Poor little Delaware. In every presidential election since 1992, she has been in the “blue” column voting for the Democratic candidate. She has long had a Democratic governor. Although she is represented at large by moderate GOP Rep. Michael Castle in the U.S. House, her Senate representation has been 100 percent Democrat since Tom Carper defeated the late Sen. William Roth in 2000.
And of course, her other U.S. Senator, Joe Biden, is now the Democratic Party’s vice presidential candidate. Yet this didn’t prevent this bluest of blue states from getting a thrashing in Tuesday night’s debate from none other than the Democratic Party front-runner, Barack Obama.
In a strange, little-noticed tangent that Obama got onto in responding to a health care question and attacking opponent John McCain for being a deregulator in every policy area (would that this were only true!), Obama picked a bone with Delaware’s incorporation laws. Claiming these laws shred consumer protections, Obama said: “Everybody goes to Delaware, because they’ve got very — pretty loose laws when it comes to things like credit cards. And in that situation, what happens is, is that the protections you have, the consumer protections that you need, you’re not going to have available to you.” (The line is about halfway through the debate, just before it turned to foreign policy, and can be read at the transcript here.)
Obama is not the first liberal to attack Delaware. In fact, some on the Left level tirades against the First State they usually reserve for deeply red states like Texas. In a 2006 New Republic article, writer Jonathan Chait referred to Delaware as “that backward, corrupt parasite state” and slammed what he called the state’s “lax corporate governance laws, which are designed to attract as many businesses as possible to formally incorporate in that fetid state, shareholder interests be damned”
What really upsets liberals (or rather statists) about Delaware is the freedom it offers to individuals in America’s system of competitive federalism. Entrepreneurs from all over the country, indeed all over the world, go to Delaware to incorporate their businesses because of the flexibility of setting up a corporation there and the consistency of the corporation laws as applied by Delaware’s renowned chancery court.
But consumers and investors also benefit greatly from Delaware. Contrary to Obama’s assertions, Delaware’s banking rules do not shred consumer protections. The simply allow credit card issuers to apply risk-based pricing for borrowers by charging the interest rates they deem appropriate, and which consumers can shop around for among competing banks. Risk-based pricing was something that was sorely missing with mortgages, by contrast
And contrary to Chait’s hysterical comments, Delaware actually offers a company’s shareholders more protection than many other states. If that weren’t the case, as Hoover Institution scholar Robert Hessen noted in his great book In Defense of the Corporation, insitutional investors wouldn’t buy stock from companies incorporating there.
In fact, the New York Times pointed out last Friday that Wachovia shareholders would have been better off had the firm been incorporated in Delaware rather than in North Carolina. The firm is now facing two competing bids from Citigroup, which would pay shareholders nothing and have taxpayers guarantee billions for mortgage defaults, and Wachovia, which would cost taxpayers nothing and pay shareholders $7 a share. Times business writer Steven Davidoff writes that “under Delaware law, Wachovia’s fiduciary duties might arguably require it to take the competing Wells Fargo bid if it is deemed superior.”
So an attack, no matter where it comes from, on Delware’s corporate laws is an attack on America’s system of federalism. The proper response is, “We are all Delawarians.”