Windfall taxes and Mr. Obama

by reader Old Vet

”Oil prices? Better find a place to park and quickly. I did.”

Gas prices are through the roof. Are we facing the end of an era? Oil companies are amassing ever greater profits as crude prices rise.

Mr. Obama very recently talked about a windfall profits tax on oil companies. In that same talk he apparently suggested using that tax to subsidize poor Americans, in essence decreasing the cost of their gasoline usage. My friend the inimitably nimble Cassandra has taken Mr. Obama to task in an article June 10, 2008 named Please, Mr Obama No Half-As**d Measures. Mr. Obama had made remarks April 25, 2008 and more recently on the subject.

The economic theory seems to be this: Rather than confiscate the economic “rents” being taken by Big Oil, or any other hugely profitable sector or economic actors, it is better to get busy and replace them with something more innovative and cheaper. In the short run, confiscation and public use of extravagant profits may be popular, but in the longer run it’s better to get revenge by replacing the profiteers through innovation and substitution. Subsidizing the gasoline consumption of poorer Americans may be a smart short term policy but unwise longer term. Any act that increases consumption of crude oil and gasoline delays grappling with the energy crisis.

As a matter of economic principle, I agree with Cassandra. It’s a slippery slope, and what else might we call a “windfall” once we get started? What if Big Coal starts making billions in extra profits, or farmers who grow corn, or who own assets whose prices rise dramatically through no action or improvements or diligence by their owners? Any public money, whether a windfall tax or any other tax, ought to go toward replacing oil consumption, and not toward subsidizing its use.

However I’ve got a bit of populist sentiment and smile to think a little windfall tax from time to time might teach the “big cheeses” a lesson. Politically what Mr. Obama said was smart in the short run to get votes, but wrong in the long run since it sends the wrong signal to people on energy.

It also opens the door to other types of confiscation by the state, whether of profits or the misuse of eminent domain or other abuses that are less in the public interest. It seems to me this is one of the perennial questions in a democracy, – the question of the greater good versus elected officials who cannot stay in office long enough to see major changes through to completion, and who thus opt for quick fixes.

So should Mr. Obama follow Cassandra’s advice and tell the public what it needs to know, or what they want to hear in order to get elected and bring about an array of changes of which energy policy is only one?
This one by Old Vet