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Look at the benefits of higher gas prices

Justin Wolfers

TEXT OF COMMENTARY

BOB MOON: Are these rising gas prices a crisis, or are they really a blessing in disguise? We're seeing American driving fewer miles -- 1.4 billion fewer highway miles in April than we did in April 2007. And buying smaller cars: Sales of midsize SUVs dropped 38 percent last month compared with May of last year. Economist Justin Wolfers says we're being compensated for these higher gas prices -- we just don't realize it.


JUSTIN WOLFERS: Gas at $4 a gallon is causing a lot of despair. But I'm not quite sure why.

Let me explain. To an economist, a higher gas price is really two things: First, it's a shift in the relative price of gas versus "other stuff." Second, it's also a rise in the average price level.

Let's begin with the shift in relative prices: The fact that gas is more expensive relative to other stuff is what's called a "relative price shift." Now, I can understand being upset that buying a gallon of gas now requires doing without more of this other stuff. But look on the bright side: each gallon of gas you conserve now buys you more "other stuff." Stated this way, it sounds like a much better deal.

Of course, relative price shifts do create winners and losers. Political discussions always seem to focus on the noisy complaints of those who lose, such as the McMansion dweller whose increasingly expensive commute is undermining his home value. What's missing is the picture of the smiling urbanite, who's earning a handsome return on her investment.

Perhaps, instead, our despair reflects higher average prices: When average prices rise, and incomes don't, then we have less spending power, and we get less gas, and less other stuff.

But I have some good news: When average prices rise, then typically wages also rise. It might be a few months later, but our spending power typically remains unchanged.

So why the concern?

One explanation is simply that we fail to understand that wages rise in tandem with average prices. Behavioral economists tell us that when each of us gets our annual raise, we think that this is a reward for our hard work, rather than something as trivial as a cost-of-living adjustment. So each year we think that our employer realizes we are ever more brilliant, even as rising gas prices steal more from our paycheck.

The truth is more mundane: You aren't that brilliant.

But you are going to be compensated for those higher gas prices.

MOON: Justin Wolfers is an associate professor at the University of Pennsylvania's Wharton School of Business.

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