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Posts Tagged ‘profits’

The tyranny of the public interest

Posted by Richard on July 23, 2010

Yaron Brook in Investor's Business Daily:

In the years leading up to 2008—09's financial meltdown, government control over mortgages, interest rates and America's banking system was at an all-time high.

And yet when crisis struck, free enterprise took the blame.

The cure, therefore, was to give government even wider powers. Washington can now bail out any company, fire CEOs, override contracts and print billions of dollars to "stimulate" the economy — all in the name of the public interest. The result? Our deficits and debt continue to mount, and there's a real possibility of a future like Greece's.

This is the state of our world today. It's remarkably similar to the state of the world in Ayn Rand's "Atlas Shrugged," a mystery story about a future America whose economy is disintegrating and whose government is accumulating power faster than anyone thought possible. This parallel is a big reason a record 500,000 people bought "Atlas Shrugged" last year.

So what can we learn from a book that foresaw in 1957 what few believed possible in 2007? We can learn a lesson the heroes of the novel learn: the cause of the government's greater, destructive control of business. And we can learn how to oppose it.

Read. The. Whole. Thing.

From the comments, a great quote: 

The pursuit of wealth generally diverts men of great talents and strong passions from the pursuit of power; and it frequently happens that a man does not undertake to direct the fortunes of the state until he has shown himself incompetent to conduct his own.
— Alexis de Tocqueville, "Democracy in America," 1835

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The truth about health insurance profit margins

Posted by Richard on March 16, 2010

As the President continues, in speech after speech, to demonize the health insurance industry as greedy exploiters of consumers raking in inordinate profits, it seems like a good time to look at the actual data, which refute such demagoguery.

Dr. Mark J. Perry did exactly that last month in a Carpe Diem post. He found that the Health Care Plan industry ranked 88th out of 215 industries, with a profit margin of 3.4% (and even that was inflated by one outlier, Wellpoint, due to a one-time surge in profits from the sale of a division).

Perry did the heavy mathematical lifting of calculating just what that profit margin means for the typical consumer (emphasis added): 

America's Health Insurance Plans (AHIP), the industry's trade association representing 1,300 members, reported last October that annual health insurance premiums averaged $2,985 for individual coverage and $6,328 for family plans in 2009. Using the industry average profit margin of 3.4% means that insurance companies make about $100 per policy in profits for individual coverage, and a little more than $200 in profits for each family policy.

So even if we could strip away 100% of the health insurance industry's profits, it would only save patients between $100 and 200 per year in health insurance costs.

Wow. $100 to $200 per year. So if the government take-over of health care is enacted and completely wipes out the private health care insurance industry (and make no mistake, that will be the long-term consequence), it might save each of us $100 to $200 per year. But only if a bunch of government bureaucrats can deliver the same quality of service with no increase in overhead or decrease in efficiency. 

If you believe that will happen, you're not familiar with the Postal Service. Or the Social Security Administration. Or the Veterans Administration. Or the Department of Education. Or the DMV. Or …

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A businessman defends profits

Posted by Richard on August 16, 2008

After Exxon Mobil reported a record 2nd-quarter profit, economic illiterates, Democrats, and leftist demagogues (but I repeat myself) fell all over themselves denouncing earnings that Obama called "outrageous." Republicans and capitalism's half-hearted, timid defenders (but I repeat myself again) mostly ducked for cover and acted as if this profit was something for which to apologize. This is unfortunate, as Investor's Business Daily noted (emphasis added):

When capitalists fail to defend the system that's done more than any other to end human misery, they make a fatal mistake. That's why it's so encouraging to see Exxon Mobil's CEO stand up for his business.


Too often, business leaders choose to duck when the arrows of outrage come flying. But Exxon Mobil CEO and Chairman Rex Tillerson made an unusual and courageous stand Wednesday, appearing on ABC's "World News" with Charles Gibson.

"I saw someone characterize our profits the other day in terms of $1,400 in profit per second," Tillerson told Gibson.

"Well, they also need to understand we paid $4,000 a second in taxes, and we spent $15,000 a second in cost. We spend $1 billion a day just running our business. So this is a business where large numbers are just characteristic of it."

We can't think of anyone who would be willing to pay $4,000 in taxes for every $5,400 they earn in salary or wages. Yet many in our country believe it's OK, even desirable, for oil companies to do just that.

What's needed here is a bit more perspective, a sense of proportion. Though Exxon Mobil set a record for nominal profit, the oil industry isn't actually making the biggest profits.

In the first quarter of this year, the profit margin for oil companies was 7.4%. That trailed the electronic equipment industry (12.1%) and the pharmaceutical and medical industry (25.9%).

Last year, 63 industrial groups posted bigger profit margins than the oil industry.

Good for Tillerson. We need more business leaders willing to stand up for capitalism, defend profit, and speak out forcefully against their critics.

