Politicians all want to do something for the economy in the worst way, and they usually do. Why? They do so either because they want to get elected, get reelected, or make money for themselves and their friends.
Perhaps a better title for this posting would be, Normative vs. Positive Economics ~ Why Politicians Aren’t Always the Best Deciders. But, because the windfall profits tax is a hot blog topic lately, I figured I’d get more hits on it with the title I chose.
Most economists, including those of us who, as teachers, just dabble at the edges of this “dismal science“, question the wisdom of imposing a windfall profits tax on big oil. We all teach that, ceteris paribus, when governments raise taxes on producers, much of that increased cost of production is simply passed-on to consumers. But if economics is only useful in the study of how things are (positive economics), then it truly is a dismal science. Fortunately, economics also involves consideration of the way things should be (normative economics).
Most Democrats in Congress, and the presumptive nominee of the Democratic Party for President, responding to the country’s desire for change, think that a windfall profits tax on big oil would be a “fair and reasonable” way to ease the pain and anxiety that Americans are feeling over rising fuel costs. They tend to believe that democracy should deliver the basics of life for all working Americans — normative economics. Republicans, who are more resistant to change, tend to be more pragmatic. They believe in classic economics which teaches that government should get out of the way and let market forces do what they do — positive economics.
I don’t recall for sure who said it first, but it certainly seems to be true: Politicians all want to do something for the economy in the worst way, and they usually do. Why? They want to do so either so they can get elected, get reelected, or so they can make money for themselves and their friends.
Here’s an interesting quote from the latest Sierra magazine: “Let us rid ourselves of the fiction that low oil prices are somehow good for the United States.” Who said this? Then representative Dick Cheney in 1986 said this as he introduced a bill before Congress to impose a tax on imported oil. Gee – that was smart.
President Jimmy Carter, who has taken an awful lot of flak over the years from Republicans for the economic problems that persisted during his administration, may just be the exception to the rule for politicians. As President, responding to OPEC’s orchestrated reduction of output to punish the west for its support of Israel during the Yum Kippur War, Carter created the Depart- ment of Energy and established a national energy policy aimed at reducing our dependence on foreign oil. By personal example, he encouraged Americans to cut back on energy consumption and he removed price controls from domestic petroleum production. As imports and oil company profits later began to grow, he tried a windfall profits tax anticipating big revenues. Instead, tax revenues declined and domestic oil production plummeted by an estimated 795 million barrels. So, we’ve been down this road before.
I personally believe that Carter was acting on the best advice of the economic advisors who had his ear at the time, and that he acted in the best interests of the nation as a whole. But one would think that we’d have learned our lesson by now.
Try as I may, I fail to find much convincing argument on the Internet currently to support Barack Obama’s pledge to impose a windfall profits tax on big oil. To the contrary, the blogosphere is filled with augments against it (good work McCain supporters). But Obama’s opponent this year isn’t making much economic sense either by advocating a federal gas tax holiday. So, why are they both making these kinds of promises? They are doing so because these things resonate with the voters, and the voters are very much in a populist mood this year. Only 47 percent of Americans are against nationalizing our oil companies, which most other nations have already done, oil being such a basic commodity to the livlihood and social welfare of a nation’s people.
A June 14th Rasmussen Report poll found that only 36 percent of voters believe that a windfall profits tax on big oil would cause fuel prices to go up. The rest, less 23 percent who said that they were not sure, said that prices would either go down or that they would stay the same. So, while the tax idea may be a loser in terms of offering a near-term solution to higher prices, it’s not necessary a looser politically, unless McCain supporters can successfully educate voters to the contrary before November. Nor is the tax necessarily a looser in terms of contributing to a long-term solution. The same Rasmussen Report poll found that 76 percent of Americans believe that new energy technology developments are more likely to solve the problem than anything else, and the majority polled said that, given sufficient investment, private industry would be far more likely to succeed at this than government research programs.
Okay, you say, but you don’t believe in polls. Well, I do. I believe that, collectively, Americans are not dumb. It’s called, government of, by and for the people, not just for stockholders, but for people who must borrow from Peter to pay Paul on a monthly basis just to keep food on the table and their kids in school.
Now we get into the arguments about whether big oil’s profits are truly excessive and whether big oil is or is not already investing substantially in alternative energy technologies.
