The folly of 'fixing' energy price hikes
HIGH ENERGY prices can bring out the best in people and firms, but they often seem to bring out the worst in politicians. Whether or not greed is good, there is plenty to be said for a little thriftiness. High prices, painful as they may be, do more to encourage energy conservation than replaying every one of President Carter's sweater-clad exhortations to turn down the heat.
But politicians sometimes react to high oil prices as if the Bill of Rights had bestowed on Americans the inalienable right to cheap fuel. Elected solons are now considering a Home Energy Affordability Tax Relief Act, which promises households a tax credit equal to one third of a home's energy costs up to $500. Some congressmen have called for restricting energy markets in an attempt to curb "speculation." Earlier in the election season, two presidential candidates came out for a temporary summer holiday for gas taxes.
Politicians seem to have an irresistible urge to intervene whenever voters start suffering from higher prices, but usually those interventions do more harm than good. Energy price controls were the clever idea of the 1970s, which only managed to give economists more evidence that you can't repeal the laws of supply and demand. Fixing prices below the market level, whether on oil or apartments, only produces shortages and long lines.
Using tax policy to reduce the price of energy is only slightly less foolish. Tax credits for home energy use reward people for using more fuel. If anything, the environmental consequences of carbon emissions and the strategic repercussions of importing Middle Eastern oil, suggest that lawmakers should be raising, not lowering, taxes on energy. Standard economic analysis suggests that oil companies would be a primary beneficiary of lower energy taxes, and I do own a modest amount of Exxon/Mobil stock, but even economists don't always work for their own financial self-interest.
Price hikes show how powerful prices can be at encouraging energy conservation. During the last gas crisis, miles per gallon increased by more than 50 percent. Today, used car lots are crowded with gas guzzling SUVs selling at steep discounts. The Prius may be the car du jour, but if gas prices stay high, car companies will move mountains to build even more fuel efficient cars.
Higher prices also push commuters out of their cars and onto public transportation. This week, the MBTA reported that it had almost 375 million riders in the 2008 fiscal year, a 6 percent increase over last year.
Some analysts have even argued that higher gas prices will destroy the suburbs and usher in a new age of inner city living. Those thinkers rightly recognize that postwar suburbanization was a child of the automobile. Nathaniel Baum-Snow has shown that in areas where the federal government subsidized more highways, the population dispersed more quickly. High European gas prices kept their cities compact.
But those facts shouldn't lead us to think that a $2 increase in the price of gas will remake America's urban areas. Housing is extremely durable, so any change is likely to happen slowly and depend on continuing high prices. Oil futures contracts suggest that investors think that prices will decline slightly over the next decade, and $4-a-gallon gas just isn't expensive enough to remake our cities.
The rise in oil price from $2 to $4 a gallon cost an average family that buys 1,000 gallons of gas annually $2,000 each year. That family could reduce oil costs substantially by moving into the city, but they could achieve about the same savings by just buying a more fuel efficient car. Switching cars is a lot less work than changing one's lifestyle.
Consumers have the ability to make wise decisions if they face prices that accurately reflect costs. Firms have just as much ability to innovate in ways that will attract thrifty buyers. High prices may be painful, but they convey a key nugget of information: Energy is scarce; use it wisely. If the government uses tax policy to artificially reduce energy prices, then the government will only deter private individuals from appropriate conservation.
Edward L. Glaeser, a professor of economics at Harvard University, is director of the Rappaport Institute for Greater Boston.
