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"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice" - Adam Smith

The conscience of the constitution

Written by Dr. Eamonn Butler | Wednesday 02 April 2014

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.

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At last Britain's private pension savers will be treated like responsible adults

Written by Dr. Eamonn Butler | Wednesday 19 March 2014

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.

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Bonuses: RBS vs. John Lewis

Written by Dr. Eamonn Butler | Monday 03 March 2014

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.

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Ukraine and the all-or-nothing EU

Written by Dr. Eamonn Butler | Thursday 27 February 2014

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.

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Unrestrained majoritarianism allows exploitation of minorities

Written by Dr. Eamonn Butler | Tuesday 25 February 2014

A few weeks ago, the Institute for Fiscal Studies pointed out that just 1% of Britain's taxpayers contributed 30% of income tax receipts. A decade ago the top 1% paid 20% of the total – indicating how much of the government's tax burden has been shifted onto higher earners.

But that is just income tax. What about the general burden of taxation, and who it goes to support? You might think that maybe four-fifths of us pay tax in order to support the other, low-earning one-fifth. Not a bit of it. In fact the majority of households in Britain are supported by the minority. Three-fifths of households get more from the state than they contribute. Only two-fifths contribute more than they receive, according to figures from the accountancy group Smith & Williamson.

The group who do best in terms of the difference between what they pay in and what they get out is in fact not the poorest at all. It is remarkable that the lowest-income decile, the tenth of households on lowest earnings (averaging £10,300 before tax) should pay tax at all, but they do – and national insurance, VAT and many other taxes to boot. Add it all up and take it away from the value of the benefits they get from the state, and the net support they get is worth £9,540. But the next decile up, households with an average gross income of £15,500, pocket a net balance of £11,240 in benefits over what they pay in taxes. The decile after that, earning £18,800, also get a better deal than the poorest, with a net balance of £10,240.

You may think it equally remarkable that higher earners should get any benefits from the state at all, but of course they do – think of all that free healthcare and education, child benefits and various subsidies to farms and businesses. In fact, a household in the seventh-highest earning decile, earning an average £38,800, receives benefits from the state of not quite £12,000 while paying taxes of not quite £11,000, making them net contributors of just £1,820. A household in the top earnings decile, on £101,300, would contribute a net £28,410.

So there you have it. Only a minority of the public, the top four deciles, meaning the highest-earning two-fifths of the population, pay more into the state than they get out. The majority, three-fifths, are living at their expense.

This in itself cannot be a healthy situation. Democracy is wonderful, but unrestrained majoritarian politics allows the majority to exploit minorities – and in the field of taxation, that exploitation is easy-peasy and the depth of it can be enormous. As we see today.

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Are the floods down to global warming?

Written by Dr. Eamonn Butler | Friday 21 February 2014

Are this winter's extreme weather, with rain and floods across Southern England, down to global warming? If so, it's been going on for some time. Remember the devastating floods of 1953, or exceptionally cold winter of 1946, followed by an extremely hot summer. Or if you want a real (pre-industrial) extreme, reflect that in the 1680s, the Thames was frozen solid for two months.

The fact is that exteme weather has never been all that unusual. It's just that today, every episode is used to justify the existence of climate change and its allegedly human cause. Melting ice? We're burning too much carbon fuel. Floods? Our warmer atmosphere carries more moisture. Hurricanes? They're created by warmer seas. Droughts? That's warming too. Snow? The Gulf Stream is shifting. Heatwaves? Do you need to ask?

Of course, much of this is based on questionable evidence: global temperature rises have stalled in the last decade; Pacific hurricane intensity has been low since the mid-1980s; Antarctic ice is increasing; atmospheric moisture levels  are no higher. But the real problem is that a theory that supposedly predicts anything in fact tells us absolutely nothing. As the Scientific Alliance puts it:

Overall, the impression is that some people are taking whatever opportunities they see to find examples of what global warming may be doing, which by inference is then due to our carbon dioxide emissions. The purpose is presumably to stiffen political backbones and keep policies aimed at radical decarbonisation on track.

