The conscience of the constitution

The Conscience of the Constitution by Timothy Sandefur, is a new Cato book that can be read with profit by anyone interested in classical liberalism, not just Americans. Some regard the US Constitution as a great bastion of democracy, yet the word, says Sandefur, appears nowhere in it. What the Constitution actually enshrines is liberty.

This liberal purpose and foundation is expressed in very plain terms by the Declaration of Independence, which is, in Sandefur's term, 'the conscience of the Constitution'. Where the Constitution says how the power of government should be limited, the Declaration explains why. Not to empower majorities and their representatives, but to restrain them.

Sandefur's thesis is that over a long period of usurpations, the liberty role of the Constitution has been eclipsed by its democracy rule. Its principles go back to Magna Carta, which declared that rulers and officials themselves had were subject to the 'law of the land' – the deep sense of justice and fairness that grows up through the voluntary interactions of free people. Governments cannot pass any rule they like, no matter how arbitrary, irrational, unfair, unclear or contradictory, and properly call it 'law'. It is this that 'due process' is all about – laws and their execution must be substantively fair and just. Americans do not simply enjoy a list of 'rights' but are protected (or should be) by a general rule against exploitation and unfairness.

In any particular case, that general rule might of course outrage the majority. And in recent years, says Sandefur, the courts have come to place the majority decisions in the legislature above the principle of safeguarding liberty, hardly ever striking down official powers. It is called 'judicial activism' but actually it is a baleful inactivity. Justices claim that legislators are nearer to the public and therefore better equipped to know what is in the 'public interest'. But that, says Sandefur, gives legislators carte blanche to pass almost any law, covering it with some or other 'public interest' fig-leaf. Also, majority decisions are actually made through the rent-seeking of interest groups, pressuring politicians, as described so well by the Public Choice economists. And much law today is made by unelected regulators anyway, so the 'nearer to the public' argument is plainly a sham.

Deliberately upholding unjust laws, concludes Sandefur, is no less damaging than accidentally striking down just ones. The courts should be in no doubt that, as the Constitution and Declaration specify, liberty is the primary object of their actions. However much democracy we have, our rulers have no right to go beyond the Constitution and thereby put the liberty of individuals at risk.

Pensions: Chancellor has taken the first step on a long road to reform

The Chancellor's Budget decision to treat pension savers as responsible adults and let them choose how to spend or invest their own pension pots on retirement – instead of being forced to convert them into annuities (or follow hugely complicated drawdown rules) – is surely welcome. But our pension system is such a mess that there is a lot more work to do.
On private pensions, for example, we need to stop fretting about 'tax relief'. The use of the phrase 'tax relief' suggests that somehow the great taxpaying public is subsidising pension savers, and it has been used to make the case that upper-rate taxpayers should not get upper-rate relief on their contributions. This is a complete misconception. When the rules were introduced decades ago, the principle was clear. If you actually drew your income, you paid tax on it. But if you did not draw your income at the time, but 'deferred' taking it until you retired, it was thought fair that you should only pay tax on it then. So it's not a subsidy – simply deferring the tax until the income is actually enjoyed.
Second, the contribution rules must be much simpler. Right now, how much you can contribute to a pension fund depends on your age and status. And thanks to Gordon Brown, there are limits on how much you can have in your pension pot before you start getting clobbered with a huge tax. The argument is that the special tax treatment is there just to make sure that pension savers have enough to live on, without having to fall back on welfare – not to help millionaires build up millions more in pensions pots. But in fact it is just a way of the Treasury saving money – money it regards as its own, rather than belonging to taxpayers like you and me. Scrap the lot and forget it.
Third, Gordon Brown (again) effectively killed off workplace pensions by over-regulating them. Sure, you need some regulation to make sure that company pension plans are well managed, but Before Brown the UK had more private pension savings than the rest of the EU put together. Now, workplace pensions are almost non-existent. The new 'people's pension' arrangement is an attempt to re-build that. Too little too late – and just another layer of rules and complexity on an already densely-stratified set of regulations.
Then there are state pensions. Current (tax) contributions go straight out to current beneficiaries. It's a pure Ponzi scheme – you just have to hope that some even bigger mug will be willing to pay in when you get to the drawing-out stage. If private-sector rules applied, Iain Duncan Smith and George Osborne would be in the slammer. When the system was introduced, the government was supposed to build up a proper fund to pay out future pensions, but (like America's too) it was never more than a fig-leaf for the fraud.
It's tough, but at some point we need to move to properly funded personal pension accounts, as Chile did in the 1980s (with many other countries following suit). Oblige people to earmark some of their earnings for pensions, by all means – but let them put it into an account that they control, rather than the Treasury black hole. Few young people today think they will ever get a meaningful pension from the state, and they are right. Again, maybe the Chancellor should do the right thing, and trust the people.
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At last Britain’s private pension savers will be treated like responsible adults

At last Britain's private pension savers will be treated like responsible adults. The rule has long been that, apart from a proportion that can be taken as a lump sum on retirement, pensioners have had to convert their retirement pot into an annuity, paying them a lifetime income. The idea was to ensure that people do indeed have a lifetime income from their (tax-aided) retirement savings, and do not just spend it all at once and then fall on welfare. But as lifetimes have lengthened and financial uncertainty has abounded, annuity rates have fallen, leaving savers much worse off then they expected.

