Bastiat's Bastions

Economists look at a lot of numbers measuring economic activity. Good economists always remember what the numbers mean and what is ultimately important, what the ends are for people and what are merely means.

Right now, we are in the midst of a recession—a recession that looks to be quite serious. We see thousands of people losing their jobs, and when people lose their jobs, they lose their sources of income, lose their control over resources and stop being financially self sufficient, becoming someone for others to take care of. This is cause for despair for some, and true mental depression for others. Recently it was reported on the news that a man in California killed his wife, his five children and himself after becoming distraught over losing his job. That is depression.

To deal with this recession or depression or whatever term you chose to describe the downturn we are facing, the Democratic Congress has devised an “economic stimulus” plan that will push the currently large deficit up by more than 800 billion dollars. Surely, 800 billion dollars will put many people to work. The real question though, is “what will we buy when we auction away 800 billion dollars plus interest of our future?

The question of what we will be buying seems to be of little interest to President Obama and his party as he urges all haste in passing the stimulus package. Here is why such a question must be asked: It is not jobs that people really need, rather, it is the ability to buy things that is crucial. If the new jobs are not producing goods and services that people want with this stimulus package, we are just giving people money to buy but with no extra goods being produced, and all we will have done is increased the competition or the bidding war for the same old goods, driving prices for those goods ever higher.

In this story from CNN by Peter Valdes-Dapena, there are two proposals specifically designed to help out the ailing auto industry. One proposal is being pushed by Sen. Diane Feinstein, D.-Calif to not only help the auto makers, but also help the environment, or at least those are her stated intentions. The plan is to give buyers of new and more environmentally friendly vehicles a governmentally financed rebate if the dealer certifies that the buyer traded in their old gas guzzler and that their old car would be scrapped instead of being resold. To keep the dealers honest, the car’s VIN number would be tracked to make sure it did not show up in the used car market.

While there may be environmental benefits to Feinstein’s plan, the economic benefits are doubtful. Feinstein’s plan would cause cars to be destroyed so as not to compete with new cars and bring their resale value down. Think about what is really going on. Cars that still work, that still have value, would be scrapped, destroyed. Cars that could still drive some family around would no longer exist.

This reminds me of the programs of Franklin Delano Roosevelt (FDR) that failed get us out of the Great Depression. Recessions usually last about 2 years. The period from 1929 to 1941 became the Great Depression because over and over, the reactions of both Hoover and FDR to the recession, and the inaction of the Federal Reserve System, made matters worse, making the recession deeper and longer than it would have been otherwise.

One such program of FDR that he hoped would help the farmers, one that my Dad saw first hand, was one designed to boost the price of beef to help the farmers. FDR’s Department of Agriculture paid farmers for their cattle, dug large holes in fields around the country to herd the cattle into, shot the cattle and buried them in mass cow graves. While Americans were going hungry, our government destroyed food. Instead of helping to feed Americans, our government destroyed food.

The truth is destroying resources never helps our economy. In the inaugural post of Bastiat’s Bastions, Norbert Michel and I discussed why there was no silver economic lining to the destruction of New Orleans, that Katrina provided no benefit to New Orleans. Had the storm not destroyed the city, all of the resources devoted to rebuilding New Orleans and coastal Mississippi could have gone to building something else or producing something else, something that we could have had in addition to having the city. In Bastiat’s story, a boy broke a window with a stray ball (see our inaugural post again for the links to Bastiat’s story), and many people thought that the breaking of the window was a good thing, because it would increase work for other people. Bastiat, however, points out that had the window not been destroyed, the owner of the window would have still had a window, and would have bought other things had he not had to buy a new window.

Destroying one thing to only replace it means we have nothing that we would not have had. Think about this. Often when people are unemployed, they take the opportunity to finish that degree that they had started years ago or somehow prepare themselves for another occupation. Without the job that they had, their “opportunity costs” of completing the degree has fallen. So, when these individuals take jobs to merely replace something that other people already had and would have still had, if not for the destruction of their cattle by FDR or their old cars by Diane Feinstein, some people would have still had their cars and other people could have prepared for better jobs instead of wasting their time replacing cars that have been destroyed.

