innovate, because they lack all pricing power over their citizens and businesses, and so all they can do to race each other to lower regulation and taxes in the short term.

races to the bottom aren’t necessarily bad, but short term ones can be – and that is exactly the game all states are playing right now…. they can’t raise taxes because if they do their neighbor will win their population & businesses, they can’t cut services. so, they basically have to use their one lever (what till recently has been massive borrowing power) and in one form or another give away money as quickly as they possibly can to citizens and businesses (incentives & services). they are basically playing a massively expensive and distortionary game of musical chairs, except for the fact that everyone is going to lose.

one fun example of this is wall street banks, who every few years threaten new york that they will leave for connecticut or new jersey unless new york does them special favors here or there… goldman sachs went so far as to build a huge tower in new jersey likely more as a leverage play with new york than actually planning on moving in across the river.

this becomes a death spiral because they effectively end up relying on the federal government to support their credit rating for their financing. states have no underlying pricing power, so they compete with each-other to give away money they don’t have, which makes them even more powerless and beholden to the federal government.

alexander hamilton won

why is this actively harmful? first, because states can’t innovate so they can’t invent any new forms of government or regulation that are any good. the us has lost the engine by which new policy ideas can be attempted on a smaller scale. we have no more marketplace for laws or governance ideas, which ultimately means that the us’s system of government could stall. our constitution, the whole point of our governmental setup, was to allow for change – but we no longer have our laboratories.

because states are making actively bad decisions and laws. they have trouble coordinating on long-term plans, so they are basically burning down the hatches on borrowed time and money.

i am sad that states are now irrelevant, they were a good idea, but at this point we need to call a spade a spade and drop the whole system. of course, that will never actually happen because we no longer have the freedom of experimentation necessary to prove that it actually is a good move, but that is what i feel like is theoretically consistent.

or, put on business terms, when you lose pricing power and are selling a market commodity, you need to consolidate…

original swl blogposts and letters 2007-2010