BUMPED: Conor Clarke Doubles Down on Ignorance

Apparently, making a fool of himself going after Sarah Palin on economic grounds wasn’t enough for Conor Clarke of The Atlantic, because he’s decided he wants to do it again. This time, Clarke’s target is this exchange between Gov. Palin and Sean Hannity (quoted from his post):

Hannity: The price of oil is going up again. It’s not quite at $140 a barrel, but it’s on its way up to $70 and $80…

Palin: Yeah, well and I thank God it’s not at $140. You know people say, "Hey, Alaska! 85% of your state budget is based on the price of a barrel of oil. Aren’t you glad the price is going up?" I say, "No!" The fewer dollars that the state of Alaska government has, the fewer dollars we spend. And that’s good for our families and for the private sector.

Clarke, predictably, thinks this is terrible—after all, Gov. Palin said, it, so it has to be, right?

If you’re taxing the profits of the private sector, and suddenly the private sector is making a much smaller profit, it’s not totally clear why this should be considered "good for our families and for the private sector."

How does he get this wrong? Let me count the ways. One, the price of oil going down did not mean that "the private sector is making a much smaller profit." It meant that one part of the private sector was making a much smaller profit; it also, don’t forget, meant that the private sector (and for that matter, the government) was seeing their expenses go down. A drop in expenses helps the profit margin.

Two, by the nature of the setup in Alaska, government revenues are driven in large part by one subsection of the private sector; what raises prices in that subsection is good for government revenues, but that doesn’t make it unilaterally good for the rest of the private sector in the state. Alaska produces crude oil, but it doesn’t get a discount on gas prices as a consequence; in a state that big and that remote, leaving the car (or snowmobile, or airplane, or what have you) parked and just walking everywhere isn’t a viable option for most people to deal with high gas prices. High oil prices enrich the government coffers and help some people; high gas prices hurt everybody.

Three, it’s not just that the equation "high oil prices = greater private-sector profits" is simplistic—it’s also that that’s not what Gov. Palin was talking about. What she said was that lower state spending is "good for our families and for the private sector," and there are two reasons why that’s true. The first is universal, the second is more specific to the current Alaskan context. The first one was articulated quite well by a commenter on Tommy Christopher’s post on this story; in response to Christopher’s piece, a chap named ulisesjorge wrote,

Government has to spend whatever is needed and not a red cent extra. What happens if oil goes back to $140 a barrel and Alaska gets a budget bonanza? Well, people start demanding that the extra money be spend, even when there is no actual need to do so. Chile is a good example:

During the emerging economies’ commodities boom a few years back, Chilean Finance Minister Andrés Velasco . . . insisted on squirreling away a large chunk in a rainy-day fund.

[. . .]

Mr. Velasco, wary that a flood of copper income could generate lending and consumption bubbles, stood his ground, even as the popularity of the center-left government withered. Latin American history, he cautioned, was full of "booms that had been mismanaged and ended badly."

This particular story had a good ending, because Chile’s government knew how to deal with this problem, stuck to their guns and now that they are in a recession they have the resources to spend for economic stimulus without having to borrow from the Chinese or mortgaging their children’s future (like some big, former English colony in north America that for now will remain unmentioned).

ulisesjorge is absolutely right, and this is exactly the battle Gov. Palin has been fighting in Alaska—most recently with regard to the so-called "stimulus" money. When oil revenues go up, the Alaska legislature wants to spend it all (some of it on things that would be good for the state, but much of it in ways that wouldn’t be helpful at all) with no regard for what they’ll do with all those new programs when oil revenues go back down. Higher government spending begets yet more government spending—it multiplies, like hangers in a closet—and because spending grows far more dependably than revenues, that ultimately gives birth to debt, which eats like a pig and grows like an ogre. If you have any doubts on that score, just go look at the state of California and the mess they’re in. That, demonstrably, is bad "for our families and for the private sector."

The second reason is that when oil profits go up, the big oil companies in Alaska tend to want to use some of that money to buy politicians. That’s what created the culture of corruption against which Sarah Palin ran, and which she’s been working for years to kill. That’s what got Ted Stevens indicted and Don Young investigated, and it’s what produced a situation in which one of those companies could get a lease on undeveloped resources and then proceed to keep them undeveloped for 30 years, because the politicians who ran the state were too indebted to the oil companies to push them to do anything about it. It’s what produced a natural-gas pipeline act that was basically written by and for the oil companies, and a resource-tax structure that was riddled with loopholes and deductions for the oil companies. As the Wall Street Journal dryly noted,

One year after it went into effect, the Petroleum Profits Tax brought in far less revenue than expected and the state suffered a revenue crunch.

Somehow, the legislature had never properly defined accounting procedures and permissible deductions—and the deductions came in much higher than expected. Meanwhile, as the shortfall appeared, a number of state legislators were on trial, under indictment, or under investigation for bribery by the FBI. These included some who should have done due diligence for the taxpayer on the proposal they enacted.

