"What is a Windfall"
August 4, 2008; Page A12
Daily Political Newsletter from
WSJ.com's Opinion Editors
The "windfall profits" tax is back, with Barack Obama stumping again to apply it to a handful of big oil companies. Which raises a few questions: What is a "windfall" profit anyway? How does it differ from your everyday, run of the mill profit? Is it some absolute number, a matter of return on equity or sales -- or does it merely depend on who earns it?
Inquiring entrepreneurs want to know. Unfortunately, Mr. Obama's "emergency" plan, announced on Friday, doesn't offer any clarity. To pay for "stimulus" checks of $1,000 for families and $500 for individuals, the Senator says government would take "a reasonable share" of oil company profits.
Mr. Obama didn't bother to define "reasonable," and neither did Dick Durbin, the second-ranking Senate Democrat, when he recently declared that "The oil companies need to know that there is a limit on how much profit they can take in this economy." Really? This extraordinary redefinition of free-market success could use some parsing.
Take Exxon Mobil, which on Thursday reported the highest quarterly profit ever and is the main target of any "windfall" tax surcharge. Yet if its profits are at record highs, its tax bills are already at record highs too. Between 2003 and 2007, Exxon paid $64.7 billion in U.S. taxes, exceeding its after-tax U.S. earnings by more than $19 billion. That sounds like a government windfall to us, but perhaps we're missing some Obama-Durbin business subtlety.
Maybe they have in mind profit margins as a percentage of sales. Yet by that standard Exxon's profits don't seem so large. Exxon's profit margin stood at 10% for 2007, which is hardly out of line with the oil and gas industry average of 8.3%, or the 8.9% for U.S. manufacturing (excluding the sputtering auto makers).
If that's what constitutes windfall profits, most of corporate America would qualify. Take aerospace or machinery -- both 8.2% in 2007. Chemicals had an average margin of 12.7%. Computers: 13.7%. Electronics and appliances: 14.5%. Pharmaceuticals (18.4%) and beverages and tobacco (19.1%) round out the Census Bureau's industry rankings. The latter two double the returns of Big Oil, though of course government has already became a tacit shareholder in Big Tobacco through the various legal settlements that guarantee a revenue stream for years to come.
In a tax bill on oil earlier this summer, no fewer than 51 Senators voted to impose a 25% windfall tax on a U.S.-based oil company whose profits grew by more than 10% in a single year and wasn't investing enough in "renewable" energy. This suggests that a windfall is defined by profits growing too fast. No one knows where that 10% came from, besides political convenience. But if 10% is the new standard, the tech industry is going to have to rethink its growth arc. So will LG, the electronics company, which saw its profits grow by 505% in 2007. Abbott Laboratories hit 110%.
If Senator Obama is as exercised about "outrageous" profits as he says he is, he might also have to turn on a few liberal darlings. Oh, say, Berkshire Hathaway. Warren Buffett's outfit pulled in $11 billion last year, up 29% from 2006. Its profit margin -- if that's the relevant figure -- was 11.47%, which beats out the American oil majors.
Or consider Google, which earned a mere $4.2 billion but at a whopping 25.3% margin. Google earns far more from each of its sales dollars than does Exxon, but why doesn't Mr. Obama consider its advertising-search windfall worthy of special taxation?
The fun part about this game is anyone can play. Jim Johnson, formerly of Fannie Mae and formerly a political fixer for Mr. Obama, reaped a windfall before Fannie's multibillion-dollar accounting scandal. Bill Clinton took down as much as $15 million working as a rainmaker for billionaire financier Ron Burkle's Yucaipa Companies. This may be the very definition of "windfall."
General Electric profits by investing in the alternative energy technology that Mr. Obama says Congress should subsidize even more heavily than it already does. GE's profit margin in 2007 was 10.3%, about the same as profiteering Exxon's. Private-equity shops like Khosla Ventures and Kleiner Perkins, which recently hired Al Gore, also invest in alternative energy start-ups, though they keep their margins to themselves. We can safely assume their profits are lofty, much like those of George Soros's investment funds.
The point isn't that these folks (other than Mr. Clinton) have something to apologize for, or that these firms are somehow more "deserving" of windfall tax extortion than Big Oil. The point is that what constitutes an abnormal profit is entirely arbitrary. It is in the eye of the political beholder, who is usually looking to soak some unpopular business.In other words, a windfall is nothing more than a profit earned by a business that some politician dislikes. And a tax on that profit is merely a form of politically motivated expropriation.
It's what politicians do in Venezuela, not in a free country.
Monday, August 11, 2008
What is a Windfall Profit According to Obama?
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9 comments:
This is a good example of politians saying what they think people want to hear instead of what they actually believe in.
Obama knows that people are fed up with gas prices, so when he speaks about huge corporate profits, obviously he is going to use the oil companies as his punching bag - because he hopes most people (voters) will agree with him on an emotional level, not an intellectual one.
