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Inflation Control

Thursday, April 27, 2006

Part of having a website that has the word "Observation" in it's title means that I have to open my eyes and watch what is going on in the world. This means that I need to be aware of different events from all over so that I can comment on them. This practice also allows me the ability to form hypotheses. That is what I'm going to do today.
As you all are aware, the price of fuel is going up, up, up. Everyone that comes into where I work complains about how much it costs to fill their vehicles and wonder when it will ever end. Some think that the big oil companies are crooks and should be run out of town on a rail. The folks that have Geo Metros that get a bazillion miles to the gallon smile smugly because they know that the price of fuel will have to get much higher before they'll feel the pinch.
While discussing this topic with one of my more ornery customers, an observation began to form in my head. Then, when I got home, I was reading the comments under a post at South Puget Sound Libertarian's blog that added to it. 655321 said:
Not related to this subject, but the Senate is going to go after petroleum companies in an attempt to "discover" any taxes they may have "missed."
To which Mark, the blog owner, responded:
Ah yes, the missing tax ploy. Call out Sherlock Holmes and Dr. Watson. They'll discover that the oil companies should have paid more taxes and gasoline prices will come tumbling down.
The needle, Watson!
This exchange got me thinking about a subject I had read about a number of months ago. It had to do with the Income Tax and how the Federal Government uses it to control inflation. By this I mean that the fed pulls money out of the economy by increasing the tax rate on taxpayers. By doing so, it contracts the money supply, forcing people to spend less.
Here's my hypothesis: What if the Federal Government and Big Oil are acting in concert to control inflation by manipulating the price of fuel to control the money supply? What better method exists of directly effecting the economy than by raising the price of fuel so high that people will forgo spending money on trips and toys, instead choosing to save (if possible) or do without? People are literally telling me they can see where they may be forced to make the decision in the near-future to fill their tank so they can get to work or to buy groceries.
"That's crazy!" you exclaim. Is it really? Consider this: In a speech given by Roy Blough, Director of the Division of Tax Research Treasury Department, delivered before the Tax Institute, New York on February 7, 1944, he stated: 
Accordingly, no apologies are necessary in considering taxation as a means of inflation control. Before proceeding to the discussion of the individual income tax as a method of inflation control, an introductory summary statement of certain conclusions about inflation, which for the present purpose serve as assumptions, may be found helpful.
1. Inflation used here as synonymous with inflationary price rise is not a curse visited by some supernatural power but groups out of human institutions and human actions and is therefore preventable and controllable if people, especially people in organized groups, understand its causes and phases and are willing to take the steps necessary to prevent and control it.
2. Inflation is characterized by a situation where consumers and business organizations are able and attempt to buy more goods and services than are available under conditions where the normal mechanisms for increasing supply and limiting demand are not operative, due to restrictions on increases in the supply of goods and accompanied by continued additions to the volume of spendable funds.
/1/ The restrictions are often not complete and the additions not unlimited, so that inflations are usually self-limiting without conscious control methods.
3. By inflation control is meant the deliberate action of an organized society to prevent, delay, or limit inflationary price rises through removal of the restrictions on supply and of additions to spending power that cause such price rises, or through modifying their impact on prices.
4. Some control measures are:
(a) Increasing the supplies of civilian goods through increased efficiency, increased use of natural and human resources, improved transportation and increased imports, as well as by diversion of resources from other uses.
(b) Decreasing, or limiting the increase, of spendable funds by (1) reduction in governmental expenditures which tend to increase such funds, (2) reduction or limitation of credit expansion for private purposes, and (3) appropriate taxation and borrowing measures.
(c) Reducing or limiting the efforts of consumers and business concerns to spend current income and accumulated savings, through priorities, rationing, patriotic appeals and through a policy of preventing price increases by directive.
5. Legal limitation of price, although a useful measure of control in avoiding increases in efforts to spend available funds, can be fully effective only temporarily in inflationary forces continue or other control measures are not taken.
6. Heavy taxation, although by no means the only method needed for inflation control when inflationary pressures are great, is a basic method which (a) reduces spendable funds, thus striking directly at causes, (b) encourages private loans to Government by indicating the serious intention of Government to control inflation, and (c) if applied on a rising scale which the spending public believes will continue to rise, discourages spending because of anticipation of higher taxes.
7. Different forms of taxation may be considered alternative or complimentary for the purposes of inflation control. If all taxes have the same anti-inflationary influence per dollar of collections, the control of inflation is not a consideration in comparing the desirability of taxes; but if the extent of the effects are different, the control of inflation becomes a consideration in comparing the desirability of different taxes in a period when inflation control is desired. For policy purposes it cannot be assumed without evidence or demonstration that different taxes and different rate schedules producing the same revenue will have equal anti-inflationary effects.
After reading this, and then re-reading it but substituting in 'higher fuel prices' where 'taxation' was cited, one can see where this hypothesis gains traction. Then, reflect on the events of the 1970's. Much of what we're seeing today has already happened before. We had creeping inflation, rising interest rates, and fuel prices that went through the roof. This is not anything new, just reworked. I propose that the Government, working with Big Oil, is trying desperately to control inflation before it gets out of hand. They've been slowly increasing the interest rates, but that effect isn't felt immediately. Fuel costs, however, are.
Consider this: by increasing the cost of fuel by no more than five cents per gallon, the U.S. Government can siphon from the economy 18.5 million extra dollars per day--or 6.75 billion per year--according to this chart. But it's much higher than that. Referring to the numbers on this page, the average price of gasoline is up 67 cents from a year ago and diesel is up 58 cents. According to the information at the right of the page, we're taxed at about 20% per gallon of fuel. Some quick math tells us that last year we paid around 45 cents per gallon in taxes. This year, we're paying around 58 cents more per gallon than last year. That means the government is taking from the market place an additional 52.5 million dollars per day in fuel taxes (or 19.1 billion dollars per year).*
What better way to immediately have an effect on the economy than by manipulating the price of fuel? In closing, let's consider what Mr. Blough said when summarizing his speech, but we're going to fix it up a bit:
In summary, the chief characteristics of the individual income fuel tax that have a bearing on its effectiveness as a device for inflation control arc those: The tax is a logical method of inflation control because it is measured by the chief inflationary force, namely, income consumption. The income fuel tax has a long history of successful operation. It is collected currently with receipt of income fuel...
For these reasons it can be [safely] concluded that the individual income fuel tax is an appropriate and effective instrument of inflation control.
It wasn't really too hard a stretch for me to come to this conclusion. And I wouldn't put it past the Government to try something like this.
*All computations were done on the fly. I make no guarantee of accuracy.