Keep in mind, there is no shortage of jobs, there is work to be done all around us. There are yards to be cut, houses to be painted, and people everywhere need help. People are not so much looking for jobs as looking for a way to get goods and services for their families. If we are employing people doing things that people don’t want to pay for with their own dollars, such as building new ATV trails, people will be just be receiving incomes to buy things that are not being produced.

Instead of stimulus, what we see in this package is pure waste. We may as well keep auto workers at their jobs by having the government buy up new cars, putting them on barges and dumping them off of the coast beyond the outer continental shelf. The image that comes to mind is of people being put to work by this stimulus package digging holes while other government workers come behind them to fill the holes back up.

What is the real point of this so-called stimulus package, then? Just as I was critical of Bush and the Republican Congress for wasteful spending on homeland security grants, we see even more pork in this present bill. In other words, the spending bills now being proposed to “stimulate” the economy will do more to stimulate the votes of special interest groups than to stimulate the economy.

My point, then, is that if we give a trillion dollars to people to make things that no one cares much about, we end up wasting the time and talents of our workers. And, like the person in the V8 commercial, when we realize what could have been, we will bang our heads with our hands for squandering funds on things no one wanted.

As is usual, our elected officials in Washington stand at the ready to “do something” about any problem even if doing something means making the problem worse. They are less concerned about the problem than the opportunity that it affords to spend money on their supporters. With the stimulus package, Congress is playing pork-barrel politics, which means the politicians are just using taxpayer funds and IOUs to buy their way to reelection.

-MC

I’m confused…

First, read the article, a comment from the democratic governor of New York. In the article, the Governor opines that he is favor of a tax on sugary beverages (think Coke and Pepsi). His argument is feeding Coke to kids makes them more likely to be obese. And this obesity leads to bad health outcomes on down the line. Thus, the tax on soda is called an “obesity” tax, perhaps by journalists and policy wonks that want to make it sound sexier. And just to be clear, I don’t thing the Governor is making a fiscal argument, but it is in the conversation.

In reading this article, I first thought I might have just something of a mild economic epiphany. But then as I kept writing, I’m only more confused. Perhaps you all can help me out?

First, some background on the economic arguments for taxation. There are (at least) two economic arguments for taxation.

The first is to raise revenue to fund legitimate governmental projects. Economists generally believe that the best goods to tax for this purpose are goods with inelastic demand curves (or inelastic supply curves). The idea is that with an inelastic demand curve, the tax can be absorbed with a relatively small change in quantity consumed and produced, resulting in the largest amount of tax revenue with the least amount of distortion or dead weight loss. This argument would explain why we might consider putting relatively high taxes on gasoline, liquor, and cigarettes. These goods tend to be inelastically demanded because there are few substitutes for these products.

Interestingly enough, its seems the demand for soda is not inelastic — actually quite elastic — anyone with a D or better in Econ 211 should be able to calculate if from the article. The elasticity shouldn’t be too shocking due to the fact that there are many alternative to sodas (water, juice, tea, kool-aid, beer, etc.). So if I am looking for a justification of this obesity tax, I have to keep looking…

The second reason to tax goods is to reduce the amount of some activity that generates what economist call “externalities”, or more precisely “external costs”. If person A does something, and person B is harmed, we say person A has generated an external cost. We call it an external costs because person B was external to the decision making — they are a victim so to speak.

Because in most situations, person A doesn’t have to pay for the harm caused on person B, there is too much of the activity pursued. As an example, think of smoking. It shouldn’t be too hard to figure out how person B is harmed (second-hand smoke). If we were to tax activity A, person A will do less of that activity, person B will suffer less harm, and we can get back to the optimal amount of that activity. (People who got a C in Econ 211 will also remember you could regulate smoking, say prohibiting it in certain places). In fact, the right sized tax is equal to the amount of suffering caused by 3rd parties. If the right size tax is imposed, the decision maker now truly faces the “full” cost of their actions, and the “problem” is “solved”.