Indeed, pensioners used to be trapped into the annuity rates that happened to prevail on the day they retired, which for some was a disaster if rates had plummeted for some reason. But the current government has already eased that problem by saying that people do not have to convert to an annuity until age 75. And there were rules allowing retirees to 'draw down' some of their pension pot each year, giving them an annual 'income' without having to take out an annuity.

Now, Chancellor George Osborne is giving them greater flexibility still. From April 2015, retirees will be able to access their pension savings pretty much as they wish. Instead of being hit by a 55% tax if they took out 'too much', ordinary rates of tax will apply. So it all becomes much easier. You build up a pension pot while you work; on retirement, you can take 25% of that tax-free (a provision designed to help people with moving costs and other changes on retirement); then you can decide whether you will buy an annuity, draw down the pot at a set rate, or withdraw the whole sum, facing tax only at the prevailing marginal rate.

People of course will need advice on which of these options will be best for them, and the government is making the insurance industry stump up the cost of that. Which does not seem so unfair – it is reasonable that product providers should tell you how best to use their products.

Pensions cause problems for libertarians. Why should a particular form of saving be given special tax treatment, and then hedged around by all sorts of complicated rules, they quite reasonably say. The trouble is that when you have a welfare system, you inevitably are sucked into some such arrangements.

It's not that pensions have a 'favourable tax treatment' exactly. The original concept was that if you were not taking part of your annual income but were 'deferring' taking it until you retired, then it was unreasonable to charge you income tax on the income you had not yet drawn. It would be taxed only when you retired. But then you needed rules to prevent people just spending all this untaxed cash on retirement, then presenting themselves as a charge on welfare – so-called 'double dipping'. And hence the mire of rules.

Most people, though, are perfectly capable of managing their retirement income and do not want to fall back on the state anyway. The new rules recognise that. On the rare occasions when governments treat us like adults, they should be encouraged.

Bonuses: RBS vs. John Lewis

Staff at John Lewis are looking forward to bonuses totalling £200m this year. Everyone thinks this is wonderful, of course, as John Lewis is supposedly a fine example of a 'mutual', a 'partnership' that is owned by the people who work in the organisation.

Staff at the Royal Bank of Scotland, meanwhile, are getting bonuses of £576m. Everyone thinks this is terrible, as the banks are thought 'greedy', not to mention mean to customers who want business loans.

The RBS bonus pot is just over twice that of the John Lewis bonus pot. But RBS has a turnover around 15 times that of John Lewis, £19.7bn compared to just £1.4bn. In terms of the size of the organisation, therefore, RBS bonuses are pretty trifling.

Which is how it should be, given the bank's losses this year. Of course, not all parts of the business make losses, and it is reasonable that staff in the profitable bits should be paid proportionately. Even if some divisions are losing money, you might still want to keep paying them well, depending on how you think things will go in the future, and how much of an investment you have made in hiring and training up those staff members – not to mention keeping them out of the clutches of your competitors.

Bonuses are actually a good way for an up-and-down business like a bank to manage their remuneration. Instead of paying high basic wages and having to lay skilled staff off when things go bad, you can simply slim their bonus, knowing that many or most will hang on in the hope of getting larger bonuses when things turn up again.

But it is interesting that a bank can pay bonuses of less than a thirtieth of its turnover and everyone thinks it's wicked, and a 'partnership' can pay bonuses of a seventh of its turnover and everyone thinks it's a national treasure. Shows you how this argument is all about politics rather than economic and business reality.

Ukraine and the all-or-nothing EU

The trouble with EU membership is that it is such a big deal. A country that wants to be part of the club, and enjoy its free trade benefits also has to accept a mountain of regulation and to sign up for the common currency. It is all or nothing.

That puts countries like Ukraine in a fix, just as it put the UK in a bit of a fix in the early 1970s. The UK did not want to raise tariff barriers and lose its trading relationships with its historic trading partners such as Canada, Australia and New Zealand, from which it imported a great many agricultural products – butter, lamb, fruit, bacon and much else. But thanks to the Common Agricultural Policy, it did not have much choice. Today, the UK is inside the EU's tariff wall, which makes trade with the rest of the world more expensive, and naturally focuses UK trade on Europe.

Ukraine would undoubtedly gain from closer trading links with the EU, but the all-or-nothing nature of the deal would mean that the country's links to Russia and other non-EU countries would suffer, just as the UK's Commonwealth links did. And that, of course, is seen as a threat by Ukraine's large Russian-speaking population. And – never mind the political and defence implications, given the EU's close links with NATO – Russia does not want to see its trade with Ukraine cut back, any more than New Zealand did ours. So they see the future direction of Ukraine as a high-stakes game.

As a logical matter, that does not have to be. If the EU allowed Ukraine the same sort of status enjoyed by (neutral) Switzerland, the country would be free to trade with the EU as part of its customs-union club – but would remain free to preserve trading links to other countries as well. It would also be free to retain its currency and its legal and regulatory structure. A free trade pact with the EU that would help grow the Ukrainian economy, without threatening Russia or the Russian-speaking Ukrainians that the country would be wholly swallowed up into a Western political alliance.

Sadly, though it might talk about creating 'closer trading links' with Ukraine, the EU will never offer the country such a free-trade-but-no-politics status. If they did, every EU applicant would be demanding it right away – along with quite the UK and a few other EU Member States who hate all the regulation, currency union and horse-trading.

Which means that as a practical matter, the stakes will remain dangerously high in Ukraine, whatever happens. What a pity we cannot just have free trade without the politics.