Harry Reid’s Ring of Power

“To keep it hid and not to use it. You are a new people and a new world to me. Are all your kin of like sort? Your land must be a realm of peace and content, and there must gardeners be in high honour.” – Faramir, The Two Towers, J.R.R. Tolkein

The expansion of government is both accelerative and fracturing. As the power of Washington grows, the incentive to possess and wield it increases. Unlimited capacity in the hands of the wrong people spells catastrophe, and even when the right people come to power, they are driven to use, rather than constrain, authority accumulated by the previous administration. This creates a volatile political see-saw, and makes an unstable foundation for enduring institutions. Many people consider Donald Trump to be the wrong people par none, but it is important to note that any fear of him stems not from his personal characteristics, but because he will be vested with all the powers of the presidency. These powers did not spring from thin air, but were gradually erected as institutional checks on the presidency were torn down. If a victorious opposition to Trump is to create a realm of peace, and avoid setting the stage for subsequent authoritarians, it must comprehend how he has been empowered.

After President Obama’s re-election in 2012, Republicans, then the minority in the Senate, refused to vote for several of his executive-office appointments and judicial nominees. The senate has historically required a supermajority of 60 senators to approve executive appointments, though changes to traditional senate rules can be made with a simple majority of senators. The ability to alter appointment approval thresholds with a simple majority vote, known as the nuclear option, had been threatened in the face of past minority obstruction, but never used. Democratic Majority Leader Harry Reid argued that in the face of unprecedented Republican opposition, a rule change was the only way to advance Obama’s progressive agenda. Instead of accepting that they could not accomplish all they wished to, Senate Democrats altered the threshold for executive appointments, ending a two hundred year tradition of resistance of majoritarianism.

NASA’s director is appointed by the president, and approved by congress. Under Obama’s presidency, NASA increased spending on earth sciences, attempting further our understanding of climate change. Trump has promised to slash its earth science budget and hand responsibility for climate oriented missions to the National Oceanic and Atmospheric Administration. If you are a voter concerned about climate change, you may not like this shift, however, because of Harry Reid’s rule change, Democrats cannot force Trump to appoint a NASA director with even marginal interest in earth sciences. If you are concerned about something else, remember that the Secretaries of Defense, State, Environmental Protection, and many more are appointed in the same way.

Supreme Court nominees can still be filibustered, requiring a 60 vote threshold for approval, however, this too can be changed by simple majority vote. Reid’s elimination of the appointment filibuster has been cited as precedent for its elimination with regard to Supreme Court nominees by both the left and right. Expecting a Clinton win, Tim Kaine threatened use of the nuclear option in the face of expected republican opposition to her SCOTUS nominees, while Johnathan Adler, a law professor at Case Western University, writes “Given Reid’s decision to go nuclear in 2013 — and threat to go further, if need be — there is no reason for Senate Republicans not to eliminate the filibuster for nominations once and for all”. Expansions of majority power both transfer losslessly to new majorities, and pave the way for the further expansion of their authority.

Donald Trump the man might be a short-fused reactionary, but he is not a naturally licensed tyrant. He inspires fear because he is the president, supported by a slight senate majority, a position empowered tremendously by those who last held it. While they may wish this power away, they cannot rebuild the norms they have toppled. Mitch McConnell is now the only senate check on Trump’s appointment ability, Harry Reid may have crafted the ring of unlimited appointment power, but it is no longer in his hands. When one side’s winning grants it carte blanche authority the loser, all factions will be less concerned with accepting stable transitions of power than stopping their opponents at all costs. As minority rights are weakened, democratic solidarity and the rule of law weaken as well. In response to potential Republican use of the nuclear option, Albany Law School professor Peter Clark has suggested refusing to accept the decisions of Trump’s Supreme Court pick as precedent, a move which would drastically destabilize the American legal order. Regardless of your political stance, if you are to secure your rights in the long term, you must resist the urge to exploit inherited power. Remember that at some point that power will be wielded by your enemies, and toss it into the volcano.   

Madsen Pirie remembers Milton Friedman

It's been ten years since the renowned Nobel prize-winning economist Milton Friedman died, but his ideas continue to lift people out of poverty and change the world we live in for the better. Madsen Pirie, a friend of Milton, discusses in this pithy video his incredible legacy and why he remains an inspiration for free-marketeers.