While most people wouldn’t look at in quite the same way, many laws can be interpreted in the lens of external costs. If person A is, say Vince Marinello, and person B is his wife, and the activity that Vince engages in is killing his wife, the external cost is astronomical. While again it would take an odd person (such as me) to think of a prison sentence as a tax — it really is — you commit a murder and you have to pay, big time. They even take away your hair piece.

Ok, back to the obesity tax. We can’t justify it on revenue grounds…but can we justify it on the grounds of obesity causing external costs? Are there external costs associated with obesity?

Suppose I (at the writing about 6’4″ and maybe 175 pounds – make that 176 as I just had a 20 oz Coke), decide to slurp Crisco through a straw until I weigh 450 pounds. Are there external costs? Who else suffers as a result of my newfound obesity?

Nobody…right? Unless…I’ll get to the unless in a second. So there shouldn’t be a tax on obesity?

Is not being obese then just like, say, playing golf? Playing poker? Watching reality TV? It seems patently absurd that the government should tax golfers, tax reality TV, or tax gamblers (oops, scratch that last one – a post for another day). Is the governor wrong?

And finally to my almost epiphany.

Does the answer to external cost question about obesity change if we live in a world where the government has decided to pay for health care (or at least a faction of health care), and pays for it through taxing its citizenry?

I think it does. When I do the Crisco thing, your future tax bill rises due to my government funded health care expenditures, perhaps to pay for my hypertension pills.

My almost epiphany…

First the government decides to provide a service, paying for it by taxing — and then given that decision, it now makes economic sense to have further government intervention (taxes) to reduce the amount of money spent on the original service.

First, it is weird how government intervention in the first place leads to more government intervention as a result, no? The amount of invasiveness in our lives as a result of provided heath care to people is, in the end, much more ranging that simply providing health care to people, right?

Second, where does it stop? Say we were to change to a 100% inclusive government provided health care system, financed by taxes. In that world, wouldn’t any activity that might potentially increase the amount of spending on health care create an external cost? And thus, shouldn’t it too be taxed? Where does it end? A Soda tax? A chocolate cake tax? A pepperoni pizza tax? A rock-climbing tax? A failure to exercise tax? A pregnancy tax?

–CT

Late last night, I came across this article which explains the latest twist in Treasury’s Troubled Asset Recovery Program (TARP). It turns out the Treasury Secretary doesn’t plan to purchase many troubled assets – at least, not the residential mortgages people assumed were the “troubled assets.” I guess this comes as a surprise to many, but the text of the legislation actually defines troubled assets very broadly. Directly from the bill, we learn:

(9) TROUBLED ASSETS.—The term ”troubled assets” means—
(A) residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and
(B) any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.

So, basically, the bill gave Secretary Paulson the authority to buy anything he and the Fed Chairman decide they need to buy. The fact that the Treasury is buying stocks in companies doesn’t really require a renaming of the plan. Stocks, after all, can certainly be defined as “any other financial instrument.” Under the language of the bill, these actions are completely justified.

The bigger problem is all the “credit” we keep throwing at the “credit crisis.” According to this article, a New York research firm estimates the U.S. government has committed nearly $5 trillion to solving the crisis (so far). That’s a bunch of tax dollars, and represents about 40 percent of GDP. I’m sure 95 percent of us will get a tax cut pretty soon, though.

NM

Responding to McCain’s sole zinger line in the final debate, “If you wanted to run against George Bush, you should have run for president four years ago,” Obama compared McCain’s voting record with the White House position and pointed out that McCain voted with the Bush White House 90 percent of the time. Then Obama repeated that old line “And if it walks like a duck….”

In a now well-known interview, Obama’s running mate, Joe Biden, laughed off a question about Obama being a socialist. Well, there are very few admitted socialists elected to office in this country. And to my knowledge, only one avowed socialist elected to any national office in the last 30 years, Bernie Sanders from the state of Vermont (see this article in the New York Times Magazine from January 21, 2007 by Mark Leibovich). Sanders calls himself a social democrat but has officially run as an Independent over the years.

