What Exactly Concerns Us About Gas Prices?
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).