The 2008 Presidential election is shaping up as historical in many senses -- the first minority candidate, the oldest candidate, a gripping primary battle, the backdrop of a faltering economy and an unpopular war.  But could both candidates be defined more by the baggage they carry than their vision for the future?

The McCain baggage is the easy story.  The "R" for Republican could just as easily mean "Radioactive" after the debacle of the 2006 election and the special elections that have already occurred this year.  In 2006, Democrats swept to power across the nation, in normally safe Republican congressional districts and such upsets as the defeat of a Maryland governor with a 60% approval rating.  Already in 2008, three high-profile special elections have proved that the Republican brand is still in bad shape.  Any Republican running for President bears the scarlet letter of the party, as well as the 25% approval rating of the current occupant of the Oval Office; President Bush seems to be a lead anchor around McCain's neck.

Historically speaking, the odds would be against McCain, even if Bush weren't a toxic drag on the ticket.  Rare are the third terms of a party.  President Bush the elder was the exception, not the rule, when he succeeded the two Reagan terms in the 1988 election:  it was the first "third term" since FDR succeeded his own two terms with an unprecedented third term.  In the meantime, Gerald Ford, Hubert Humphrey, and Richard Nixon failed to extend their respective party's reign beyond 8 years; this concept was, of course, reinforced in the 2000 election.  There just seems to be a reflexive urge for change following two terms of a President's (or a party's) service.

But McCain is by no means unique in being possessive of drags on his campaign.  The Democratic Congress that swept into control in 2006 and seems likely to solidify its gains is even less popularly approved than President Bush -- the current Congressional approval ratings came in at a dismal 11%.  Since the Democrats came to power offering to "drain the swamp" of corruption, at least two members, including Chris Dodd, former DNC Chairman and current Chairman of the Senate Banking Committee, have been discovered to have received corrupt sweetheart deals from Countrywide Financial Services -- the company demonized in the housing credit crunch and subprime mortgage meltdown of the past year.  Promising "change" in 2006, the Democrats have seen the economy falter, unemployment increase, and gasoline prices double on their Congressional watch.  Not exactly the kind of change voters were expecting, I think it's fair to say.

But the Democratic Congress and its incompetence is not the only drag on Obama's campaign.  The cornerstone of Obama's campaign is slew of tax increases:  on investment, on businesses, on income, on payrolls.  Where most of the industrialized world is cutting taxes and improving competitiveness, Obama and the Democrats are seeking to increase them.  Of course, the normal bogeyman of "the rich" is being used as a justification for the massive expansion of government, but so far Obama and the Democrats have been voting to raise taxes on all taxpayers, even the lowest income Americans -- the so-called "Bush tax cuts" applied to every tax bracket, including the lowering of the bottom bracket from 15% to 10%, and capital gains tax increases impact pensions and retirement plans.  Tax increase advocacy has not exactly been a recipe for success for Presidential candidates -- just ask Walter Mondale, Michael Dukakis, Al Gore, and John Kerry.   Raising taxes during a period of faltering economic news seems an especially bad idea.

Obama has other drags as well on his candidacy, although he has benefited to some extent from getting them out in the open in the primary battle with Hillary Clinton.  His associations with corrupt businessman and convicted felon Tony Rezko, admitted and unrepentant terrorist William Ayers, and controversial pastor Jeremiah Wright have already played out and are most likely non-issues in the fall campaign when most voters become engaged.  And, unfortunately, Obama has been the subject of internet smear campaigns that unfairly distort his statements, actions, and history to suggest some sort of "Manchurian candidacy" fantasy.

Hopefully, voters will base their decisions on actual facts, not innuendo.  But there are real concerns about an Obama presidency:  higher taxes, a near unprecedented expansion of government, and (ironically given his message about the future and change) failed policies from the Great Society and the New Deal that threaten American competitiveness and individual liberty.

Ultimately, this November's election may be decided less by people voting for a candidate than it is about who gets pulled under by the weight of his own negatives.  The election could be more about drag than about propulsion.

