Richard Epstein on Barack Obama – his former colleague

Professor Richard Epstein, a former Business Roundtable Sir Ronald Trotter Lecturer, is interviewed here on the US economy, stimulus, regulation and his former Chicago Law School colleague President Obama.  

Richard has a fierce intellect and, as usual, delivers wide ranging and rapid fire observations:

Below are some examples of Professor Richard Epstein’s work – for many more visit www.nzbr.org.nz and enter his name in the search field.

What Do We Mean by the Rule of Law? 

Understanding America

A Country is Not a Company

Affirmative Action: The US Experience and Implications for New Zealand

Has the ‘Peak Oil’ drama peaked?

Remember Peak Oil?  Just a few years ago Green Party leaders Jeanette Fitzsimons and Russell Norman routinely issued warnings about ‘the world running out of oil’ and told us that we needed to move freight off roads and on to shipping and rail, and commuters out of cars and on to trains, buses and bicycles.

They weren’t alone of course.  An April 2006 article in The Economist reported that:

For years a small group of geologists has been claiming that the world has started to grow short of oil, that alternatives cannot possible replace it and that an imminent peak in production will lead to economic disaster.  In recent months this view has gained wider acceptance on Wall Street and in the media.  Recent books on oil have bewailed the threat.  Every few weeks, its seems, “Out of Gas”, “The Empty Tank” and “The Coming Economic Collapse: How You Can Thrive When Oil Costs $200 a Barrel”, are joined by yet more gloomy titles.

How times change!  Just this month the following items have appeared in the international media (hat tip:  Global Warming Policy Foundation).

In the last few years, we’ve discovered the equivalent of two Saudi Arabias of oil in the form of natural gas in the United States. Not one, but two. –Aubrey McClendon, CBS, 14 November 2010

Just as it seemed that the world was running on fumes, giant oil fields were discovered off the coasts of Brazil and Africa, and Canadian oil sands projects expanded so fast, they now provide North America with more oil than Saudi Arabia. In addition, the United States has increased domestic oil production for the first time in a generation. Meanwhile, another wave of natural gas drilling has taken off in shale rock fields across the United States, and more shale gas drilling is just beginning in Europe and Asia. Energy experts now predict decades of residential and commercial power at reasonable prices. Simply put, the world of energy has once again been turned upside down. –The New York Times, 17 November 2010

The word “revolution” is overused, but it’s truly appropriate when applied to these technological breakthroughs. Literally trillions of dollars’ worth of shale oil and gas can now be economically extracted. The implications are staggering. Oil production, too, in the U.S. will increase far beyond what experts thought possible a few short years ago. The Earth is awash in energy. –Steve Forbes, November 2010

Oil and gas will continue to be pillars for global energy supply for decades to come. The competitiveness of oil and gas and the scale at which they are produced mean that there are no readily available substitutes in either one year or 20 years. — James Burkhard, The New York Times, 17 November 2010

“When wind guys talk to each other,” said Michael Skelly, president of Clean Line Energy Partners, a developer of transmission lines for renewable energy, “they say, ‘Damn, what are we going to do about the price of natural gas?’” Without a government policy fixing a price on carbon emissions through a tax or cap and trade, the hydrocarbon bridge could go on and on without end. –The New York Times, 17 November 2010

In order to avoid higher electricity prices, Prague is slowing the solar power boom and is slapping a new tax on it. It will be the death knell for smaller operators – up to 1450 companies are seriously effected by the new tax. In the neighbouring country of Slovakia, an amendment to the Energy Law was adopted in May which has severely curtailed the potential for solar energy investment.  –Christoph Thanei, Die Presse, 17 November 2010

The Spanish government has launched a new regulatory framework that will result in subsidized tariffs for ground-mounted solar energy projects drop 45% this year, killing future investment in the trade, which industry leaders expect will be frozen in the next few years. In addition, approximately 75,000 jobs have been lost with countless firms moving abroad to find new growth opportunities. -–Renewable Energy World, 15 November 2010

Danish environmentalist Bjorn Lomborg suggested in his 2003 Sir Ronald Trotter Lecture for the Business  Roundtable that oil and substitutes like shale oil could cover current energy consumption levels for 5000 years.

He also noted that “Sheik Yamani, founder of the Organisation of Petroleum Exporting Countries (OPEC), has often pointed out that the oil age will come to an end but not for a lack of oil, just as the stone age came to an end but not for a lack of stones.  Humans search constantly for better alternatives.”

Provided markets are allowed to adjust to supply and demand trends, and are not distorted by government interventions based on false ‘peak oil’ premises, there is every likelihood of an eventual smooth transition to other energy sources.

Pathways to prosperity for indigenous people

The Business Roundtable was very fortunate to have Aboriginal leader and founder of the Cape York Institute Noel Pearson deliver the 2010 Sir Ronald Trotter Lecture Pathways to Prosperity for Indigenous People last Tuesday, 2 November.

Noel was an outstanding speaker and impressed the large audience with the scope of his talk – he covered a wide variety of policy issues including education, welfare, employment and other indigenous issues – and it was obvious he is a deep philosophical and economic thinker. I was particularly interested in how Noel drew on the work and principles of Adam Smith, and the impact that thinking has had on the inspiring work the Cape York Institute does for impoverished aboriginal communities.

