Kudos to Congressional Republicans for defending capitalism and rejecting central economic planning. On Tuesday, Senate Republicans denied their Democratic colleagues the 60 votes needed to end debate and pass a windfall oil profits bill. The bill would have put a 25 percent tax (windfall oil profits tax) on profits over what would be determined "reasonable" when compared to profits several years ago. It would have regulated energy futures traders in order to limit market speculation. It would have made price gouging of oil and gas a federal crime during a declared energy emergency by the president. Lastly, it would have given the Justice Department authority to bring charges of price fixing against countries that belong to the OPEC oil cartel. The measure was meant to address and punish those that are responsible for high prices at the pump – namely big oil companies, speculators and oil producing countries. Of course, these Washington contrived villains are not ultimately responsible for high gas prices. Even if they were, the measure would not have solved the problem. It would only have made it worse.
It is amazing what short memories proponents of a windfall profits tax have. In 1980, Jimmy Carter enacted one and from 1980 to 1988 (the last year of the tax) there was a 3 to 6 percent decrease in domestic oil production. This happened because the tax increased the marginal cost of production, thereby reducing the quantity of gasoline produced. A decrease in gas supplies without a corresponding decline in demand means even higher prices at the pump. In a best case scenario, if the tax had been enacted oil companies would pass the tax expense on to consumers in the form of higher prices and we might have to wait in long lines to fill up or be subject to rationing.
Windfall profit taxes are also bad because 41 percent of oil company stocks valued at over $267 billion are currently held in various forms of pension plans and retirement accounts. The tax would cause the values of these accounts to dwindle causing negative effects on national savings and our senior population. Rest assured, while the Democrats believe a windfall profits tax is the right thing to do, the measure’s vengeance would have been mostly felt by the American consumer.
Article comments
1 - Dave Nalle
Some good points here, Kenn, but I'm afraid I have to contest one of your points. Much though we all hate fiat money and all the bogus currency the government has printed, it is not actually responsible for more than a fraction of the increase in oil prices.
For example, in the 3 year period when so much money was printed, the value of the dollar dropped only 15%. Mathematically that means it only increased the nominal price of a barrel of oil by about 9%, nowhere near enough to account for the massive increase in the price per barrel in that same period.
And if we look at the numbers for the last 7 years, since Bush started printing more money to deliberately deflate the value of the dollar, you see the price of oil increasing almost 200% while the value of the dollar has gone down only 44%. That 44% decrease in dollar value accounts for only an 81% increase in the price per barrel, so the remaining 3/5 of the increase in oil prices MUST have a different cause.
Sorry, but the math just doesn't back up your claim.
Dave
2 - jamminsue
The only part of the bill that I would have supported was the speculators being required to pay 100% of their bid for the futures, same as the "regular" stock market speculator has to pay for his stock. When I found out that the speculators only have to front 25% that concerned me.
Isn't that how the stock market was a contributor to the Great Depression? I know of other issues, but that was one of the biggies, right?
3 - Clavos
jammin,
"speculators being required to pay 100% of their bid for the futures, same as the "regular" stock market speculator has to pay for his stock."
Under NASD and NYSE regulations, an investor can buy stock on the NYSE with as little as 50% initial margin. Maintenance margin can be as low as 25%.
Individual brokerage firms can establish their own requirements (higher, not lower), but usually don't.
4 - bliffle
Leverage is obtained by buying options, not the stocks or commodities themselves.
5 - Clavos
And your point would be?
6 - Kenn Jacobine
Dave,
I did say that "The primary culprit responsible for high oil prices are the monetary central planners at the Federal Reserve Bank." There is a demand issue also from India and China. Additionally, our foreign policy in the Middle East has caused speculation - will the U.S. invade Iran and oil supplies cut? So the Fed in my view is not the only cause of the high cost of gas. The article's point was that planned central economies do not function as well as totally free markets. Free markets are not perfect, but they are the best way to go and I will always be unapologetic about that view
7 - bliffle
Command economies don't work but neither do "free market" economies since they soon devolve into monopolies administered in much the same way and with the same disastrous results as command economies.
8 - bliffle
If the congressional republicans were really opposed to managed economies they would stop promoting subsidies to oil interests as well as opposing windfall profits taxes. Subsidies and taxes are two sides of the same coin.
9 - bliffle
If the congressional republicans were really opposed to managed economies they would stop promoting subsidies to oil interests as well as opposing windfall profits taxes. Subsidies and taxes are two sides of the same coin.
10 - Dave Nalle
Kenn, control on the money supply and interest rates and regulation of banking does not necessarily mean that trade in general is not free. It's certainly possible to have controls and regulation on finances while having pretty unregulated trade in most other areas, and that seems like a functional balance between the stability of managing the financial sector and the dynamic growth that goes with free trade in other sectors.
Dave
11 - Kenn Jacobine
Dave,
The problem is that central banks do not provide stability to the financial markets. Look at 20th Century U.S. economic history - Great Depression, various recessions, 1970's inflation, and today's crisis. I am afraid that today's crisis is going to be the mother of all economic crisis. The Fed has backed itself into a corner - recessionary economy with inflation and no where to go on interest rates. Can anybody say stagflation?
Further, the Fed was founded with one purpose - to protect big banks from failure and allow them to participate in risky behaviors to achieve huge profits. JP Morgan was at the front of fighting for a central bank and among its rewards was the Fed guaranteed "purchase" of Bear Stearns.
Lastly, the inflation caused since 1913 is huge. Inflation is a hidden tax which allows the politicians to spend at will while our savings and the financial integrity of our currency is destroyed. I just don't see how the current Fed is a benefit to the U.S. as a whole?
12 - Dave Nalle
Last I checked large profits are GOOD for the economy. More people making more money including bank shareholders seems like a very desirable thing. Plus I'm pretty sure none of us would benefit from the failure of a bunch of big banks, even if that were the sole function of the Fed.
As for stability, your assertion that the Fed somehow caused the depression, the inflation of the 1970s and all of our current problems is absolutely unsupportable. It just doesn't square with the facts.
The Fed did not cause US manufacturers to overproduce in anticipation of non-existent foreign markets in the 1920s. It didn't cause the oil shortage, high taxation and terrible government policies of the 1970s, and while it may have created opportunity for misbehavior in the current situation it certainly didn't cause it.
And do you know why Morgan ended up supporting a Federal bank? Because when the Treasury ran out of gold in 1895 as a result of the Panic of '93, Morgan had to basically front them $65 million in gold against a $100 million bond issue to keep the government solvent. Morgan rightly concluded that a gold-based currency system was too vulnerable and needed rational control.
Dave