Lex Americana
Did you know we are all subjects of the USA? It seems that we are. A letter from my stockbrokers this morning advised that I had to complete two forms for the US tax authorities stating that I am British and have no US interests. For the record, I have no US trade or income or investment or any other connection that should rightly be of interest to the US tax authorities but that is not good enough. I have to prove it.
Apparently if I refuse to complete these forms, required under the US Foreign Account Tax Compliance Act, sanctions will be taken out against my stockbrokers who do have American interests.
The less irritating of the two forms simply asks a series of yes/no questions. Some ask for a single yes/no responses to a multiple questions. For example you can only say yes or no in aggregate to “Are you a US Resident or US Citizen or have dual nationality?”. You are not allowed to say yes to one and no to the others. Some are redundant. For example for example, having established “no” to all the above, it goes on to ask if one holds a US passport. Could someone please tell me how one acquires a US passport without being either a US Resident, or US citizen or having dual nationality.
The more vexatious form is the W-8BEN Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding. Part I requires my name and address, no big deal. Part II is more challenging as one is required to certify any or all of five things but only if they apply. How do I know if they apply when I do not even understand what they are. One of them asks if I am “related” to someone who might pay US tax. I think I have a fourth cousin once removed in Iowa, but I’m not sure of that. This is all under the heading of “Claim of Tax Treaty Benefits (if applicable)”.
Part III deals with “Notional Principal Contracts”. I have no idea what they might be and you probably have none either. The small print asks me to certify that I have, or will, provide a statement that identifies “those notional principal contracts from which the income is not effectively connected with the conduct of a trade or business in the United States.” This statement may be a long time coming but luckily there does not seem to be a time limit.
Part IV specifies more certification in print so fine I needed a magnifying glass. The first is to confirm that I am the beneficial owner of “the income to which this form relates”. What income is that? As I said at the start, I have no US investments or income.
My stockbroker required the two forms signed and dated and a certified copy of my passport, probably just the page with the photograph but it does not say that. A visit to the local solicitor is now called for.
Two final idiocies: I signed and dated in the English form but was then told that the form would be returned if the date was not in US format: MM DD YY. And the bottom line says “For Paperwork Reduction Act Notice, see separate instructions.”
What asylum is responsible for this nonsense? The UK government cravenly complies with US legal requirements, notably the one-sided implementation of the extradition agreement which was intended for terrorists but did not bring a single provisional IRA suspect back to the UK. The UK government should make it clear that we are UK subjects and taxpayers and should not be hassled by the US tax authorities.
Nothing left
Tim Worstall and I rarely disagree about anything. Indeed, if the genie of the lamp gave me three wishes, the first would be to have Tim Worstall installed as Economic Advisor to the Treasury.
Tim, however, claims he is a left-winger, whereas I know I am not. He says:
But as I have argued before, we also share the basic lefty goals: we want a world that is getting better, a greener one, one in which all can achieve their potential and so on. As long as we stick to political vacuity we sign up to pretty much all of the desired goals. All we argue about is what is the best way to get from here to that desired goal.
I do not agree that these are left-wing goals. They may be goals that are shared by some left-wingers, and certainly are ones that I espouse. I also go along, of course, with Tim's commitment to breaking monopolies and creating conditions for competition and choice. But it is worth looking at what 'left wing' and 'right wing' actually entail, apart from their BBC usage as synonyms for 'good' and 'bad.'
Tim's case (with maybe just a touch of the mischief that is a hallmark of the ASI) is that sharing those goals makes him a lefty, albeit one who thinks free markets and judicious tweaking are the best way to achieve those goals. I, in contrast, do not think that it is your goals that define your position on the left or the right.
There are those who think that individuals and their families can generally do better for themselves, and that the order produced by the interaction between them is more humane and more efficient than an imposed one.
On the other side are grouped those who think that society can do these things better collectively, acting in concert to plan and produce an order different from the one that spontaneity would achieve, and one that they think will achieve more worthwhile things.
Those leaning to the right tend to be more concerned with opportunities for self-betterment, whereas those who lean left seem more preoccupied with equality. And since I have a deep distrust of central planning and a deep dislike of forcing people to live out someone else's ideal of what they ought to be like, I do not describe myself as left wing. Tim and I will just have to differ on this one.
