Yesterday I discussed some basic economics to support the theory I’m going to expand in this part and critiqued the stimulus check program currently being undertaken by the federal government. Today’s installment looks at who has the capital to truly stimulate the economy.
If you go under the assumption that capital flows from those who have more of it to those who have less of it, you may be scratching your head about who’s doing well in these subpar economic times. Certainly it’s not mortgage lenders or real estate agents; on the other hand those who make their fortune by buying the debt written off by lenders and other creditors for pennies on the dollar and aggressively making their own attempts to collect might not be doing too poorly right now.
And while the federal government is attempting to place monetary capital back into the economy by sending out all of these stimulus checks, the reality is that much of that capital will simply bail out the creditors who made the mistake of allowing underqualified borrowers and pure speculators to use their service capital and provided them monetary capital to purchase overvalued real estate – in other words, excessive capital invested in a good.
There are a number of goods (or commodities) that are doing well and holding their value, though. While housing is not one of them, those who have some of their capital tied up in precious metals are faring quite well these days – particularly those who invested in gold. But there is another commodity that is at a record high price, and while most of us can live without gold for the most part (it does prove useful in the electronics field and there may be a tiny fraction of an ounce of gold in the computer you read this on) not many of us can live without oil. Oil is one good that has a lot of capital potential, and the major oil companies have the monetary capital to show for it.
Unfortunately, while the federal government was quick to place itself into debt and send out millions of stimulus checks with only their good name to back them up, they also see these oil company profits as a quick source of additional monetary capital. And what makes this even more appealing to the federal government is that they don’t have to make any investment in the company to coerce a profit for themselves. Simply pass a few new tax regulations and voila! a new stream of monetary capital is born, ready for redistribution.
One may contend that, because the government provides necessary services and the oil companies make more profit than they need, that a windfall profits tax like the ones proposed by both Democrats in the running for the White House is only fair. After all, they opine, the government will take that capital and invest it in companies who research alternative forms of energy, sources that will wean us off our thirst for oil.
So let’s say that the windfall profits tax becomes law. I’m going to leave aside the logical argument that oil companies will not actually pay this tax because they’ll simply do what any business does with its costs and pass them on to the consumer; rather I’ll concentrate on what happens to the monetary capital that is transferred from the oil company’s coffers to Washington’s.
For starters, getting this new source of capital will require hiring a number of people in some new bureau or agency to oversee who gets the government largesse. They will dictate to whom the newfound capital flows, and in order to increase someone’s chances it may be worth sending some of their own monetary capital to a particular politician or a lobbyist just to let that new bureau or agency know that person or company has a REAL interest in acquiring some of that monetary capital from the oil company windfall profit tax. Thus, a percentage of the windfall gets spent and not one watt of new energy has been converted to a useful form yet.
And when the federal government sends out this monetary capital, there’s no guarantee of results nor is there a real incentive for results to occur – after all, it’s not really the beneficiaries’ capital that is at risk. A company who receives this monetary capital may simply be using it to assist their efforts at a practice called rent-seeking, where companies or groups of companies use lobbyists, elected officials, and bureaucrats to set the rules and regulations in a market for their own benefit and close the market to competitors.
Thus, if a windfall profits tax approach is tried, it has little chance of actually creating opportunities to use the monetary capital to exploit goods and services, creating further monetary capital. That cash would create some jobs, but the end result of most of these positions will be the same as what you accomplish by shuffling papers from one end of the desk to the other.
Instead, I favor an approach which will allow those companies who have that huge pile of monetary capital to better position themselves in securing the product that has allowed them to collect it in the first place. And in that effort, they will spend their monetary capital on a myriad of goods and services, each creating the prospect for unlocking the capital in other goods and services.
As an example, let’s go back to the trip to the gas station I spoke of yesterday. (Yes, I picked the analogy for a reason!) Currently, the chances are very good that the tankful of gasoline you purchased predominantly came from an oil field outside of our borders and was refined in a refinery that is over thirty years old. For the privilege of using offshore resources and possibly outmoded technology to refine those resources, you paid about $3.60 per gallon – of that, maybe a nickel or two a gallon actually accrued to the oil company (monetary capital in exchange for its refining and/or distribution service) while much larger proportions of that price went to a foreign supplier (the exchange of monetary capital for the capital locked up in the commodity) and to state and federal government in the form of taxes (also monetary capital in exchange for services, but not those which necessarily assisted you at the gas station). For this example we’ll disregard the much smaller portions of monetary capital you exchange for the myriad other services provided like the pumps, the credit card, electricity to run the pump, and so forth.
If we were to allow the oil companies more leeway to invest the huge amounts of monetary capital into tasks like tapping those sources we’ve already confirmed have a huge amount of oil and natural gas, building new refineries to handle the increased supply that will begin flowing from within our borders and coastal waters, laying pipelines or securing other means to transport their product, and researching the possibilities of alternative forms of energy (yes, oil companies indeed do that) imagine all of the people who would be able to use their service capital to acquire a portion of the monetary capital the oil companies are sitting on along with all of the capital locked up in the various goods that all parties to these transactions need to complete their tasks.
And while the federal government wouldn’t necessarily receive as much of the profit that the oil companies make as they might with a windfall profits tax, they will still get their healthy cut they’ve received for the last several years. Moreover, they’ll also see the monetary capital from all those who secured or enhanced their employment because of all this oil company activity – not just from the people directly benefitted like those who constructed the pipelines or worked second shift at the refinery, but those people like the car dealer who saw his sales jump through the roof because of the new oil company facility that came to town or the truck driver who cleared more income after expenses because the price of diesel dropped significantly.
Some have argued that the oil in ANWR would be easier to export than to use domestically. Even if that’s the case, certainly we could use less expensive oil to assist our allies around the Pacific Rim like Japan or South Korea and create trade imbalances in our favor for a change. OPEC could use a little competition, and many jobs would still be created; mostly in Alaska but others around the country would secure new and better jobs as well.
Because it weighs so heavily in our day-to-day lives, I felt the oil industry was the perfect entree into making the argument that, rather than attempting to regulate and shape markets, government does better for both itself and our citizens at-large by allowing markets to become more free rather than less so. Tomorrow I’m going to extend that argument into individual situations and talk about what we can do to strengthen the dollar as well.
“And while the federal government is attempting to place monetary capital back into the economy by sending out all of these stimulus checks, the reality is that much of that capital will simply bail out the creditors…”
huh? I fail to see how any significant amount of the stimulus will end up in the hands of real-estate creditors. remember, only about 1% of mortgages are in foreclosure (nationwide: http://www.reuters.com/article/hotStocksNews/idUSN2849823320080129)
“And while the federal government wouldn’t necessarily receive as much of the profit that the oil companies make as they might with a windfall profits tax, they will still get their healthy cut they’ve received for the last several years.”
Windfall Profit Taxes (one-time, or when profits surpass certain thresholds) are so shortsighted — if there is a profit threshold, companies will keep profits below that threshold (by investing more in R&D now, even investing on more risky projects that might pay off rather than pay excess taxes).
The government is much better off getting a steady stream of reliable revenue, as current gas taxes do. Give the government a big lump sum in a flush year, and they’ll spend it before it hits the coffers (and then go looking for more next year when the ‘excess’ profits might not be there).