The author could have easily exposed this same trend on the Republican side, but chose to keep his/her opinion partisan.
Everyone knows politians will say whatever it takes just to get elected, even if it doesn't make much sense like this article pointed out. But if voters stopped voting with their emotions, stopped being loyal to just one party, and used the same standards of critique for all candidates, it might actually force politians to be honest for once.
I agree that politicians speak to specific audiences and say what they need to in order to further their agenda. Putting oil company profit margins in perspective relative to other industry profits is helpful in formulating an opinion concerning a proposed government policy. In all honesty though, I think that the oil companies themselves have very little to worry about, especially when it comes to government tax policy. Money talks and I highly doubt the oil industry will allow a cut in their margins. They just sit back comfortably and know that Obama is saying that to get elected, just like any other politician.
In comment to Andrew's comment about voters voting with their emotions: I would have to argue that it would be near imposible to seperate the emotion factor out of voting, or any other aspect of life, since emotions are what makes us human. A specific voter can agree or disagree on both an emotional and intellectual level, equally. For that specific voter, such a mix of emotional and intellectual influences makes perfect rational sense.
I'd like to recommend a book - "Learning to Live, Love & Lipsync - with Logic." by Mr. Spock. Thirty-three weeks on the New York Times Bestsellers List.
Seriously though, I agree that a certain amount of emotion will always be involved in our decisions because that is a part of our human-ness (new word). But the problem lies with decision making techniques that are comprised of mostly all criteria that is emotionally based and very little if any intellectual inquiry or critique.
And I might add that while emotions are easily manipulated, critical thought is much harder to fool. Think about how many times film makers easily manipulated your emotions through their productions. They can make you feel sad, happy, angry, depressed, frightened, paranoid, enlightened, disgusted, tearful, etc. They manipulate their audience every time. They understand the power behind creating the mood, controlling the setting, and then presenting their message at just the right moment...BAM! You've just been manipulated. Which is all fine and dandy when it comes to entertainment, but a little scary when people are succumbing to those same emotional tactics when making life-altering decisions.
In politics, the candidates use emotional manipulation all the time, even in their 30 second commercials. Those have little to do with substance, but everything to do with tugging on the voters emotional strings.
So, we are human, not Vulcan, and emotion is forever connected to us as a species. Is this a weakness or a strength? I think emotion can be used wisely. It is what brings passion to any pursuit in life. But that is after the critical thinking process takes place. First, before emotions should be let loose, intelligent thought should be the first priority.
Going back to the movie analogy, that is how people should decide which movie to watch. Logic says that if you don't want to waste your money, you need to find out if the movie is one that you will enjoy. An intelligent way to go about this is by reading what the movie critics said about the movie. This way you can make a sound, critically based decision on what movie to watch. Then you can go to the movie and prepare to enjoy the emotional experience.
But if you go to a movie simply based on another's viewers opinion that the movie was "scary" or "romantic" or "funny" or "inspirational" to them, you are using their emotional experience to judge how you are going to spend your time and money.
It is for these reasons that consumers are advised not to shop with their emotions, but with their heads. It's why you don't go shopping when you're hungry, or why it's not wise to buy expensive items on impulse, or believe something that sounds "too good to be true". Those are all emotionally based manipulative traps.
And would you begin a business and invest your life savings because you think it is an "exciting opportunity"? Of course not. There are plenty of critical techniques to help an entrepreneur make the right decison about which business will most likely succeed. Emotions are there to bring fullness to our experiences, not to use as a decison making tool.
Isn't that why childhood and adolecence is so volatile? Emotions are all that children use to make their decisions, and teenagers aren't much better, usually. Maturity in life should bring more and more intelect into the decison making process and less emotion.
So I'm not discounting emotions all together, just the way in which they can manipulate our decision making processes.
I agree that emotions can manipulate our decision making processes. In fact, they do so to our benefit, which is logical. This is why:
I choose not to watch scary movies not based on what's in the movie, but simply because it's scary. And it would probably give me nightmares. That is an example of both emotion (me being scared) and logic (don't want nightmares, therefore don't watch the movie). But even the logical part is due to my emotion of being scared.
I would argue that logic is based on our emotions. Let's take your example....for example. :-) You said: "Logic says that if you don't want to waste your money, you need to find out if the movie is one that you will enjoy".
Now, if I want to waste my money, then logic instructs otherwise. Therefore, logic is dependent on what I want, which is based on emotion.
Logic is just as volatile as emotions, because what may be completely logical for me may not be for you.
Logic involves reason, which is based on rational motives. Who decides what's rational? The individual. Based on what? An emotion. Therefore, logic used in decision-making procedures is based on emotions.
