August 29th, 2005

Brad @ Burning Man

Some Guesses - What Will $4/Gal Gas Mean in America?

Edit: Disregard the numbers in the following article. See next entry.

I don't have accurate numbers on what the average family spends on gasoline. I get the feeling that those numbers are out there, but I can't think where to look and am too tired to dig for it. But I can do some back-of-an-envelope calculations from a few known facts and a few plausible guesses. For example, I know that the reason cars used to come with a warranty that works out to 1k mi/mo is that the average driver drives just a little over 1k mi/mo. So we'll do the calculation based on 1k mi/mo and round up at the end. I don't know what the average American's fuel economy is, but I do know that there are a lot of old cars out there. Americans stopped trading in their cars every three years back during the Reagan recession, and now they pretty much all drive their cars until they start to fall apart, at least six years and often longer. So to pull a number out of the air, I'm guessing that the average American gets 25 mi/gal. Before this price spike, average Americans were paying somewhere around $2/gal, and we're talking about what happens at $4/gal, so let's assume a $2/gal price increase from what people think of as "normal." That comes out to 1k mi/mo ÷ 25 mi/gal = 40 gal/mo per driver, which sounds a little low if you ask me. 40 gal/mo x $2/gal = $80/mo.

So we're asking how will Americans change their lifestyle if you kick a $75 to $100 hole per wage earner in their budget. And for the purposes of these calculations, where we want to compare the impact of these numbers to inflation, let's assume that pretty much all American workers, whether wage earners or retirees on Social Security, will get about a 3% raise over that same time. And because I have no way to predict how the prices of other things will go up because employers are paying twice as much for fuel, we're going to leave the inflation rate alone at between 3% and 4%, so remember that these estimates are unreasonably optimistic.

Now, to predict how people are going to react to this, I'm going to make one more prediction: almost no Americans will believe, for at least the first two years, that these increases are permanent. They will believe this for two reasons, one reasonable and one insane. One reason is that an awful lot of people in the job market right now grew up during the Clinton administration and think that the dot-com bubble is what a "normal" economy looks like. They think that the only reason that they're not making 20%/yr on investments during 3%/yr inflation with minimal attention to their portfolio is because some evil politicians somewhere must be cheating them out of it, so they're just waiting or looking for the politician who will slay that villain and bring them back their prosperity. These people are insane. On the other hand, this jump in price is being driven by a jump in demand. In the past, long-term jumps in demand have lead to increases in investment in oil exploration, and I think pretty much have to lead to increases in refinery capacity, so prices should at least stabilize in the long term and are very likely to drop unless you think there's some really solid reason why one of those things can't happen. So that's the not-entirely-unreasonable reason why even many families who could do so will hold off for a couple of years before making major investments in energy savings or any other major changes in the way they live because of $4/gal gas.

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Brad @ Burning Man

Disregard Previous Entry, Needs Extensive Research and Wholesale Revision

Crap, crap, crap. Disregard the income numbers in my previous journal entry, they're all wrong.

Someone just spotted something I didn't, and I feel like a moron. While I was doing web searches to back up my guesses, I went looking for a table of personal income by wage earner by quintiles, that is to say, by 20%-wide ranges of the population. In other words, what do the lowest 20% of all wage-earners make, then the next 20%, and so on. This is turning out to be surprisingly difficult to find, but I finally found a current source and used it in this morning's journal entry.

An anonymous reader just noticed that the link in question ends in dot-nz. Those are the New Zealand income numbers. Oops.

In my own defense, I've just spent an hour trying to find matching numbers for the US, and I'm having no luck. The US Bureau of the Census only keeps household data. Unfortunately, knowing the household income tells me next to nothing about how many people per household at that income level work outside the home and therefore in all probability need a car. It gives me no way to estimate what percentage of their household budget goes to transportation expenses in general and to gasoline in particular.

