According to the SRD:Favored Class
A character’s favored class doesn’t count against him or her when determining experience point penalties for multiclassing.
In your opinion, is Favored Class intended to:
(a) Reward characters who focus on a racially-specific class?
(b) Punish characters who take more than a couple levels of one non-racially-specific class, and
a level of another
(c) Drive characters into Prestige Classes as soon as possible so that the question becomes moot?
If your answer is (a), in what way is a Dwarf 10th-level fighter better off than a 10th level cleric, a 5/5 Fighter/Cleric, or a 5/5 Wizard/Cleric, aside from purely "levels of fighter, duh"? If there is no difference, what rewards would you suggest?
If your answer is (b), why did they build the game system that way? What does it prevent, really? Is this whole game mechanic really there just to keep everybody from taking two levels of Rogue so they can get Evasion? Have you seen many players saying, "Well, to make this dwarven rogue really sing, I need a level of Scount so I can get extra movement and a Skirmish bonus, then three levels of Cleric so I can get 2nd level spells, but then I'd have an EP penalty, so to heck with that?" If you removed the existing mechanic, do you think would you see your players being 10/5/2 in various mixed core classes, and would that be a bad thing? If so, why?