Last Friday, I was talking gas prices and their impact on family budgets and the wider economy on MSNBC (link coming when/if available) with host Matt Miller and economist Peter Morici.
I was again struck by the two competing views that I, and I suspect others, hold in their heads on this issue.
Even though I’m one of those economists who see market failures hiding around many corners, I still think it’s extremely important to pay attention to price signals. (It’s crucial that those signals are accurate, of course—a quick explanation of the housing bubble/financial crash is that risk was severely underpriced).
And when gas prices rise as much as they have over the past year, the market is sending an important price signal that we need to get serious about conservation, alternative (renewable) energy sources, and so on. I believe we should heed this signal and act accordingly.
But then there’s this: middle and low-income households are getting stung by higher energy prices at a particularly bad time, and it’s pinching their already constrained family budgets. This hurts them and it hurts the fragile economic recovery. Neither is it realistic to believe that everyone can conserve their way out of this, by quickly changing their driving habits or shifting to higher mileage, or even electric, vehicles (check this out).
As I’ve noted in recent posts, thanks to the combination of stagnant earnings’ growth and faster inflation (itself largely driven by energy costs), real paychecks have been falling. And according to BLS data, the average, middle-income family spent about $2,000 a year on gas last year. Since then, prices at the pump are up almost 40%, meaning that if folks eat the whole increase, that’s another $800 tacked onto the family budget.
Now, there’s an elasticity in play here, which is just to say that people will sometimes buy less of something when the price goes up. But when it comes to gasoline, at least in the short run, people tend to suck it up and just pay most of the difference (gasoline is “inelastically demanded” in the short run).
[I’ve seen some suggestive evidence that we may, in fact, be getting better at responding to higher gas prices more quickly. If this response is truly becoming more elastic, it’s very important and if there’s an econ grad student out there listening, I just gave you a great dissertation topic…you’re welcome…keep me posted.]
One interesting point here: if you sum up all the extra money we’re spending on gas thanks to the recent price spike, it looks like it’s going to amount to around $100 billion this year. That’s about the same aggregate amount that the payroll tax cut agreed to last December is putting into people’s paychecks. So in that sense, the increase in at least somewhat offset, at least for working families.
But other than tapping our strategic reserves, which aren’t really for market driven price movements (it’s supposed to be for big, temporary shocks, like Katrina—though it’s true the “Arab Spring” revolutions are playing a role here, I don’t think these warrant tapping the reserve now), there’s not much we can do to lower the price in the short run. It’s a truism in economic policy that it’s tougher for government interventions to address supply relative to demand-side contractions.
And again, do we really want to jam this market signal?
At the end of the day, as President Obama (very courageously, I might add) recently said, we’re going to have to get used to higher gas prices. Any offset ideas could only be temporary, and the reality is that there’s probably nothing much we can do to alter the price of fossil fuels in the long run. Physical resource constraints combined with the price and availability of alternatives will determine this.
As I said on the TV, maybe the best way to resolve the mental conflict I’m suffering is to think about policy actions that both create good jobs for middle class workers while building up a domestic clean energy sector. Again, it won’t happen tomorrow, and thus won’t do much for those of us paying $75 bucks this weekend to fill up the minivan to get to the kids’ soccer tournament, etc…
And they didn’t even win.