I started to wonder how close Obama’s voting record was to Senator Sanders, since the closeness of McCain’s vote turned him into George W. So I went to the website of the U.S. Senate and found the Senate roll call votes here. Both Obama and Sanders are freshmen Senators in the 110^th Congress, so it makes their voting records easy to compare.

In one crucial respect, their voting records are quite different. Senator Sanders missed only 6 out of 655 votes held in the Senate in the 110^th Congress, voting over 99% of the time. Obama, on the other hand, had voted only 36% of the time in 2008 and slightly less than 54% of the time in the 110^th Congress (2007 and 2008 combined). Of course, Obama ran for president and Sanders did not. Still, by August 3, 2007, Obama had already missed more votes in the U.S. Senate than Sanders had by October of this year. And there weren’t any primaries to run for before that August date.

After excluding the many votes that Obama did not cast and the few that Sanders could not cast, there were 348 votes where both voted. Of these 348 votes, Obama voted with Sanders 320 times, or 92% of the time.

Certainly, Obama’s redistribution policies and his proposed takeover of the U.S. health care system, his agreement (like McCain and Bush) to take over banks and help out the auto industry, his plan to take away the secret ballot from workers for union representation elections and his proposal to lift the minimum wage to one that compares to what the French have (which has led to widespread minority youth unemployment and riots there), all show that

Obama has the socialist walk and quack down pat.

With a voting record that matches the voting record of an avowed socialist, how can Obama deny being a socialist? Bernie Sanders doesn’t.

-MC

In 1944, an Austrian economist, Frederick Hayek wrote the book, The Road to Serfdom. His book was later shortened and released by Reader’s Digest, and even came out in comic book format and distributed by General Motors. Hayek dedicated his book to socialists of all parties. The central idea of the book is that socialism or collectivism has the same result, whether it is the sort we see in the old Soviet Union and China, and now in North Korea and Cuba, or Fascism of the sort we have seen in Hitler’s Nazi Germany, Il Duce’s Fascist Italy. Hayek’s thesis was that collectivism leads down the same road to tyrannical dictatorships by tyrannical dictators, and he has a very intriguing chapter on “why the worst get on top” in socialism. That very same road, of socialism or collectivism, whether the communist or fascist variety, where people surrender their freedom for the good of the country or the good of the universe, and fall under the spell of the idea that somehow something can be good for the country without being good for any particular person in that country.

Hayek put Fascism and the Naziism in the same category of the Marxism of the Russians, incensing political leaders and academicians in the U.S. as well as with our allies.

Why? The Russians were our allies and the Nazis our enemies. Also, many academicians, even academic economists, were taken in by the ideas of the Marxists. Their societies could not possibly be two sides of the same coin. Or could they?

Well, as my title suggests, we are not only on a road to serfdom, but we are speeding down it as fast as we can go, with little to slow us down.

It is not just that we are about to elect a radical left progressive to the White House. It is also not that both houses of our legislature are also going to have heavy progressive majorities.

No, we are not about to get on the autobahn to serfdom, we have been traveling on it awhile. Certainly policies passed under FDR’s New Deal got us on that road. And that was about the time that the real Autobahn in Germany was being built. It was started before Hitler came to power, but much progress was made on the roads under Herr Hitler, and much of it, fittingly, with slave labor.

The lanes widened with LBJ’s “War on Poverty,” a war that we should all agree did nothing to alleviate poverty, but perhaps only entrenched it and made it more durable, more systemic.

The highway was then super-sized, going from four to eight lanes, and all headed in the same direction, with banking of the curves added to keep us from crashing, but only encouraging us to go faster still. This was accomplished this past month with Bush’s gigantic bailouts with equity positions taken in banks worldwide.

