Thursday, April 27, 2006

In my first economics class at Illinois State University, my instructor said that if we learned the material presented in the class we would know more economics than 95% of the adults in the United States.  One of the basic principles presented was that in a free market economy without impediments price is determined by supply and demand.  According to ABC news, 75% of the adults polled in a recent public opinion poll blamed President George W. Bush for the high price of gasoline in the United States.  Unless the President has some magical power over supply and demand, that supposition is patently absurd.

The reasoning of those polled seems to follow these similar lines.  John F. Kennedy was elected President in 1960.  In 1963 because he had some political problems, he went to Texas to help his political fortunes.  While he Texas, he participated in a political caravan in Dallas.  During that caravan, his head got in the way of bullets killing him.  Therefore, John F. Kennedy is to blame for his own murder.  Isn’t that ridiculous?  Yes.  And it is just as ridiculous to blame President Bush for the price of gasoline.

Do I like paying almost $3.00 a gallon for a gallon of gasoline?  No!  I would much rather pay $.50 a gallon and get it free on Tuesdays and Thursdays.  But, I doubt that will happen.

I also don’t like Bill Gates being a multi-billionaire.  I also don’t like large corporate executives being paid millions of dollars a year.  I also don’t like baseball, basketball, and football players among other athletes being paid millions of dollars a year.  I also don’t like so called movie and TV stars being paid millions of dollars a year.  However, I understand why they are—supply and demand.  Our demand for those products is great and the supply seems to be limited.  The result is high prices.

Wednesday morning I was in a local grocery store.  Out of curiosity, I checked the price of selected products.  T-bone steak was $8.99 a pound.  The store brand milk was on sell for $1.00 per half gallon or $2.45 for a gallon container of the same brand of milk.  Two other brands of milk were selling for $2.75 and $3.68 per gallon respectively.  A select brand of fruit juices was on sell for $2.00 a half gallon ($4.00 a gallon).  The regular price was $2.99 or more per half gallon depending upon the type of fruit juice selected.  Orange juice was on sell for $2.50 a half gallon ($5.00 a gallon).  The regular price was $2.99 for a half gallon.  A 1.75 quart of a name brand ice cream was on sell for $3.55.  If I did the math correctly, that translates into a price of $8.11+ for a gallon of ice cream.  

In perspective, maybe the price of gasoline which also includes additional taxes is not so out of line after all.  The problem is—we use a lot more gasoline that these other products.  We also seem to have gotten use to the concept that we have some kind of magical right to low priced gasoline.

Some members of Congress are proposing a so called “windfall profits tax” on oil companies.  According to tonight’s PBS stock market report, Exxon’s profit in the first quarter of 2006 increased 7% above the same quarter last year.  Is that a “wind- fall profit”?  Who decides what is and what is not a “windfall profit”?

According to the Peoria Journal Star (4/25/06, front page), Caterpillar Tractor Company “had a record first-quarter profit….”
“The profit-per-share was 48 percent above that of the first quarter of 2005 as sales and revenue increased 13 percent….”  Should Caterpillar pay a “windfall profit tax”?  In 1991, I had a 46% increase in investment income.  Three other years in that decade, I had increases of more than 30% each year.  Should I have had to pay a “windfall profit tax”?  One of my clients went from zero investment income in 1990 to a paper net worth of over a million dollars by the end of the decade.  (He lost over half of it when the tech bubble imploded.)  Should he have paid a “windfall profit tax”?  Select individuals win millions of dollars by selecting one correct set of numbers in an instant.  Should they pay a “windfall profit tax”?  When a baseball player receives a new contract that increases his salary by over 50% a year, should he pay a “windfall profit tax”?  

In short, how can anyone possibly determine what is a “windfall profit”?  They can not!        



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