But there is a deeper agenda among some campaigners. The first element of it is to suggest that industrialisation and economic growth are our problem. In fact, they are the solution. The economist Andrew Lilico points out that, even if we assume that global warming is a reality, it is far cheaper and more practical to adapt to it than to try to reverse it. And economic growth makes us rich enough to make those adaptations. For future generations, it will be even easier.

The second element is that, when any sort of problem occurs – and not just some weather event –  people are inclined to say 'the government should do something about it'. So the more problems that campaigners can create, the more pressure there is for government expansion. And, indeed, for political intervention into markets. One can already see the insurance companies being lined up for a beating. Can it be long before they are told they have to provide cheap flood cover to everyone, no matter how often their riverside homes have been inundated before? The result, of course, will be that more people are encouraged to build and live in flood-prone areas – or that insurers simply leave the market and nobody can get bad-weather coverage at all. 

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The Scottish independence debate just got interesting

Written by Dr. Eamonn Butler | Tuesday 18 February 2014

The Scottish independence debate just got interesting. Not over the future of North Sea oil or nuclear submarine bases, but on the dull matter of monetary policy.

In September, Scotland holds a referendum on whether to remain part of the United Kingdom or go solo. So far, many people just assumed that a 'Yes' vote would be crazy. Scotland already has devolved government, with its own Parliament in Edinburgh deciding matters such as health, education and welfare policy. Scotland has more than its share of MPs in the UK Parliament in London, who even get to vote on exclusively English matters. It also enjoys a higher share of UK public spending. Devolved powers and English subsidies...seems like paradise.

The polls reflected the strength of this 'No' case – but things are narrowing. The Scottish nationalist leader Alex Salmond is a wily politician. His party won a majority in the Scottish Parliament despite an electoral system designed to keep them out. He tells Scots not to throw away their one chance of doing something extraordinary. He affirms Scotland's proven ability to run its own affairs. And he makes the point that an independent Scotland would never have to endure a Conservative government ever again.

By contrast the 'No' campaign looks unambitious and condescending, suggesting that Scots aren't up to governing themselves. And the Conservatives, mostly pro-union, have such a polluted brand in Scotland that they kept quiet rather than adding weight to the 'No' lobby.

Brave, then, for Conservative Chancellor of the Exchequer to enter the fray, saying that an independent Scotland would not be allowed to keep the pound sterling. Nonsense of course: only draconian laws preventing cross-border sterling business could stop that. And with so much cross-border trade, forcing Scotland into a new currency helps neither country – though that is what Osborne is trying to imply.

The reality is that the Scots could use the pound (or for that matter the dollar, euro or yen) but would have no say in the currency's management. But Osborne insists that the Bank of England would set interest rates and create money according to the needs England, Wales and Northern Ireland – not some foreign country called Scotland. Again, that is over-egging it: with so much cross-border trade, the Bank would have to take account of conditions in Scotland when setting its policy.

So the Scots would be like Ecuador, Panama or El Salvador, who use the dollar but who have no voice in US Federal Reserve policy. And just as they have no hope of the Fed bailing them out in a crisis, Scotland cannot expect any Bank bailouts either. That sounds bleak until you remember that Panama's banks are some of the world's soundest. They have to have big reserves precisely because there are no bailouts. So that might even make Scottish banks more attractive in these uncertain times.

Up to a point. The Scottish banks, or government, would still have to create a financial buffer big enough to ensure that Scotland's financial sector can keep standing without Bank of England support. It is a big ask: the Royal Bank of Scotland alone would need billions of new capital to let go of the Bank of England. Where does the money come from? The worry is that Scotland's huge financial sector would up sticks and head south, where it could still cling to nurse. And that anyone left behind would have to offer investors sky-high interest rates to reflect their risky go-it-along policy – which they would in turn have to pass on to borrowers, like people with mortgages.

The wily Salmond will have some answer, of course. The pity is that we have not had this rather critical debate until now. It would certainly have made the whole campaign a lot more interesting.

