Thursday, September 08, 2005

Economically illiterate politicians

Via Don Luskin, I read this article on Maine Democrats who oppose repealing the tax that businesses pay on heating oil. Personally, I find taxing anyone's heating oil to be absurd. Is it scarce? Perhaps, but as I wrote last week, the price system will take care of it far better than any government controls.

Gasoline taxes have some validity, since they pay for roads, although I find them far too high for the value received. Road construction tends to be wasteful across the U.S., and why not? Armed with the "full faith and credit of the taxpayer's wallet," government has no incentive to keep costs down. Heating oil taxes, however, have no specific purpose (that I've ever heard of, at least). Or does the federal government secretly create kinetic energy, i.e. heat, requiring that it tax anything that gives us warmth? That would explain all the hot air from Congress, state legislatures and most local governments.

In his desire to keep costs high for businesses, this politician takes first prize in "Who Wants to Demonstrate Economic Illiteracy":
"I don't think giving Wal-Mart a tax break on their heating oil will help Maine families, and they should be our primary concern," said House Majority Leader Glenn Cummings. "I think what we need to do is work together on a plan that will make a real difference for Maine people, and our small businesses, at the pump and at home."
I wonder of Cummings has ever managed a competitive business, and if he has, how competently. People shop at Wal-Mart, don't they? If Wal-Mart and all its competitors save on their heating oil expenses, competition dictates that they will pass the savings onto their customers. So how can Cummings claim that people will not benefit when Wal-Mart's expenses fall?

The principle of competition tells us this: when expenses go down, businesses have every incentive to lower their prices to attract additional customers while still maintaining the same profit margins. This is unavoidable when that cost is common to all businesses in a particular economic sector, even one that is allegedly dominated by collusion (as "Big Oil" is so often accused of having). Some businesses will charge the same prices and enjoy higher profit margins. Others, though, will lower their prices, accepting smaller profit margins in the hope of attracting more companies.

That being said, Wal-Mart is certainly no exception to competition, especially because of its lower prices. The basis of its business model is not just deeply discounted prices, but maintaining a certain price advantage. If all businesses no longer had to pay taxes on heating oil, and Wal-Mart's competitors then lowered their prices, Wal-Mart must follow suit. Even if its competitors' prices were still higher, every gain they make will increase their business at Wal-Mart's expense: some customers will find the competitors' prices higher but worth the convenience of closer proximity, less crowding, etc.

On Wednesday, Wal-Mart's CEO promised continued "aggressive" pricing through the holiday season. Isn't it remarkable how this article in one breath reported Wal-Mart's prices were "too high" last year and were "driving some customers away," and in the next breath it reported that Wal-Mart "was trying to drive competitors out of business" when in 2003 it cut prices on its toys? Media, politicians, and people who don't know any better, will damn Wal-Mart for whichever direction it chooses.

Any price will turn some buyers away. You could sell anything, even filet mignon, at cost, yet as desirable as it is at that price, as incredible as it sounds that people would turn down the opportunity, some still won't buy it. Simply, their money is scarce enough that they value other purchases more. Now, like all other businesses, Wal-Mart is no exception to two more things. It must charge enough to stay solvent (that bit about marginal revenue exceeding the marginal cost of production), and, world's biggest discounter or not, it will still charge "what the market will bear." And Wal-Mart's prices are apparently "correct" to a sufficient extent that it attracts 100 million shoppers each week (the article's own figures). So it's absurd to claim its prices are "too high" when, for reasons that politicians and Wal-Mart bashers will never fathom, people still pay them. See this wonderful column by Walter Williams, which taught me that "Only an unreasonable person would pay unreasonable prices."

Even a dollar store chain is complaining about losing sales to Wal-Mart. Why should that matter to the consumer, who ultimately follows the economics axiom about maximizing individual happiness for the least cost? Why do so many people think low prices are a bad thing? Remember what Bastiat set forth in the first part of his Economic Sophisms: artificially higher prices create unnecessary scarcity. Why do we want scarcity for any reason, when it lowers our standard of living, and why, more than 150 years after Bastiat's passing, do we still fear abundance? Things have not changed. People will say, "Of course I like abundance," then they will advocate higher prices as a good thing.

I give thanks to God that Bastiat's wisdom endures, for we can see that the accusation against Wal-Mart, and other businesses offering rock-bottom prices, is an old one: that a company selling at lower prices is "trying to kill off its competitors." Is it not the very definition of competition to do something better? Then why do so many believe that it's "uncompetitive" to offer more value for a lower cost? What are businesses supposed to do, agree on a standard price? Oh, that is "uncompetitive" too, since it's collusion. (Elliot Spitzer will be breathing down your back at the first hint of that.)

This is all elementary economics and business but is probably all lost on Cummings. He probably also believes that businesses don't pay enough taxes. It was in my original "What would Bastiat say?", and then in "What is free? And what is 'inflation'?", that I addressed the ludicrous notion of taxing businesses. Many before me have observed that businesses do not pay taxes; they only collect them. Toward the end of this entry, I noted the advantage of eliminating all taxes on businesses: they spend so much to pay their taxes, which is tremendous overhead and wasted energy. Each level of taxation is hardly just a shift , but an increase in deadweight loss, because it adds a new fixed cost (overhead to pay it, whether it's hiring CPAs, or recordkeeping).

Glenn Cummings, do you really want to make a difference for everyone at the pump? Let the free market work and oppose any governmental attempts to control the price of oil and gasoline.

Glenn Cummings, do you really want to help poor people maximize their income? Then push for legislation to abolish taxes on all businesses, including Wal-Mart, and cut your state government's spending to match. Let people spend their own money as they see fit, which is invariably more efficient than government bureaucrats' decisions.

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