There is a new Democrat proposal for a Reasonable Profits Board that would monitor profits made by oil & gas companies in order to apply a windfall profit tax of any profits the board deems are beyond reasonable. This proposal is part of their Gas Price Spike Act. The failure here is twofold. One, they simply focus on the total dollar amount of net profit, and fail to account for net profit margin, which is a better indicator in comparing the profitability of one industry to another. When you compare net profit margin of different industry segments, you discover that the various aspects of the oil & gas industries rank in the middle of the pack. Two, those pushing this legislation discount the fact that profits lead to reserve capital which allows for the stability of a company to weather future economic upheavals. It also allows a company to invest in expansion and exploration. Profits are the essential foundation for future growth. And, the accumulation of capital is vital to the growth of wages.
This is the sort of legislation that the Occupy Movements get behind as they often equate profit seeking in itself as evil. Where the Occupy Movement and Tea Party do agree is the outrageousness of the bailouts. “The banks got bailed, we got sold out!” The two movements can also agree that the use of Federal regulations as a means to gain profits that are privatized while the losses are socialized is abhorrent.
It is the government’s rigging of capitalism that is to blame, not capitalism in itself. Profits and losses are essential for capitalism to work effectively. Dr. Daniel J. Smith, Assistant Professor of Economics at Troy University, simplifies it:
Where the Tea Party and Occupy Movement move apart is the attack on capitalism by OWS and Occupy’s misconception on what capitalism is. Occupy and the Tea Party agree that there is too much corporate money in politics and it provides a significant conflict of interest for our elected representatives. Who are they elected to represent? The corporate donors to their campaigns or the citizens who elected them? The Tea Party has mostly focused on the lobbying efforts to effect regulations to unfairly benefit some while hindering competitors. Occupy has focused more on campaign contributions and the influence that money brings. Both are correct and need to broaden their horizons to incorporate the other’s viewpoint more into their own thoughts and actions.
The Tea Party, though, focuses accurately when placing much of the blame for the corruption of crony capitalism on government, and not capitalism in itself. Economist Chris Coyne attempts to explain:
Occupy borders on Libertarianism with their views on the Fed and the bailouts, but those views have been pushed to the back burner in the media. Lest the two Movements find common ground, the focus of the media attention has turned towards Occupy’s rage against income inequality. Here is one area the two sides split apart. Income inequality is a flawed argument and focuses on the wrong criteria. Occupy and the media cite statistics using snapshot data to compare income earners as comprising one group from one year compared to new people representing the same quintile in another year. What they fail to point out is the mobility of different individual earners moving from one income bracket to another over the course of time. This movement of individuals through the economic ranks is called income mobility. In order to put all the available statistics together and gain some perspective, there is a 22 page study done that examines income mobility in the United States from 1996 – 2005 as well as cites data from previous studies that you can read in its entirety at United States Department of the Treasury website.
The key findings of this study show:
- There was considerable income mobility of individuals in the U.S. economy during the 1996 through 2005 period as over half of taxpayers moved to a different income quintile over this period.
- Roughly half of taxpayers who began in the bottom income quintile in 1996 moved up to a higher income group by 2005.
- The composition of the very top income groups changes dramatically over time. Less than half (40 percent or 43 percent depending on the measure) of those in the top 1 percent in 1996 were still in the top 1 percent in 2005. Only about 25 percent of the individuals in the top 1/100th percent in 1996 remained in the top 1/100th percent in 2005.
- The degree of mobility among income groups is unchanged from the prior decade (1987 through 1996).
- Economic growth resulted in rising incomes for most taxpayers over the period from 1996 to 2005. Median incomes of all taxpayers increased by 24 percent after adjusting for inflation. The real incomes of two-thirds of all taxpayers increased over this period. In addition, the median incomes of those initially in the lower income groups increased more than the median incomes of those initially in the higher income groups.
I want to repeat the one in bold. Among the top 1% of income earners in 1996, less than half remained in the top 1% in 2005. This top 1% that is so vilified is ever changing in who actually comprises it.
Dr. Steven Horwitz, Professor of Economics at St. Lawrence University, has done a wonderful job of using the information available in the previous studies that indicated similar trends in income mobility by summarizing it in an easy to understand video:
It is important that Americans do not forget that our economic freedom is the cornerstone of the foundation for the opportunity to build personal wealth. That opportunity must be balanced by personal responsibility. Too many talk about government policies needing to level the playing field by punishing those who are successful and unfairly subsidizing those who fail. But, the proper role of government is to work for the common good, not for the good of selected classes, as one of our Founding Fathers, John Adams, so eloquently spoke:
Government is instituted for the common good; for the protection, safety, prosperity, and happiness of the people; and not for profit, honor, or private interest of any one man, family, or class of men.
Our country again and again comes dangerously close to completely turning away from the ideals of a free economic system that led to one of the greatest nations the world has ever seen. The more we concentrate on being envious of those more successful than ourselves, insist that government provide for us what we have failed to provide on our own, the less responsibility we take for our own successes and failures, then the less freedoms we will have remaining. Everyone needs to remember that being poor is not a permanent condition in a free economic society. If some of us continue to give up our freedom to take responsibility for ourselves, then we will lose the opportunity to pursue a better life for ourselves as well. By surrendering our responsibility, thus our empowerment, to a government entity, our individual liberty shall continue to erode. Here, we all still have the opportunity of economic mobility as long as we maintain and broaden our economic freedoms. Abraham Lincoln, first Republican President of the United States of America, wisely concluded:
“Again, as has already been said, there is not of necessity any such thing as the free hired laborer being fixed to that condition for life. Many independent men everywhere in these States a few years back in their lives were hired laborers. The prudent, penniless beginner in the world labors for wages awhile, saves a surplus with which to buy tools or land for himself, then labors on his own account another while, and at length hires another new beginner to help him. This is the just and generous and prosperous system which opens the way to all, gives hope to all, and consequent energy and progress and improvement of condition to all. No men living are more worthy to be trusted than those who toil up from poverty; none less inclined to take or touch aught which they have not honestly earned. Let them beware of surrendering a political power which they already possess, and which if surrendered will surely be used to close the door of advancement against such as they and to fix new disabilities and burdens upon them till all of liberty shall be lost.”
For capitalism to work, for opportunities to abound for all, the incentives have to be in place for people to pursue personal excellence. Income distribution is one of the primary incentives for individuals to utilize one’s unique talents to be successful. When people are incentivized to excel by allowing them to enjoy the fruits of their labors, we all are better off. Dr. Daniel J. Smith touches upon these incentives and the importance of income distribution in improving all our lives: