Walter E. Williams tackles windfall profits in his latest column.

Our US Senators, led by the likes of Republican Pete Domenici (NM) and Democrat Charles Schumer (NY), are investigating the oil companies' recent profits and whether or not they are justified.

Domenici says "they better come prepared, they better bring their charts, they better show us what they're doing with this money." Schumer says "the least they can do is give some back... we ought to force it to happen." Guess who they want the comapnies to "give back" the money to?

Talk is of a new excise tax, or a windfall profit tax, or some kind of tax to hit the companies hard.

Walter Williams explains why this is an awful idea:

Suppose there's a disaster wiping out food resources in Harrisburg, Pa., and I live in Philadelphia. Prior to the disaster, bread prices in both cities were $2 a loaf. I buy a truckload of bread, cart it to Harrisburg and sell it for $20 a loaf, earning huge windfall profits. When the word gets out that there are profits to be made, what do you think happens? If you said other people will start carting bread to Harrisburg, bakers will start working overtime to produce more bread, people who formerly used their oven to bake cakes and pies will switch to baking bread, there'll be bread conservation in Philadelphia and elsewhere and eventually bread prices will start to fall in Harrisburg and windfall profits would vanish, go to the head of the class. While some might find people earning windfall profits objectionable, the result of their actions, getting more bread to Harrisburg, is precisely what's desired.

What if politicians said, "People are profiting from the misery of others, and we're going to impose a bread windfall profits tax"? Say they legislated a 100 percent tax, taking all of the $18 of windfall profits. Would you expect to see people making all those efforts to get bread to Harrisburg? Suppose there were huge startup costs for companies to expand their operation or onerous regulations for people to get into the bread business, would that be good news or bad news for people in Harrisburg?

What kind of facism are we getting ourselves into, where the government can investigate an individual company's profit, and determine that it's too much and has to be given back? This is yet another example of politicians' ignorance disrupting the economic system. As Williams suggests, large profits are a signal that more production, more supply, and more research are needed in a specific area. And the profits are what provide the motivation, but profits also provide the resources necessary for that expansion.

In this particular example, our politicians have learned nothing from the oil crisis of the 70's, which resulted in higher prices, low supply, and increased dependence on foreign sources of oil. I'm not surprised to see Democrats want to make the same mistakes. But Republicans should know better. The more and more Republicans act ignorant of basic economics, and there is less and less of a difference between Republicans and Democrats, the more and more I'm becoming Libertarian.

Labels: politics