The Milton Friedman agenda

When I was younger, I used to think of Milton Friedman, who died on this day ten years ago, as a great man who’d changed the world but gotten a few things wrong. His books, Youtube clips and Free to Choose series made me a liberal. But my liking for Austrian economics persuaded me that he had been wrong about monetary policy and economic methodology; my belief in private charity made me think his negative income tax was unnecessary.

The arrogance of youth! The older I get, the more I realise that Friedman was right about pretty much everything, and I wrong. And, as my friend Dan Klein points out, he gets the credit he deserves – in all the classical liberal pantheon only Adam Smith is more widely respected by liberals and non-liberals alike. Eamonn’s discussion of Friedman’s life is a must-read, and Madsen's new video about him is brilliant.

He deserves to be recognised as one of the leading lights of modern capitalism. But there’s a lot left in the Friedman agenda that still needs to be done. Here at the Adam Smith Institute what we do in policy terms is a continuation of Friedman's priorities.

1. Drug legalisation. Friedman, a long-time advocate of the legalisation of drugs, argued that “the harm that comes from drugs is because they are illegal”, as rising costs led to drug users switching to things that give a stronger hit for a given amount of money. He would have been heartened today to see the rapid move towards legalisation and regulation of cannabis in the United States, a move that seems to be gaining momentum in lots of developed countries. We have a paper on what this means for Britain out next Monday.
2. Monetary reform. Friedman’s greatest achievement, and the one that won him his Nobel Prize, was to recognise and demonstrate that “Inflation is always and everywhere a monetary phenomenon” and that the Great Depression was, above all, caused by bad monetary policy – in that case, excessively tight money. Friedman also realised that the stagflation of the 1970s was caused by excessively loose money. Some mistakenly characterise him as a hardcore anti-inflation advocate for this reason, forgetting about his other work. He was neither a consistent dove nor a hawk – he wanted monetary stability and realised that the discretionary approach to central banking, where a panel of wise men made all the decisions, could not produce that. Instead he wanted rules that were predictable for markets and designed to keep the macroeconomy on an even keel. As Scott Sumner argues, he probably would have supported nominal GDP targeting if that had been a live issue while he was alive. And he supported quantitative easing for Japan in the 2000s. Our Sound Money paper is in this tradition, though we would ultimately like to see central banks scrapped altogether.
3. Negative income taxes. Friedman worried about welfare creating a poverty trap. Since minimum wages can cause unemployment, Friedman favoured replacing most of the US welfare apparatus with a Negative Income Tax that topped up low-paid workers’ wages in a way that made work always pay more than welfare. That nearly made it into law under Nixon, eventually through a second-best compromise of an “earning income tax credit”, a cash transfer to poor workers. Our Free Market Welfare paper made the case for this, and we've done a huge amount of media and events work promoting this solution to the problems with welfare.
4. School choice. Why should only rich parents be able to choose the school their children go to? Friedman pushed for school choice throughout the later years of his life so that competition between schools and independence from a central authority would drive up standards for poor children. We’re halfway there – free schools in Britain emulate this, imperfectly, and where charter schools in the US have been allowed they’ve been amazingly good for kids from poor backgrounds, in terms of lifetime earnings, pregnancy rates, incarceration rates and math skills – especially for non-white kids. 
5. Economic methodology. This might not sound sexy, but it’s a very interesting one. Some economists do it with models, but Friedman was a hardcore empiricist, pioneering a “natural experiment” method that has now become one of the most effective tools in economics. This approach looks for special events in history that allow us to filter out complicating factors, so that we can identify effects of a single cause we’re trying to understand – like a boatlift of Cuban refugees, which allows us to isolate the effects of a large influx of immigrants into a city’s economy. This lets us dispense both with deductive theorising and abstract modelling in favour of testing our hypotheses against reality.

And of course Friedman made the case for lower, simpler taxes; for free trade between nations; for a liberal, but controlled, immigration policy; for giving people control over their own lives. And he did it with a smile.

I’ll leave you with the words of Milton Friedman himself: “A major source of objection to a free economy is precisely that it gives people what they want instead of what a particular group thinks they ought to want. Underlying most arguments against the free market is a lack of belief in freedom itself.”

It's in that spirit that that we here at the ASI try to continue his great work.

Of all the strange things to complain about

Mars and others have decided to aid poor African farmers by doing the sort of research into plant genetics that hasn't been done as yet, given that these are generally peasant, not commercially farmed, crops. We'll all end up knowing more about these crops, be better able to selectively breed them and just in general this is a good thing.

