Category Archives: Economics

Miscellaneous economy stuff

Oil-and-Gas Industry and Tax Breaks

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Here’s another post comes from a Wall Street Journal debate/point-counterpoint piece.  This time, though, I think the question itself is too narrow, limited as it is to oil and gas subsidies.  The imbalance in the WSJ question is illustrated by this claim from President-On-The-Way-Out Barack Obama (D):

Not only has President Barack Obama repeatedly called for a repeal of much of the oil-and-gas industry’s favorable tax treatment, his budget proposal for fiscal 2017 included a new $10-a-barrel fee on oil to help fund low-carbon infrastructure projects.

Mark Perry, of the American Enterprise Institute and a Professor of Economics in the University of Michigan-Flint School of Management, made the case for continuing these tax breaks, centering his argument on using taxes to create incentives to do Government-favored things in an otherwise free market.

Tax incentives are essential for unconventional oil-and-gas production, and there would have been no shale revolution without them.

Then Perry had this remark in disparagement of those who oppose the oil-and-gas industry generally:

For climate crusaders who view oil and gas as a problem instead of the lifeblood of our economy, rejiggering the tax code is seen as a catalyst for restructuring the energy economy.

Compare that with Perry’s claim quoted just above it.  Perry wants to use exactly the same tool—the tax code—merely to do precisely the opposite.  His own contradiction is just an argument for getting the tax code out of the market place.

Ryan Alexander, President of Taxpayers for Common Sense, is on the right side of this question, but too narrowly so.

The tax breaks that Congress provides on income derived from or devoted to certain activities are designed to encourage that specific activity. But what they end up doing is distorting economic decision making and rewarding activity that would occur even without the special treatment.

But it’s not just oil and gas energy.  Low-carbon infrastructure projects and other “green”-related energy enterprises do not need subsidies, just as oil and gas enterprises do not.  If these sorts of enterprises—even industries—can’t compete on their own in a free market, they’re not ready for production or sale.  Market forces alone—including market forces that pushed $100 oil into a fracking boom—are sufficient to determine whither oil, gas, and “green” energy, and any other aspect of a free market.

No, taxes have no business being used for social engineering, or market manipulation, or managing private business decisions, or anything at all other than funding government so it can do its three constitutionally mandated tasks.

Government-Mandated Fuel Standards

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This post comes from one of The Wall Street Journal‘s earlier debate/point-counterpoint pieces.

Carol Lee Rawn, who runs the Transportation Program at Ceres, made her argument in favor of this Government intervention into the free market (many of you can guess my position on fuel standards set by Government rather than by market).

First, the standards benefit consumers and the economy. The standards set different mileage goals for different sizes of cars and trucks.

Umm, no.  The cars and trucks start out with differences in their intrinsic mileages; the standards don’t affect those differences in any qualitative way.  What they do, though, is run up the costs of all cars and trucks, reducing the ability of consumers to buy them in the first place.

Second, to remain competitive, the Big Three auto makers of Detroit must offer more fuel-efficient vehicles. During the last global spike in oil prices (when fuel-efficiency standards had essentially stagnated for years), the Detroit Three found themselves overinvested in gas-guzzling vehicles they couldn’t sell.

Couple things on this.  First, to remain competitive, the Big Three—and the others in our auto industry—have to make cars and trucks that folks want to buy and drive, not what Government will permit them to choose from.

The second thing points up the interlocking nature of a modern economy; individual factors cannot be taken in isolation from each other.  Were Government to get out of the way of the energy production industry, its departure would couple with the vasty seas of oil and natural gas right here in North America and the production thereof, and this would vastly reduce the likelihood of another spike, global or otherwise, in oil prices.  Which would render this factor a straw man.

Third, maintaining strong fuel-efficiency standards locks in growth for innovative suppliers to the auto industry.

This is just more of Government determining who will be allowed to succeed and who will be required to fail in our economy.  Furthermore, these suppliers have no more inherent right to exist than did buggy whip suppliers who’d innovated to provide bigger, better, more flexible whips.  Like those whip suppliers, who moved on to provide horns and gas pedals and etc to the automobile manufacturers that overwhelmed the buggy manufacturing industry, these suppliers can, in a free market, prosper just fine by moving on to supply other items to a reviving auto industry.

The bottom line: making great vehicles that go farther on every gallon of fuel is good for the auto industry and good for America.

No, the bottom line is letting Americans decide for themselves what’s good for them.  Vehicles that go farther on every gallon of fuel are part of that.  So are vehicles that last longer.  So are vehicles with better entertainment systems for the passengers.  Most importantly, so are vehicles made to American buyers’ wants and needs, not to Government specs.  Government has no legitimate role in dictating to us what our choices must be.

Tax Rates

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James Pethokoukis had a piece on this at AEIdeas, but I want to focus on just a small part of it.

[W]hat would be the economic case for lower rates for the 0.1%?

Pethoukis doesn’t object to these lower rates; he just has other job-growth priorities.

I have, though, two questions in answer to this question: what would be the economic case for excluding this or that group of Americans from an otherwise general tax policy?  And the obverse: what would be the economic case for forcing inclusion of this or that group of Americans into an otherwise limited tax policy?

Fair Share

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Here, via AEIdeas, are some more data on the relative shares of income taxes members of various economic strata pay. 

The 1,400 citizens in the top one-thousandths of one per cent of income tax payers paid 30% more in taxes across the class than did the 70 million citizens in the bottom 50%.  Singling out the top 400 for special consideration, they paid 78% of the total that those in the lower half paid in aggregate.

It works out, too, to $35.6 million per Privileged One compared to $540 per Poor Downtrodden one.

It works out, too, to a tax rate of 23% for those top 400 vs 24% for those Privileged Ones vs 3.5% [sic] for the Poor Downtroddens.

But the Progressives and Democrats refuse to say what the fair share of the successful is—beyond “more.”

A Market Prediction

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Because hubris—I has it.

In an article on the future relationship of Central Banks with economies and markets, The Wall Street Journal had this datum tossed in:

…shares in the S&P 500 are currently trading at 17 times the earnings they are expected to generate during the next year, compared with a 10-year average of 14.4[.]

That’s not a very large premium; all this P/E ratio means is that, in the coming year, stock market growth will be slower than in the last couple of years (recall that I’ve written, too, about the disconnect between the stock market and the underlying economy in the last few years).  Prices will slow their rise as earnings catch up; prices won’t fall back toward earnings.

It takes a P/E above 20 for the markets to begin to approach drops in prices longer than day to day or week to week micro-corrections—otherwise recognized as noise.

Disclaimer for the legalists among you: I am not a registered or licensed advisor of any sort, nor do I play one on the radio.