Here are a few signposts along this “Autobahn to Serfdom:”

1. Abolition of property in land and application of all rents of land to public purposes.
2. A heavy progressive or graduated income tax.
3. Abolition of all rights of inheritance.
4. Confiscation of the property of all emigrants and rebels.
5. Centralization of credit in the banks of the state, by means of a national bank with state capital and an exclusive monopoly.
6. Centralization of the means of communication and transport in the hands of the state.

Notice that # 5 was pretty much taken care of in the U.S. and abroad with the giant bailouts. Both #2 and #3 seem to be well on their way with the next president and the next congress. You should note that these signposts are taken from Marx’s own Communist Manifesto.

Zoom, zoom, zoom!

-MC

In the now-famous incident where “Joe the Plumber” questioned presidential candidate, Barack Obama, over his intentions to raise taxes on individuals earning more than $250,000 per year, Obama said “when you spread the wealth around, it’s good for everybody.” So, what is wrong with that, what is wrong with taking from some to give to others? Let me count the ways that wholesale redistribution should be cause for concern:

1. If the government has the right and ability to take from the rich to give to the poor, or from someone you don’t favor to give to someone you do favor, it also can take from those you do like to give to those you do not.
2. Reducing the incomes of the rich in order to increase the incomes of the poor reduce incentives to save, to invest in further education and to work hard. Certainly, our forefathers saw this in Plymouth when the Pilgrims came to this land. Great harvests, for which our first Thanksgiving was celebrated, came on the heels of starvation. What made the difference? Private property in farm land that gave families an incentive to work on their own lands, and to feed their own families. When everyone shared equally in the harvests, incentives were so weakened that they barely were able to survive. See this 2006 post I penned with my student, Amanda Walker, on Thanksgiving.
3. The third way is one that people often do not see, which is that resources that could be very productive elsewhere suddenly get devoted to fighting to come out winners in redistributive efforts, while other resources fight to keep from becoming losers in the redistribution game. A good indication as to what awaits in the fight over funds to be redistributed can be seen now in the current lobbying competition for the bailout funds in Washington. This wasting of resources in non-productive fights over who gets what and who has to pay is what economists have termed “rent seeking,” the competition for goodies out of someone else’s pockets. Take a look at this article to get an idea of where we are headed. Lobbying is an expensive undertaking and is done by very talented individuals. These resources just tend to cancel each other out instead of producing anything of value. And when resources are diverted from productive activities to non-productive activities, our economy underperforms and grows at a slower rate.

Now both points 2 and 3 tell us that economic growth will be slower with substantial redistribution than without it. Now suppose that economic growth over the next 100 years would be 5% without redistribution, but a whole percentage point less, 4%, with it. Think of someone putting aside $1500 a year each of those years, say by making contributions to an IRA. Of course, somewhere in there money passes from generation to generation, but let us suppose that funds are added at the same amount year after year. At the slower rate, the sum grows to a whopping $1.93 million after those 100 years, but at just 1% faster rate of growth, the sum grows to $4.1 million in that same time period. That more than twice the wealth can support more than twice the annual income flow from that wealth. Even with a substantially wider distribution of wealth, the higher rate of growth allows much more to be done in the economy for those at the bottom.

But perhaps the best illustration of mass redistribution to equalize outcomes is from that master story teller, Kurt Vonnegut, in “Harrison Bergeron.”

Be sure to read these few pages by Vonnegut as he portrays a future society that has equalized society in the only way it can truly do this, by handicapping the very talented and the very bright, by bringing everyone down to the same low level. Notice that everyone is made worse off as a result, as even entertainment is reduced to a low level. Spreading wealth around not only fails to make everyone better off, it makes very many of us worse off.

-MC

…Then, the finances.

When I tell someone that I fear the U.S. is going to be completely transformed into a socialist economy, two of the most common responses I get are: (1) No way; and (2) There’s nothing wrong with that. Notwithstanding the validity of the second response, there is mounting evidence that “no way” is completely wrong.

To begin, there is the potential Obama/Bush Treasury/Federal Reserve set of issues. Then, there’s this lovely story (via Best of the Web Today), where we learn of “A plan by Teresa Ghilarducci, professor of economic-policy analysis at the New School for Social Research in New York.”