Therefore people are complaining: 

Critics of the project say efforts to map the genetic data of crops are more likely to help private companies moving into new African seed markets rather than smallholder farmers.

Mariam Mayet, director of the African Centre for Biodiversity, said: “What are farmers going to do with gene sequences? … These top-down, techno-fix solutions sound good, and sound like we’re entering the 21st century, but they’re not what small farmers need.”

Patrick Mulvaney, at the UK Food Group, said that even if genetic data is freely available online, “the only ones that can really make use of it are the big companies”. He suggested corporations “want orphan crops too, to consolidate their control” of global food systems.

Sigh. There is no way that the poor can be made worse off as a result of this new knowledge.

Imagine that the knowledge does lead commercial breeders to design better crops and then sell them. The old varieties will still be available, it will still be possible for those peasant farmers to save some of last year's crop to plant this. They might, possibly, want to pay for the commercially bred seeds but this will be true only if that is of net benefit to them.

Thus the only possible end results of this is that they will be better off or that they will be just where they are today. Matters getting worse is not one of the available options the universe is offering us here.

Quite why people are complaining about a zero risk opportunity to make things better we're just not sure. But there it is, they really are complaining about this.

The ultimate Trump infrastructure project

A key plank of Trump's economic platform is his proposal for massive infrastructure spending, which some estimates put at $1 trillion, to boost the US economy.  He will pay for this by tax cuts, one of the most significant being the proposal to cut to 10% the tax on repatriated funds that big corporations currently hold offshore.  There is one infrastructure project, the biggest of all, that he should consider.

When I wrote in the Mensa magazine 30-odd years ago of my imaginary future train journey to America, Harry Harrison, sci-fi author of Soylent Green, commented in a Cambridge pub, "Ah, you'll be using my tunnel."  He had written a sci-fi novel called "Transatlantic Tunnel."  "No," I told him, "I'll be going the other way round."

My imagined train journey would go through the Channel Tunnel, across Europe and Siberia, and then across the Bering Straits Bridge to be greeted in Alaska by a high school marching band at the train station.  I later discovered I was by no means the first to suggest such a venture.  William Gilpin, first governor of the Colorado territory proposed this in 1890, and Joseph Strauss in 1892 drew up engineering designs for such a bridge.  Others have taken it up since.

It is by no means beyond our capabilities.  The deepest water depth is about 55 metres, and the link might be achieved by a 25 mile bridge to the intervening Diomede Islands, and then either a bridge or a tunnel to Alaska.  There is no doubt it could be done, and would provide a link for trade and commerce as well as passengers.  Pipelines alongside could carry oil or gas supplies.

Why it should be done is partly symbolic as well as economic.  The election of Donald Trump will probably mark a thaw in the West's relations with Russia.  President Trump will acknowledge Russia's need for dominant influence on their "near abroad," just as he will respect China's aspiration to be a leading Pacific power.  The easing of tensions will defuse potential conflict, and might be symbolized by the new physical link connecting America and Russia.

The project would generate vast numbers of jobs in both America and Russia, not only for the link itself, but also for the supporting infrastructure.  More than that, though, it would be a symbol of a truly interconnected world.  This is a project he might consider to be worthy of his presidency.

The latest misleading story about climate change

Zoe Williams tries to scare the bejabbers out of all of us with he latest story about climate change:

When it looked like the news couldn’t get any worse, it did: worse in a way that dwarfed our petty elections and clueless, pendulum analyses, worse in a way that dusted the present with the irrelevance of history. In the journal Science Advances, five of the world’s most eminent climatologists warned of the possibility that warming may be significantly worse than we thought. Previous consensus was that the Earth’s average temperature would go up by between 2.6C - life-altering but manageable - and 4.8C - cataclysmic. Now, the range suggested by one projection goes up to 7.4C, which is “game over” by the 22nd century.

This is not going to happen. No, not because all climate science is a crock, not because CO2 is plant food or any of that. But because this report is based upon something that will not happen:

Using the Representative Concentration Pathway 8.5 for future greenhouse radiative forcing

RCP 8.5 simply is not going to happen. As Matt Ridley has been saying for some years now that is not a possible path for our future. It requires that we use more coal in hte future than we do now. That we use energy less efficiently than we do now, more of it and a greater portion of it comes from coal. This is just not going to happen.