This is what’s properly called "crony capitalism," and it’s a constant danger in any jurisdiction where government revenues are primarily driven by one company or industry; and the higher oil prices go, and the more the government gets addicted to oil revenues, the more of a danger it is in Alaska. This, too, is why Gov. Palin says,

The fewer dollars that the state of Alaska government has, the fewer dollars we spend. And that’s good for our families and for the private sector.

This leads quite logically into the next thing Clarke gets wrong:

But, to scratch a little bit deeper, one might also note that if Palin really truly wanted to get rid of all that pesky revenue, she doesn’t have to sit around waiting for the price of oil to fall and the revenue to drop. She could also … lower Alaska’s tax on oil. Palin, of course, did the exact opposite of this and enacted a huge windfall profits tax in 2007 that greatly increased the state’s reliance on oil.

This is a serious misunderstanding and mischaracterization of the resource tax reform Gov. Palin introduced. But don’t believe me, believe an expert: Bill Dyer, who blogs as Beldar, a Texas lawyer who has handled cases in this field. In his post on this issue from last August, Beldar dismissed the Seattle Times article on which Clarke draws as a "hatchet job," and wrote:

Palin has stood up to the major oil companies, and has made utterly transparent the State of Alaska’s dealings with them, but she is neither in their pocket nor a rabble-rouser who unfairly demonizes them. She’s dealt with them like a responsible public servant, not a class warrior.

[…]

What the article you linked to is discussing is a severance tax. State severance taxes charged on production of oil and gas and minerals are common throughout the United States. Also sometimes called "production taxes," they’re charged by the state from beneath whose land valuable resources are extracted, and they’re designed not to punish the energy companies, but to recompense the state for its loss of a non-replaceable resource—one that must be quantified and taxed upon removal, if it is ever to be taxed at all. Severance taxes are therefore based on production from within the state, not on profits earned by the company extracting that production—even though the production may be measured in, and the tax assessed upon, the market value or gross revenues (as measured in dollars) received for that production, rather than an "in kind" delivery to the state in barrels or cubic feet as such. See, e.g., Tex. Tax Code §§ 201.051 & 202.051 (Texas production taxes on gas and oil respectively).

Indeed, I once represented Conoco in a Houston lawsuit against Mobil over how to allocate the severance tax they jointly owed based on jointly owned oil and gas leases in Idaho. There’s actually a fair amount of competing case-law from different states over whether severance taxes are more properly characterized as "property taxes" or "income taxes"—if for some reason (e.g., interpreting a sloppy contract) you have to put them into one of those two categories or the other. But in any event, severance taxes are in no way premised on the notion that energy companies are making unconscionable or excessive profits.

Alaska’s previous version of its severance tax had been negotiated behind closed doors by defeated Gov. Frank Murkowski, a few top state legislators (some of whom are now in prison for corruption), and energy lobbyists. One of the campaign planks upon which Gov. Palin ran for office was replacing that tax with one negotiated in the open with full transparency; and the resulting tax was, indeed, slightly more favorable to the State of Alaska. The article you linked tells some of this anti-corruption history on the part of Gov. Palin. But just because the newspaper headline writers and some of the people the article quoted used the word "windfall," don’t be fooled into thinking that the tax in question is the same thing Barack Obama and the Democrats are now promoting at a national level.

In other words, Gov. Palin’s tax bill ("Alaska’s Clear and Equitable Share," or ACES), while it did produce a slight increase in the top tax rate (from 22.5% to 25%)—even as it also "hedges against low prices in the future by ensuring that oil companies exposed to commodity price swings don’t face a crushing tax burden when commodity prices fall"—wasn’t anything like a "windfall profits tax." It was, rather, an effort to clean up Alaskan politics by writing the tax code on the oil companies out in the open, where everyone could see it, in order to replace the tax law that the oil companies had pretty much written to suit themselves in a back room away from public scrutiny. It was about replacing crony capitalism with a more ethical way of doing business.

Finally, Clarke writes,

A final point to make might be that Palin said the opposite of her line to Hannity two days ago in a press release put out on her own website: "History reminds us that high oil prices are a double-edged sword," Governor Palin said. "The state treasury may swell, but Alaskans will feel the pain at the pump and the pinch of higher energy prices."

Unless I am badly misunderstanding the sword metaphor, or unless "pain at the pump" is the happy edge of this particular sword, Palin is saying it’s a good thing that the state treasury swells when oil prices go up.

This one’s easy to respond to: Dude, you’re badly misunderstanding the sword metaphor. What she’s clearly saying is that high oil prices are good for the state treasury and bad for Alaskans. That doesn’t contradict her statement to Hannity, it makes the same point.

So, let’s see. Conor Clarke has now written two posts on Sarah Palin. The first was based on an incorrect conclusion from an unreasonable application of irrelevant data; the second is based on a (willful?) misinterpretation and misapplication of her words and complete ignorance of Alaska’s political and economic context. One always hesitates to draw a conclusion from two data points (much less put up a beautiful two-tone graph of it, as Clarke likes to do), but these two are clear enough that I feel safe in drawing a preliminary conclusion, anyway: Conor Clarke is a tool.



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