Blogger Mark said...

I have no clue as to what the goverment may do or not do in regard to high gasoline prices except, if they don't just leave things alone, we'll have a real catastrophe on our hands.

However, 3 points:

1. There has been very little change in the inflation-adjusted price of gasoline since, roughly, 1980. See this link for a graph.

2. Inflation isn't caused by government manipulation of the price of fuel to control the money supply. It is caused by government manipulation of the supply of money (printing money) to pay off its debts. The price of fuel (and other things) then rises because the money is worth less.

3. Oil prices are set in the global market, not here in the US. The global market is worried about US policy towards Iran, US policy that has resulted in throttling oil production in Iraq and the political instability in Nigeria. Gasoline prices are based on the market price of oil but also are heavily influenced by government regulations on additives, on the type of oil used in refineries, on the distribution of different formulations to different parts of the country and on the construction of refineries.

The government will try to blame the oil companies when it is government policy and action which has caused prices to spike, but not as much as most people think because of the already existing underlying inflation (devaluation of money) created by the Federal Reserve.

4:28 PM  
Blogger Don Bangert said...

OK, I'll admit that I did slip my tinfoil hat on this morning, but you have to admit the concept does make one think. I "shopped" this around at work to get people's reaction to it. Most remarked that while possible, it would not be probable. One fellow even suggested that Congress couldn't organize themselves in such a way to pull something of this magnitude off. He's probably right.

In the end, what I found really interesting was the fact that Americans consume approximately 375,000,000 gallons of fuel each and every day of the year. Using the percentages from this page, we can calculate how much money each recipient is getting from all the fuel we buy:

55% goes to the purchase of crude oil - (375,000,000 x $2.914) x 55% = $601,012,500.00

22% goes to refining costs - (375,000,000 x $2.914) x 22% = $240,405,000

4% goes towards distribution and marketing - (375,000,000 x $2.914) x 4% = $43,710,000

19% goes to pay federal taxes - (375,000,000 x $2.914) x 19% = $207,622,500

Added all together, we spend each day approximately $1,092,750,000 on fuel. That's a lot of money!

8:05 PM  

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