Ghilarducci actually testified about her plan last week, on Capitol Hill, though I don’t recall her (apparently well-received) testimony making the evening news.

What is the crux of her plan?

…all workers would receive a $600 annual inflation-adjusted subsidy from the U.S. government but would be required to invest 5 percent of their pay into a guaranteed retirement account administered by the Social Security Administration. The money in turn would be invested in special government bonds that would pay 3 percent a year, adjusted for inflation. The current system of providing tax breaks on 401(k) contributions and earnings would be eliminated.

We can call this by any name that we like, but it does not change the end result of the plan: the government will take over private retirement accounts. But why only 3 percent? With the rates the Feds are charging AIG, surely they can do better than 3 percent. I almost wish I didn’t believe this was happening.

NM

My recent post noted that many low-income workers do not need additional tax credits to offset Social Security taxes because of the Earned Income Tax Credit. This afternoon, I was reminded of a related conversation I had with a former president of the National Tax Association (NTA).

The NTA person (I don’t want to name names) let me know that he was tired of “conservatives” saying that low-income people don’t pay taxes. In fact, he let me know, poor people pay social security taxes and sales taxes, both of which are highly regressive. Well, I’ve already posted on one problem with this logic (the EITC). Still there are others.

For one, it turns out that many people do not pay state and/or local sales taxes on food and “necessities,” the definition of which depends on where one lives. These data are very difficult to pin down because so many municipalities have so many different rules. However, there are several papers at the Tax Foundation that provide a good summary.

Beyond that, the claim that Social Security taxes are regressive is simply a farce. The goal of the Social Security program is to provide a safety net for retirement (call it a pension, if you must). More importantly, the system works by providing retirees with benefits based on what they put in.
In other words, if you work more, you pay more in, but you’re eligible for more when you retire.

On the flip side, if you work less, you pay less in, and end up with lower benefits at retirement…precisely because you didn’t work as much. The only way this can be considered a regressive tax is if you believe (a) Social Security is not a retirement program at all; and, (b) people who work more (and thus pay higher payroll taxes) should have their benefits reduced. I can think of a few words for part b.

NM

In today’s Wall Street Journal, William McGurn does an excellent job describing why it is impossible for Obama (or anyone else) to give an income tax cut to 95 percent of Americans. Why? Because approximately 40 percent of Americans don’t pay income taxes.

McGurn writes:

In most parts of America, getting money back on taxes you haven’t paid sounds a lot like welfare. Ah, say the Obama people, you forget: Even those who pay no income taxes pay payroll taxes for Social Security. Under the Obama plan, they say, these Americans would get an income tax credit up to $500 based on what they are paying into Social Security.

McGurn does a very nice job of debunking the notion that, as Obama’s camp suggests, the tax credit won’t really be a payroll tax cut. Still, McGurn misses a larger point called the Earned Income Tax Credit (EITC).

Many low income families qualify for the EITC, which was originally designed to offset some of their payroll taxes. Naturally, the EITC has been expanded through the years. For at least the last seven years, EITC payments more than offset low-income workers’ payroll taxes.
The exact amount of the credit depends on martial status, the amount of income earned, and the number of children in the family.

Here’s an example (using numbers from a couple of years ago):

Single with no children, earning $15,400
- .0765 payroll tax = 1,178; EITC = $2,747
- Federal income tax = $613
- Net Credit: $956

Married with one child, earning $16,849 in wages
- .0765 payroll tax = 1,289; EITC = $2,747
- Federal income tax = $0 (may even get an additional “refund”)
- Net Credit: $2,747 (at least)

Granted, someone in either of these two situations probably is not having an easy time of things, but that is not the point. The point is simply that our tax system already has the type of credits Obama’s plan is calling for and then some. All the more frightening that Obama is quoted as saying: “We’re not going to solve Social Security and Medicare unless we understand the rest of our tax policies.”