The British economics Lionel Robbins defined economics as "the study of the use of scarce resources which have alternative uses."  It's a pretty simple concept -- if the cost of filling up one's gas tank increases from $40 to $80, then one has $40 fewer to spend on, say, that new pair of Nikes or tickets to the Astros game.  In the general economy, the concept can become more complex, particularly when government and politics get involved.  Additional taxes paid by businesses reduce the pool of money available for employee bonuses, capital investments, or additional employees.  Land used for planting corn subsidized for ethanol production is then not available to grow wheat or beans or other crops. 

Politicians rarely look towards greater efficiency in promoting policies; rather, typically the opposite is the goal of government initiatives, as few laws are typically required to coerce people to do what's in their own best interest, and in the abstract of a free market competition promotes greater efficiency.  I'm not likely to use my scarce resource of time on what is for me a highly inefficient task of working on my car; better instead for me to pay the mechanic to do so, while I use my time to work at something at which I am myself more efficiently deployed.

Few places are economics as defined by Robbins ignored more than in government action in health care and the environment.  As demonstrated by the recent debate over "cap and trade" legislation in the US Senate, politicians often are willing to commit much of the scarce resource of our paychecks to projects of undefined and even dubious merit.  Some estimates of the cost of the Warner-Lieberman legislation entered the trillions of dollars; yet no mention of the alternative use of these resources was discussed, and as mentioned above the benefit was nowhere defined.  The question remained:  what benefit would cap-and-trade bring, and at what cost?  Is cap-and-trade the most efficient use of our scarce resources, even if one accepts at face value the premise that global warming is in fact a man-made problem for which there is a legislative solution?  Are there other problems even more pressing than global warming that are more urgent, or even some "low hanging fruit" -- problems that could be easily solved for a great number of people at a minimal cost?

A group of esteemed economists, including five Nobel Prize laureates, convened in a project called the Copenhagen Consensus.  Their task was to examine the state of the art in terms of research and capabilities to solve global problems in the following areas:  air pollution, conflict, disease, global warming, hunger and malnutrition, lack of education, gender inequity, lack of water and sanitation, terrorism, and trade barriers.  This group is no "industry hack", nor "in the pocket of Big Oil" -- one of the lead researchers was also a lead author on the report of the Intergovernmental Panel on Climate Change -- the group that shared last year's Nobel Peace Prize with former vice president Al Gore.

The group's findings were interesting, to say the least.  They found that "spending $800 billion over 100 years solely on mitigating emissions would reduce inevitable temperature increases by just 0.4 degrees Fahrenheit by the end of this century. Even accounting for the key environmental damage from warming, we would lose money, with avoided damage of just $685 billion for our $800 billion investment."  This hardly seems an efficient use of scarce resources.

The panel didn't advocate ignoring the effects of global warming; rather than cutting emissions by decree, however, in the manner of government command-and-control methods such as cap-and-trade, the panel instead advocated a dramatic increase in the research and development of alternative energy technologies such as solar panels.

Perhaps most interesting, however, was that even this consensus choice towards fighting global warming didn't crack the Top 10 list of the most cost-effective ways of helping the world's poor.  Unfortunately, the list of actual cost-effective impact actions as determined by the Copenhagen Consensus aren't flashy, and aren't likely to be front-page headlines.  Number 1?  Vitamin A and zinc supplements.  Number 3?  Iron supplements and salt ionization.

Perhaps most surprising was the Number 2 action.  Far from a government program, rather it is also an option that increases individual liberty:  increased free trade.  Yes, free trade is good for the poor, and good for the environment, regardless of the protectionist hostility aimed at it by people like Barack Obama, Lou Dobbs, and Pat Buchanan.  As Bjorn Lomborg, the political scientist who heads the project, states:  "It's true that trade doesn't immediately save lives, but it's proven that when people have more money they improve their health, their education and so on."  And people tend to have more money when they pay less for goods and services (as happens when tariffs are lifted on imports) and when they have increased markets for the goods and services they produce (as happens when import tariffs are reduced in other countries).

When politicians are spending money, they aren't spending their own money but rather they are spending ours.  The incentive is not efficiency, but rather the appearance of "doing something".  With global warming hysteria on the front page nearly every day, being seen as engaged in the "fight" against global warming is perceived as a good way to appear strong and visionary.  Instead, a truly visionary group of economists is showing us that there are better ways to allocate our scarce resources.

