Okay, I'll write this slowly so that even Ben Stein can follow it. [View All]

Explaining Windfalls to Ben Stein

I apologize to readers who know what a windfall is, but since NYT columnist Ben Stein does not and asked to be taught, I thought I would oblige him. Mr. Stein notes that Senator Obama wants to tax the profits of the oil industry to help to pay for a stimulus package. He then asks:

"why punish the owners of the oil companies, who are largely pension plans, group or individual, and individual investors? Why should we punish some American firefighters who own oil company stocks more than American firefighters who own drug company stocks or tobacco stocks? Why tax away the savings of some Americans because they happen to own a share in a company that supplies a totally legal, absolutely indispensable product like oil? I don’t get that at all."

Okay, I'll write this slowly so that even Ben Stein can follow it.

First, close to half of stock, included oil company stock, is owned by very rich people, so the fact that a small portion is owned by firefighters has nothing to do with the time of day. Some of the oil companies' stock is owned by child molesters. Should we be discussing that?

More practically, the oil companies are making enormous profits at present because oil prices went up far beyond what almost anyone had anticipated. In other words, Exxon-Mobil, Shell, and the others had not anticipated $120 a barrel oil when they undertook their investments 10-20 years ago. They would have made a fine profit if oil had stayed in the range of the $30-$40 a barrel they anticipated when they made their investments. The gap between the return they expected and the return they are getting because of unanticipated events is what economists call a "windfall."

The government often acts to prevent windfall gains. For example, if workers in a key industry opted to go on strike to press for higher wages, they would get put in jail. Mr. Stein may be too young to remember, but this is what happened to air traffic controllers when they went on strike in 1981. Their leaders were thrown in jail. The government has held the threat of jail over the heads of other unions that have considered or carried through strikes in situations where they were arguably exploiting their bargaining position.

The neat thing about a windfall is that the elimination of the windfall does not affect supply. It would have been profitable to produce the amount of oil that the industry is currently producing even at far lower prices. This means that we can tax away much of the industry's profits without affecting the supply of oil. In the longer-term, there could be some modest impact, since oil companies will realize that their likelihood of collecting an extraordinary windfall in the future is lower if governments are prepared to tax it away. However, this may not be much of a concern, since just about everyone recognizes that we have to move away from oil consumption in any case.

http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=08&year=2008&base_name=explaining_windfalls_to_ben_st