As Bjorn Lomborg pointed out near two decades ago all we have ever needed to do to avoid those terrors of boiling Flipper in the meltwater from the last ice floe is to get solar power down to about the price of coal fired. Which we've done. And no one thinks that it is going to stop getting cheaper off into the future either.

The truth about the catastrophic part of climate change is that we've already done what we needed to do to avoid it even if the direst original predictions were true. We needed that economic change to reduce coal burning, the economic change which has been achieved through solar cost reduction. We're done therefore - we are, after all, only a year or two away from people preferentially installing solar purely on cost grounds.

And any and every report, paper and surmise which is based upon RCP 8.5, or the earlier scare story of A1FI, is simply untrue. For we've already done enough to avoid those emissions pathways.

It’s all been said before

Working in free market economics can sometimes feel as if one is merely writing footnotes to an 18th century Scot.  Pretty much anything worth saying has already been written by Adam Smith, and often all that we can do is collect some more evidence, quantify the effects that he predicted, or apply his wisdom to the modern world.

Maybe that explains some of the wilder economic theories of recent decades; some people will write anything, no matter how daft, just to try to be original.

But in my field of tax, it turns out this feeling that it’s all been said before is even older.  Never mind the 18th century; the basic economics of business tax was summed up in the 1500s:

“Taxes and imposts upon merchants do seldom good to the King’s revenue … the particular rates being increased, but the total bulk of trading rather decreased.”

That was Sir Francis Bacon, lawyer, politician and scholar under Elizabeth I and James I, credited with being one of the founders of the enlightenment, scientific method, the modern approach to the common law, and America.

As with Smith on economics, what more is there to say on business taxation that does not merely expand on what Bacon wrote over four hundred years ago?  If you tax something, you have less of it.  If you tax business, even though the Treasury may see a direct benefit, the indirect effect is that the whole country is made poorer.

It sums of most of the few things we know for certain about tax.  What matters isn’t who actually pays the tax and how much is collected, but what the wider effects are; what economic problems does the tax cause and who bears the cost of those?

And Bacon had grasped a fact that seems to have eluded many campaigners today; different taxes have different effects, and taxing businesses is one of the most economically damaging ways for a government to try to raise revenue.

With business tax, we know that the vast majority of the burden of the tax falls not on business owners but on workers, as higher taxes result in less investment into business, and therefore fewer jobs are created and those that are tend to be less productive and so lower paid.

Second order effects, the incidence of taxes, endogenous growth theory, the Laffer Curve, negative externalities, optimal tax theory; the phrases weren’t invented but the concepts were all there in one paragraph, in the writings not of a modern academic but of an Elizabethan courtier.

Still, at least in tax the work was only done four hundred years ago.  Pity those negotiating post-Brexit trade deals, where the definitive treaty on international trade was signed eight hundred years ago:

“All merchants shall have safe and secure exit from England, and entry to England, with the right to tarry there and to move about as well by land as by water, for buying and selling by the ancient and right customs, quit from all evil tolls”

Magna Carta of course.  That’s import duties dealt with as well; is there anything left to write about?

A bold move for Britain

One of the campaign pledges made by Donald Trump was that he would renegotiate the North American Free Trade Agreement (NAFTA), which came into force on January 1st 1994.  Basically it involves free trade between the United States, Canada and Mexico.  Canada's Prime Minister, Justin Trudeau, has declared himself ready to renegotiate the treaty.

This gives the UK a great opportunity to extend free trade in the aftermath of Brexit. The UK could apply to join the renegotiated NAFTA, taking part in the negotiations to hammer out a new treaty that included the UK.  It would then become the North Atlantic Free Trade Agreement, but would keep the NAFTA acronym.

Several influential Conservatives have indicated that there might be opportunities for closer transatlantic economic ties.  Indeed, Sir John Major floated the idea during his premiership.  It would give the UK a head start in its bid to launch bilateral and multilateral free trade deals once free of the EU's protectionist grip.  And it would make nonsense of the always absurd notion expressed by President Obama that Britain would be "at the back of the queue" in any trade deal with the US. 

Prime Minister Theresa May is expected to use her Lord Mayor's Banquet speech to declare her support for free markets and free trade.  A move toward joining a revised NAFTA would underscore that commitment and give people confidence that she meant it.

