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Who Gets Hurt the Most from Rising Gas Prices?

David Callahan

The progressive policy world does a great job of spotlighting the economic hardships of low- and moderate-income Americans, but I've long noticed a big gap in all this work: An appreciation of how much the volatility in energy prices impacts these struggling households.

The truth is that energy prices, particularly gas prices, are now nearly as important to economic well-being as other factors that policy analysts typically focus on: like minimum wage levels or the generosity of tax credits like the EITC. If we really care about the economic challenges facing the bottom half of the country, we need to find a way to buffer these Americans from surging energy prices. Isabel V. Sawhill of Brookings draws needed attention to this issue in a recent article, arguing that gas prices is a bigger issue for lower income Americans than commonly supposed:

One assumption is that these households do not all own cars, that many use mass transit instead. Looking at all households with annual incomes less than $50,000, it turns out that the vast majority (80%) do own cars, and a significant portion (over a third) own more than one car. Of course, even if they do not own cars, higher gas prices can affect mass transit riders as well once higher costs show up at the fare box, although this undoubtedly occurs with more of a lag.

Among low-to-moderate-income households that do own cars, they drove about 10,000 miles and spent about $1,500 on motor fuel during 2010 when the average price of gasoline was about $2.80. Gas prices are now approaching $3.80 a gallon, and some observers believe they could reach $5.00 by this summer. Every dollar increase, holding the number of miles driven constant, would cost these moderate- and lower-income households an extra $530 per year. For a family with an annual income of $20,000, this is an additional 2.7% of their total income. Although higher gas prices eventually encourage consumers to cut back on driving or switch to more fuel-efficient vehicles, in the short-run they may have few options but to cut back on other expenditures in the family budget. Since low- and moderate-income families’ spend most of their income on average, in the very short run they can only choose between spending less on other items and going further into debt. In addition, less spending on other items operates much like higher taxes in slowing an incipient recovery. In other words, higher gas prices drain purchasing power from the economy. That means that these families get hit twice: once by the direct impact on their household budgets but a second time when higher prices retard the economic recovery.

Sawhill, like many others, doesn't have an easy solution to rising energy prices. But she makes the point that it's crucial that government be prepared to cushion households from these price swings -- both to ensure their economic security and avoid broader economic downturns.

I can't disagree with that, but let's be realistic: Gas prices can surge quickly and government policy moves slowly, especially in this age of conservative obstructionism. What's really needed here are longer term protections to buffer Americans from high gas prices, and -- as it happens -- the Obama Administration has already enacted one: federal mileage standards are now set to rise to 54.5 MPG by 2025. In effect, every new car will eventually have to get the kind of mileage that a Prius now does, mileage so good that higher gas prices won't much matter.

So all that is great. The problem is that 2025 is a long, long time away.