If truly helping people is the goal, rather than self-serving, short-sighted, political expediency, our politicians would be well-served to read the recommendations of the Copenhagen Consensus.

This week, presumptive Democratic Presidential nominee Barack Obama announced that he's bypassing the "public" financing available for his fall presidential campaign against presumptive Republican nominee John McCain; instead, he will rely on private donations.  While many are attacking him for his flip-flop on the issue -- he pledged last fall to utilize the so-called "public finance" system in the general campaign -- I salute him.  In essence, he has decided to rely solely on voluntary rather than coerced contributions; he also seemingly has recognized the superior nature of the private enterprise system to government intrusion.

The so-called "public finance" system of funding campaigns is based on the idea that too much money in politics has a corrupting influence, and that the public is better served by having money confiscated from their paychecks and given to candidates for campaigns, regardless of whether or not an individual agrees with that candidate or wants his money spent thusly.  The amount of money available is ostensibly determined by the people who mark the check box on their tax returns, which currently volunteers $3 for each person checking.  Of course, the government claims that this doesn't affect one's tax return either way, and in a narrowly-defined way they are telling the truth -- it might not come directly from an individual's tax return, but since the government has to get the money somewhere, it obviously impacts all taxpayers, whether or not they check the box.  [This writer makes it a point never to check the box.]  In agreeing to the "public" funding, the candidate assumes certain limitations in spending -- money will be raised in small increments defined by the government, for example.  At any rate, the system is one in which the taxpayers are forced to foot the bill for private jets, campaign consultants, four-star hotels, and other perks for the candidate and his or her staff and consultants.  In eschewing this money, Sen. Obama has decided to accept the campaign donations of only those who voluntarily decide to give him money.  For this he should be thanked.

Obama's decision also shows, for perhaps the first time, his understanding that the private sector is more effective than the public sector at providing goods and services.  A practical fund raising machine, Obama has already raised more campaign cash than any candidate in history.  He already bypassed the public financing system for the primaries, and he is the first major candidate to turn down the public money in the general election.  The ultimate reason:  already a record-setting fundraiser, Obama is predicted to raise upwards of $250 million for the general election; some are predicting as much as $300-400 million.  The estimated amount of public financing he would have received is only $84-85 million.  This means that he will have somewhere between $170-300 million more than McCain, putting normally out-of-play states into the picture.  One expert on the radio today, Dr. Larry Sabato of the University of Virginia, estimated that McCain has enough cash to make a serious effort in about 20 states; he'll certainly campaign in more than that, and some states are solidly enough Republican that they don't require campaign expenditures.  Obama, on the other hand, will be able to make pushes in 35-40 states.  This could assist not only Obama's campaign, but also the down-ballot candidates.  An Obama victory could have major coattails in the House and Senate, as well as state legislatures -- immensely important heading into the 2010 census and the subsequent redistricting.

Unfortunately, both Obama and McCain want to limit our ability to participate in the political process, as both favor government regulation of our political speech; the most famous campaign finance "reform" bill carries McCain's name.  At least Obama has freed the taxpayers from the burden of funding his efforts.  Perhaps the success he finds at using the private sector for his campaign will help him rethink his faith in using the government to coerce taxpayers to fund other endeavors such as health care and social programs.  Perhaps his success at bypassing the public funding system will help both men rethink their faith in government regulation of political speech.  If so, the winners will be the taxpayers and all citizens who prize individual liberty.

Senator John McCain's call this week for drilling on the Outer Continental Shelf was a welcome move in the face of skyrocketing prices for oil, gasoline, and other petroleum-related products and services.  It also served to highlight inconsistencies and weaknesses -- in the positions of Democrats (particularly Barack Obama), but unfortunately also in the positions of McCain himself.

We're familiar with the situation, as it is front page news nearly everyday:  worldwide demand for oil is up, particularly with the aggressive economic growth of China and India.  Approximately 80% of the world's active oil reserves are controlled by nationalized oil companies, owned by governments that can range from openly hostile to the United States, such as Iran, to at least opposed in rhetoric and policy, such as Venezuela; much of the oil is located in the unstable Middle East.  The OPEC wields considerable power of worldwide oil supply, and in the face of the adverse economic impact of record-high oil prices, the best we seemingly can do is to plead with governments relatively friendly with the United States to increase production, plead with American consumers to conserve, and plead with everyone to come up with energy alternatives.