Exxon Mobil, the world’s largest oil company, reported last quarter a profit of $10.9 billion, up 17 percent from a year before. It was the second-most-lucrative quarter in the company’s history, after the record $11.7 billion pocketed in the previous three months. Chevron reported profit of $5.2 billion, up almost 10 percent from a year earlier. Europe’s Royal Dutch Shell said its quarterly profit jumped 25 percent to a record $9.1 billion, while British Petroleum said its profit soared 63 percent to a record $7.6 billion. Earlier, ConocoPhillips said its profit rose 17 percent to $4.1 billion, and Occidental Petroleum said its profit climbed 50 percent to a record $1.8 billion. But, is any of this excessive? What is a fair and reasonable profit? Should government ever set limits on how successful corporations can be in terms of profit, and should we not be able to compel businesses, by legislation, to act responsibly? All these questions are in the realm of normative economics, so the answers tend to be subjective.
Most of us would agree that 10 percent profit is fair and reason- able… but twice that much – seven times that much, especially when the average Joe can’t afford enough gas to just commute back and forth to work? Forget about that summer trip this year, kids. No wonder Americans are outraged. Even John McCain is outraged. On May 5, while campaigning in North Carolina, McCain said that he was willing to consider the windfall profits tax too. “I don’t like obscene profits being made anywhere,” McCain said, “I’d be glad to look not just at the windfall profits tax, that’s not what bothers me, but we should look at any incentives that we are giving to people – or industries or corporations – that are distorting the markets.”
On the score card for investments in alternative energy tech- nologies by U.S. oil companies, it seems to me that the picture is more objective. Speaking at a Houston energy conference last year, Exxon Mobil chairman and CEO Rex Tillerson said, “I don’t know much about farming, I’m not an expert on biofuels, and there’s not a lot of technology I can add to moonshine. There is really nothing we can bring to that whole issue. We don’t see a direct role for ourselves with today’s technology.” Obviously, he and the second largest corporation in the world after WalMart, are more interested in near term profits than into long term sustain- ability. Long term? Hey, that’s my grandkids we’re talking about now!
During their press conference last month, the founding family and self-billed longest continuous shareholders of Exxon Mobil, the Rockefellers, said that they think the oil giant should be investing more in clean energy — and that separating the chairman and CEO functions may put the company in a better position to face challenges in the future. Exxon Mobil’s competitors, they pointed out, like British Petroleum, Royal Dutch Shell, Conoco Phillips, and Chevron, have collectively invested billions of dollars in recent years in renewable, low carbon technology research to reduce emissions and integrate the cost of carbon into strategic planning and investments. But half of these companies are foreign, government-owned companies. So, no, I do not think that U.S. oil companies are adequately committed to the long term, best interests of the American people. They are concerned first and foremost about near term profit for their shareholders.
The problem of high fuel prices is basically an issue of supply and demand. The high and ever-growing global demand for oil and its limited supply, coupled with market uncertainty over the stability of its supply, is raising the price per barrel. At the same time, profit expectations of oil company stockholders stoke each company’s drive to seek ever higher profit margins. Obviously, these two factors are in tension. If economic theory holds, in time the market will find an equilibrium that suits both the consumer and the investor. But this begs the question: will it happen soon enough? As John Maynard Keynes said, “In the long run we are all dead.”
Fuel prices are less in the United States than they are in most of the rest of the world. However, Americans don’t care. Our economy and our standards of living, for as long as any of us can remember, have been based on the false assumptions of an unlimited and uninterrupted supply of oil. We complain about volatile prices for gas and diesel at the pump while, at the same time, we demand that our investments turn a profit.
A windfall profits tax, if implemented properly with incentives built-in to increase investment in capital to include new energy technologies, might help to regulate market volatility felt at the pump. But let me emphasize the underlined word, might; big oil moguls and large shareholders could just decide, as they have in the past, to just take their money and run. I’m sorry Barack, but I must conclude that it’s highly unlikely that a windfall profits tax will raise much revenue or ever bring prices down. To bring prices down, we must do some combination of the fallowing: reduce world demand for oil; restore the value of our dollar by reducing debt and the foreign exchange deficit; reduce or eliminate market anxieties concerning the flow of oil out of the Persian Gulf; and develop sustainable alternatives for it.
I invite your comments to this posting, whether pro or con.