Let Gas Prices Rise
3/3/22
With gas and energy being a staple for American businesses and consumers alike, and with these prices rising sharply, we’re reminded about the pain of inflation virtually daily. Despite this pain, any predilection to insulate the public from these price changes is wrong-headed. Dampening the upward pressure on energy prices will allow for demand for other goods and services to be higher than they otherwise would be, fostering higher inflation in those sectors. Thus, efforts to tame energy price increases will likely serve to institutionalize more widely distributed inflation, rather than the situation where inflation is particularly out of line in selected sectors, as we currently have.
Meanwhile, working to tamp down prices of fossil fuels will also serve to sidetrack efforts to transition to green energy sources and control climate change. It’s time to get our priorities in order. Inflation is a problem, but climate change should take precedence over inflation as the more pressing area of concern. Yes, inflation is painful, but it’s not the existential threat that climate change presents.
Given the growing awareness of the climate crisis that we’re facing, the chart below shows a dispiriting history. (Src: US Energy Information Administration.) The Covid-19 pandemic fostered a short-lived dip in the consumption of fossil fuels, but usage has since ratcheted back up to a pace comparable to the pre-pandemic period. Meanwhile, consumption of renewable energy has been remarkably stable. From these data, it seems clear that any concerted effort to reduce reliance on fossil fuels in the US has been ineffectual. Higher fossil fuel prices, however, would foster the transition that we should be seeking to establish. The administration should let the market work its magic.
In prior blog posts, I’ve challenged the conventional wisdom of fighting inflation solely by relying on contractionary fiscal and monetary policies to rein in aggregate demand. Still, these policies have their place; and if we’re seeking to reduce aggregate demand, doesn’t it make sense to let the surge in gas and energy prices contribute to that effort?
The climate concerns notwithstanding, the inclination to mitigate the upward price pressure on energy prices misdirects scarce resources. Almost everyone suffers from rising prices (save those who are profiteering from them), but some suffer more than others. Specifically, we should appreciate the divide between households with earnings that exceed consumption requirements versus those who are less fortunate. Put another way, the distinction between savers and non-savers is relevant. To some extent, all of us have some capacity to adjust our purchases either by cutting back or by substituting cheaper goods for more expensive ones; but those able to put money away (despite inflation) are in vastly superior circumstances relative to those for whom inflation precipitates debt or bankruptcy.
If we do want to mitigate the pain of inflation, doesn’t it make sense to direct scarce resources to those living at or below the margin, as opposed to taking actions that would benefit a much larger population? Certainly, I think so. That’s why I’m for allowing fossil fuel prices to achieve their market level — even with coordinated boycotts of Russian energy products — with a complementary expansion of the social safety net. Ideally, I favor a means-tested, basic income program; but I’d expect some form of a resurrected child tax credit to be acceptable and more politically palatable.
As a practical matter, efforts to combat inflation have largely been left to the Federal Reserve Board. While the Fed has the dual mandate of promoting full employment while also holding inflation in check, the two goals may be in conflict. Tilting toward a more aggressive stance with regard to fighting inflation means slowing the pace of monetary expansion with the coincident rise in interest rates. The burden of higher interest rates, like the burden of higher energy prices, falls disproportionately on the poor. As with higher energy prices, those able to add to their savings are much more able to cope with higher interest rates relative to those without savings. Thus, in connection with monetary policy, if our Congress or the Administration wants to alleviate the pain associated with the cure, the child tax credit should again be reinstated. Steps to expand the production and use of fossil fuels, on the other hand should be resisted.