And clearly, judging by Exxon Mobil's falling share price, the oil giant needs a higher profit margin, not more taxes. 


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Insurance scam

Posted by Richard on February 20, 2007

I’m no insurance expert, but I know that flood insurance is a special case. Some time back, the feds effectively preempted the field, and if you want flood insurance, you get it at a federally subsidized rate. Because of that situation, no ordinary property insurance policy covers flood-water damage. You’d think people who live in a highly flood-prone area, such as a Gulf Coast state subject to hurricanes, would know this and gratefully avail themselves of the subsidized, low-cost flood insurance, right? And you’d think those who didn’t bother could expect little sympathy from the courts and public officials, right?

Wrong. And wrong again. In Mississippi, the courts and Attorney General Jim Hood have fallen all over themselves with sympathy for the (voluntarily) uninsured victims of Katrina’s flood waters. As a consequence of some jury awards and coerced settlements negotiated with the AG, State Farm has decided the climate in Mississippi is so hostile that they can’t continue offering homeowner insurance in the state. The future risk is too great.

Attorney General Hood objected to this business decision, and he’s proposed a law to force insurance companies who sell auto insurance in the state to also sell homeowner insurance. Dan Melson took umbrage at this anti-capitalist move:

State Farm is not a charitable organization. They are entitled to charge enough to make a profit – otherwise there is no reason to be in business. If they decide they cannot do that within the environment in a given state, they are entitled to decide to leave. If they can’t do it at all, the correct decision is to go out of business.

Add hefty punitive fines for not wanting to pay out claims for things which weren’t insured, and it’s a miracle that anyone is willing to issue homeowner’s insurance in Mississippi. Make them write homeowner’s insurance in order to write automobile insurance, and some insurers might do it – but others will cancel their policies of automobile insurance. Exactly how bad does the state of Mississippi want their insurance situation to get?

Dan’s right, of course. Hood’s populist grandstanding is both immoral and stupid. The state’s deputy insurance commissioner noted that a similar, but less onerous, law in Florida is driving insurers out of the state already, even though it won’t take effect until 2008. Robert Hartwig, chief economist for the Insurance Institute, doesn’t think such a law will have the desired effect:

Automobile insurance isn’t profitable enough to offset losses in the sale of homeowner insurance in a hurricane-vulnerable region so the company may be inclined to stop selling auto policies if they also must sell homeowner policies there, Hartwig said.

"The only losers in this situation are consumers facing fewer options for automobile insurance," Hartwig said.

I’m pleasantly surprised that Republican Governor Haley Barbour, despite an upcoming re-election campaign, resisted the urge to pander or cave and rejected Democrat Jim Hood’s call for an executive order:

"Having considered my statutory and constitutional emergency powers including the statute you cited in your letter, I have no authority to force a private company to sell its products in the State of Mississippi," Barbour responded in a letter to Hood.

After the epidemic of invertebrateness among Republicans recently, that statement — as cautious as it is — is a breath of fresh air. Bravo, Gov. Barbour!

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Granholm’s grandstanding

Posted by Richard on April 29, 2006

Michigan Gov. Jennifer Granholm, who’s apparently facing a tough reelection battle, came up with her own twist on the current fervor for gas price demagoguery. Her particular bit of grandstanding consists of an online petition at the governor’s official website calling for a cap on oil company profits.

Who would that hurt? Well, according to the Detroit News, Michigan’s teachers and civil servants, for starters:

ExxonMobil Corp. is the largest stock held by the Michigan State Employees’ Retirement System and the Michigan Public School Employees’ Retirement System. At the end of 2005, the state pension funds owned more than 13 million shares of the oil company’s stock with a market value of more than $846 million.

Since January, the value of Michigan’s ExxonMobil portfolio has increased more than $79 million. In dividend income alone, Michigan earned more than $15 million last year from its Exxon stock, which has helped fund the benefits the state’s public school teachers, other state employees and their beneficiaries enjoy.

But that’s of little concern to Granholm, who would apparently rather grab headlines in an election year than protect the pensions of state employees. There are more than 570,000 people (retirees, beneficiaries and active and inactive vested members) who are affected by the two state funds, according to the state’s annual financial reports of the systems.

Of course, Michigan public sector employees aren’t the only ones. The odds are that if you’re participating in any pension or retirement plan, you too are a beneficiary of those "record profits" in the oil industry (it would be hard to find a pension fund or broadbased equity mutual fund that had no direct or indirect investment in the oil and gas industry). If you’re not, why not?

You know, for the price of that flat-screen TV you’ve been eyeing, you can buy 50 or more shares of ExxonMobil. Then, when they pay their next quarterly dividend, you can smile. Or maybe complain about how high ExxonMobil’s taxes are and worry about their shrinking profit margin (see my Thursday post).

