Bubbles Toil and Oil Troubles

It's been a long time since I took an econ class, so I might not remember everything correctly, but I'm pretty sure this isn't how Adam Smith saw capitalism.

Daniel J. Weiss and Valeri Vasquez write,

Americans spent 28 percent more for gasoline during the first three months of 2011 than the same period in 2010. Meanwhile, the big five oil companies—BP, Chevron, Conoco Phillips, ExxonMobil, and Shell—made 38 percent more profit. The companies then used a major portion of these additional profits to enrich their board of directors, senior managers, and shareholders by purchasing shares of their stock.

Further, the corporations "are battling to retain $40 billion of tax loopholes that will be paid for by taxpayers who are already providing their additional profits due to high oil and gasoline prices."  In short, Weiss and Vasquez conclude, "While consumers and taxpayers get hit with bills for higher gasoline prices and tax loopholes, Big Oil companies get richer by the minute."

Weiss and Vasquez published their article on May 3. 2011.  Yesterday, the commodities market took a hit, "led by the steepest drop in oil prices since the fall of 2008."  The cause seems to have a commodities bubble.

“You’re in a situation where a lot of these markets have pushed to all-time highs and it’s at a point where it became very unstable and that’s where you started to topple,” said Dax L. Wedemeyer, a broker analyst with US Commodities, a brokerage firm West Des Moines, Iowa.

Writing for his Mother Jones blog, Kevin Drum points out,

". . . it does make you wonder if we really do have a global economy these days that's inherently built on bubbles of one kind or another. Our financial rocket scientists seem almost incapable of making money in a normal economy — making enough money to satisfy themselves, anyway — so instead they spend their time seeking out smallish bubbles and then working overtime to supercharge them enough to spin out some temporary wealth before everything crashes back down to earth."

Of course, the big time folks looked at the bright side.

“I think it’s very healthy,” said Michael Rose, a trader at Angus Jackson. “The market was like a seesaw with everyone on one side, and now the markets will have time to clear out and balance."

He added, “The losers are going to be the small investors who thought it was going to go on forever like in the cases of the real estate and Internet bubbles.”

 So everything is good.  Consumers pay too much; small investors take a hit, and multi national corporations make out like bandits.  Drum muses, "One of these days we might actually get serious about regulating leverage enough to slow this down, but it hasn't happened yet. Maybe another half dozen bubbles will finally do the trick."  Drum seems to have be an optimist.  It'll probably take two or three dozen bubbles before anyone gets serious.

Dynasty Without Joan Collins

Cory and his commenters at The Madville Times are starting a little discussion about the estate tax.  At the risk of adding a little fuel to the fire, I think this editorial from the NY Times shows that the rich have found ways to get around the estate tax.

Ray D. Madoff, a law professor at Boston College, points out that "dynasty trusts" will help develop an "American aristocracy" because the trusts allow the rich to "provide their heirs with money and property largely free from taxes and immune to the claims of creditors. And rather than benefit only children and grandchildren, dynasty trusts provide for generations in perpetuity." [Madoff, America Builds an Aristocracy, NYT 7/9/10]

I don't have a problem with the rich leaving their money to their offspring, but these "assets can pass tax-free and creditor-proof to the next generation."  More importantly,

[the] tax breaks are not the only special advantages . . .they commonly include a “spendthrift clause,” which provides that trust assets cannot be reached by a beneficiary’s creditors. If a beneficiary causes a car accident, for example, the victim cannot be compensated with assets from the trust, even if they are the driver’s only resources. So beneficiaries are free to behave as recklessly as they like, knowing that their money is forever protected for themselves and their heirs. [Madoff, America Builds an Aristocracy, NYT 7/9/10]

In short, generations of spoiled brats can live on the wealth of the predecessors and behave badly, but face few, if any, financial risks.  Financially, it seems, they have immunity that foreign diplomats would kill to obtain.

The US has corporations that are too big to fail, a fact that means the poor and middle class have to bail them out when they behave irresponsibly.  Further, the wealthy people who don't want to pay any income taxes or estate taxes but expect the poor and middle class to pay payroll taxes on every dollar.  Now, the rich want their children to remain rich without responsibility.  I'm positive this situation isn't what Adam Smith endorsed.