Look at the benefits of higher gas prices
Are these rising gas prices a crisis, or are they really a blessing in disguise? Economist and commentator Justin Wolfers says we're being compensated for these higher gas prices -- we just don't realize it.
Justin Wolfers (Wharton School of Business, Univ. of Pennsylvania)
More on The Economy, Commentaries
TEXT OF COMMENTARY
BOB MOON: Are these rising gas prices a crisis, or are they really a blessing in disguise? We're seeing American driving fewer miles -- 1.4 billion fewer highway miles in April than we did in April 2007. And buying smaller cars: Sales of midsize SUVs dropped 38 percent last month compared with May of last year. Economist Justin Wolfers says we're being compensated for these higher gas prices -- we just don't realize it.
JUSTIN WOLFERS: Gas at $4 a gallon is causing a lot of despair. But I'm not quite sure why.
Let me explain. To an economist, a higher gas price is really two things: First, it's a shift in the relative price of gas versus "other stuff." Second, it's also a rise in the average price level.
Let's begin with the shift in relative prices: The fact that gas is more expensive relative to other stuff is what's called a "relative price shift." Now, I can understand being upset that buying a gallon of gas now requires doing without more of this other stuff. But look on the bright side: each gallon of gas you conserve now buys you more "other stuff." Stated this way, it sounds like a much better deal.
Of course, relative price shifts do create winners and losers. Political discussions always seem to focus on the noisy complaints of those who lose, such as the McMansion dweller whose increasingly expensive commute is undermining his home value. What's missing is the picture of the smiling urbanite, who's earning a handsome return on her investment.
Perhaps, instead, our despair reflects higher average prices: When average prices rise, and incomes don't, then we have less spending power, and we get less gas, and less other stuff.
But I have some good news: When average prices rise, then typically wages also rise. It might be a few months later, but our spending power typically remains unchanged.
So why the concern?
One explanation is simply that we fail to understand that wages rise in tandem with average prices. Behavioral economists tell us that when each of us gets our annual raise, we think that this is a reward for our hard work, rather than 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 paycheck.
The truth is more mundane: You aren't that brilliant.
But you are going to be compensated for those higher gas prices.
MOON: Justin Wolfers is an associate professor at the University of Pennsylvania's Wharton School of Business.
Comments
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From Bloomington, IL, 06/24/2008
Then let me illustrate the why it's a big concern to many American families:
1) What am I going to do between MAY and DECEMBER, before my annual review and [possible] salary increase? Answer: I must have the amount of gas I use currently - no cutting is possible for me to get to work. So, therefore, I will cut back on my food, clothing, and any other expenditures I can. The thing people are up in arms about is: what are we going to do NOW! Not at some point in the future when salary and costs may stabilize.
2) My [possible] salary increase is typically just slightly *less* than CPI inflation. I lose to begin with.
So when gas, which is *not* measured in the CPI anyway, skyrockets upward in price, it will NOT be accounted for in my COLA raise - if I get one. Instead, it will still have to continue to be covered by my shorting all the other things which have inflated in price as well. Unless you happen to think that rent, utilities, etc. are going to lower their natural inflation to make way for gas. Good luck if you believe that.
3) If we were talking 3% per year, every year, we'd probably be at the same point by now. BUT, a 75% increase in two years is NOT the same thing. Not by a long shot. If you get one apple per day and I take one bite of it, then I come along the next week and eat half of it, ask yourself if you're comforted by the fact that you'll get one more slice per day at the end of the year.
It's ivory tower thinking like this which makes economics and economists four letter words.