The Business Roundtable was grateful to Tainui Group CEO Mike Pohio for a vote of thanks that reflected the audience’s appreciation for an exceptional speech.

The whole lecture, including Business Roundtable chairman Roger Partridge’s welcome and my introduction is on vimeo, or there are clips edited to just Noel’s talk below:

Part I

Part II

Part III

Part IV

The virtues and perils of gridlocked government and policy packages

With the dust somewhat settled I thought I’d take a look at a couple of interesting aspects of the seismic shift in government power in the United States.

In a surge of voter dissatisfaction at the state of the US economy, Republicans took back the House of Representatives in the mid-term elections last week.

So what can Americans expect from the new congress? At least a breather, according to distinguished American legal scholar, frequent visitor to New Zealand and past presenter of the Business Roundtable’s Sir Ronald Trotter Lecture, Richard Epstein:

The good news is that the incoming crowd could not repeat the blunders of the outgoing Congress even if it tried.  Divided government counts gridlock as one of its greatest virtues.  Even a long overdue political bed rest from the next round of Obama legislative mischief should provide a strong tonic for the economy.

But clearly something else has to be done.  Unfortunately, our complex system of divided government has a downside that will be difficult to overcome.  It is just as hard to repeal bad legislation once it is in place as it was to enact that bad legislation in the first instance.  Ties go to the status quo, which in this instance is not enough.

He goes on to suggest some stronger remedies:

The first and most obvious task is to find some political way to derail or postpone the introduction of the health care bill whose internal flaws become only more apparent with each painful administrative announcement. 

The hugely costly but ultimately ineffectual and unpopular health reforms seemed to be a major factor in the demise of many Democrats.  

He also advocates moves in the direction of a flat tax:

On a second front, Congress could opt again toward a flat tax by refusing to raise the top rates on the wealthy.  Only the New York Times editorial board—incorrigible after an electoral drubbing—could be so short-sighted as to think that some deep attachment to income redistribution should drive all tax policy, when incentives for production, labor and investment matter so much more.

and argues that a vigorous programme of deregulation is needed:

Start with easing all the restrictions on employment so that it actually makes economic sense to hire people on terms and conditions that make sense for workers and employers alike.  Then push forward a free trade agenda that removes all the bottlenecks to the movement of labor, goods and capital across national boundaries.  Then be relentless in the opposition to the continued dominance of public unions. And finally open up education to competition from the private sector, including the for-profits, so that entrenched public institutions do not continue to hold their implicit monopoly position. 

The economy and, in particular, government spending, was undoubtedly the defining issue in the US mid-terms.  Plenty of lessons there for New Zealand, and let’s hope it adds impetus to the New Zealand government’s efforts to pursue its 2025 goal.   

Another lesson for New Zealand is contained in Richard Epstein’s explanation of his deep personal aversion to publicly endorsing political candidates for office:

The reason has nothing to do with any sense of personal shyness about taking strong stands on substantive issues.  Indeed, the concern is precisely the opposite.

Candidates represent what might be called tied purchases of a market basket of goods.  The only choices that are given to hapless voters is to pick one such basket over another.  Anyone who offers the menu at a Chinese restaurant gets to choose one from column A and one from column B.  Yet that form of flexibility is denied in choosing people for political office.  It is not because of any inherent defect in the political system.  It is simply because the person is the smallest unit for which it is possible to cast a vote for holding public office.  The only comfort that one takes is that no voter is required to vote for the entire slate of candidates from either party, but can pick and choose among them.

No such comfort in New Zealand.  Under New Zealand’s MMP system, one of the two votes you cast does force you to vote for an entire slate of candidates. More’s the pity.

Another ‘takeaway’ is that voting (politics) is a very crude way for people to pursue their preferences. Markets and voluntary cooperation are often infinitely superior. We should reserve for voting only those things that need to be decided through the political system.

I recommend reading Richard Epstein’s full article. 

As a postscript, I was interested to note that the Tea (Taxed Enough Already) Party – surely one of the most spectacularly successful grass roots movements of our times – is not the ‘extreme conservative movement’ it’s sometimes been painted as. The movement has in fact brought together huge numbers of Americans of a variety of political hues, united in a belief in fiscal austerity as a solution to the country’s economic problems. Interestingly one recent survey showed that 28% of Tea Partiers are independents, and 17% Democrats. 

Much of the movement’s success in uniting such a large and diverse constituency (Moe Tucker of the band Velvet Underground has been a vocal supporter) can be attributed to a desire to maintain a steadfast focus on the economy, and in particular government spending. Another lesson for New Zealand?

For an interesting pre-election view on the biggest myths of the mid-term elections which covers Tea Party misconceptions, read Kimberly Strassel’s article.

Black or White: Good Cat is Mouse-Catching

This is an article I wrote for the ODT last week:

Black or White: Good Cat is Mouse-Catching

Some months ago the Sunday Star-Times organised a series of questions to put to the prime minister, John Key, and printed them along with his replies.

This was a worthwhile exercise in open democracy.

