Economist John Mitchell: The end of the way we were

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Wednesday, October 01, 2008

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.

t_JohnMitchell BY JOHN MITCHELL

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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