Ironically, while asking other countries to increase their oil production to bring down oil & gas prices, the US government has "colluded" to prevent additional domestic supply from being brought online, and Democrats in Congress have even advocated increasing further the cost of oil through new taxes on companies that provide oil and gasoline.  The US has vast known resources in the Outer Continental Shelf, oil shale in the Rocky Mountains, and the Arctic National Wildlife Refuge.  Harvesting this oil is illegal, prevented by the government.  Further, the regulations and permitting requirements necessary to build new refineries is so complex and expensive that no new refineries have been built in the US in 30 years.  In short, the US government is purposefully acting to keep oil prices high.  In supporting "cap-and-trade" legislation, McCain and congressional Democrats actively sought to increase prices even further in the coming years.

Of course, the justification for the forbidding of oil drilling in the OCS, ANWR, and elsewhere is that drilling would spoil pristine environment.  Of course, the known benefit of more oil is contrasted against some nebulous environmental benefit -- no specific environmental cost is detailed, and many of the proposed conceptual risks, such as decreased caribou population or oil spill catastrophes during, say, hurricanes, is in direct opposition to experience in current drilling locations.  The caribou population in Prudhoe Bay, Alaska, has increased since drilling began in the 1960s; even the catastrophic 2005 hurricanes Rita and Katrina did not result in major oil spills in the Gulf of Mexico.

In my weekly work routine, I drive between Houston and Beaumont 2-4 times per week.  Along the way, I pass an area where oil drilling occurred.  As I passed by day-to-day, I saw drilling equipment brought in, oil removed, and the area setup for further removal.  Passing by today, if you didn't know that oil had been drilled there, you wouldn't even notice the area.  It sits in the middle of farmland, with a crawfish farm nearby; farming in the area was apparently not impacted by the drilling, save for the immediate area where the equipment was located.  No environmental blight is visible.

In decrying "Big Oil" for not producing more oil to bring down the price while simultaneously purposefully restricting their ability to do so, Sen. Obama and the Democrats illustrate a basic weakness in an issue that hits Americans in their bank statements, and hurts lower-income families the hardest.  Unfortunately, Sen. McCain's own position is inconsistent, preventing him from fully capitalizing on this issue.

In a recent interview with the Wall Street Journal, Democratic Presidential candidate Barack Obama said that "[g]lobalization and technology and automation all weaken the position of workers", calling for government action to redistribute wealth more equitably.  Such a statement encapsulates the fundamental lack of understanding of basic economics, and progress in general, that is the basis of Obama's entire economic agenda.

Such a statement is ridiculous enough on the face of it to elicit laughter -- is he saying that, for example, farm workers were in a better "position" using oxen and plows compared to tractors?  Were cotton field workers better off before Eli Whitney's cotton 'gin came along?  Certainly, the ox-breeders and manufacturers of yolks might have thought so; perhaps he is angling for the Amish vote.

For Obama's statement to be true, some pretty strange assumptions are necessary, and one is forced to look at things from a "trickle up" standpoint where what is true for a localized system becomes true for the entire world.  Certainly the innovation of the automobile had a negative impact on the employment of stagecoach constructors, but the overall impact was certainly a positive for job creation and worker prosperity.

"Globalization" can be a dirty word to many anti-trade protectionists on the left and the right.  But as the world economy has opened up, it has served to increase the market for goods and services.  Economy of scale and comparative advantage have produced a worldwide boom in economic activity and prosperity wherever free markets and trade are promoted.  Instead of working only for the "Big Three" of Ford, Chrysler, or GM, auto workers in the United States now have job opportunities producing Toyotas in Texas, Mercedes Benzes in Alabama, or Nissans in Tennessee.  Farmers have increased exports to countries such as Canada, Mexico, China, and Columbia.  Less expensive imports of steel have fueled construction in the US, creating jobs and opportunities.

Technological innovation is a net negative for economic prosperity only if one looks at the small picture.  Where a century ago over half of the labor force was employed in agriculture, now we have more plentiful, less expensive food with only about 3% of the population working to produce it.  Those formerly earning their living toiling in the fields now can be mobilized towards more productive efforts.  The result has been a standard of living that continues to improve.

