11/29/2012 09:06 am ET Updated Jan 29, 2013

Government Power in the Balance

While researching for a recent book, I was surprised how many times the idea of power balancing came up as a solution to a variety of problems. I guess I shouldn't have been surprised, but I was. Balancing is an important, perhaps the most important, component of governmental design as laid out in the Constitution. Balancing is a prominent grand strategy in international relations. And balancing is a productive way to think about the role of government in domestic affairs. Each begins with the notion that power is central, concentration of power corrupts, and balance is the corrective.

The Constitution specifies three co-equal branches of government: the legislature, the executive, and an independent judiciary. In making his argument for this republican governmental design, Madison said, "Ambition must be made to counteract ambition." There is a "necessary partition of power" with checks and balances. Efficiency was not a primary concern of the constitutional framers. The threat to be countered was a concentration of power in the hands of one body.

In international relations, balance of power defines the objective of a prominent grand strategy apparent throughout time. The threat to be countered was one state gaining a preponderance of power and exerting its dominance over others. To counter any state's primacy, other states could aggregate their power and balance against the hegemon.

Athens always entered in alliance with the weaker side to tip the scales against an ambitious competitor. Britain has historically adopted a balancing strategy toward continental powers and followed David Hume's recommendation to "support the weaker side in every conflict." England balanced with Germany against Napoleonic France but balanced with France against Germany in the two World Wars. The United States entered into both World Wars late to tip the scales. But post-Cold War the U.S. has been exerting preponderance rather than balancing power, thus becoming the hegemon to balance against.

A third application of balancing caught my attention during the recent campaign: the role of government in balancing between the competing interests of corporations and the interests of the people. Clearly there are cases of too much and too little government intervention. The command economy in communist countries, and socialism, where the means of production are owned by the government, provide examples of too much power in the hands of government for most Americans. And the laissez faire governments at the advent of the industrial revolution that created unimagined wealth, unprecedented concentration of wealth, and deplorable working conditions, provide examples of too little for those in the weaker position.

Government put its thumb on the scales during the Progressive Era when it became clear that monopolies represented too much power concentrated in big business and a distortion of market forces by limiting competition. The public was ill served. Government weighed in to restore balance by breaking up the monopolies and preventing new ones.

The Gilded Age was dominated by a few individuals -- e.g., John D. Rockefeller, J.P. Morgan, Andrew Carnegie, Cornelius Vanderbilt -- who were called captains of industry by their admirers and robber barons by their detractors. They undeniably drove industrialization and modernization of the country and built vast monopolies through predatory business practices.

The dominant company, among other tactics, set prices below market level to drive competitors into bankruptcy. Defeated companies were then bought at depressed prices and put under a single board of directors -- a trust -- to camouflage the monopoly. Once monopoly was achieved through predatory practices, the lack of competition allowed the survivor to charge customers and pay workers whatever it liked. Monopoly represented a lack of competition and failure of the free market.

The deficiencies of laissez faire became too much to bear. Life-threatening working conditions and poverty wages in the steel industry energized laborers to aggregate their individual power through labor unions to balance against the power of giant businesses. Government consistently took sides with business in labor disputes. The government-hating Anarchist movement grew in size and intensity. The same conditions in Europe led some countries to abandon democracy and capitalism to adopt communism or fascism.

The Sherman Anti-Trust Act (1890) provided the statutory tool to counter monopolistic forces, but it found little application until public pressure forced government action.

Presidents of the Progressive Era took different approaches to restore competition to the market. Republican McKinley was aided in his election by the wealthiest industrialists. He was originally of the mind that government's role was to maintain high tariffs to advantage American products over cheap imports. Otherwise, hands off. Late in his administration, he concluded that lower tariffs and free trade was a more beneficial course of action. He established a commission to examine monopolistic business practices. Too little, too late, he was overcome by history, assassinated by an Anarchist.

McKinley's vice president, Teddy Roosevelt, assumed the presidency and brought vigor to the serious work of regulating interstate commerce. Roosevelt favored regulation, believing that the role of government was to be the great arbiter between the various economic interests in the country -- to level the playing field. Roosevelt groomed William Howard Taft to be his successor. Industrialists like John D. Rockefeller favored laissez faire, hands off, government and backed Taft to ensure their interests in the 1908 election. But once in office, Taft shifted emphasis from regulation to trust busting, bringing Roosevelt out of retirement to run again.

The election of 1912 offered clear alternatives.

  • Republican Taft responded to considerable public pressure and turned to trust busting against the industrialists who had backed him.
  • Roosevelt ran under the Progressive Party that formed around him after he lost the Republican primary competition to Taft. Roosevelt believed monopolies were inevitable but needed to be regulated.
  • Eugene Debs ran as a Socialist. He thought obsolete Adam Smith's reverence for competition. He thought government should take over the inevitable monopolies and run them in the public interest.
  • Wilson was the Democratic Party's candidate. His views on monopolies were evolving. He initially opposed TR's regulation and Taft's trust busting favoring instead reforming tariffs and banking to stimulate competition. Wilson later leaned toward TR's regulation.

The Republican vote was divided between Taft and Roosevelt giving Wilson the White House. When in office, Wilson carried out a policy blend of trust-busting and regulation and signed the Clayton Act (1914) strengthening anti-trust law.

But what does all of this have to do with today?

The belief -- perhaps the reality -- that some financial institutions were "too big to fail" led to a government (taxpayer) bail out and to calls for greater regulation to prevent a repeat. The same solutions of the Progressive Era apply -- break up the too big and strengthen regulation over the rest. By analogy to the breakup of monopolies, the financial institutions could be broken up into pieces that could succeed or fail without threatening the national and international economy -- an extreme measure. And regulation -- because the free market works best when investors are fully informed and markets are free of fraud and corruption -- would be designed to prevent free market failures. Those options received little attention, and instead, the government response was tepid, and the too-big-to-fail financial institutions continue unabated.

The two parties disagree on the road ahead.

The Republican Party believes that government has achieved too much power in the form of regulatory authority like that of the Environmental Protection Agency, Securities and Exchange Commission, and the new Consumer Financial Protection Bureau. Trickle-down, supply-side economics and corporate libertarianism are part of this line of reason.

The Democratic Party believes that corporate interests have achieved too much power and balance must be restored in favor of the middle class. The shrinking middle class, obstacles to entering the middle class, and growing wealth disparity may have rejuvenated the old progressive movement, but it is unlikely to achieve a degree of dominance unless and until the public demands it.

There is no permanent balance. Significant changes in the economy -- like the change from agricultural to industrial economy, industrial to information economy, manufacturing to service economy -- unbalance the system. We have yet to find a new balance, a new equilibrium, a new level playing field that presents equal opportunity for all. The contest can be expected to continue in the next administration without resolution.