The Wisdom of Madisonian Governance

September 14, 2012

The constitutional structure of the United States is unique among democracies in its having established not only a bicameral legislative body, but also in its mandating that certain matters should be either the province of one of the bodies or must begin in one body only.  This division and allocation of areas of expertise and authority are a sound, logical recognition that the interests and costs of differing issues should be allocated on the basis of what is in the long-term, best and most sustainable welfare of our nation. 

While every man’s vote should count equally, our Founding Father’s recognized that those casting a vote do not have equal wisdom in their decision making.  For that reason, matters of a more federal concern, such as treaties and trying impeachments, were allocated to the Senate for approval where each state has an equal vote.  On the other hand, matters relating to raising revenues were required to originate in the House of Representatives and required House approval.   This latter requirement was a recognition that wealthier states, who likely would also be more populous, should have more say in revenue matters as it would be they who would be asked to shoulder a disproportional part of the bill.

The supreme wisdom of this governance structure becomes apparent when contrasted with the recent Latinization of the Euro, a direct consequence of the European Union’s theory of governance as reflected in the Maastricht Treaty, the founding document of the euro currency area.  Under that treaty, there is only one governing body, with all countries treated as equals, much like our Senate.  Thus, each country’s vote is treated as though there were a uniform level of wisdom and fiscal responsibility across the continent.

Because the euro area was set to collapse if the European Central Bank (the “ECB”) did not agree to engage in large-scale acquisitions of government debt from Spain and Italy and others similarly situated, the ECB’s governing council voted last week, over strenuous German objections, to proceed with such bailouts.  Specifically, it authorized the ECB to purchase unlimited quantities of short-term national debts.

Germany lost this determination because it holds only one of the seventeen votes on the counsel.  On the other hand, Germany’s population of 81 million out of the 333 million within the euro area, or roughly a quarter of the citizens, means that the debtor nations have prevailed at the ECB with the prospect that Germany’s responsible austerity will be rewarded by its funding the profligate practices of other members.

As noted in a commentary by Peter Boone and Simon Johnson in the NYT.com’s Economix blog,

“Unemployment in Spain is now around 25 percent and in Greece it is at 24.4% (with unemployment for young people aged 14 to 24 now at 55 percent).  Both Portugal and Ireland have made progress implementing their austerity programs, but they are not growing and their debts remain very large (gross general government debt is projected by the IMF’s Fiscal Monitor to be 115 percent of GDP next year in Portugal and 118 percent of GDP in Ireland).  The current Italian government is well regarded, but there are large political battles ahead and it is also burdened with big debts (to reach 124 percent of GDP in 2013).”

This bodes ill for the euro.  Obviously, the debtor nations will have the incentive to make as few concessions as possible in exchange for such bailouts.  Worse still, once the debtor-camel gets its head into the ECB’s tent, the ECB’s leverage to obtain more concessions for future bailouts evaporates.  According to the traditional wisdom of sound banking, “If you owe the bank a hundred thousand dollars, the bank owns you; but if you owe a bank a hundred million dollars, you own the bank.”

Madison recognized that those states who will provide more of the funds for government should have greater input into the decision to raise such funds than those who not only will be providing a much smaller share, but who in fact turn out to be the recipient of those funds.  The European Union has based its approach on the theory that all nations are deemed equal in their w and responsibility.

My money is on Madison.


© Richard L Wise and RLWise.wordpress.com 2012. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Richard L Wise and RLWise.wordpress.com with appropriate and specific direction to the original content.

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