Watch Out for Windfalling Prices

Mary Katharine Ham
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Posted: Nov 17, 2005 8:29 PM

Andy Roth at Club for Growth notes that the Windfall Profits Tax failed this afternoon, 35-64. Thank goodness. What with those oil executive interrogations last week, I was beginning to feel like I was living in America, circa page 600 of "Atlas Shrugged."

All the Republicans voted NO, plus 8 Democrats, which I would say is pretty encouraging except that Andy warns of a "stealth" profits tax thrown in to appease moderates.

The premise on which the windfall profits tax is based is that rich, mean oil men are taking advantage of the twin catastrophes of Katrina and Wilma to price-gouge regular Americans into penury and out of productivity. The folks pushing windfall profit taxes and price-gouging legislation make no allowance for the fact that two 100-year storms put just a bit of crimp in oil refining and production, thereby driving down supply and necessarily driving up prices.

To them, prices are not signals of supply and demand, but arbitrary numbers picked by oil bosses who have it in for the little guy. Price-gouging legislation and windfall profits taxes, therefore, help the little guy, right? At times like this, I like to refer the 35 Senators who voted for a windfall profits tax to some of my favorite economists.

First, Thomas Sowell explains prices:

Why do prices exist at all? To cause things to be produced and made available to the public -- and to cause consumers to limit how much they consume. Why then do prices suddenly shoot up? Because there is either less of a supply available or more of a demand, or both.

Second, Walter Williams explains the relationship between windfall profits and the little guy, particularly in the wake of a disaster:

So-called windfall profits are profits above and beyond those needed to keep an entrepreneur producing a good or service. But they serve a vital social function. They serve as a signal that there are unmet human wants. One of the best examples of the role of windfall profits are those that arise in the wake of a disaster and are often condemned as price gouging....

In the wake of Florida’s Hurricane Andrew, windfall profits played a vital though unappreciated role. Plywood destined to be shipped to the Midwest, West and Northeast suddenly was rerouted to South Florida. Lumber mills increased production. Truckers and other workers worked overtime in order to increase the availability of plywood and other construction materials to Floridians. Rising plywood prices meant something else as well. All that plywood heading south meant plywood prices rose in other locations, discouraging "lower valued" uses of plywood such as home improvement projects. After all, rebuilding and repairing destroyed homes is a "higher valued" use of plywood....

Rising prices and opportunities for higher profits encouraged people to do voluntarily what was in the social interest: help their fellow man recover from a disaster.

If one of your Senators voted for the windfall profits tax, you may want to e-mail him or her a steady diet of Sowell and Williams. I know it's hard for them to believe that anything could work in the social interest better than a Senator can, but the market really does. And thank goodness.