The more I thought about the passage of the Farm Bill last week, the angrier I got.  So, I decided to write my Texas Senators, Kay Bailey Hutchison and John Cornyn, and complain.  Both claim to advocate limited government, fiscal responsibility, and free market capitalism.  The Farm Bill passed last week contains none of the above.


By the way, if you haven't read Federalist No. 10, it's pretty interesting and, absent the archaic language, could easily be of contemporary origin.

In a callous disregard for individual liberty and free market capitalism, and a warm embrace of election-year pandering using money confiscated from the paychecks of working taxpayers, the House of Representatives and Senate respectively voted 318-106 and 81-15 to pass the "Food and Energy Security Act of 2007", a.k.a. the "farm bill".  As is typical when anything is done by the government on a "bipartisan" basis, hold on to your wallet because this bill spends over $307 billion of your money over the next 5 years.  Of course, that's just the direct cost -- subsidizing agriculture and paying farmers not to grow crops serves to increase the price of food, so not only does the government get first crack at your paycheck, you'll pay more at the grocery store as well.  Then there's the more obscure cost:  the subsidies will possibly trigger a response by countries to whom the United States exports farm goods.  Such a response could take the form of retaliatory tariffs or subsidies; either would raise barriers to US exports, thus reducing the market for those goods (and, of course, raising prices for consumers in the countries whose governments choose to retaliate).

How bad is the farm bill?  While the rhetoric used in passing the bill extolled the virtue of the "family farmer", consider the following, courtesy of Citizens Against Government Waste (emphases added)

• It provides little improvement to means testing or payment limits.  Married couples with an adjusted gross income of $1.5 million will still receive subsidies.  The payment limit level of $360,000 was not reduced.
• It continues to dole out $5.2 billion annually in direct payments to individuals (many of whom are no longer farming) without any regard to prices or income.  These direct payments, 60 percent of which go to the wealthiest 10 percent of recipients, were created in 1996 and were supposed to phase out by 2002.  
• It creates a new “permanent disaster fund” worth $3.8 billion - a disaster for taxpayers, most farmers, and the environment.  This will encourage planting on disaster-prone land, plus most payments will go to the same producers already receiving the bulk of the direct payments.
• It increases the support price for sugar, reserves 85 percent of the U.S. market for domestic producers and creates a new sugar ethanol program.  The Congressional Budget Office estimates that this new program will cost taxpayers $1.3 billion over ten years, although the real cost is likely to exceed $4 billion.  The consumer costs of the sugar program will exceed $2 billion annually.
• It adds earmarks such as $5 million for grants to broadcasting systems inserted by Sen. Kent Conrad (D-N.D.), $3 million for Delta Health Alliance Grants inserted by Sen. Thad Cochran (R-Miss.), and $1 million for the National Sheep and Goat Industry Improvement Center inserted by Sen. Max Baucus (D-Mont.).

According to various news stories about the bill's passage, it also includes subsidies for thoroughbred race horse breeders.  I love watching the Kentucky Derby as much as anyone, but do those horse owners really have a right to the money I earn?

Joining the Democrats in the House in passing the legislation were 100 Republican Congressmen.  In the Senate, only 13 Republicans and 2 Democrats voted against the bill (both Texas Senators voted for the bill).  This is abhorrent behavior for the party that advertises itself as the party of "limited government" (at least the Democrats make no such claim).

If this vote holds, then President Bush's threatened veto will be overridden, and we'll be saddled with the cost.  Worse, the various legislators will go back to their districts and trumpet their great bipartisan "success" in passing what is, of course, "much needed" legislation.  They pass idiotic boondoggles, and we pay the tab.  Instead of profiles in courage, we are the recipients of profiles in calamity.

Watching CNN today, I saw an interesting story on exports that is especially topical in terms of the anti-trade sentiment that has been so prevalent over the past couple of years, particularly during the current campaign for the Presidency.  At various times, Republican candidates like Duncan Hunter, Tom Tancredo, and Mike Huckabee and Democratic frontrunners Hillary Clinton and Barack Obama have advocated greater government intrusion into trade and commerce, and have denigrated free trade agreements like NAFTA.  Trade with China has been another favorite target of politicians' ire, stoked by a spate of product quality issues in Chinese-made toys.

According to data from the US Office of Trade and Industry Information, (a department within the Commerce Department), in 2007 the United States exported $1.1 trillion in goods and services.  That's a 100% increase over the past 15 years, and exports increased in 2007.  The leading countries in increased exports?  Canada, with an $18.2 billion increase, and China, with a $10 billion increase.  Others in the top 5 included Germany ($8.3 billion), and developing economies India ($7.5 billion) and Brazil ($5.4 billion).

The data are significant, as they show that trade is not just a one-way transaction -- a fact ignored by repeated emphasis on the so-called "trade deficit" and by the anecdotes of lost jobs due to trade deals.  Yes, we are importing billions of dollars of goods and services from our NAFTA partners and from China, but we are also increasing our exports as well.  Imports provide American consumers with more choices, greater innovation, and lower prices while stoking competition that improves the quality of American companies.  Exports create jobs as American companies expand their markets overseas.  Both are engines of economic growth; neither should be discouraged by anti-trade government intrusion.

As gasoline prices rise to record levels, the impact is not limited to pain in the pocketbook of American consumers -- apparently it has infected certain candidates for the Presidency with a brazen re-definition of market economics.  The key to lowering the high price of gasoline, according to Sens. Hillary Clinton and Barack Obama, is increasing the expenses of oil companies.  The method for doing so is a so-called "windfall profits tax" on oil companies.  Powerful indeed is the impact of high oil prices if it is powerful enough to turn traditional economics on its head.

The idea of a "windfall profits tax" is a bad one on many different levels, both economically and philosophically.  On a philosophical level, the idea that the government should decide what is a "fair" profit margin, and therefore confiscating more revenues above that level, is in line with the Socialist and Fascist regimes that characterized much of the 20th century world.  The level at which a "windfall" ensues is completely arbitrary, and in the case proposed by Sens. Clinton and Obama, the industry at which they are aimed is also arbitrary.  No "windfall profits tax" on business in general, only on producers of oil.  Why should the government decide for any industry what is an acceptable profit margin?  And, if one were to promote such a government strategy, why only aim such actions on a particular segment of industry?  Why no "windfall profits tax" on, say, trial lawyers?  Or sugar producers?  Or banks?

Thinking further on a philosophical basis, consider where the profits from oil companies (or any company) go.  Those profits can be re-invested in capital (which, for oil companies, is often largely the case -- investment in refinery expansions and exploration are huge parts of their annual budget, since finding, transporting, and refining oil isn't cheap), given to workers in the form of raises, bonuses, and other benefits, or distributed to the shareholders in the form of dividends.  That the companies are profitable makes their stock a good investment for not only individual investors but also pension funds, so increases in stock price and dividend payouts help improve the standard of living for current and future retirees.  A windfall profits tax penalizes those investors, particularly pension funds.

So on a philosophical basis, you have the government arbitrarily deciding which companies are allowed to make how much profit.  They are taking money out of the private sector, where it can create jobs and improve the standard of living for individuals and families.

From an economic standpoint, the idea is even worse.  Of course, a big item in the news is "record profits" for the "Big Oil" companies.  Companies like ExxonMobil are reaping huge profits as demand for petroleum products increases worldwide -- three of the top five Fortune 500 companies are "Big Oil", and all are extremely profitable.  However, re-sorting the list by profitability shows a different story:  while ExxonMobil leads the way with $39.5 billion in profits in 2007, the next oil company isn't until #7, with two financial services companies in the top five.  Only three out of the top 20 profitable companies are oil companies.

Re-sorting the list further yields even more interesting information.  When compared by Return on Revenue, "Big Oil" is suddenly nowhere to be found.  While some energy companies do make the list, e.g., Anadarko Petroleum and a company known as XTO Energy are in the top 10, ExxonMobil, ChevronTexaco, and ConocoPhillips fail to crack even the top 50.  While those "Big Oil" companies are making huge profits, they do not have particularly high profit margins.  Even if one accepts the premise of a "windfall profits tax", it hardly seems like the energy sector is reaping windfalls based on their profit margins and Return on Revenue.

More interesting information is available when one studies how much taxation "Big Oil" already falls under.  ExxonMobil made $39.5 billion in taxes in 2007; yet they paid over $105 billion in income taxes.  The government's "profit" off of ExxonMobil's products and services was over 265% that of ExxonMobil itself.  Who is making "windfall profits?

