There’s no doubt that Americans are currently frustrated by high gas prices. And certainly many voters believe that “something oughta be done about it.” But why? Here’s a simple taxonomy of concerns:
1. Relative prices: Are people frustrated that a gallon of gas now requires more foregone “stuff.” Or alternatively phrased, are they concerned about the low relative price of “stuff”? Stated this way, it sounds a bit odd that we are so upset that the benefit of giving up one more gallon of gas is now a heckuva lot more stuff. (Indeed, environmentalists should be thrilled.)
2. Absolute prices: Are people concerned about the change in the absolute average price level? The consumer price index is currently 216.632; is this too high? If so, what is the right average price level?
3. Real wages: Is the real concern about the average price level relative to (nominal) incomes? That is, if the average price level rises but our money incomes stay the same, we tend to cut back on both gas and “stuff.” If so, I have some good news: money income typically rises roughly in tandem with the average price level, keeping the real wage constant. And if you think the current episode will be an exception to this rule, then are your concerns about the gas market or the labor market — and does this change what “oughta be done”?
4. Inflation: There are also concerns about the rate of change of gas prices (#2 is about the level, not the change) and how this may impact inflation. However while gasoline and oil futures markets suggest that current high prices are here to stay, they aren’t expected to continue rising.
5. Reallocative costs of changes in relative prices: In the long run we will learn that a Pruis does as good a job at getting you to work as a Hummer and at a much lower cost. But in the short run, it will be expensive to shut down Hummer production and expand Prius production.
6. Redistribution due to changes in relative prices: It is unsurprising that the loudest gas-price whining is coming from those in the exurbs whose house prices have fallen due to higher commuting costs. But what is missing here is the urban homeowners who have simply kept quiet about their gains. In many cases one group’s losses are roughly offset by another group’s gains.
#4 is the focus of discussion by serious macroeconomists, although inflationary concerns should not be overstated; #5 is important, but in popular discussions it gets too easily confounded with #3 and #6. And because we rarely see pictures of workers enjoying their compensatory cost-of-living wage rises or investors in urban housing or green companies rejoicing that their investments have paid off, too often we focus only on the losses but miss the gains.
My favorite is a behavioral variant of #3: wages will probably continue to rise in line with the average price level, but when each of us gets our wage rise, we think that this is a reward for our hard work and not something as trivial as a cost-of-living adjustment. So each year we think that our employer realizes we are ever more brilliant, even as rising gas prices steal more from our paychecks. But workers should be tipped off that it isn’t just a coincidence that each year these two forces tend to balance out. (More: see Shafir, Diamond, and Tversky.)
This leads me to think that we are over-emphasizing the importance of high gas prices. What have I missed? And what exactly worries you about current high gas prices?
See my commentary on NPR’s Marketplace for more (or just listen here).
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“I have some good news: money income typically rises roughly in tandem with the average price level, keeping the real wage constant.”
So stagnating real wages is now good news? I thought progress was defined as being able to buy more stuff.
Good article. I am amazed at how the public freaks out about increases in fuel costs. Assuming no changes in behavior, a driver doing 12,000 miles per year and getting only 20mpg, now spends a whopping $3 per day more at $4.20/gal then she did at $2.40/gal. Not fun to pay but certtainly as life changing as the media reports of “America’s Fuel Crisis!” would have you believe. Plus, there are huge benefits to higher fuel prices in terms of ushering in the next big technology. It won’t happen at $3/gal but it will at $5 or $6!
For the record, I drive a big SUV and can’t wait to have my behavior changed by self-serving reasons.
My concern is that Diesel fuel prices have risen faster recently than the economy has expanded. The United States relies heavily on trucking to move goods around, so high fuel prices will result in higher prices on food and other goods and therefore more friction on our ecomomy.
Being a so-called environmentalist, I hope gas prices continue to rise. It might just finally reflect it’s true cost. As we know, gas is relatively cheaper than so many things like bottled water, single serving coffees, vending machine soda, etc. (although I rarely hear people complaining when they buy their said soda or bottles water or coffee, but most complain about gas prices). People will bike, walk, and use public transport more; emit less carbon; and buy less stuff. One of the real problems I see is that we do not have adequate transportation systems in most places, and will not soon enough.
The price of gas could reach 10 dollars a gallon, and I could deal with it, if the price of everything else that I buy wasn’t affected. But heating oil and food costs are directly affected as well. I don’t buy much of anything else on a regular enough basis to care. And I’ve reached my salary cap at a flat-funded agency, so I won’t be getting a raise any time soon.
The complaints come from those who’ve anchored on a number. They become emotionally involved with the number; they love the number, and have difficulty accepting the new, fatter, less sexy number.
I think the fear about gas prices is that rising gas prices can raise the price of everything we buy. If it was just at the pump it would be one thing, but oil is required to bring all our goods to market and many of the services to whichever place they are performed at and thus effect the market all the way around in a way that raising costs in other commodities just doesn’t do.
What I think you’ve missed is the feeling of the sheer magnitude of the percentage increase in gas prices. From January 2004 to May 2008 the price of regular increased from roughly $1.50/gal to $4.00/gal where I live. That’s roughly a 267% increase in just under 4.5 years, and it thus seems (“feels”) like a major increase.
The reality, of course, is that the real impact isn’t from the direct cost of filling our vehicles with gas. It’s from the secondary impact of rising costs in other key areas such as food and mass transit. It seems to be a psychological whammy that we see and feel gas prices escalating rapidly (relatively) along with food prices and other purchases.
It would be interesting to me to see how the price increase in gas compares with other price increases (milk, eggs, bread, produce, etc.), as well as how that compares to previous periods (say a decade at a time). Also, I’m very interested to know how the base gas price (sans taxes) compares with gas prices abroad. Thus far, we’ve only heard comparisons to composite prices (inclusive of taxes), which doesn’t really provide a clean picture.
fwiw.