Not one pound, not even one penny

We've mentioned before that we think that leaving the EU is a great opportunity for us to properly sort out British farming. Wean it from the teat of subsidy that is, go the full New Zealand and offer not one pound, not a penny, as subsidy to farmers.

It would appear that the likely next leader of the NFU has got some of the message:

Farmers will lose most of their direct subsidies after Brexit and must do more to prove that any remaining support delivers public benefits, a farmers’ leader has said.

More than £2 billion a year is paid to farmers based on the amount of land they own but Minette Batters, deputy president of the National Farmers’ Union, accepted that these payments would all but disappear once Britain left the EU. The National Trust and many campaign groups have already called for an end to these “basic payments”. Ms Batters revealed that the farming industry also accepted the need for radical reform of subsidies.

That's nice but not good enough. There should be no subsidies whatsoever. Needless to say The Times doesn't agree:

Subsidies should be scrapped altogether when Britain leaves the EU, this argument runs, since they only prop up failing businesses. That would be a mistake. Many farms, particularly hill farms and small farms in Scotland, Wales and Northern Ireland, would no longer be viable. Large rural areas would be overtaken by brambles, thistles, nettles and scrub. Productive potential would be lost and landscapes sullied. Emissions would rise as Britain sent lorries and aircraft to fetch food from abroad. Prices in the supermarket would shoot up too. That hits the poorest hardest, as more of their income goes on food.

This is to miss the point that subsidies come from somewhere. Taxpayers cannot be made worse off through rising food prices if they also don't have to pay the subsidies at the same time. However, it's here that they are truly in error:

 The CAP’s main condition is on land ownership: the bigger the farm, the bigger the subsidy. Ms Batters reckons that this is unlikely to go on after Brexit. Neither should it. Bigger farms are normally those least in need of the subsidy to survive. Supporting smaller farms also avoids mass consolidation which narrows the gene pool and renders crops less resilient against disease.

The focus should be on providing farms of all sizes with the capital to invest in more productive equipment and training to use it.

Sigh. Subsidy to the simple ownership of land just increases the capital value of that land as David Ricardo pointed out that it would. not having such subsidies would therefore lower the price of farmland. And a lower cost of farmland reduces the amount of capital needed to be a farmer - thus neatly providing farmers with more capital simply by abolishing the subsidies.

Our very demand, the removal of all subsidy, would produce the very thing The Times desires, more capital for farmers.

We've got to get this right about the robots stealing all our jobs

Another one flowing from that assembly line of pieces mithering about what will happen once the robots steal all our jobs. And this is one area where we might hope that automation will indeed take over, and quickly too, because we should assume that machine learning will lead to the fully automated version being correct.

Automation does not lower the price of labour, automation raises the rewards to labour:

To sample what lies ahead, my colleague Ryan Avent in his book in automation’s impact, The Wealth of Humans,tried out a computer program that copied complex analytical journalism. Happily for my trade, the result was not a must-read. Yet even if we columnists are not yet to be displaced by some offspring of Sophia, with an expertly engineered prose style, it’s a safe bet that some parts of many jobs will be altered or eradicated by automation much faster than we reckoned on or find comfortable. A report for the World Economic Forum estimated that technology would create about 2m jobs by 2020 worldwide, but displace 7m.

For the educated and financially secure, this causes apprehension enough. Now imagine you are either without a job or in low-paid, patchy work, in economies facing the resulting efficiency gains but lowering the price of labour and wearing away workers’ bargaining power.

I think we'll all agree that the world is rather more automated than it was 240 years ago, when Adam Smith published WoT? And I think we'd all agree that labour is paid rather more today than then? Thus what is going to be our first pass attempt at portraying the relationship between automation and the rewards to labour? More means more, right? 

In more detail we could take Paul Krugman's explanation. The average wage in an economy is determined by the average productivity of labour in that economy. Up goes the productivity and up goes the wage - automation increases labour productivity.

We can even dig right down into the details and consider why a barber in Nuneaton makes a higher income than a barber in Nairobi. Both are doing the same task using the same technology with the same level of productivity. But as William Baumol's cost disease argument points out, the higher productivity of the alternative uses of that labour pull up that barber's wage. 

And it really is that alternative use of the labour which determines the general level of wages. And as automation makes the labour running the machines more valuable so does the real wage rate rise.

As it must do of course - because now we've the machines making myriad things which must be consumed, we humans are the only people who can do the consuming and thus we get to consume more. Our real wages have risen.