Don’t believe everything a Democrat says just because you don’t trust Republicans.
Republicans lie so much I no longer believe anything they say, and they’re lying about gas prices too; when a Democrat talks, he’s not necessarily right, but at least you get to use your critical thinking skills.
Robert Reich (profile here) is a Rhodes Scholar and ex-cabinet secretary, and I’m not; but he’s a lawyer, not an economist; and while he can frame an argument, so can I, and he’s wrong about gas prices.
He says there are “three things Joe Biden and the Democrats who control Congress can do to lower gas prices ahead of the 2022 midterm elections.” These are: A windfall profits tax on oil companies, break up monopolies, and stop buybacks (read story here).
I’ll take these one at a time, and this won’t take long.
Windfall profits tax
Raw Story says, “Reich noted that ‘big oil is raking it in.'” That’s not true; Exxon’s and Chevron’s projected profits next year will roughly equal what they made in 2012, and their profits this year are about 10% to 20% above that, much of which will go toward paying off debt incurred during the pandemic when they were losing money.
Reich argues, “There ought to be … a windfall profits tax … [such that] if there are extra profits above what we’ve had the last five years in this industry we’re going to tax them so the industry doesn’t have any incentive to continue to use a kind of price gouging of consumers and that’s what’s going on.”
But if you do that, you’re going to perpetuate low production, fuel shortages, and high prices. We got in this fix in the first place because profits collapsed in 2015, which forced oil companies to cut spending on production. If you tax away the profits they’re making now, they not only won’t have an incentive to invest in more production, they won’t have the money to do it, either.
Enforce anti-trust laws
Reich said, “The other thing the administration needs to do is enforce antitrust laws, bust up the monopolies around the country,” specifically mentioning Tyson, the food processing giant. True, meatpacking is dominated by four companies, which limits competition in the industry, but four competitors isn’t a monopoly, and unless you can prove they’re engaging in price-fixing, they’re not breaking anti-trust laws.
By the way, lack of more competition in the meatpacking industry has nothing to do with gas prices. And there’s way more than four companies supplying oil and gasoline.
Stop stock buybacks
Finally, Reich said, “The other thing … I think is still very important is to stop what are called stock buybacks, which are artificial ways of raising stock prices that used to be considered by the securities and exchange commission to be stock manipulation before the Reagan administration. We ought to go back to that. There’s no reason that all of this excess profit ought to go to buying back shares of stock so basically shareholders can get the benefit.”
Stock buybacks happen when a corporation buys its own shares, which reduces the total number of shares (details here). What Reich is talking about is this:
“Share repurchases have been critically evaluated since the 1970’s but after 1982, the Securities and Exchange Commission largely condoned them. At that time, the agency already ascertained ‘that a large volume of stock buybacks would manipulate the market’. Only when Rule 10b-18 was implemented in the US, stock repurchases were seen as ‘virtually unregulated’. According to the Harvard Law School Forum of Corporate Governance, stock buy back programs are ‘drivers of our imbalanced economy’, in which poverty increases and corporations are less willing to increase worker’s wages.”
(Quoted from Wikipedia here.) Buybacks are one of two ways companies pay shareholders. The other is dividends. Corporate execs like buybacks because they fatten their stock-option compensation, which these days is a major component of executive pay at many companies, and they’re easier to cut or suspend than dividends. If you’re an ordinary shareholder, you’re better off to get paid cash directly in the form of a dividend, not least because corporate financial officers are no better at timing stock purchase than anybody else and often “buy high,” with the same results as if you buy expensive stocks that come down in price.
It’s not really as complicated as my feeble writing makes it sound; but in any case, the only thing you need to know about stock buybacks is they have nothing to do with gas prices.
Summary and final comments
I’m not a Rhodes Scholar, but don’t have to be, to see what Reich is up to. He wants to take money from oil companies’ shareholders and give it to their employees and customers. But a “windfall profits” tax doesn’t even do that; it takes money that would otherwise go to shareholders and gives it to the government, not workers or consumers.
In the process, you reduce the incomes of retirees, pension funds, university endowments, and others who depend on investment income; you continue the low investment in oil production that created the shortage in the first place; and you don’t lower pump prices at all.
This is what happens if you let lawyers make economic policy.
P.S., gas prices have begun easing because people are driving less, mostly because the economy is slowing. Given the inelasticity of gasoline supply and demand, even a small reduction in consumption has a big effect on pump prices, and we’re seeing that now. However, hurricane season is starting, and that could cause temporary supply disruptions and price spikes.