Monday, November 28, 2005

Political and Economic Illiteracy

Gene’, an American living in the UK, posted on “Harry’s Place” (, the following today on the politics and economics of petrol (aka ‘gas’) under the heading ‘Oil companies and Congress enable Chavez propaganda coup’.

"A couple of observations about President Hugo Chavez's program to provide heating fuel at discounted prices for low-income customers in Boston through the Venezuelan-owned oil company Citgo.

--No one should believe that Chavez is more concerned about helping the American poor than he is about scoring propaganda points against the USA. But it would be disgusting for anyone who can comfortably afford to heat his home to criticize anyone who can't for accepting Citgo's help.

--By earning
enormous profits at a time of record-high fuel prices-- prices that for many Americans this winter may mean a choice between heating and eating-- US oil companies make it possible for Chavez to score these points. So does Congress by failing to enact a windfall profits tax for the oil industry.

Senator Byron Dorgan, a North Dakota Democrat, has sponsored a bill that would tax profits when oil is above $40 a barrel and rebate the money to taxpayers. The Senate rejected the measure... 64-35.

Senator Charles Grassley, an Iowa Republican, has asked oil companies to donate 10 percent of their profits to help families pay heating bills. The world's five biggest publicly traded oil companies earned a combined $33.4 billion in the third quarter.
Outside of Citgo, the oil companies have
refused Grassley's request.
Some US oil executives and politicians ought to be ashamed of themselves. Of course they won't be.”

“By earning
enormous profits at a time of record-high fuel prices” is a statement of the blindingly obvious. Profits are high because fuel prices are high, all the way through the world's fuel chain. As stocks fall and replacement stocks rise, profits will fall. When fuel prices eventually fall, stocks will eventually sell at a loss below their bought-in prices until these stocks are used up and new stocks purchased at the new lower prices. Hence, the usual price reduction drag whenever this happens.

Is the remedy one of imposing government windfall taxes on the oil companies? This is a double bind. The other – and major gainer – of rising fuel prices, of course, is the government in the tax imposed on, er, fuel prices! This windfall tax gain will continue while oil pirces are high irrespective of costs. Whatever the oil companies rake in from windfall profits (which in due course become windfall losses), the government rakes in from their windfall tax gains, and for which there are no losses. This, incidentally, is why Chavez can afford to play games with gullible US public opinion – it is paid from the additional tax gains his government makes from high world fuel prices.

Senator Byron Dorgan, a North Dakota Democrat, is playing populist politics, which are always short-term with long-term consequences. He wants to add to the windfall gains the government makes from oil price increases a share (everything above $40) of the temporary windfall gains of the oil companies by increeasing their taxation to the government. How this benefits the US consumer is not explained. How would the rebate be distributed? How much of it would be re-distributed to consumers or tax payers and when? A means test – the rich can afford the higher prices, so only the poor get the rebate? How much would go into administration to identify the beneficiaries? More Federal Commissions and new agencies? Or Federal and State enforced cuts in pump prices? How many inspectors would that require? Or would the high costs of the policy simply be deducted from the confiscated windfall profits?

Senator Charles Grassley, an Iowa Republican, wants a 10 per cent deduction from oil profits “to help families pay heating bills”. Really? Who administers this distribution and at what cost? Who identifies the US families that would be eligible? Federal or State government? What rights of appeal would there be for those above the cut off line? Whenever has allowing governments to select revenue from their pork barrels been either an efficient or fair use of government power? What is the expected rate of litigation over these issues?

The fact that so far Senate has rejected such populist nonsense is small comfort. A vote against of 65-34 is worrying; it should have been 99-1. Economic illiteracy is one thing. But illiteracy about the tax and spend (or spend and tax) behaviours of government is quite another.

Lastly, I have advised that the Chavez ‘problem’ should be left alone to wither away as his ‘socialist’ policies impoverish the country and alienate the people. Opportunist populism should be ignored. Do Nothing! Don’t repeat the mistake of past policies with Castro that would give Chavez a political lifeline by doing something – anything – that keeps him in power.

For a country that claims close affinity with Smithian markets (albeit of a distorted kind from the miss-users of Smith’s Legacy), I am astonished that some of the members of its highest office advocate doing exactly what Chavez and is ilk do when they interfere in the economy. It will have the same disappointing results.


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