OCTOBER 2008: THE STATE WE'RE IN
The end of the way we were
The past few months have been marked by surging gas and food
prices, plummeting auto sales, a continued housing implosion
and Russia acting like the old days. With apologies to Barbra
Streisand, I can’t help thinking that this period might
signal the end of the way we were.
BY JOHN
MITCHELL
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The surge in gasoline prices leaped to the top of voters
concerns, displacing matters of war, other economic issues and
where Brett Favre would play. The factors cited in that price
run-up cover the gamut from spiking consumption in nations such
as China and India, where people with rising incomes are
emulating some of the things we do; increasing demand in the
Middle East; declining output in Russia; Nigerian unrest; and
speculators (always popular when prices go up). Whatever the
supply and demand factors involved, crude prices approached
$150 per barrel.
Economic theory tells us that when relative prices change, it
sends signals for people to alter their behavior. Hundreds of
millions Americans got a new set of signals this past summer.
Ridership on TriMet and other transit systems across the nation
surged. Bicycle sales boomed along with sales of scooters.
Amtrak ridership grew, while airlines hemorrhaged and
dropped service to some small Oregon towns and began charging
for peanuts. Miles driven began to drop, with the sharpest
declines taking place in rural areas. Asset prices changed with
large SUVs plummeting in value, while year-old hybrids sold for
more than new ones, which were not available. Our real income
decreased.
It reminded us that demand curves slope downward to the right.
Over time our ability to adjust increases: The Hummer is paid
off; now I can buy a Prius or I can move closer to where I
work.
The energy situation for consumers was compounded by the not
unrelated food price increases and the downshift in home
prices. The price increase translated into massive increases in
revenue for the nations that happened to have significant
hydrocarbon deposits. Unfortunately, many of them are not close
friends (excluding Canada): Russia, Venezuela, Iran, etc. One
could argue Russia’s move into Georgia was facilitated by
newfound oil wealth and the chokehold on Western Europe’s
gas supply. Security considerations suggest that it would
behoove us to seek alternatives rather than send funds to folks
who seek to destabilize or threaten our future. This is a path
that has been talked about for decades. Many can recall the gas
lines of the 1970s and Oregon’s odd day/even day
gas-buying system. But alas, we stopped conserving when prices
fell.
This time the price volatility and the security considerations
have been joined with a concern about global warming and the
role man might play in it. Both presidential candidates, the
Western Climate Initiative and Oregon law are trying to move us
toward a reduction in greenhouse gas emissions.
If we are serious, the run-up in energy prices is a good
thing, setting in motion decisions that will over time help
decrease our carbon emissions. This is really what things like
cap and trade and the climate initiative are all about.
The people who build large vehicles or work in portions of the
airline industry, to name a few, will not instantly morph into
windmill mechanics, nurses or solar techs. It is just like the
turmoil in the real estate business where new construction has
declined by more than half and mortgage companies have
vaporized. There will be painful dislocations as there are
during periods of significant change. We cannot forget that
behind the numbers are people whose lives and incomes are being
affected and that policy should help facilitate transitions,
not hinder them.
In the mid 1970s and the early 1980s we started the process of
changing our fuel consumption only to stop. Maybe it will be
different now. But as one of my favorite commentators once
said, the most dangerous words in the English language are
“Things are different this time.”
John Mitchell is the former
chief economist for US Bancorp.
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