Thursday, June 19, 2008

Economic Stupidity

According to most national polls, Americans are more concerned about the economy than about any other issue. They worry about rising gas and food prices, a dismal housing market, and the threat of a recession. Americans are looking to Washington for help. Unfortunately, the presumptive nominees of both parties are complete economic morons.

John McCain and Barack Obama are both angry over the “obscene profits” raked in by oil companies. It is not clear how the word “obscene” can be used to describe profits of any kind (“obscene”{ is defined as something immoral or disgusting), or exactly by what criteria profits are judged “obscene,” or even why “obscene profits” are particularly bad. But they are, and the high profits made by oil companies (and most American oil companies are posting record profits) are definitely considered “obscene” by McCain and Obama.

This kind of thinking is offensive. Not because of the implied anti-profit ethos (which is obviously political posturing), but rather because of the complete nonunderstanding of simple, basic economics. This is not a mere misunderstanding, which is excusable—both McCain and Obama are willfully ignorant on this issue.

As everyone who has even the most rudimentary awareness of economics knows (or should know), the most revealing indicator of companies profitability is its profit margin, not its total profit. A profit margin shows the amount of money realized per dollar invested, and better allows comparisons of corporations of different sizes.

So how do oil companies stack up with other industries? Oil companies have a net profit margin of around 8.3%, which is a comfortable figure, but certainly not excessive. Electronics manufacturers get around 14%, and Microsoft has a net profit margin of 27%. (H/T Karl Rove) The profits made by oil companies are not only not “obscene”; they are even particularly high when compared to other industries. (Comparing oil profit margins to other corporations: McDonald’s has a higher net profit margin (10.4%); Toyota is at 6.9%; Hershey was at 4.3% in 2007, but at around 10% in the years before that; and Coca-Cola is at a whopping 20%)

Another stupid gripe both candidates have against oil companies is the idea that rich oilmen rake in profits while never investing anything in alternative fuel industries. Ignore, for the moment, that that assessment is totally false—oil companies are responsible for about a quarter of alternative fuel research. This idea is also profoundly anti-capitalistic, and against all common sense.

Self-interest is capitalism’s guiding force. It is absolutely illogical to attempt to force oil companies to attempt to invest in an industry in which they have little self-interest. It is difficult to imagine any oil company making a serious effort to render itself obsolete, so it is improbable that any alternative fuel development done by oil companies will free us from our dependency on oil.

Energy companies will, however, start seriously investing in alternative fuels when and if the price of oil becomes prohibitively high. At that point, their only hope of survival will rest with alternative fuels. Likewise, if someone ever discovers a way to make alternative energy profitable, oil companies will do their best to jump on board.

This idea is clearly independent of any understanding of economics, and is instead borne out of a sort of hair shirt environmentalism—oil companies are responsible for pollution (and high gas prices); therefore, they must perform some kind of penance. This penance is research into environmentally friendly but wholly useless “green” technologies.

Nobody on the right expected much in the way of economic understanding from Barack Obama, who thinks that it is possible to implement nationalized health care and save money while doing so. But conservatives should expect more from McCain. Generally, I like McCain, but it is hard to disagree with his own estimate of his economic knowledge: “the issue of economics is not something I’ve understood as well as I should.” Liberals and conservatives can agree on that point, though perhaps for different reasons.


At June 20, 2008 at 5:06 AM , Blogger Beth said...

The American people in general don't understand economics, and so the politicians take advantage of their stupidity, as well as use class warfare, to earn votes. It is so pathetic, it makes me cringe!

At June 20, 2008 at 11:07 AM , Blogger Marie's Two Cents said...

Come on over to my place Danny and sign the petition to Drill Here, Drill NOW, Pay Less.

It's got over 1 million signatures and we are on a roll.

We are going to MAKE this Democrat controlled congress get up off thier asses and listen to us.

74% of the entire Country says Drill Here!!

At June 20, 2008 at 11:50 AM , Anonymous Anonymous said...

See my blog on how and why economics effect gas prices.

At June 20, 2008 at 3:17 PM , Blogger WomanHonorThyself said...

Drill drill drill!..indeed!

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