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Gas prices, demagoguery, and economic illiteracy

Posted by Richard on April 27, 2006

It’s bad enough having to listen to the Democrats’ demagoguery on the issue of gasoline prices. Jeez, these are the same people who for decades have demanded higher taxes on energy in order to raise prices and punish our profligate lifestyles. Anybody remember Sen. John Effin’ Kerry’s call for a 50-cent increase in the federal gasoline tax? They should all be celebrating $3/gallon gas — they’ve demanded it for years!

But what’s even worse — in fact, just pitiful — is watching a bunch of spineless Republicans wet their fingers, hold them up to the wind, and begin spouting populist poppycock about "price gouging" and "excess profits." Even W., who’s an oil man, for cryin’ out loud, and ought to know better!

Econ 101, folks: Prices serve purposes other than giving you something to do with your wages. They convey critical information and affect behavior, and they do so in a way that’s far more effective than any news story, preacher’s sermon, or exhortation by a politician. An increase in the price of gasoline tells you that gasoline supplies are relatively tight, and that you need to adjust your behavior accordingly. It also tells refiners, producers, explorers, and assorted autocrats sitting on huge pools of petroleum that demand is relatively high, and that they might want to take advantage of that fact.

No amount of pleading with people to conserve will reduce demand as effectively as an increase in price. No amount of schmoozing with the Sa’ud family or cajoling of Chavez will ease supply shortages as effectively as an increase in price. Price, left to find its own level, will resolve short-term shortages, stimulate long-term supply increases, and provide for gradual very-long-term development of alternatives. Price must be left alone to fulfill its essential role.

This isn’t purely theoretical crap out of some econ text. All this was demonstrated in the real world within the lifetime of most people reading this. The worst president of my lifetime, Jimmy Carter, following the economically illiterate example of another sorry president, Richard Nixon, kept price controls on oil throughout most of his abysmal single term, and when finally pressured to ease them, substituted a "windfall profits" tax. The consequences were long lines at gas stations and massive shortages, distortions, and economic disruptions. Double-digit inflation. Double-digit interest rates. Double-digit unemployment. No growth.

The best president of my lifetime, Ronald Reagan, deregulated oil prices on his first day in office. The price of gasoline rose to what is still a record level (about $4/gallon in today’s dollars), but the shortages and lines disappeared overnight. And within five years, the price of oil had plummeted to less than $10/barrel, and the oil industry was awash in red ink. Funny, I don’t remember anyone fretting about their capped oil wells, laid-off workers, and lack of profits.

Speaking of oil industry profits, which many people are in outraged tones: ExxonMobile announced its Q1 results yesterday, and it underperformed analysts’ expectations (emphasis added):

Exxon Mobil Corp., the world’s biggest oil company, said first-quarter profit climbed 6.9 percent because of record prices and the first production increase in a year and a half.

Net income rose to $8.4 billion, or $1.37 a share, from $7.86 billion, or $1.22, a year earlier, Irving, Texas-based Exxon Mobil said today in a statement. Per-share profit was 10 cents lower than the average estimate from 20 analysts surveyed by Thomson Financial. Sales climbed 8.4 percent to $89 billion.

Oil and natural-gas output rose 5.1 percent as new wells began producing in Africa.

So, let’s see: Output was up 5.1%, sales were up 8.4%, but profit was up only 6.9%. The share price has dropped on the news, and I can see why. If I were a stockholder, I’d be a bit disappointed. With oil having risen so much, this is a pretty modest rise in profits. In fact, since sales were up by 8.4% and profits were up only 6.9%, their margin — the profit per dollar of sales — actually declined.

I wonder why ExxonMobile underperformed. Oh, wait — here’s one reason (emphasis added):

Profit fell short of expectations because Exxon Mobil’s effective income-tax rate jumped to 46 percent from 39 percent, shaving $1.03 billion in net income, said Kenneth Carroll, an analyst at Johnson Rice & Co. in New Orleans.

The federal excise tax on gasoline already adds twice as much two-thirds as much (18 cents) to each gallon as the average oil company’s profit (9 cents 9%, or about 27 cents per gallon), and most state excise taxes are far higher than that. Now, it turns out that almost half of ExxonMobile’s profit went to the tax man, too!

You want to offer working Americans some relief at the gas pump, Sens. Reid, Durbin, et al? Cut taxes!

UPDATE: Note the corrections above regarding the profit per gallon vs. per dollar. I guess I was living in the past, when the two were closer to being the same. :-}

In any case, my point remains valid, although the difference is smaller than I originally stated: in virtually all states (Alaska excepted), more of your gas purchase goes to taxes than to the oil company. Here’s a page showing 2002 taxes by state (I’m sure they haven’t decreased). The average combined state and federal tax per gallon is 42 cents.

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