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Expanding teams would not water down the talent...not long term. As the game has expanded through time, the talent pool has expanded to keep pace with the demand. That continues to be true today. Generally, league expansions have resulted in temporarily weaker leagues (1998, 1999 were very weak by modern standards), but long term gains in player development, scouting, and interest in the game.
You're thinking in the here and now G...you need to think like an economist to understand wy the game will benefit from expansion long term. Or...you could try thinking like a historian.