From Chester, VA, 06/24/2008
I really don't think that Mr. Wolfers understands the hype because he has never has to be in the situations that most of us have been in. For instance, we have cut things out in my house to compensate for the gas price gauge. There isn't anything else to cut out and we still struggle to put food on the table for us and our child. Not everybody has the luxury of having a job that gives a great annual raise. Where I work you get a little one IF you are lucky. There are families that the main supporter has loss their job due to lay offs because of the gas prices that have to go to churches to get food because they make too much for food stamps. So until he spends some time in our shoes then he will never understand. Let him loose his job and figure out how to keep his house from being forclosed on and how to get food on the table and to basically survive making only $8.00/hr like most do. He dosen't seem to understand that when gas goes up so does food, especially with ethenol. Im sorry but it is not cheaper and it DECREASES your gas mileage, not to mention if you have an older car it will eventually ruin the car. People like him will never fully understand how and why this effects us the way it does.
06/23/2008
I see a major flaw in the relative price shift argument put forth by Mr. Wolfers, i.e. "if we conserve the gas that we spend, we will have money left over for other stuff". As I see it, as the cost of fuel goes up the cost of transporting everything that we consume will go up too and hence the cost of "other stuff" will go up too. So will we be able to any of that "other stuff" by saving on gas?
From Nashville, TN, 06/23/2008
I believe the other readers' disappointment is the apparent gloss over of the pain felt by people who were already on the edge of financial distress. There will ALWAYS be people on that edge and that is a precarious position to be in for this very reason: the inability to absorb price shock or any other unexpected expense.
Individuals aren't the only ones subject to price shock; employers on the edge also react and more job losses are often the result.
About that wage bump: that assumes companies have been able to pass the additional costs to the consumer. Without the additional cashflow in, there won't be more cashflow out to EEs. I'm not sure that part of the equation has been fully realized yet.
Also consider the fact that the term 'few months' represents an unknown value (6,12,24,?) No, the pain isn't permanent, but no one can say exactly when it will end. (Remember execs tend to cover the required ROI and pay themselves before they share the wealth.)
From Minneapolis, MN, 06/23/2008
"Gas at $4 a gallon is causing a lot of despair. But I'm not quite sure why."
It's comments like that that give people the impression of economists as being "elitist" and "out of touch" with the pain that people feel. If Mr. Wolfers understood people instead of just numbers, he might have a better informed sense of why people make the decisions they do, instead of the way that his models tell him they should.
From San Diego, CA, 06/22/2008
Higher gas prices do encourage conservation, and that's definitely a cause for celebration. But in some cases you simply can't conserve. The vast amount of Americans living in temperate areas of the U.S. are seeing the cost of heating their homes rise higher and higher. Keeping your thermostat at 50 degrees during the winter is not a viable money-saving solution.
From MD, 06/22/2008
Higher gas prices are the best thing that has happened to the USA in a long time.
Low gas price simply encouraged waste, and fatter, dumber people! High gas prices will make people 'walk', 'bike' more. Women/men will start to look sexier, and actually be healthier. Smarter people, who know how to drive efficiently will be rewarded, stupid people will be penalized. This actually helps in improving the quality of the population. Since stupid people will now have less money (and hopefully less children), the natural selection process which has made us what we are, will start anew. And finally, we will be as smart, as beautiful and as intellectually competent as most europeans :) Pizza eating, beer drinking, tv watching americans will finally have to get up and get their act together. Of course, it will be painful, even fatal for really stupid and over-weight people. But natural selection was never painless. The rewards, however, are well worth the pain. Now lets just hope that the democrats don't threaten the arabs into coughing up free gas again, and ruin this beautiful process. --ST
From Richmond, CA, 06/21/2008
It is obvious that Mr. Wolfers was born after the 1970's. When wages go up because of increased energy costs it fuels (pun intended) spiralling inflation. I remember that was no fun.
From San Francisco, CA, 06/21/2008
I agree that there are good things that may come from increases in gasoline prices. For one, if it encourages people to start even thinking about how they get to work, higher gas prices are great! But, I don't agree that wages will keep up with the prices. Average people are not seeing the wages that he describes as, "It might be a few months later, but our spending power typically remains unchanged." Here are some easily found statistics:
In May 2001 Median hourly wage for CA $14.31, Mean hourly $18.14, Mean annual $37,730 (U.S. Dept. of Labor).
