Cheap Gas and Conventional Wisdom
Readers of this column know I honor a rule that keeps me in a tiny minority of wackos, some red, some blue, but mostly colorless libertarian. The rule is, “Question Conventional Wisdom.” An item of Conventional Wisdom that has become more conventional than ever lately is that gasoline is unusually expensive.
One of my tree-hugging pals recently pointed to a wonderful benefit of sky high gas prices — that they will force Americans to abandon their Hummers and conserve fuel like the rest of the civilized world.
Always happy to witness an epiphany of the law of supply and demand, I agreed. High prices reduce demand for anything. But when I told my friend that gasoline today was about the same price it’s been for the last 70 years, Conventional Wisdom came between us.
He didn’t believe me. Although he clearly has a grasp of supply and demand, he thinks Europeans drive cars smaller than orthopedic shoes, not because their gas is $7 a gallon, but because they are environmentally enlightened. He thinks Americans drive SUV’s because we are insensitive boors. We may be, but we are insensitive boors who live where gas has always been and still is inexpensive.
We don’t know how cheap gas is because inflation deceives us. Inflation has been referred to as the “money illusion.” The title of Milton Friedman’s book, Money Mischief is a better description. Inflation is an increase in the amount of circulating money without a corresponding increase in things to buy.
For private citizens printing money is a crime called counterfeiting. For governments and banks it is the perfectly legal scam known as inflation.
Counterfeiting is a crime because it is theft. But it is a sly thievery. The victims are almost impossible to identify. That’s why politicians love inflation. They can pick our pockets without our knowing it and then buy our votes with the money. A vote purchased with a newly printed dollar is as valuable as one bought with taxes, but has none of the costly political baggage of tax money.
Except for the person creating it, new money is not new wealth. It’s a new claim on wealth. As it cycles through the economy it bids up prices without increasing the supply of the things that people want and must toil to get, essential things like beer, golf balls, bullets and fuel for your SUV.
The victims of inflationary theft are the laboring saps who prudently save thinking the dollar is an honest vehicle for storing hard earned wealth. Inflation punishes thrift and rewards borrowing and speculation.
What concerns us here is just one of the many disadvantages of inflation, the lack of a stable standard of value. Comparison of prices over time is difficult and fraught with deception. Even in times of recession, shrinking dollars can give the illusion of rising income.
Gasoline is no more valuable now than it has ever been. If anything it is less valuable because it is more plentiful and modern engines use it more efficiently. What has changed is the unit we use to measure it. Gas in 1925 actually cost more, in terms of how long it took to earn, than it costs today. It appears more expensive today because we measure it in meaningless, undefined “dollars” that have no relationship to the stable, gold-backed unit of 1925.
If we were as cavalier with other standards of measure as we are with money, trade and commerce would be impossible. Pounds and ounces, feet and inches, gallons and pints would be different in different places and at different times. If other measuring units had changed like our dollar has, a man who was six feet tall in 1950, would be 48 feet 7 inches tall today, without having grown at all. If gallons had shrunk instead of dollars, you could still buy a gallon of gas for 25 cents, but the gas would barely fill a tall beer can.
Merchants who give short measure are rightfully scorned and prosecuted, but when our government cheats 5% a year off the standard against which we measure everything — the dollar — we accept it as “normal inflation.”
In the 1930’s gasoline sold for between 15 and 20 cents a gallon. Using the inflation calculator provided by the Bureau of Labor Standards, which probably understates inflation, the 1930’s price of gas in today’s dollars would be between $1.76 and $2.34 per gallon. In the 1950’s, gasoline cost between 25 and 30 cents per gallon, or somewhere between $2.03 and $2.43 in today’s dollars. By the 1970’s gas had gone above 50 cents per gallon. That would be $2.52 today. The price of gasoline actually peaked in 1981 at over $3 in today’s money. Its price has fallen steadily since then until just recently. Though it may happen soon, as of this writing we have yet to reach the record highs of 1981.
Another way to correct for inflation and include increased productivity at the same time is to calculate how long a person has to work to earn a gallon of gas. In the 30’s the typical American wage earner had to work more than 20 minutes to earn the price of a gallon of gas. In the 40’s it took 12 minutes. Ten minutes in the 50’s. Today it takes less than 7 minutes for a worker earning the national average of over $17 an hour.
The idea that the government can “do something” about the high price of gasoline is one of the many fallacious nuggets of Conventional Wisdom Americans have come to accept. The nominally high price of gasoline is a direct result of Uncle Sam’s having printed an ocean of money in the last 70 years and stolen American’s savings with it.
The actual price of gasoline, more affordable than it has ever been, is a triumph of private sector innovation and the efficiency of the free market. We continue to enjoy low gas prices now in spite of government dishonesty, meddling and substantial taxes on all forms of fuel.