Even though the dollar figures are completely useless, it's still my impression that if I can find the data, I still think that by income quintile, this will be the impact:
  • Working Poor: These are people for whom an extra $75 to $100 in expenses per wage earner is a crippling blow, a lifestyle killer, an end to any dream of saving up money to invest in anything that would claw them up out of poverty like home equity or a better education for their children. I think that it will render certain low-income jobs just plain unworkable for a large percentage of the people currently in those jobs, for whom the job is already just barely paying more than it costs to work it, and that this will push up unemployment and welfare spending.
  • Lower-Middle Class: I think that gasoline is a big chunk of these people's monthly budget, but one where they've already made nearly all the cuts they can over the last couple of years. So while they're likely to reduce their automobile usage some more, the impact will mostly be felt in a desperate need to cut other expenses, like entertainment, clothing, and personal electronics. I also expect these people to reverse their recent trend towards paying down credit card balances and to have a major run-up in credit card balances.
  • Middle Class: I think that these people will feel the pinch a little bit and make minor changes in the way they use their cars, like using the smaller car rather than the larger car for discretionary trips, spending more of their entertainment dollars at home, and shopping closer to home, and that they'll find short-term ways to cut back on other expense categories to make up the difference until someone convinces them that this is permanent.
  • Professionals and the Wealthy: I still think that the top 40% of all wage-earners will notice that the price at the pump has doubled and grumble about it as a visible and constant reminder of inflation, but that it will make next to no difference in the way they live their lives because gasoline isn't that high a percentage of their monthly expenses, so it won't squeeze them enough to get them to make any significant change in how they use transportation. I also expect only trivial changes in their other expense categories.
But I can't prove that from the data I have on hand. And from my preliminary searches, I'm not sure that the data I'd need to prove my point even exists. I'll keep looking.

By the way, I took a lot, and I mean a lot, of flack about two assumptions that I feel a need to comment on.

Forget Social Security reform, the real third rail in American political discussion is social class. It was with malice aforethought that I assigned social class labels to the quintiles, labeling the lowest 20% working poor, the next 20% working class, the middle 20% middle class, the second-highest 20% relatively wealthy, and the top 20% wealthy. In early drafts, that second-from-the-top group was alternatively labeled upper middle class or professional class. Having been called on it, I will admit that social class is a complicated enough equation that you can't directly map social class onto income, nor is it precisely accurate to assume that, of the five (not three) social classes that I divide most Americans into, you can fit them into 20%-wide bands. But I also know that American society leans too hard the other way, calling nearly everybody but the poorest 5% and the richest 5% middle class, which makes the "middle class" range of incomes so broad as to make it impossible to generalize about the effect of any economic change on the "middle class." So I think that, for the purposes of this discussion, it wasn't a bad hack to label the quintiles by social class. Besides, it's not as if there are any popular alternative labels for the quintiles!

cuglas, minidoc, and others picked on me for insisting that the working poor, or that anybody at all apparently, need to have money saved up for the purpose if their kids are to get a college education. They insist that what every American is supposed to do is run up tens or even hundreds of thousands of dollars in student loans, and that doing so has, in fact, become the norm. Now, let me ask you a few things. How many people do you know with college degrees who are sweeping floors, emptying trash cans, telemarketing, or waiting tables because their degree didn't prepare them for any real job? How many people do you know with college degrees who had useful degrees but are back in those poverty-level jobs, or unemployed altogether, because demand for their skills dropped through the floor, because too many people went into that line of work, and/or because their jobs went overseas? For a middle class or upper middle class family, the idea of graduating from college with $150k in debt doesn't seem like that much of a gamble. If you have a middle class family and middle class friends, the odds look pretty good that no matter what happens to you, you'll find some way to make your minimum student loan payments. But for the working poor, that's a do-or-die proposition. If you aren't lucky enough to find out that your degree is worth big money when you get out and likely to remain so, then there isn't anybody you know who's likely to be able to help you, and you just wrecked your life by starting out your adulthood with a bankruptcy, and one with terms so stringent that you're unlikely to be able to save up any money for a second chance at improving your situation.

No, you shouldn't assume that your kids should be paying for your entire college education with loans, especially if the reason you want your kids to go to college is income mobility. If you want your kids to go to college so they can maintain the same standard of living you have, they may be able to borrow that money and gamble on paying it back. If, on the other hand, you want your kids to go to college so that they can have a better life than you, then you need to save money. And that is why I said that any economic change that kicks a big hole in the ability of the working poor to save money for their kids' tuition is a crippling blow to the idea of upward economic mobility.
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