In May 2007 Median hourly wage for CA $16.91, Mean hourly $22.11, Mean annual $45,990 (U.S. Dept. of Labor).
That's an increase of 21% in 6 years. Maybe I'm doing the math wrong, but the Consumer price index for May of 2001 was 115.7 and May 2007 was 202.4 (from the BLS website). Thats a 74% increase in the same 6 years. I don't understand how this guy says that wages are keeping up with prices. Gasoline has gone far higher, food is higher, etc.
I guess in a couple months I should be getting a super big raise. Wooo hoo!!!
From poestenkill, NY, 06/20/2008
Higher prices for gas, and stuff in general *is* a blessing in disguise, and I don't know why more people don't see it. It has got to come to something like this before we realize we cannot sustain such a huge population and do something about it. Less buying power and longer working hours per capita are already reducing family size.
From Ft. Myers, FL, 06/20/2008
I am not quite sure where Justin is getting his information, but it seems to be lacking "real" perspective. It would be great to have a job in which an annual increase is a given, but for many of us in this economey our companies have down sized and are looking to trim as much fat from the budget as possible so annual raises and paid vacations are falling by the way side. This becomes an even greater burden if you happen to be part of the trimings. What we need right now are programs that create good paying jobs. The time to switch to alternative energy is now. Solar, tidal, geo thermal, wind, magnetic. If we can retrofit existing houses and buildings with energy gathering techknowledgy and tie them together into an all incompassing grid we can help unburden large centralized power companies. This will not only provide a more stable power delivery network but also make our power grid safer from possible terrorist attack. In so doing we will need to build new infrastructures and retool manufacturing plant. We need to give incentives to businesses to manufacture to stay at home. More jobs will be created and direct cross over jobs from old tech to new tech so no one needs to fear about being out of work. We need to work together to raise this great country from her knees and the I got mine attitude will not do it. Greed has fueled our nation for far to long. The economic gap between the classes is the greatest it has ever been and is still growing daily. It seems our politicians and the "haves" and "haves more" seem to forgoten about those of us below there standing. How many high priced ticket items need be purchased for us all to feel that good old boy trickle down, it does not work. So Justin should remove his rose colored blinders and get out of the office more.
From Kansas City, MO, 06/20/2008
Wolfers claims that "wages rise in tandem with average prices...."
For a very specific segment of the population, those people whose incomes are closely tied to profits in oil, that may be true; but it is certainly not true for the vast majority of workers in the U.S.
Yes, of course, I get a wage increase of ~2% every year (and no, I do not, as Wolfers suggests, believe it has anything to do with performance). But that 2% occurs every year regardless of any increase or decrease in the price of gasoline. Consequently a dramatic increase in gasoline prices has the effect of reducing my income.
The only way his claim could be true is if, when it's all averaged out, the income of the segment of the population who profits from oil sales has increased so dramatically that statistically it overwhelms the decline in income of the millions of workers whose pay increases at a rate independent of the price of oil.
I can't say that that would surprise me, but neither can I say that it's a cause for celebration.
From Sheboygan, WI, 06/20/2008
Who is this guy trying to kid. Wages are not keeping up with gas price increases not to mention health care etc. Employers are rewarding people these days with raises which are then completely eaten up by increased health care co-pay. This story sounds like it represents employees in government, not the public sector, a complete misrepresentation of reality.
From Hilliard, OH, 06/20/2008
Justin has a clear failure to recognize not everyone is in the employ of an institution or corporation.
Mental health counselors in private practice have not seen an increase in hourly compensation in over 10 years. If anything, insurance providers are reducing reimbursement rates.
Additionally, those of us who are self employed and working to build a new business don't have the luxury of an annual bump in pay. Hopefully, this career path will result in longer term rewards but does not minimize the short-term pain.
This editorial feels shallow and lacking in its assessment - not what I would have expected from Wharton.
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