Stop letting farmers milk the poor
All too often, when discussing how to make the poor better off, we focus on the sum of money they have to spend, as opposed to what that they can buy with the money they have to spend. This image from the Occupy movement highlights the issue:
Quite rightly, it notes that this food makes up more of the budget of a poorer individual. We all need food to survive, and that includes the minimum wage earner it describes. The action it suggests, however, raising the minimum wage, is unlikely to improve the lot of the poorest. Minimum and 'living' wage laws are likely to harm those they are put in place to help by making it illegal to profitably hire workers with little in the way of experience or skills.
Rather, supply-side reforms aimed at reducing the cost of milk and other foodstuffs are likely to be far more effective. Government interference in this market is something we should be especially wary of. As opposed to the regulation of other products such as tobacco and alcohol, a consumer can not simply avoid prohibitive taxes and regulation on the production of food. Interventions such as the Common Agricultural Policy in OECD countries increase the costs a family of four on average $1,000 per year in higher prices and taxes. These interventions often cater to relatively wealthy (and politically influential) landowners. When milk prices fall (as they did in 2009), the political response to this has been to cater to protesting farmers, with the EU agreeing to further support the dairy industry by €17.9m from 2010-13. This past week has seen threats of strikes as dairy farmers have opposed milk being sold at lower prices in the UK.
Trade barriers and tariffs serve to both raise food prices domestically while inhibiting job creation and development in developing nations. Research has shown that milk prices would fall by liberalizing trade between countries as far apart as the US and Australia despite milk’s limited shelf life. Importing milk allows nations to be better insulated against shocks in individual countries, which poorer individuals are particularly vulnerable to.
We can also be confident that markets will continue to provide food more readily and cheaply. In the last century, leaps and bounds in agriculture through development of new crops as well as improvements in distribution with an emergence of larger stores have helped to increase the choices available to even the poorest. While once Roman banquets may have catered to a select few, providing the greatest range of dishes that were known, these do not compare to modern day dining. Now a far greater range of choices are available to a far greater section of society. Almost everyone in the Western world can now call upon a selection of takeaway restaurants that will offer a choice of global cuisines.
New technologies we already know about are on the horizon that could reduce food prices further. Milk can be produced in a number of ways, and while milking a cow may be easy, alternatives such as milking whales, which may yield 40 times more milk, have not yet been explored. Innovations such as artificial meat and the development of GM Crops have the potential to do the same. Markets are constantly working to provide more options for consumers to try, bringing about better goods and more efficiently.
The goal of the Occupy movement is an admirable one: that the poor should have more left over after buying essentials. Income policies are unlikely to achieve this, but we can trust markets to increase the purchasing power of the poorest over time.
Let's have an autumn offensive
The political and media establishments seem obsessed with things that do not matter at the expense of things that do. This mid-term government is exhibiting many unwelcome characteristics. It introduces a succession of small-scale measures while having no discernible theme that would give a unity and purpose to its actions.
The government might think that it is failing to put its message across, but the reality is that it does not have a message. It should use the summer months to plan an autumn offensive that can reinvigorate it and send a powerful and clear signal that it is determined to lift the UK out of its present difficulties. It should unveil a growth strategy to stand alongside any cuts it might make in public spending.
It should allow small firms to have workers registered as self-employed. No single measure would do more to loosen up the labour market and create the new jobs. It should remove the taxes that pander to envy without raising revenue proportionate to the harm they do to wealth creation. It should repeal the taxes that fall upon capital, the source of the investment crucial for expansion. The aim should be declared in ringing tones to be that of turning Britain into a low-tax, wealth-friendly, growth-oriented country, a magnet for investment and talent. It should commit to expansion, not retrenchment.
A government which did that would find a country that not only understood what it was doing, but approved of it. The Adam Smith Institute stands ready to help it in this endeavour, but time is short. Autumn would be a good time to launch it.
New at AdamSmith.org: Why Nations Fail, reviewed
What makes countries end up in persistent and permanent poverty? Why is Mexico much poorer than the United States? Why is Latin America so fundamentally different to North America? How is it possible that an average American is 40 times richer than an average Sierra Leonean? Is it climate, geography, culture, or could it be the ignorance of domestic leaders? Acemoglu and Robinson suggest it’s none of these – rather, the real reason behind the poverty trap and significant between-nation differences lies in the role of political and economic institutions.
