...but they really shouldn't have to. What bubbles am I talking about? I'm talking about the mass hysteria that the American media has been pumping into the brains of Americans the past few months regarding the "credit" bubble, the "housing" bubble, the "fuel" bubble, etc. With the crash of the easy-money housing market, sky-rocketing fuel prices, subsequent increase in food costs, saber-rattling against Iran (and with no end in sight in Iraq), it seems that the hysterical socio-psychological mindset of the average American is not without spillover into other countries of the world, and not without reason. So I thought I'd throw in my two cents on the matter.
For one, the credit crisis bubble is popping, and along with it, the housing bubble. I'm convinced many of these problems stem from this country's misguided ideas regarding lending, insurance, the money supply, and government regulation. Without a long tretise on the matter, I boil it down to this: the government created this bubble, and is now scrambling to seal it back up again. As I stated in my earlier post, this country is stuck in a post-Keynesian, "the New Deal was a great idea" mindset in which the government can intervene into this intangible force called "the market" and attempt to get it into a chokehold to force it to act a certain way. This could only work if the government represented all parties in the production, distribution, and consumption areas. But it isn't. There are millions of people in this country, which in turn does business that affects billions of others. No amount of regulation by the Federal Reserve, the Treasury, or any other economic government agency could coerce such a magnificent and awesome force as the market. Of course the bubbles are popping all around us. The ideologies and vehicles which brought us these bubbles to begin with are more than two generations old (the Federal Reserve celebrates its 100th birthday in about 5 years) and were doomed to fail eventually. If you have the time, go read criticism on John Maynard Keynes. It's his philosophies that influenced FDR, which have influenced us today. If there are bubbles to be popped, they'll eventually pop. One cannot convince me that the power to attempt to coerce the economy can remain intact for long.
Secondly, these sorts of things find equilibrium. We've had stock market crashes before in the late 80s and early 90s. We've had fuel crises before. Food has been expensive, and we have fought what seemed like perpetual war before (this time, however, our Dear Leader has declared war on a concept - terrorism - which I don't think is constitutional. It doesn't wear a uniform, it has no borders, is intangible, etc. Moreover, I find it insightfully ironic and Orwellian that Dear Leader uses terrorism to fight terrorism). With each crisis, things generally simmered down, and people got back to their lives. I had a recent conversation with my wife's uncle, whose opinion on things I value above nearly everyone I know, and he opened my mind to something that I hadn't considered before but has set my mind at ease. Hopefully it does the same for you. He said that no matter what, people will strive to get along, they will fall in love, they will carry on with what they have, and things will find equilibrium. Human well-being is even stronger than any bubble under which we may think we live. We may have to adjust some of our habits, but in the end, life goes on.
My last point - an unregulated economy, in my opinion, has far fewer bubbles to allow bursting. Since WE are the market, and WE determine pricing, money supply, interest rates, etc. any bubble that MAY form (if any), would never really "burst." I say this because an open market immediately adjusts to the supply and demand naturally inherent in it. In a regulated economy, there is a delay because the government can impose things like windfall taxes, rent controls, minimum wage requirements, unfair taxes, etc. And again, I'm not convinced those "protections" are meant to be there - the Keynesian philosophy does not consider the risk that builds up or is shifted to the masses when these controls are in place. A true laissez-faire economy (I had a good laugh a few months ago when the WSJ indicated that Greenspan ran a laissez-faire economy as chairman of the Federal Reserve - idiots!) adapts as the market (you and me) adapt, not as some outside force tries to change it.
There need not be any bubbles to burst at all. All we need is (economic) freedom.
Update I (October 10, 2008):
Murray Sabrin over at lewrockwell.com agrees with me - a free economy knows no bubbles. No "stabilization actions" required to keep it "propped up." Anarcho-capitalism benefits everyone.
Thursday, July 17, 2008
Wednesday, July 02, 2008
on windfall profits tax
Windfall taxes are not new, but they have surfaced in recent news. What is a windfall tax? A windfall tax is a tax placed upon a business, usually in the commodities industry, by a government during times when economic conditions allow said business to reap larger than normal profits.
Lately, the US Congress has been battling over the issue of levying a windfall tax on oil companies in the wake of Exxon-Mobil’s record-breaking profits, with an eye on a record high $140 per barrel oil price.
Some Democrats in Congress think this is a great idea. They believe that such a tax will cause the price at the pump to go down because the oil companies will pull back on the pricing they charge out for the oil they’re producing/distributing. Indeed, the windfall tax will most likely result in lower prices at the pump. For now, anyway.
