I believe the federal government should peg the price of gas to say $4 a gallon. I’ll explain that in a minute, but now that I’ve gotten your attention, let’s talk about inflation.
Right now, we are seeing pent-up and excess demand clash with lower global output because of the pandemic and other bottlenecks. Thus, too much money chasing too few goods has led to a spike in inflation. The Economist forecasts inflation next year at 4.1 percent, lower than the 6.1 percent rate for 2021 but twice the 2 percent targeted by the Fed. So, expect the Fed to taper its bond purchases, leading to lower inflation but higher interest rates.
Now, back to the price of gasoline. It has risen to $3.40 a gallon from its pandemic low of $1.80, an 89 percent increase. That’s a lot!
But let’s look at it in another way. Early in the pandemic, people weren’t driving, so demand for gas — and therefore its price at the pump — plunged. Measured from before the pandemic, the increase has been about 31 percent.
Still another touchstone: Today’s price as a percentage of disposable income is 3.1 percent, well below the levels of 2008 to 2014 when a 10-gallon weekly purchase consumed 4.2 to 4.8 percent of disposable income. Indeed, today’s level of 3.1 percent is very close to what it was from 1992 to 2003, and for most of the time since 2015, making today’s figure pretty much par for the course.
My two cents’ worth: The government should peg the price of a gallon of gas at say $4 per gallon. So, if price without the peg and taxes (which I’ll call P&T) was, say $3.05, the difference of 95 cents would be a tax collected that would be used to increase the Earned Income Tax Credit for lower income groups to soften the blow. If the price without the P&T was to increase to $3.20, the tax collected would be 80 cents. The objective would be to stabilize the price at the pump at $4 per gallon to reduce uncertainty for consumers, businesses and car manufacturers.
If the price without the P&T were to rise to say $4.25, the government would subsidize the price down to $4 temporarily but would announce that the pegged price would rise to say $4.50 in three months, allowing consumers and manufacturers to plan for the price increase.
A caveat here: The pegged price would exclude state and local taxes, which would lead to a higher price at the pump. Otherwise, they would increase their taxes at the expense of the federal government. Florida has a state tax of 27 cents per gallon while California has the highest tax at 67 cents per gallon. Plus, you have local taxes. These taxes hardly fluctuate so the price paid at the pump would be stable.
Spend your days with Hayes
Subscribe to our free Stephinitely newsletter
You’re all signed up!
Want more of our free, weekly newsletters in your inbox? Let’s get started.Explore all your options
The cost of carbon created by a gallon of gas is estimated to be between 21 and 45 cents. So, one could make the case that part of the tax collected is the cost of the carbon externality that could be used to address climate change, such as building charging stations for electric cars and subsidizing the sale of electric cars.
Gas, of course, isn’t the only thing that costs more. Car prices are up. Most of the increase in auto prices and electronic components is due to production bottlenecks in Asia. Once the supply issues are resolved, expect prices — especially of cars — to decline.
But that’s only part of the inflation puzzle. Wage increases sought by lowest income workers are leading to higher prices for consumers, also fueling inflation. Not helping is the shortage of critical workers such as truckers and nurses. COVID-19 in the short term and changing demographics in the long run are increasing retirements without an adequate number of young willing workers available to replace them. The previous administration, by cutting legal immigration in half, bears some culpability for the inflation spike.
Economist Larry Summers was spot on, predicting that inflation would spike this year. He supports both the federal Infrastructure Investment and Jobs Act and the pending Build Back Better plan, believing that they will boost economic output without spurring inflation. Together, they are lower over 10 years than this past year’s stimulus was over a single year, and in addition they will be substantially paid for. Because the spending is offset by revenue increases and because it includes measures such as childcare which will increase the economy’s capacity, the spending should have a negligible impact on inflation.
Putting matters in perspective, the budget deficit totaled $2.77 trillion for fiscal 2021, $360 billion lower than the $3.13 trillion in 2020, as a recovering economy boosted revenues helping to offset government spending from pandemic relief efforts. As a percentage of the overall economy, the 2021 deficit represents 12.4% of GDP, down from the 2020 deficit, which was 15% of GDP. The sky is not falling any more than it did in 2020.
The benefits from the stimulus spending have been many. For those lower on the income ladder, the expanded child tax credit kept three million American children out of poverty in its first month. Pay for hourly workers in the low-pay leisure and hospitality sector jumped 13 percent — more than twice the inflation rate — in August compared to the previous year.
The economy is expected to grow by some estimates between 7 to 8 percent this quarter. Unemployment claims are the lowest they have been in 52 years. About two-thirds of Americans are pleased with their household’s financial situation. Whatever the price of gas, that’s a pretty good number.
Murad Antia, now retired, taught finance at the Muma College of Business at USF.