Politics and the formation of political institutions take centre stage in their book, which formulates the thesis that only within an inclusive political system is it possible for nations to achieve prosperity. The opposite scenario will occur under extractive political institutions where wealth will be accumulated within a narrow ruling elite which will aim to preserve its power thus sentencing a nation to persistent poverty.
In the very beginning of the book the authors hint to the reader how it will be organized – through a series of historical case studies upon which they illustrate their theory of institutional change and the consequential success or failure of nations. It starts with the example of Nogales, a city on the US-Mexican border, which is split in half by a fence. One city, in the same geographical position, characterized by the same cultural upbringings, same population, same diseases, but one part three times richer, much healthier, safer, and with higher living standards. The crucial difference is the very border separating the two parts of the city depicting the different institutional settings within them.
Inquiry festivals
Prime Minister David Cameron has just got to think bigger. His announcement of a parliamentary inquiry into the banking industry as a result of the Libor scandal missed a huge opportunity. Maybe Labour leader Ed Miliband has the right idea with his call for a full-blown independent Leveson-style inquiry into British banking.
This could be the start of a series of inquiries around the country on any number of issues. After all, the music festival business is in decline and the Olympics will soon be over so Ed’s Big Idea could keep the circuses coming.
For one thing, it would help reduce unemployment. Think of all those people at Leveson officiating, supporting, analysing, covering, guarding, pontificating, chauffering or otherwise just hanging around. A smart entrepreneur could even make a profit by charging admission, offering corporate boxes and selling programs, refreshments and cream pies for throwing at the baddies. There might even be a market in DVD box sets. Cameron’s parliamentary inquiry merely recycles the tired bunch in Westminster.
A whole raft of inquiries would also leave politicians with little to do as they await the findings of each inquiry. The longer the inquiry, the better as it would keep the politicians out of mischief. Indeed, once these inquiries really get rolling, who needs Parliament at all? We just await the pronouncements of the wise – like the European Commission.
Here’s just three topics ripe for extended inquiries and loaded with drama, villains, victims, money and passion.
The Brown Deficits: How did the Terminator of boom’n’bust run up huge budget deficits during many years of economic growth? Let’s see the emails from Treasury officials, minutes from meetings with the Bank of England and lists of lobbyists trooping through No. 11. Did Tony Blair ever ask what was going on? Did anyone offer to resign? Lord Sugar would be the clear favourite to chair this one. (“What on earth were you thinking???)
The Housing Bubble: Oh, what a rogues’ gallery of witnesses this would be. NIMBYs restricting supply, estate agents flogging the impossible dream and weak-kneed politicians defending the ultimate tax shelter. Polish plumbers, Russian oligarchs, make-over TV show producers – the possibilities are endless. This inquiry would strike at the heart of the British psyche so two co-chairs would be needed. Ken Livingstone and Boris Johnson?
The Education Mystery: So much money spent to produce so many students with declining skills in literacy, numeracy and foreign languages but increasing ignorance of history, geography and literature. Let’s grill the unions on why no teacher ever gets fired for incompetence. Let’s make the trendy education theorists explain their thinking. And let’s see all the email trails flowing through education ministries, if only to assess whether they were comprehensible. Jeremy Paxman to chair. (“Come on, come on!”)
Religion as a bulwark against big government
The ongoing debate in the United States over Obamacare recalls the value of religion in the debate on liberty. Key to the religious perspective on the debate are efforts by the US Department of Health and Human Services (HHS) to require Catholic organisations to provide contraceptive, abortifacient and sterilisation services to their employees as part of their health insurance programmes; an attempt which the Catholic Church has staunchly resisted as infringing on matters of conscience.
The opposition from the Catholic Church of course hinges on religious freedoms guaranteed under the First Amendment, but galvanises awareness among religious groups of the broader personal freedoms at stake under the other Obamacare mandate, requiring all Americans to purchase health insurance on pain of a fine. Indeed, a Gallup poll now shows that a majority of Americans regardless of political persuasion view the mandate central to the health reform package as unconstitutional.
