Economic Realities: More Dollars than Sense?
By Phil Bollin

“The difference between stupidity and genius is that genius has its limits.” Albert Einstein
As a former engineer, I have learned a lot about Albert Einstein through the course of my academic studies and career experiences. Of the dozens of quotes attributed to him, this is my favorite. After you read on, perhaps you will understand why.

After listening to the presidential candidates for the past five months and reading hundreds of newspaper articles and letters of opinion, I have come to the conclusion that most Americans, and in particular our politicians, need a refresher course in basic economics. Let us look at some examples of flawed economic reasoning that are being hotly debated in the news.

Two of the three presidential hopefuls are proposing a “summer vacation” from the federal gasoline tax as a way to ease the pain consumers feel at the gasoline pumps. Temporarily suspending the $0.184 federal gas tax through the summer months will probably cost the government around $10 billion in lost tax revenues while lowering the cost of gasoline to consumers by about only four or five percent. For consumers using 200 gallons of gasoline this summer, the savings would only be $36.80.

Unfortunately, this gas tax “vacation” will do absolutely nothing to alleviate the problem of rising oil and gasoline costs in the long run. Gasoline prices are determined by supply and demand, which is perhaps the most fundamental concept in economics. And the demand for gasoline changes only slightly with price increases because there are few suitable substitutes for gasoline. If you do not believe me, try filling up your car with something other than gasoline, and let me know how far you get.

As worldwide demand for gasoline and oil continues to increase, the only way to keep prices down for U.S. consumers is to increase the supply made available to them. Regrettably, we are not likely to see domestic oil supplies increasing any time soon, as environmental legislation enacted over the years has held hostage many of our natural energy resources by preventing exploration.

Senate Democrats and the two Democratic presidential hopefuls are also proposing a windfall profits tax on the oil companies. Once again, this course of action will do nothing to either increase the supply of crude oil or lower the demand for oil’s refined products, the two major factors that determine oil prices.

The windfall profits tax is much more likely to hurt consumers than help them because the tax will lead to a decline in oil exploration and development efforts, in the long run. In the short run, investors will be hurt because the value of investors’ oil company stock holdings, which partially reflect expected future profits, will fall as soon as the new tax is enacted. Considering that roughly 100 million of the 300 million residents of the United States invest in oil companies either directly (individual stocks) or indirectly (mutual funds), just what will the windfall profits tax accomplish except to put more money in the hands of economically inept politicians?

There have also been rumblings about our politicians looking at the “excessive” pay that CEOs are receiving and possibly capping their compensation. What message is this sending us? We can encourage people to work hard, and aspire to greatness, but not to be so great that their compensation goes beyond a certain level. To me, that sounds an awful lot like communism.

Somewhere along the way, “capitalism” has become a dirty word. We are forgetting that free markets have worked for hundreds of years, and free markets are constantly in flux and quickly correct mispricing and regulate supply and demand in the marketplace. Yes, oil companies are making record profits currently. But, like many other industries, petroleum is cyclical and experiences periods of both boom and bust. And until the supply of oil increases, or the demand decreases, we are stuck with oil priced over $100 a barrel. That is of course, until substitutes for oil and its refined products are developed. I am willing to bet, right now, dozens of entrepreneurs all over America are developing viable alternatives to gasoline to power automobiles in the future.

The stark reality of all of these proposed actions and taxes is that they are short-term focused and will probably hurt the very people they are trying to help in the long run. Politicians can no sooner change the laws of economics than they can change the laws of physics. So, until we can see our politicians disprove Newton’s Law of Gravity or Einstein’s Theory of Relativity, let us kindly ask them to step aside and let free markets work.