Few topics seem to addle the collective brain of Washington like high gas prices. Politicians who raise this issue can generally be assumed to be partisan, cynical, demagogic, and dishonest. But one must not discount the possibility that something about the subject actually makes them stupid.
With gasoline prices now spiking around $3 a gallon—near their inflation-adjusted 1981 peak—we are witnessing stupidity on wheels. Republicans, who as incumbents fear that they will be blamed, are in a kind of frenzy to abandon free-market principles, basic economic reasoning, and increasingly, reason itself. Their week began with Senate Majority Leader Bill Frist and House Speaker Dennis Hastert calling upon the Bush administration to investigate possible price-gouging and market manipulation. The Republican leaders went so far as to recommend "sweeps" of gas stations to confirm that price increases reflect "changes in market conditions" and are not merely attempts by businesses to earn money. The next day, President Bush joined in calling on the Bush administration to launch an investigation. As it happens, a Federal Trade Commission investigation into possible market manipulation is already under way from last year, when Bush and Congress asked for one following a post-Hurricane Katrina gas-price rise. While he was at it, Bush also asked Congress to repeal the tax breaks they joined together to give to the oil companies last year.
This investigation won't find anything but a market working the way it's meant to. To understand what's really going on, see Pat Cleary, Ed Morrissey, Mike Hudson, and my colleague Prof. Blanchard, who have all written on the subject of oil prices. Also, check out this gas price chart that shows adjustments for inflation. And Nick Schulz of Forbes is asking a good question: if gas prices are hurting consumers as much as the media says, why haven't they changed their behavior?
But what's more interesting about these stories is what they don't tell you. For example, the Associated Press reports that "surveys indicate drivers won't be easing off on their mileage, using even more gas than a year ago." Now why is that? If prices are rising, one would expect consumers would use less.
The answer might be in some of the long-term trends that the short-term media lens is too cramped to see. Energy prices may be rising, but energy itself is much less important to consumers and to the overall economy than it once was.
According to the Bureau of Economic Affairs ( see chart here), American consumer spending on energy as a fraction of total personal consumption has declined considerably since 1980. Whereas 25 years ago, one in every ten consumer dollars was spent on energy, today it's one in every 16. In other words, what it takes to heat and cool our homes and drive to and from our jobs and vacation destinations is relatively less costly than it was then.
This goes a long way toward explaining why even when gas prices rise this summer--higher than they were throughout the 1990s--people will still be driving more; it's much more of a value than it was a generation ago.
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