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08.07.2008... Campaign Follies': Obama and McCain Spout Economic Nonsense
Barack Obama and John McCain are busy demonstrating that in close elections during tough economic times, candidates for president can be economically illiterate and irresponsibly populist.
In Raleigh, N.C., last week, Obama promised, "I'll make oil companies like Exxon pay a tax on their windfall profits, and we'll use the money to help families pay for their skyrocketing energy sts and other bills."
Set aside for a minute that Jimmy Carter passed a "windfall profits tax" to devastating effect, putting American oil companies at a competitive disadvantage to foreign competitors, virtually ending domestic energy exploration, and making the U.S. more dependent on foreign sources of oil and gas.
Instead ask this: Why should we stop with oil companies? They make about 8.3 cents in gross profit per dollar of sales. Why doesn't Obama slap a windfall profits tax on sectors of the economy that have fatter margins? Electronics make 14.5 cents per dollar and computer equipment makers take in 13.7 cents per dollar, according to the Census Bureau. Microsoft's margin is 27.5 cents per dollar of sales. Call out the Pelosi-Obama Windfall Profits Police!
It's not the profit margin, but the total number of dollars earned that is the problem, Obama might say. But if that were the case, why isn't he targeting other industries? Oil and gas companies made $86.5 billion in profits last year. At the same time, the financial services industry took in $498.5 billion in profits, the retail industry walked away with $137.5 billion, and information technology companies made off with $103.4 billion. What kind of special outrage does Obama have for these companies?
McCain doesn't support the windfall profits tax, but he can be as hostile to profits as Obama. "[W]e should look at any incentives that we are giving," McCain said in May, even as he talked up a gas tax "holiday" that would give drivers incentives to burn more gasoline.
This past Thursday, McCain came close to advocating a form of industrial policy, saying, "I'm very angry, frankly, at the oil companies not only because of the obscene profits they've made, but their failure to invest in alternate energy."
But oil and gas companies report that they have invested heavily in alternative energy. Out of the $46 billion spent researching alternative energy in North America from 2000 to 2005, $12 billion came from oil and gas companies, making the industry one of the nation's largest backers of wind and solar power, biofuels, lithium-ion batteries and fuel-cell technology.
Such investments, however, are not as important as money spent on technologies that help find and extract more oil. Because oil companies invested in innovation and technology, they are now tapping reserves that were formerly thought to be unrecoverable. Maybe we are all better off when oil companies invest in what they know, not what they don't.
And do we really want the government deciding how profits should be invested? If so, should Microsoft be forced to invest in Linux-based software or McDonald's in weight-loss research?
McCain's angry statement shows a lack of understanding of the insights of Joseph Schumpeter, the 20th century economist who explained that capitalism is inherently unstable because a p erennial gale of creative destruction" is brought on by entrepreneurs who create new goods, markets and processes. The entrepreneur is "the pivot on which everything turns," Schumpeter argued, and "proceeds by competitively destroying old businesses."
Most dramatic change comes from new businesses, not old ones. Buggy whip makers did not create the auto industry. Railroads didn't create the airplane. Even when established industries help create new ones, old-line firms are often not as nimble as new ones. IBM helped give rise to personal computers, but didn't see the importance of software and ceded that part of the business to young upstarts who founded Microsoft.
So why should McCain expect oil and gas companies to lead the way in developing alternative energy? As with past technological change, new enterprises will likely be the drivers of alternative energy innovation.
Obama and McCain both reveal a disturbing animus toward free markets and success. It is uncalled for and self-defeating for presidential candidates to demonize American companies. It is understandable that Obama, one of the most liberal members of the Senate, would endorse reckless policies that are the DNA of the party he leads. But McCain, a self-described Reagan Republican, should know better.