NM

In case you haven’t heard, Sen. Clinton and Sen. McCain have each advocated cutting the federal highway-use tax on gasoline from Memorial Day to Labor Day to save drivers (rather, voters) a whole 18.4 cents per gallon, which amounts to about 5% of what they spend on gasoline. Senator McCain suggests making up the difference in the federal highway infrastructure fund with money from the federal government’s general fund, adding about $10 billion to our already blossoming federal deficit. Sen. Clinton, along with Sen. Obama have advocated placing a windfall profits tax on the oil companies . Obama, it should be noted, has opposed the Clinton-McCain gas tax holiday.

Some opponents of the tax holiday (New York Times Blog and Wall Street Journal) have countered that the short-term tax break would not affect prices that consumers pay, and these opponents are correct. Think about the underlying downward-sloping demand and somewhat upward-sloping supply of gasoline. The short-term upward-sloping supply of gasoline, during the summer months, becomes vertical, as the refineries in the U.S. are all operating at their maximum output levels. With a completely inelastic supply of gasoline, all of any tax falls on the suppliers, but all of any tax-cut is enjoyed by the suppliers. If the price to buyers were to decrease at all from their present levels, the quantity demanded would increase as buyers respond to lower prices by buying more, which we know from the law of demand. But with no more units able to be supplied by refiners, there would be a shortage which would push the price up, back up to its original level. This would save nothing for tax payers over the summer and would cut highway infrastructure moneys, money that could build new bridges, like the ones we see we could use after the Minneapolis bridge disaster last year.

A similar disaster for the millions of drivers would occur with Clinton and Obama’s windfall profits tax on oil. The Carter windfall-profits tax amounted to little more than an excise tax on gasoline from domestic oil, raising gas prices for consumers, cutting the profits on domestic oil, cutting domestic production, and raising reliance on foreign oil. Even if a tax were devised that taxed just profits, which is not what happened with the 1980 windfall profits tax under Jimmy Carter, the long-run results of such a tax would be to make refineries less profitable, reducing long-run supply from what it would have been otherwise, and raising the price of gasoline at the pumps from what it would have been. The Obama plan would put a tax on every barrel of oil that sold at a price higher than $80, which would mostly just get passed along to consumers, who have a very inelastic demand for oil, while oil companies could easily sell their oil outside of the US without the tax (elastic supply of oil to the US), reducing the amount of oil supplied in the US and increasing the prices at the pumps for consumers.

But this increase in prices because of the tax is something that consumers never see, never seem to notice, and blame the higher prices on the oil companies, and not on the federal government, just as the high prices from the lack of investment in new refineries is blamed on the oil companies instead of the myriad of federal and state regulations, such as the needed, but ill-designed air pollution regulations.

What Clinton and McCain want is a reduction in gas prices now, but their tax-holiday idea, while popular, would completely fail to do what taxpayer/voters want it to do, cut prices at the pump. What it will do is make them relatively more popular than Obama, from what they would have been otherwise (economists say, “ceteris paribus“), because voters hear the speech and believe what their candidate tells them. All Clinton and Obama’s windfall profits tax would do is to raise prices on gasoline, as a tax would tend to fall on consumers who have a relatively inelastic demand for gasoline, instead of on owners of oil companies, the stockholders of oil companies. Stockholders have many options in the long run and will divert their funds away from oil companies if these companies are forced to pay a profits tax. Cutting supply raises price. Cutting supply to a good that has an inelastic price raises price a lot.

Clinton says she is “reluctant to throw her lot in with economists.” I’m even reluctant to throw my lot in with politicians. While corporations that lie in their ads and promotions can be convicted for fraud, it seems that fraud does not apply to politicians vying for our votes.

Two lessons. One, people trying to get elected are to be believed about as much as those emails from the dying wife of the Nigerian Oil Minister who wants to make you rich. The other lesson is that what we have been talking about in class with burdens of taxes and elasticities was to help understand real proposals, and to help us detect BS before we down in it face first.

And here is a little update–other economists weigh in here.

-MC