Of course, there are the unintended consequences of "windfall profits" taxes as well.  If the marginal benefit of producing additional outputs decrease, then there is less incentive to produce additional outputs.  That's simple economics.  Therefore, if a company is approaching the level of a windfall profit punitive taxation level, the incentive would be to slow production; in the case of petroleum, that means produce less oil.  If demand for petroleum stays constant or rises, then of course this increases the price of petroleum -- a windfall profits tax encourages higher prices on the supply side.  Of course, there's the demand-side effect as well -- whatever tax a company pays, it passes on to its consumers.  Any oil company that did begin paying the punitive tax would have to raise prices to recoup the losses.  So not only would a windfall profits tax raise prices through reduced supply, it would raise prices through offsetting the taxation.

But there's still more.  In reducing the production of domestic oil, implementation of a windfall profits tax would thus increase US reliance on imported oil.  This would empower foreign government-owned oil companies, such as those in Venezuela and Iran, providing governments hostile to the US with increased leverage and economic benefit.  When a similar tax was enacted in the US in the 1970s and 1980s, domestic production fell by 6% and foreign imports increased by 16%.

Implementation of a windfall profits tax is a statist approach that fails to meet any objective economic or philosophically capitalist criteria.  It would hurt the economy, the consumer, and the pensioner.  It would further an anti-business climate in the US, and do so in an arbitrary way.  We need fewer taxes on businesses, not more.

As detailed in a previous post, Democrats in the House of Representatives effectively killed the Columbia Free Trade Agreement, thus passing on a chance to expand the market for American goods and services in Columbia and assist an ally against Hugo Chavez.  Nature abhors a vacuum, and in our absence, our friends to the north are stepping in to fill the vacuum left by our short-sighted, protectionist, anti-trade legislature.

As reported by Bloomberg:

Canada's Trade Minister David Emerson said he may soon complete a free trade agreement with Colombia...

 

…Prime Minister Stephen Harper has made strengthening ties with Latin America a priority in an effort to broaden markets for Canadian commodities and reduce dependence on a slowing U.S. economy. Harper says the trade accord also will help Colombia stem violence against labor leaders.

 

An agreement would give Canadian farmers preferential access to the U.S.'s third largest market for wheat exports in Latin America. It also underscores the risks of growing trade protectionism in the U.S. that includes labor union efforts to thwart a trade accord with South Korea, said Jeffrey Schott, an economist at the Peterson Institute for International Economics in Washington.

Instead of easier access to American products, the Columbian consumer will find Canadian products less expensive and more readily available.  Keep in mind this vital information:  as mentioned in a previous post, 93% of Columbian products already enter the United States tariff-free; the Columbian Free Trade Agreement would remove the tariffs on American goods entering Columbia.  The action taken by Nancy Pelosi's House (and supported by Senators Clinton and Obama) hurts US manufacturers and farmers as well as Columbian consumers.  Fortunately for the Canadians, their Parliamentary leadership is not so short-sighted and isolationist as ours.

In response to the high (and getting higher) price of gasoline, the presidential candidates Hillary Clinton and John McCain have proposed a federal "gasoline tax holiday" for the summer, when gasoline prices traditionally are at their highest.  The proposal, no doubt going nowhere in Congress and therefore somewhat of a campaign gimmick, has been met by skepticism by the general public (if polls are accurate, which is always debatable) and  economists, and downright scorn by various environmental groups.

The current federal gasoline tax stands at $0.18/gallon.  This is a straight per-gallon tax, not a percent of the overall price.  States add their own tax in, from a low of $0.075/gallon in Georgia to a high of $0.321/gallon in Wisconsin; some states add in additional sales taxes and wholesale taxes, further increasing the cost of gasoline, and of course the gasoline retailers, wholesalers, and oil production companies all pay income taxes, capital gains taxes, payroll taxes, and other costs imposed by the government in terms of regulation.  All this together means that the government collects more "profit" off of each gallon of gas than does the companies responsible for its supply.

Environmental groups favor higher-priced gasoline as a means of reducing overall consumption -- many have called for increases in gasoline taxes, stating that the current average price at this writing of $3.63/gallon is still too low, and that prices more in line with those in Europe are needed to promote conservation.  My guess is that the public would disagree with that assessment, particularly since gasoline prices hit the poorest citizens in any society the hardest -- older cars tend to have less fuel efficiency, and most poor people tend not to be able to afford a new hybrid Prius.