Automation likewise serves to increase productivity while lowering prices and increasing options.  Automation also creates new jobs writing software, manufacturing the automation equipment itself, and a myriad of other related jobs -- jobs which tend to be more highly compensated than pure assembly line positions.

Certainly there are pockets of economically depressed areas.  Cheaper steel from overseas can result in the closing of domestic steel mills; however, competition ultimately benefits those American industries that innovate, and as mentioned above, less expensive steel leads to increases in construction and decreases in related costs for businesses and consumers.

Rather than the increased government intrusion on the market advocated by Sen. Obama, a better answer is less government intervention -- removing the shackles of government taxation and micromanagement would allow American companies to be more efficient and competitive; it is instructive that the highest unemployment rates are in states where the highest levels of taxation and regulation are in place.  It is increased government intrusion on the free market -- on individual choice -- that harms the position of workers, not progress.

In response to this editorial in yesterday's Houston Chronicle, I sent the following response:

An infamous milestone was reached today on the oil market:  a $10.75 spike in the price of a barrel of oil; the 8.8% increase is largest one-day increase ever.  But that's just the start:  analysts also announced that due to increased demand in Asia, the price of oil could hit $150/barrel by July 4 -- an additional 8.2% over the next month.

There are many factors involved in the increase in the price of oil and gasoline, but we can lay the ultimate blame for the impact on the American economy on one entity:  the government of the United States of America, and its utter refusal to drill for oil that we already know we have.

Whether we're talking about oil shale in Colorado, the Gulf of Mexico, the Outer Continental Shelf, or the Alaska National Wildlife Refuge, we have known reserves of oil that would help increase the supply of oil on the global market.  Even most politicians know that increasing supply relative to demand lowers prices -- that's classic Economics 101.

But instead of increasing supply, politicians in the United States have colluded and conspired to reduce supply and increase prices paid by Americans by banning the extraction of our known oil reserves.  To take the focus off of their greedy actions, they put up a smoke screen by blaming the oil companies.  In short, the government is criticizing the oil companies for the results of their own policies.  A more Orwellian scenario is hardly imaginable.

But wait:  it gets worse.  Record-high gasoline prices are not good enough for certain politicians.  Not only does official government policy artificially increase the price of oil, natural gas, and gasoline, the actions they are attempting to take in response will further.  The presumed Democratic candidate for President, Barack Obama, favors increasing taxes on oil companies -- the so-called "windfall profits" tax.  Because corporations pass along taxes to the consumer, this would immediately increase the price of gasoline, heating oil, natural gas, electricity, and every petroleum- and petrochemical-related product, as well as shipping other goods and services as transportation costs increase.  But that's just the immediate impact.  Longer-term, the prospect of lower potential profits decreases the incentive for oil companies to engage in the risky and expensive endeavor of searching for new oil deposits.  Instead, we'll be even more dependent on the oil-exporting countries, many located in the unstable Middle East.

As if that weren't bad enough, we're still not done counting the ways the government is attempting to screw us on energy prices.  Both presumed major candidates for President, Obama and Republican John McCain, favor a "cap-and-trade" system for reducing so-called "greenhouse gas" emissions.  As detailed in numerous other sources, this will only serve to increase the price of gasoline further.  The ostensible benefit of cap-and-trade remains undefined.

If a private company were to undertake actions that have such a deleterious impact on American individuals and families, they would rightly face civil and perhaps criminal legal action.  Instead, its the government engaging in actively creating an artificial scarcity of oil.  Instead of being shamed for shameful behavior, the politicians pat themselves on the back and wax eloquently about their righteousness.

This week, the United States Senate will begin debate on so-called "cap-and-trade" legislation.  Supported at least in concept by all three candidates who have a realistic shot at becoming President, the legislation would basically set a national limit on CO2 emissions (a "cap") that would decrease over time.  Companies would bid on "credits" to emit CO2, then could trade these credits amongst themselves -- businesses that emit less CO2 could sell their permits to companies that emit more.