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Quote of the week

Written by Dr. Eamonn Butler | Monday 10 February 2014

"The miracles of the past three and a half centuries – the unprecedented improvements in democracy, in longevity, in freedom, in literacy, in calorie intake, in infant survival rates, in height, in equality of opportunity – came about largely because of the individualist market system developed in the Anglosphere. All these miracles followed from the recognition of people as free individuals, equal before the law, and able to make agreements one with another for mutual benefit."

– Daniel Hannan
How We Invented Freedom & Why It Matters

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Motorways, pubs and nannies

Written by Dr. Eamonn Butler | Tuesday 21 January 2014

A new pub has opened in Beaconsfield, Buckinghamshire. That's news in itself, given that around 1200 pubs closed down last year, thanks (or no thanks) to the weight of retail and employment regulation that makes pubs so darn expensive to run.

But the Hope & Champion is of doubt interest, because it is in the Extra Motorway Service Area at Junction 2 of the M40. So the people who go there are almost certain to get there by car. So naturally there have been plenty of critics complaining that this initiative sends out all the wrong signals about drinking and driving.

Well, pubs in the UK are licensed, precisely because we know the potential problems that can go with alcohol consumption. But the fact is that the local police did not object to the licence, nor did the local authority. And the local paper is giving the new pub splash coverage. So local people don't think there's a problem here.

The real problem is the message that the critics send out, yet again – that the political class in Britain thinks the adult population of their country are completely incapable of making their own choices, and that their lives have to be micro-managed for them. This pub, like most others these days, is basically a restaurant that also serves alcohol. It opens at four in the morning and starts selling alcohol at nine - though apart from one stalwart getting stuck into a pint for the cameras, most people there this morning were getting stuck into nothing more life-threatening than a Full English Breakfast. And if a group of people want to stop off the M40 for lunch or dinner, why should the passengers be denied the pleasure of a small sherry just so that drivers are 'kept away from temptation'?

Weatherspoons, the pub owners, are a responsible chain. Their menus carry Drink Aware slogans and information. Their staff do not serve people who have already had enough. People know that there are legal limits on drinking and driving - and they know that even drinking below the legal limit can slow down your reactions. So most drivers who visit the pub, alone or with a group, would probably not have alcohol anyway, and their passengers would probably not want them to.

So as the police and local authority figure, there's no problem. The only problem is all those people who deem it their business to treat us like children.

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Hannan, Law and Innovation

Written by Dr. Eamonn Butler | Monday 20 January 2014

I was struck by a passage in Daniel Hannan's new book How We Invented Freedom And Why It Matters. As a UK Member of the European Parliament, he is always asking other MEPs why they think new rules are needed, in banking, working hours, herbal remedies and much else. As he says:

"The response is always the same: 'But the old system was unregulated!' The idea that absence of regulation might be a natural state of affairs is seen as preposterous. In Continental usage, 'unregulated' and 'illegal' are much closer concepts than in places where lawmaking happens in English."

This is a profound point. We've all heard about the differences between British (specifically, English) and Continental Law. In English, Common Law, rules are decided by courts in response to some 'specific problem' arising. In Continental, Roman Law, rules are laid down by the authorities. So in Britain, things are presumed to be permitted unless there is a law to stop them. On the Continent, things are presumed to be prohibited unless there is a law to allow them.

I always figured that such traditions explain why the British are more enterprising, and why they have a much lower opinion of their authorities: to them, politicians and officials just get in the way of what you want to do. To a continental, though, they are people you need to coddle and get onside in order to do what you want to do.

But Hannan's illustrative conversation explains much more: specifically, why the European Union generates so much regulation. To the Continental mind, for something to be permitted, there must be a law – or a set of regulations – permitting it. If you are doing something that is not regulated, you must be up to no good. Indeed, it is cheeky of you not to have asked permission in the first place.

In slow-moving societies, this might work tolerably well. But when you are facing rapid social and economic change, as we are today, the Continental presumption of required consent cannot possible respond fast enough, because every innovation has to be considered and ruled on. In the English tradition, by contrast, you can innovate as much as you want unless or until it infringes other people's rights. Facing the international competition that we do, that seems a much more promising system.

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