My question was along the following lines: “Your predecessor Helen Clark famously declared that the role of government is whatever the government defined it to be.  What is your idea of the proper role of government?”

Mr Key replied that his view was a pragmatic one: the government should do whatever works.

This was a good answer.  It reminded me of the Sichuan proverb: “black or white – good cat is mouse-catching”.  Deng Xiaoping, the Chinese leader who initiated China‘s moves away from a socialist system in the 1970s, adapted it to say that it didn’t matter whether the cat was black or white “as long as it can catch mice”.

Deng’s reforms certainly worked: in a generation they lifted more people out of poverty than ever before in human history.

I agree that public policy should be based on what works for prosperity, liberty and equity.  No one would argue that governments should adopt what doesn’t work.  Hence the need for evidence and analysis to inform policy: for so-called “evidence-based policy making”.

Economics is a discipline that can help inform policy choices.  It is fundamentally an empirical science.  There is no sense in which a policy can be correct in theory but wrong in practice: if the practice goes wrong, the theory is defective (as socialism demonstrated).

Free trade is an example of a policy that is ultimately justified more on practical than theoretical grounds.  To be sure, it rests on the fundamental economic principle of comparative advantage, but there are a number of theoretical arguments for departing from that principle: optimum tariff notions, strategic trade theory, infant industry arguments and the like.

As a matter of policy, however, the vast majority of professional economists put aside these theories as unworkable in practice and come down on the side of free trade.

A similar comment applies to business ownership.  The evidence is now compelling that – not always, but on average and over time – privately owned enterprises out-perform state-owned enterprises (and it is the general outcome that should inform sound public policy).  The reasons for better private sector performance have become well understood but the fundamental argument for privatisation is pragmatic: it generally works.

Likewise, there is a high level of agreement among economists about the potentially harmful effects of minimum wages.  In a paper last year on evidence-based policy-making, the chairman of the Australian Productivity Commission, Gary Banks, cited indigenous leader Noel Pearson (who is giving the Business Roundtable’s annual Sir Ronald Trotter Lecture in Auckland next month).

“[As Pearson affirmed], perhaps the most calamitous and tragic example of all was the extension of ‘equal wages’ to Aboriginal stockmen in the late 1960s.  Despite warnings by some at the time, this apparently well-motivated action led to the majority losing their jobs, driving them and their extended families into townships – ultimately subjecting them to the ravages of passive welfare.”

Of course, facts seldom speak for themselves – they have to be interpreted.  Everyone involved in the debate about public policy argues on the basis of some set of principles or ideas, whether or not they are conscious of them or make them explicit.

This is obviously true of the current government.  For example, the Confidence and Supply Agreement between the National and ACT parties recognises that a commitment “to limited government – government limited to its proper role” will need to be consistently adhered to if the 2025 goal of bridging the income gap with Australia is to be achieved.

‘Limited’ does not mean minimalist – or even necessarily small – government.  It means government focused on roles that economics teaches us governments need to undertake, such as the provision of genuine public goods and a social safety net.

Thus in some circumstances, high levels of spending on, say, national security (a public good) may well be justified.  But if governments go beyond such roles, economic growth and the well-being of the community is jeopardised.

A study for the Treasury suggested that a limited government criterion for public expenditure would normally point to a spending ratio of around 15% of GDP.  Even John Maynard Keynes thought government spending should be no more than 25% of a country’s GDP.  By comparison, government spending at all levels is currently running at around 45% of GDP in New Zealand.

Just as fat and lazy cats are not good mouse-catchers, over-extended and bloated governments are not good for economic growth and prosperity.

The 2025 Taskforce, which derives from the Confidence and Supply Agreement – with its emphasis on the importance of limited government – will no doubt be making that point when it reports later this month.

 

Eras beginning and ending

Welcome to my new blog.  A self-confessed technophobe, I thought it high time I ventured into the blogosphere and joined the era of new media.  I plan to comment here from time to time on public policy, economics and matters of related interest. 

The launch of this blog coincides with the end of another era, a very significant one in the history of New Zealand business and public life.  The death last week of Sir Ronald Trotter, one of New Zealand’s true heroes, saw hundreds of tributes flow from friends, colleagues and admirers from around the world.  Among his many leadership roles in business and public affairs, Ron was the founding chairman of the New Zealand Business Roundtable and led the business community through a necessary period of profound and painful adjustment to the benefit of New Zealand as a whole. 

In 1995 we inaugurated the annual Sir Ronald Trotter Lecture in Ron’s honour.  The inaugural lecturer, Chicago Professor Richard Epstein, arguably the most brilliant legal scholar of our times, wrote last week of respect for Ron that “comes from a life dedicated to an excellence of character and judgment and of good deeds that are universally known and respected.”

Yesterday family and friends packed Old St Paul’s in Wellington for a most fitting and uplifting send-off that Ron himself would have thoroughly enjoyed.  I was honoured to be invited by the family to make this tribute to Ron.  As Ron’s long-time colleague Sir Roderick Weir noted, Ron rose to the top of business because of his wonderful nature: “Everyone liked him”, Rod said.  Ron will be greatly missed.