The fundamental problem with the windfall tax on petroleum is the burden it places on the oil company itself. The exorbitant profits the oil industry is now gaining isn’t “just because they want more profit,” but because these companies’ speculators suspect that future mining, extraction, refinement, and distribution of future oil findings will come at a much greater cost than before (hence talk of "peak oil"). In essence, they’re hedging their profits in lieu of the coming shift in energy sources and also due to increased global demand. What this tax will do will hurt the pump price in the long run. Here is why:
Companies exist to make money, and for no other reason (unless they are non-profit organizations). What a company does with its profits vary by industry, but for the most part, companies pay their bills (which includes salaries/wages, taxes, insurance, etc.), and anything left over they keep in order to develop better processes, systems, products, advertising, etc. A windfall tax on the oil companies is extremely myopic. It may lower prices for the consumer in the short run, but with one of two (or both) outcomes.
One outcome is that the oil industry will not be able to re-invest in itself. The extraction, refinement, and distribution of oil is not cheap – the only reason a gallon of oil costs less than a gallon of soda pop is because millions upon millions of barrels of oil are produced and consumed each day. But the idea that a windfall tax will keep the pricing down is false. It will keep them down in the short-term, but in the long run it will only drive pricing up more dramatically. This is due to the fact that the company is hindered from investing in itself due the additional tax levied on its profit margins. Procurement would decrease, refinement would decrease, and distribution costs would increase. This all ads up to artificial expense increases that only become deferred through time until the windfall tax is lifted, at which time the company spikes its prices to make up for the lost profits during the tax years. Not a good scenario.
Another problem with the windfall tax is that it is not capitalistic in any way, it is anti-freedom, and the profit/pricing controls it implies are the very thing that caused the USSR to have so many economic problems through the decades leading up to the 1990s. A company should be able to charge what it wants. If people pay for it, great. If they don’t, then pricing adjustments need to be made. In a free market, the consumer IS the market, and ultimately dictates the price through supply & demand. When government officials (who are generally NOT economists) intervene with mechanisms such as a windfall tax, they are disrupting the natural state of the marketplace/economy, which may create wealth in the short-term, but in the long run the bubble will burst.
In this sense, I am glad that the Republicans have stopped any attempts to tax windfall profits on oil companies.
Lately, the US Congress has been battling over the issue of levying a windfall tax on oil companies in the wake of Exxon-Mobil’s record-breaking profits, with an eye on a record high $140 per barrel oil price.
Some Democrats in Congress think this is a great idea. They believe that such a tax will cause the price at the pump to go down because the oil companies will pull back on the pricing they charge out for the oil they’re producing/distributing. Indeed, the windfall tax will most likely result in lower prices at the pump. For now, anyway.
The fundamental problem with the windfall tax on petroleum is the burden it places on the oil company itself. The exorbitant profits the oil industry is now gaining isn’t “just because they want more profit,” but because these companies’ speculators suspect that future mining, extraction, refinement, and distribution of future oil findings will come at a much greater cost than before (hence talk of "peak oil"). In essence, they’re hedging their profits in lieu of the coming shift in energy sources and also due to increased global demand. What this tax will do will hurt the pump price in the long run. Here is why:
Companies exist to make money, and for no other reason (unless they are non-profit organizations). What a company does with its profits vary by industry, but for the most part, companies pay their bills (which includes salaries/wages, taxes, insurance, etc.), and anything left over they keep in order to develop better processes, systems, products, advertising, etc. A windfall tax on the oil companies is extremely myopic. It may lower prices for the consumer in the short run, but with one of two (or both) outcomes.
One outcome is that the oil industry will not be able to re-invest in itself. The extraction, refinement, and distribution of oil is not cheap – the only reason a gallon of oil costs less than a gallon of soda pop is because millions upon millions of barrels of oil are produced and consumed each day. But the idea that a windfall tax will keep the pricing down is false. It will keep them down in the short-term, but in the long run it will only drive pricing up more dramatically. This is due to the fact that the company is hindered from investing in itself due the additional tax levied on its profit margins. Procurement would decrease, refinement would decrease, and distribution costs would increase. This all ads up to artificial expense increases that only become deferred through time until the windfall tax is lifted, at which time the company spikes its prices to make up for the lost profits during the tax years. Not a good scenario.
Another problem with the windfall tax is that it is not capitalistic in any way, it is anti-freedom, and the profit/pricing controls it implies are the very thing that caused the USSR to have so many economic problems through the decades leading up to the 1990s. A company should be able to charge what it wants. If people pay for it, great. If they don’t, then pricing adjustments need to be made. In a free market, the consumer IS the market, and ultimately dictates the price through supply & demand. When government officials (who are generally NOT economists) intervene with mechanisms such as a windfall tax, they are disrupting the natural state of the marketplace/economy, which may create wealth in the short-term, but in the long run the bubble will burst.
In this sense, I am glad that the Republicans have stopped any attempts to tax windfall profits on oil companies.
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