The economists and politicians have come out against the gasoline tax holiday for various reasons.  Some, like Alice Rivlin, who served in the previous Clinton Administration, cites the need for higher gasoline taxes in her analysis, and no doubt others fall into that camp.  Many favor anti-global warming carbon "cap and trade" taxes that are de facto increases on the price of all products that utilize petroleum in their production (or packaging, or transportation, which of course ultimately means all products whatsoever).

Other economists, however, employ a more rigorous analysis.  The gist of their opposition to the gasoline tax holiday centers around a couple of points.  First of all, the drop in price would increase demand for gasoline.  Of course, this is Economics 101 -- lower prices stimulate higher demand for a product.  However, subtracting 18 cents per gallon from a record high gasoline price still yields a near record price -- will demand be that much stimulated by a reduction to a price that was already spurring decreased consumption?

A second argument is that the oil companies will simply swallow up the reduction in the tax, meaning prices will stay the same and the oil companies will increase their already-record profits.  To combat this supposed scenario, Hillary Clinton is proposing a "windfall profits tax" on the oil companies.  I'd be interested in hearing of any example from any point in the history of any country where raising a tax on a specific industry has ever resulted in a lower price for any product -- if a company's tax burden is increased, to maintain a profit margin the company will either raise the price of its products to recoup the loss, or else they will look for other cost reductions -- layoffs, decreased investment in capital projects, lower dividend payments to shareholders.  None of these actions promote lower prices for consumers nor spur economic activity; the Clinton argument suggests that the government is a better provider of economic growth than are businesses.  But this argument also ignores another truth about a free market:  competition among businesses for the consumers' dollars promotes lower prices.  Would a retraction of the 18.4 cent gasoline tax result in an immediate drop in the price of a gallon of gasoline of 18.4 cents?  Probably not, especially if the dollar continues to weaken (which is a complete topic itself).  But competition and a return to Economics 101 point towards an overall reduction in price.

A third argument against decreasing the government's intrusion into the purchase of fuel is that because that gasoline tax is currently earmarked for the road construction fund, such a tax holiday will result in no roads being built.  This calamity would lead to loss in jobs, and many seek to paint a dire picture of crumbling infrastructure and bread lines for construction workers.  But this presupposes that the government could not simply cut spending in other areas and channel that money instead to continue those road projects.  It also ignores the state gasoline taxes, many of which have some percentage earmarked for construction.  But on a more philosophical level, such a view that cutting the gasoline tax would lead to lost jobs in the overall economy suggests that the government, not the private sector, is the engine of job growth in the economy.  Comparing job growth in the United States with those countries with a higher tax burden (and common sense) suggest otherwise.

A final argument against the proposal is that it is simply an election-year gimmick, a pander to voters.  On this issue, I have to agree -- it is a sort of gimmick.  However, I fail to see how this is any more of a "gimmick" that "panders" to voters than promising them free college, or free health care, or other supposedly "free" (read:  money is confiscated from someone else to pay for them) services from the government.  At least this so-called gimmick increases the amount of money that people keep to spend for themselves rather than turn over to the government rather than promising to confiscate money from one group of people to give to another.  It might be a small amount, even a small amount of money in the hands of individuals rather than the government is a good thing in my book.

Ultimately, I believe that the tax holiday should be enacted, so long as spending is cut in other areas to "pay for" the tax cut, providing the road tax fund with no reduction in revenues.  Perhaps a good start would be to repeal all earmarks in the budget; as we've seen, there are billions of dollars there to be cut, and roads are actually a valid function of government.  Ultimately, I cast my lot with the great Nobel Laureate Milton Friedman (yes, he is an economist):  ""I favor tax reductions under any circumstances, for any excuse, for any reason, at any time."  It's our money, not the government's -- they should have to beg for every penny, not the other way around.

A favorite rhetorical nemesis during the current campaign for the US Presidency is the concept of free trade agreements. With its advantages and benefits well established from Adam Smith's Wealth of Nations, through various of the Federalist Papers, to the writings of Friedrich Hayek and Milton Friedman, concepts such as comparative advantage and economy of scale inherent to freer trade with less government intrusion on the marketplace are well explained and the benefits well documented.