You've heard about the fat tax and the gas tax. Now brace yourself to hear about ... the Fat-Based Gas Tax, the simple new tax that can save America!

Inspired by the latest social science research...

"The Economic Impact of Obesity on Automobile Fuel Consumption"

...the Fat-Gas Tax is a variable rate gasoline tax determined by Body Mass Index on an individual basis. You pay for your gasoline purchase by debit or credit card and the tax is added automatically.

Imagine a simple, single tax that can help avert global warming, de-fund Arab terrorists, save scarce natural resources, reduce pollution AND remedy the government's approaching funding crisis for Medicare (by heading off the coming diabetes epidemic, etc.) ... save private individuals billions of dollars of medical costs from avoided heart attacks and strokes and blood pressure medication prescriptions ... make the general population lean and good looking ... and improve your sex life too! That's the Fat-Gas Tax.

Arabia, he [Chuck Schumer] said, "holds the key to reducing gasoline prices at home in the short term." Therefore arms sales to that kingdom should be blocked unless it "increases its oil production by one million barrels per day," which would cause the price of gasoline to fall "50 cents a gallon almost immediately."

Can a senator, with so many things on his mind, know so precisely how the price of gasoline would respond to that increase in the oil supply? Schumer does know that if you increase the supply of something, the price of it probably will fall... Seventy-one of the 97 senators who voted to stop filling the reserve also oppose drilling in the Arctic National Wildlife Refuge.

One million barrels is what might today be flowing from ANWR if in 1995 President Bill Clinton had not vetoed legislation to permit drilling there. One million barrels produce 27 million gallons of gasoline and diesel fuel. Seventy-two of today's senators — including Schumer, of course, and 38 other Democrats, including Barack Obama, and 33 Republicans, including John McCain — have voted to keep ANWR's estimated 10.4 billion barrels of oil off the market.

So Schumer, according to Schumer, is complicit in taking $10 away from every American who buys 20 gallons of gasoline. "Democracy," said H.L. Mencken, "is the theory that the common people know what they want and deserve to get it good and hard." The common people of New York want Schumer to be their senator, so they should pipe down about gasoline prices, which are a predictable consequence of their political choice.

This sunburst comes from David Brooks' op-ed in today's New York Times:

I’ve spent the past few years trying to find conservative experts to provide remedies for middle-class economic anxiety. Let me tell you, the state of free-market thinking on this subject is pathetic.

I wonder what kind of therapeutic feel-good policy Brooks is looking for that "free market thinkers" have thus far failed to provide. Oh, he allows that are "a few" creative thinkers, but "most of them" are under 30 (so I guess you're out). On the other hand, he says, "Obama can draw on a coherent body of economic work ..." So there you have it Don, that's the voice of conservative Republicanism in the New York Times. Read it and weep.

Let me assure you that you’re not the only one who feels this way. Sometimes I wonder where is the country that I once knew? The principle of free market and hard work has all but disappeared. Ironically, we’re switching roles with a ton of ex-communist countries on mainstream economic philosophies right now, or so it seems. The so called “Change” from the left side of the political spectrum has been tried and failed many times over… No need to go into that since we all knew that part of the history. My point is, why do people buy into all the failed policies of the past (income redistribution, central command economies) and believe that as “Change”?

In my view, capital are like water, it flows towards low tax, low regulatory regions which offers the highest net return. Capitalists aren’t dumb, when they’re hated in one place, they look for refuge elsewhere, and you know this better then anyone else, that there are many doors open elsewhere, waiting for capital to come with a marching band and flowers and a low-tax welcome package. Your normal Joe six-pack don’t know that, the tree-hugging trust babies on the left don’t care about that (even though in their trust portfolio they might benefit from it). The left wants the US businesses be “patriotic” by losing money. I really don’t know just how patriotic that is.

Let me end this email by sharing a commercial that I think sums up everything that I am trying to vent here: Maybe you’ve seen this commercial on TV: It says “ It’s my money and I need it now!” and a bunch of people Just kept on repeating this phrase over and over. It is a service that advances litigation settlements to people who just can’t wait to get their greedy little claws on money that probably don’t belong to them in the first place. Don, you see, it’s not about hard work or smart work anymore! It’s about class warfare and gaming the system.

Sorry for the venting.

The Commodities Futures Trading Commission, charged with overseeing these markets, has said there is no rigorous evidence commodity index funds have any particular effect on commodity prices – and plenty of reasons to think that they don't. Nevertheless, it was reported over the weekend that the CFTC will likely bow to political pressure, and soon announce initiatives to crack down.