In some ways, the circumstances resemble the manner in which the first New Deal was brought down by provisions which violated the kosher practices of Jewish butchers, as recounted in an article in The Freeman this month. In that case, the butchers’ challenge did not rest on First Amendment grounds, but it was motivated by religion and ultimately resulted in the economic regulation being struck down by the Supreme Court.
As the religiously-minded classical liberals of the 19th-century wrote, religion was valuable in a free society because it reminded the people that their sole duty was not to the state, and could thus serve as a means of protecting civil liberties from encroaching government. As historian Ralph Raico says of Alexis de Tocqueville, who penned Democracy in America in 1835, the Frenchman believed that religious sentiment:
“...sets up barriers to the heedless trampling on individual rights. It is ultimately because of these influences, he holds, that ‘no one in the United States has dared to advance the maxim that everything is permissible for the interests of society, an impious adage which seems to have been invented in an age of freedom to shelter all future tyrants.’ ” (p. 99)
Whatever the Supreme Court may decide this week – whether it overturns or upholds the individual mandate which affects all citizens, or the HHS contraceptive mandate which affects employers – the religious dimension of this debate will hopefully sharpen awareness of individual liberties in future political discourse. Many secular libertarians today, like their 19th-century forerunners, suspect authority including religious authority. Rather, it is coercive authority which is to be suspect. Ultimately, the first protection in upholding the rule of law in a free society is not the court or legislature, but the sentiment of the people, wherein religious sentiment can perform a valuable role.
A cheer for constitutional monarchy's restraint on government
As the Queen’s Diamond Jubilee celebrations wind down, it may be well to reflect on an aspect of public choice theory which supports constitutional monarchy — principally its rôle as a brake upon self-aggrandising politicians.
Public choice argues that, contrary to the myths propagated about the selfless motives of public servants, politicians and bureaucrats can be as self-interested in their public personas as they are as private citizens.
This is not the time to examine the unitive functions of the Crown, nor the acts of public service performed by the Royal Family — and how monarchy either refutes or conforms to the political landscape sketched out by public choice theory (though I personally believe the opportunities for gain are very few, while the burdens are many).
Neither is this an argument for constitutional monarchy as against republican forms of government; indeed, this may be one of the few areas where both forms, when modelled on justice, are equally serviceable according to the respective country’s traditions and national character — quite in variance, by the way, with respect to economics, where all the arguments are in favour of classical liberal/Austrian theories and quite contrary to Keynesian prescriptions.
Moreover, let it be admitted that constitutional monarchy is rarely an active force in limiting the power of politicians (minority parliaments being one exception, where the Crown has legitimate avenues of intervention), but serves rather more as a passive agent in limiting the State.
First, the very hereditary nature of British constitutional monarchy — i.e., non-elective — disinclines government to aggrandise the Head of State. Governments are reluctant to invoke public criticism for expenditures which do not in some way flatter the ‘heirs’ of democracy (especially when the House of Windsor is itself exceptionally well-endowed financially): Witness the absence of a royal yacht when H.M.Y. Britannia was decommissioned.
Second, the constitutional role of the monarch in the Westminster parliamentary system means that the prime minister is a servant of the Crown and cannot therefore with impunity rise above his station. It is at best to be guilty of lèse-majesté, and at worse an affront to the parliamentary party which can always be relied upon to remember that the inhabitant of No. 10 is simply primus inter pares.
The theoretical ground of this public choice defence is laid out by Austrian economist Hans-Hermann Hoppe who, while he may not necessarily be a monarchist, sees the unrestrained growth of elective governments as far more destructive of personal liberty and economic freedom. When absolute monarchy reigned, Hoppe argues, the State and its appurtenances were held as private property, and husbanded wisely as a future inheritance; subjects were jealous of their rights and defended them tenaciously (arising from an awareness of ‘class consciousness’), leaving the Crown on guard not to exceed its authority. Democracies, to the contrary, do not arouse a corresponding scepticism — Why, one day I too may be leader of the country! — but nor do they engender similar feelings of safeguarding wealth: Without the responsibility of bequeathing royal estates to one’s children, politicians become mere ‘caretakers’, and the spoils of State become transitory gifts that must be enjoyed and shared with one’s cronies while the democratic gods shine (a form of present-orientedness that is reflected in citizens’ consumption rather than investment).
