Optimists, confronting adversity, are fond of saying that every problem is an opportunity.
Pessimists, however, know that every such opportunity is a chance to make the problem worse. In our current panic over inflation, the pessimists may take some satisfaction in being proven right.
The signs come in two sectors: energy and housing. With oil prices spiking briefly to more than $130 a barrel, Democratic politicians have revived one of Jimmy Carter’s worst ideas: a windfall profits tax. Meanwhile, as rents climb, states and cities have embraced rent control, another regrettable fashion of the 1970s.
Sens. Sheldon Whitehouse of Rhode Island and Elizabeth Warren of Massachusetts want to punish oil companies for the sin of making money. Their measure “would curb Big Oil’s profiteering and provide relief to Americans getting gouged at the pump,” declared Warren.
It would confiscate 50% of any price above $66, the average cost of a barrel between 2015 and 2019. If prices are $120 a barrel, the estimated revenue would amount to $45 billion a year. It would be rebated to taxpayers at a rate of about $240 per year to individual taxpayers and $360 to joint filers.
They shouldn’t spend it just yet. There is no guarantee that prices will be $120 a barrel.
They have already fallen below $100. The price surge came in response to the Russian invasion of Ukraine and the decision of the United States to ban imports of Russian petroleum. But the war could reach a negotiated end anytime. The new COVID-related lockdowns in two of China’s manufacturing hubs will cool demand. Prices could fall just as sharply as they rose.
A windfall profits tax, however, would impede this adjustment by dampening production.
The higher the profit on a barrel of oil, the more incentive there is to extract it — including from wells that are unprofitable at low prices. Removing profits invariably removes output.
The same politicians who decry this phase of the supply-and-demand cycle were not weeping for the oil companies when they were drowning in red ink. In 2020, as the pandemic strangled demand, motorists reaped a windfall from low gasoline prices, while the industry lost tens of billions of dollars.
With the U.S. and other countries acting to curb fossil fuel use, the industry’s golden years are clearly in the past. In 2008, ExxonMobil made $45 billion. Last year, despite a booming economy, it made about half that.
The less politicians interfere with the market, the quicker supply will rise and the quicker prices will fall. Carter’s windfall profits tax, which applied only to domestic oil, resulted in less U.S. production, according to a study by the Congressional Research Service.
The same economic laws apply to housing. Nationally, rents have jumped by 18% over the past two years, The Wall Street Journal reports. California and Oregon have responded with laws limiting what landlords can charge. Boston’s Democratic Mayor Michelle Wu was elected last year vowing to restore rent control, and other cities are considering the idea.
But the source of rising rents and home prices is simple: Supply has lagged behind population growth, particularly in big cities. The only solution is to build, build and build some more. Rent control does nothing to undo the regulations that stifle construction in much of the country.
It does, however, encourage landlords to skimp on basic maintenance, which can lead to neighborhood deterioration. It deters the building of new units, even if they are exempt from controls, because they could eventually be included. Developers are encouraged to erect homes for sale, not for rent. To escape the restrictions, owners of apartments may convert them to condos — or rent them on a short-term basis on platforms like Airbnb.
Rent control is supposed to help tenants at the expense of landlords. But it also penalizes future tenants for the benefit of current ones. Existing renters tend to stay put when their rent is controlled, forcing new tenants to bid for space in uncontrolled buildings. New tenants end up paying more than the market rate so others can pay less.
In an analysis for the liberal Brookings Institution, Stanford University economist Rebecca Diamond concluded, “Rent control appears to help affordability in the short run for current tenants, but in the long-run decreases affordability, fuels gentrification, and creates negative externalities on the surrounding neighborhood.”
We’ve found out before how much damage policies like these can do. But pessimists won’t be surprised if we have to learn that lesson again.