Commodity index funds are especially vulnerable politically. They are a big target – reportedly, there is about $260 billion invested in them currently. Among their largest investors are retirement funds for government employees and teachers, which by their very nature are subject to political pressure. For example, the organized labor lobby is already trying to get states to make their funds to stop investing in private equity deals in companies that won't employ union labor.

These and other investors in commodity index funds hold them for the same reason that they – and probably you, too – hold plain-vanilla stock index funds. In both cases, they're a simple, low-risk and low-cost way to get broad and diversified exposure to a major asset class.

Commodity index funds do what index managers like Vanguard have done for decades with stocks – invest passively in a portfolio designed to track a published benchmark index. For stocks, it's generally the S&P 500. For commodities, the most popular is the Goldman Sachs Commodities Index (GSCI).

The evidence against the index funds is circumstantial at best: Commodity prices have soared over the same recent period that commodity index funds have rapidly grown. So the index funds must have caused it.

But coincidence isn't causation. And such causation that can be shown to exist actually runs the other way: Rising commodity prices cause the dollar value of commodity index funds to rise, just as rising stock prices would make a stock index fund more valuable. This accounts for nearly half the reported growth in commodity index fund assets this year. But if commodity index funds are such a powerful influence on prices, how can one explain the fact that not all the commodities in the GSCI have risen?

Over the last year, the agricultural, energy and precious-metals sectors in the GSCI have risen. Livestock prices, however, have been flat, and industrial metals are lower on average – with the conspicuous exception of steel. Steel is up dramatically but is not even in the index.

In the absence of rigorous evidence, are there theoretical reasons to expect that commodity index funds should affect prices? Yes, if only that when new buyers enter a market they can be expected to drive prices higher, all else being equal.

That is no crime, even though some politicians would like to portray it as such now. But of all investors, index funds should have the least power to move prices. That has always been one of the great attractions of stock index funds, and the same principle applies to commodities.

Why? When Warren Buffett buys an individual stock – or when T. Boone Pickens buys an individual commodity – prices will rise because the market must incorporate the possibility that these experts "know something." But index funds buy broadly diversified portfolios (whether it be stocks or commodities) because they know nothing at all. Does anyone think that the California Public Employees Retirement System has any superior knowledge about crude oil or wheat? Of course not.

Unlike other commodities buyers, index funds never take physical delivery of commodities to store or consume them. They are investors, not hoarders. They don't divert any supplies from the markets. When their futures contracts near expiration, they sell them and replace them with longer-dated contracts. Thus, once their positions are established, they are perpetually both buyers and sellers in equal proportion.

And index funds, despite their size, pose no threat of market instability. Held by heavily regulated fiduciaries, they typically don't employ the enormous leverage available to futures speculators. So when prices are volatile, index funds will be an anchor of stability.

With increasing demand from emerging economies, the dollar near all-time lows, and the Federal Reserve holding interest rates below the rate of inflation, surely we can come up with better explanations for high commodity prices than the growth of commodity index funds. Sadly, those better explanations are more difficult to swallow politically.

Update... Reader Liv Douglas adds,

Over the past year, we've seen an explosion in assets in money-market funds (from $2.6 trillion to $3.5 trillion) -- far more than the increase in commodity index fund assets. Perhaps the politicians in Washington D.C. will consider prosecuting money-market fund investors for "hoarding" and driving up the prices of T-bills and commercial paper...

I worry that few of our 535 economy-commissars comprehend the instruments and activities they seek to regulate. This inspired a poem. With apologies to Martin Niemöller:

In the 80's, they came for my junk bonds. Because I held only AAA, I was silent Then they came for the REITs. I did not speak up because I was in equities. Now the Senate wants to ban my Securitized mortgage derivatives And no one is left to speak up for me.

When it serves his purpose to ignore the facts and instead assume that whatever people happen to believe is reality, he does so:

Never mind whether we’re technically in a recession: it feels like a recession to most people...

...consumers are, for the first time in decades, telling pollsters that they expect a sharp rise in prices over the next year. Fair enough.

But where are the unions demanding 11-percent-a-year wage increases?

From the Krugman column yesterday:

“In fact, wage growth actually seems to be slowing”

Hasn’t he been telling us for 7 years that wages have been going down? How then is wage growth suddenly slowing?

Posted by Donald L. Luskin at 10:42 PM | link  

Posted by Donald L. Luskin at 3:55 PM | link  

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