An Unprofitable Read

Brad DeLong, an economist at UC-Berkeley and prolific blogger (and a former Treasury Department official in the Clinton administration), has a regular feature called "why can't we have a better press corps?" where he bemoans the lack of economic literacy on the part of  journalists and editorialists.  I'm beginning to think that we need a Vermont version. 

Witness the editorial in Saturday's Freeps titled

Obscene Profits May Pave Way for Reform

I won't comment on the definition and use of the word obscene but will instead focus on the meat (such as there is) of the editorial.

The editorial's focus was Exxon Mobil's $11.7 billion second quarter profit, which should leave us

Outraged.  Of course, how else should we react?

I suppose we're supposed to be outraged at the magnitude of the profits.  If so, there's a simple solution.  Break Exxon Mobil up into 10 smaller firms and each would have only $1.17 billion in profits.  No outrage?

The way to look at profits is as a percent--of sales, assets, or equity.  In 2007, Exxon Mobil earned $40 billion in net profits, a margin of 10.4% of sales.  Is that big or small?  Gannett, the parent company that owns the Free Press, earned a piddling $1 billion in profits.  But that was 13.1% of sales.  So by that measure, Gannett was more profitable than Exxon Mobil.  Where's the Gannett outrage? 

The editorial goes on to try to make some sort of comparison between Exxon Mobil's profits and the high price of heating oil and of food.  I have no idea how an oil company's profits are supposed to be related to rising food prices (and let's remember that food prices are up 5% compared to last year, hardly a crisis, although it is of concern).  Later, the editorial rants about the mortgage crisis, the Iraq war, and other issues--all somehow relating to Exxon-Mobil's profits in a way that I could not figure out.

Then another kicker:

Adding salt to the wound, Exxon Mobil stock dropped 5 percent [after the profit announcement] -- because Wall Street expected even bigger profits.  Let's repeat that: Wall Street expected bigger profits.  Who are these people...? 

Who are they?  They are us.  Anyone who has a 401k plan invested in a diversified portfolio, any Vermont teacher or state employee.  They all have part of their retirement assets in Exxon Mobil stock.  (If they don't they should find another fund manager.) 

The profits that any firm make do not just disappear down a black hole.  They are either used for investment or they get distributed to shareholders.  And Vermont residents receive a higher share of their total income from dividends than residents of most other states, according to the BEA.

More fundamentally, the editors of the Free Press need to understand the role of profits in a market economy.  When profits are high, it's a sign that people want more of the product.  Would the editors rather have Exxon Mobil earn zero profits?  If so, what incentive would there be for anyone to invest in more petroleum supplies? 

And high profits are a consequence of high consumer demand, not a cause of high prices.  The only way we will ever get alternatives to fossil fuels, which presumably is something the editorial writers support, is if new technologies bring forth new, cheaper alternatives to oil.  The higher the price of oil (and consequently the higher the profits are to anyone who happens to own oil) the more likely it is that alternatives will  be economically viable.

If profit is a four-letter word, then excess profits are an obscenity and should be taxed away.  But what's good for the goose is good for the gander.  Any Vermonter who bought a house more than ten years ago can sell it for more than double what they paid for it.  That's an outrage and a hardship on new potential homeowners. 

Shouldn't those "excess profits" accruing to the homeowner be taxed?  That money could be used for all sorts of social purposes--like providing houses for low income Vermonters.  Instead, the homeowner pays zero tax on the capital gains (profits) on the sale of the house.   Maybe we should use that model and have Exxon Mobil pay zero taxes, instead of the $30 billion in taxes they paid last year.  And maybe we should just eliminate the tax on corporate profits, normal or obscene.

Comments

[Lazarus Long]

When your brain has a "Big Daddy Warbucks" view of corporations then reality might not penetrate. I'm sure the editorial writer has none of their liveable wage income invested in anything but Ben and Jerry's.

[Charity]

I could not even finish reading that editorial because I was so "outraged" at the implication that outrage is the only reasonable reaction to a profitable business.

Great analysis.

Now if only you could figure out how to infuse some of that economic literacy into the press. (I think the rest of us could probably use some, too.)

[Green Mtn Punter]

Very well expressed, Art, this post is worthy of inclusion in "Econ 101 For Dummies". But I think all of their hooey about excess profits is just the authors' smokescreen for their unstated goals: To abolish fossil fuels and capitalism. They can't, of course, come out and say that so they resort to disinformation, the big lie a la Lenin and Stalin.

Besides, they have neither understanding of, or respect for, capitalism, nor do they pretend to want to learn. This is illustrated over and over again in their position on capital gains taxes- they want to raise them - ALWAYS- even in a slow economy.

It is impossible to have a rational discussion with the left because they don't want one; thankfully, you and other Tiger contributors regularly point out the absurdity of their positions for Vermont voters and your efforts are much appreciated.

[bt]

it's useful to take note that the "capitalism/communism" dicotomy
was another ideological creation of Karl Marx.

imo,the dicotomy has an enervating effect on people's abilities to think about money,finances,and economics.

jealousy and envy are not generally conducive to sober thinking...nor did Marx intend them to be.

some one also pointed out that the "middle class" was the "most revolutionary" product of the 19th & 20th centuries.

but class war
is so much more exciting.

[the Gooch]

I see President-elect Obama is backing a 'Windfall Profits' tax now, too.

I don't know how they can define windfall profit without making the measure a bill of attainder, which, last I checked, was explicitly verboten in the Constitution.

Can anyone with a better understanding of tax law and Constitutional law explain that to me?

[Dan]

Well, what can we expect from those who are not only economically illiterate - but also financially illiterate and in-general innumerate (that last being a defining characteristic of the contemporary left).

In a possibly related development, I noticed that VPT was fund-raising last evening with another one of those dreary "Peter, Paul, and Mary" retrospectives. *Gag.*

But back in the real world, if the editors at the flea press really wanted to understand why XOM stock took a plunge after the report, the answer is very simple - THAT REPORT INDICATES THAT XOM's BUSINESS PERFORMANCE IS ACTUALLY DETERIORATING.

(Ref: http://www.businesswire.com/portal/site/exxonmobil/index.jsp?ndmViewId=news_view&ndmConfigId=1001106&newsId=20080731005690&newsLang=en )

Comparing 2Q08 and 2Q07, XOM's top line (revenue) rose from $98.4B to $138.1B - a strong rise of some 40%. However, the bottom line (net after-tax income) rose from $10.3B to $11.7B - a rise of only some 13.5%.

The bottom line (literally) is that comparing last year and this year, XOM's net after-tax margin eroded from 10.5% to 8.5% - in other words, their business strength is deteriorating. Oil is a notoriously hyper-cyclical business (good ol "boom-and-bust"), and this report tends to indicate that the most recent boom has expired and that profitability will be deteriorating for the foreseeable future.

Perhaps some of the hyperventilators have taken short positions in XOM and are trying to talk it down even further?