If I were to be offered a job tomorrow paying $80,000 in New Mexico, I wouldn't take it, despite it being a billions times better than earning $9.50/hr right now in Moscow. That doesn't seem logical, until my feelings are taken into account. I don't want to live in New Mexico because it's too hot. But an even greater reason is because my Hungarian family isn't there nor would it lead me to Hungary. Family is based on love. An emotion. So, I'm declining this job based on two emotions. These emotions formulate the rational motives of the decision, which justify the logic behind it.
I don't discredit the vital importance of using logic and reason in making decisions. But emotions are just as important as logic, if not more so, when making decisions because when the two do not depend on each other, the one (emotion) precedes the other (logic).
Actually Chris, your act of not watching a scary movie is 100% logic, or common sense, and has nothing to do with emotion. This is because your decision was not a result of your emotional state at all. It was a choice to avoid a particular emotion that you'd rather not experience. A purely logical choice, not an emotional one.
It seems to me that you are taking rational decisions and twisting them into emotional ones by precluding how you might feel emotionally if you were to choose one thing or another. It is a logical choice to avoid a situation that you have determined would cause you emotional discomfort.
Same with the job thing you brought up. Not moving to New Mexico in order to keep strong family connections and to avoid the heat is just common sense.
If your decision not to move to New Mexico was an emotional decision, then you would need to make that decision during an emotional state. But a decision made to avoid a certain emotion or in order to experience a known welcome emotion is a rational choice.
You might as well say that the choice to not put your hand on a hot stove is emotional because of the extreme pain you don't want to experience. No, that would be logic. Emotion would be the motivating factor if, while standing at the hot stove with your hand out, your heart started to beat faster, you broke into a sweat, you felt scared about what might happen, and then you quickly pulled your hand away at the final moment, feeling a sudden rush of relief sensing that you were now out of harms way. Those would all be emotionally based choices. But just simply choosing to not do it is making a common sense, rational choice.
Take for instance a child. I tell the child to eat and the child refuses. If the child thought logically, they would eat, knowing that it will be hours until the next meal is offered and they want to avoid the hunger pains (a logical choice, not an emotional one because the child is not feeling hunger pains at that moment). But the child is having fun playing and does not want to stop having fun, so they refuse to eat. This is an emotionally based decision since it is based on the emotion of having fun and not wanting that feeling to stop.
That last comment you made about emotion preceding logic when the two do not depend on each other, it reminded me of how a therapist works. You lay down on their couch and pour out your problems to them while they ask over and over again, "and how does that make you feel?" The therapist uses this technique to help their clients make better, rationally based decisions, by helping them to see how their decisions are causing emotional distress to themselves and others. Those who need to see a therapist in many cases tend to make impulsive, emotional decisions instead of rational common sense decisions.
I think we actually agree on how decisions are made, we just disagree on the definitions of the motivating factors behind the decision making process.
One other example I just thought about: Drug users.
Does a smoker decide to smoke through logic or emotion?
Logic says: this drug will slowly kill you. Don't light up. (Factually based, rationally thought, common sense approach. Logic.)
Emotion says: If you don't have another cigarette right now, your hands won't stop shaking, you'll continue feeling anxiety and nervousness, and you'll probably gain some weight too. (All emotions that are present at the time of the decision. Fear & anxiety - emotion)
Even when they smoked their first cigarette, in was an emotionally based decision - peer pressure (fear).
In fact, I would wager that all destructively addictive behavior is because of emotionally based decision making.
Your examples are good ones. It's true that logic would lead one to eat to avoid being hungary and not touch a hot stove to avoid physical pain. And I agree that it is a logical choice (as opposed to an emotional one) to initially avoid a situation that I have determined would cause me future emotional discomfort.
But as you said, if I take those future feelings into account when making my decision, then my decision becomes rational for me.
So if I want to experience the pain of a hot stove on my bare hand, then it would be logical to touch it. If I want to slowly die of lung cancer because I love my nicotine, then it would be logical to continue smoking despite my outrageous health care premiums.
I think we agree, then, that what's logical for an individual often depends on that individual's wants and perception of his/her needs. How one interprets those personal wants and needs, without getting emotional, would therefore lead one to a logical decision. I just wanted to make the point that I think logic isn't employed until one's wants and needs are taken into consideration. I suppose that is what I meant by emotions....wants and needs. There's the difference in definitions you pointed out....often the cause for mutual confusion.
Yes, that is true. We agree on much of what we've been saying. I've played the devil's advocate a little bit, but I agree that logic can be completely skewed by perceptions, be they true or false.
If we were to continue down this discussion path though, it would necessitate exploring cognitive dissonance, confirmation bias, and ad hoc hypotheses as decision manipulators. But a comment forum on a blog really wouldn't do it justice, so, to be continued...
If you feel so inclined to further explore some of what I've touched on you can read A Practical Guide To Critical Thinking found at http://www.skepdic.com/essays/Haskins.html
Ok, Thanks
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