Businesses that tend to emit more CO2 are involved in energy production:  electricity generated from burning coal or natural gas, for example, or refineries and chemical plants.  Proponents of the bill claim that creating a cap-and-trade system is a "free market" approach to reducing so-called "greenhouse gas", thus fulfilling our "obligation" to "do something" about global warming.  The claim is fraudulent on several points.

First of all, a "free market" doesn't require legislation from the government to enact.  The attempt to portray cap-and-trade as a "free market" approach is a language juxtaposition of Orwellian proportions.  The government is mandating the terms of the trade, setting a national limit on the supposed "commerce" of the deal.  Rather than creating a "free market" -- one based on voluntary exchange between consenting individuals -- the government is imposing a situation where the exchange is legislated and does not benefit the market as a whole.  Rather than a "free market" approach, cap-and-trade is statism at the extreme.

But looking further at the impacts of a cap-and-trade system yields even more not to like.  In the European Union, signatories of the famous Kyoto Protocol have been under the yolk of cap-and-trade for several years now.  As reported by Bloomberg:

"Gasoline rose 30 percent in the U.S. this year to a record $3.962 a gallon on May 29, according to AAA, the nation's biggest motoring club. In Germany, a gallon costs $8.33, more than double 2002 levels. The highest is $9.69 in Norway...  British gasoline costs $4.64 a gallon more than in the U.S., compared with an average difference of $3.85 over the past five years ..."

As Bloomberg further reports, the cost difference is at least partly attributable to taxation: 

"Americans paid about 12 percent in tax on every gallon of gasoline purchased in April, according to the Energy Department. More than 50 percent of the retail gasoline price in the U.K. goes to the government... includ[ing] fuel duty of 39 percent and value- added-tax of 17.5 percent..."

Keeping in mind that "[t]he cost of crude oil determines about 73 percent of the pump price of gasoline", and, as reported in previous posts, oil company profits typically run 8-10% of sales, and it is easy to see that cap-and-trade tax increases will have a significant impact on the price of gasoline and other petroleum and petrochemical products, e.g., plastics.  Thus, the ripple through the market will be felt directly, in terms of higher costs for electricity and gasoline, and indirectly, in the form of higher prices for food (due to fertilizer and shipping cost increases) and construction (due to higher costs for plastics, whose feedstock components are typically fossil fuel-related).

Economists have varied estimates about the total impact of cap-and-trade on the economy, and of course the ultimate impact is impossible to predict precisely, due to the change in behavior of investors, producers, and consumers.  The Congressional Budget Office estimates that the current cap-and-trade bill under consideration in the US Senate would result in a tax increase of $1.2 trillion over the next 7 years.  That's $1.2 trillion that individuals won't be spending on education for themselves or their children, or retirement investing, or on a new house, boat, or car, but rather sending to the government.  Of course, proponents of cap-and-trade claim this money will be "invested" in so-called "green" technologies.  Translation:  money will be confiscated from individuals and delivered to businesses favored by the government.  It is a wealth transfer of historic proportions, yet another corporate welfare program for the wealthy.

But setting aside the economic, taxation, and government expansion aspects of the cap-and-trade bill for a second.  Shouldn't we be "doing something" about global warming?  As proponents of government expansion to deal with the problem suggest, isn't it a necessity to "act now"?  If so, there's a pretty significant question that has not, to my knowledge, been answered anywhere by anyone discussing any cap-and-trade program:  How Much Will This Program Lower Global Warming?  Is it by 10%?  20%?  30%?  1%?  The brazenness of the idea is amazing:  we are expected to "invest" in programs in which the private sector doesn't see a return (else private capital would be flowing into these programs without government intervention), rather than voluntarily "investing" our money will be taken from us without our consent, and there is not one single person who can tell us what the ultimate benefit will be!  There is no promised, defined, outlined return on our "investment" -- only numbers telling us what the decrease in CO2 emissions will be ... that is, if we are actually able to meet the cap targets (many countries in Europe are finding it difficult to do so).

A dramatic increase in energy costs for an undefined benefit:  that's the deal we're getting with cap-and-trade.  If experience is any guide, should we enact this legislation, within a few short years we'll be looking back on $4 with nostalgic reminiscing -- a fond memory of a cost we found unimaginable only 2 years ago.

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.