Arthur Seldon called this ‘the dilemma of democracy’, noting four weaknesses in popular government: short-sighted with material resources; over-expansive with a tendency to ‘grow’; liable to conspiratorial patronage; and uncritical of majoritarian electoral decisions.
All of which leads me to wonder why classical liberals are so often enamoured of the republican ideal. As Hoppe observes:
From the viewpoint of those who prefer less exploitation over more and who value farsightedness and individual responsibility above shortsightedness and irresponsibility, the historic transition from monarchy to democracy represents not progress but civilizational decline.
One can understand their inability to appreciate a Tory reverence for tradition and continuity, yet why do they so cavalierly dismiss the public choice arguments that demonstrate that limited government in the age of the Welfare State is held hostage to democratic fortune?
‘It is the highest impertinence and presumption, therefore, in kings and ministers, to pretend to watch over the œconomy of private people, and to restrain their expence,’ wrote Adam Smith in The Wealth of Nations. ‘They are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expence, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will (II.iii.36).’
Let not the irony be lost: Britain has gone from the time when a burgeoning representative democracy set in motion the end of the divine right of kings, transformed thus into constitutional monarchy — which itself has become the most visible restraint on elected politicians who behave as if themselves graced with divine sanction. We may no longer fear kings, but their ministers remain a threat to our rights and freedoms. Elizabeth II embodies the limits we must impose upon the political classes; her Diamond Jubilee an occasion to remember the State is the servant of the people. God Save the Queen!
New at AdamSmith.org: The Case for Single-Issue Activism
In recent years, believers in a small state have largely failed to convert good intellectual arguments against interventionism into concrete political achievements. Whig argues for a change of gears by liberals, away from politics and towards a focus on single-issue group campaigning.
Classical liberals, libertarians or indeed anyone arguing for a smaller state (I’m going to use ‘Liberals’ as shorthand) have a serious problem. We don’t seem to be very successful at converting the corpus of intellectual work and powerful arguments against interventionism into concrete political success. Whilst the Archbishop of Canterbury, Polly Toynbee or Michael Sandel, to name a few, seem to think we are living in an era of unbridled free markets, any sensible observer can see that this is not the case; state capitalism or corporatism is the status quo. In reality, the trend of the last twenty years has been a move away from free markets with growing taxation and more regulation. What can be done to reverse this trend or at least to revive the momentum of support for limited government?
While there are some elements of the Conservatives and perhaps Liberal Democrats with (some) Liberal ideals – and one or two Labour politicians have sensible ideas on particular issues – there are no elements of mainstream political life we can call home. Fortunately, one might say the same for out-and-out socialists but I would argue that, given the size and reach of government and the state of public discourse, they are rather more at home in contemporary politics.
Wealth and democracy
In most societies the rich are outnumbered by the not-so-rich (which for simplicity might be called "the poor"). This matters in a democracy because the poor have more votes. There is thus always a tension between how much politicians will raid the wealth of the rich to distribute in benefits to the poor. If they take too much, the rich might move away to generate their wealth elsewhere. If they take too little, social unrest might result, possibly even revolution, which is not what the rich want, and certainly not what the politicians want. These limits have set restraints on how far the process could go.
The tension is dynamic, sometimes favouring the one group, only to be redressed later by a tilt toward the interests of the other. It could be argued that Britain in the 1970s, with a top income tax rate of 98 percent, had tilted too far against those who create wealth, and that this was redressed to some extent in the tax-cutting 1980s.
Unfortunately in recent years the politicians in democracies discovered a third group they could raid with impunity, distributing its wealth and assets to the poor without limiting too much the capacity and co-operation of the rich. This third group has no votes, and does not therefore limit the electoral prospects of the politicians who plunder it. The group is called the future.
Politicians found they could deliver benefits to the current poor by borrowing money that would have to be repaid by future generations. Since those future generations are not here, they have no say in the matter, or any ability to influence current events. There have thus been no restraints on the degree to which democratic politicians could raid their wealth in order to buy electoral popularity today.
Politicians in many countries learned how to do this, until the overhang of debt became so large that people doubted that it could ever be repaid. If there is a solution to this problem afflicting democracies, one that is compatible with the democratic process, it has yet to reveal itself. Perhaps some form of inviolable constitutional limits on borrowing might be a solution of sorts?