So, how can we lower gas prices?
There are a variety of options.
These days when I talk about the need for rate hikes to bring inflation down, I’m sometimes confronted with the argument that the only thing that needs to come down is gas prices. The thinking seems to be that even if much of our inflation is due to high aggregate demand, gas prices themselves are due to a supply shock, perhaps from the Russia sanctions. And if gas prices, rather than inflation in general, are what Americans really care about, then really we don’t need to focus on beating inflation itself; we just need to find some way to increase the supply of gasoline. So, no need for a Fed-induced recession.
Or so the theory goes, anyway. The idea that Americans mostly just care about gas prices, instead of about inflation, has partial empirical support from the political science literature. Harbridge, Krosnick, & Wooldridge (2016) do find that while inflation matters for presidential approval ratings, gasoline prices also matter above and beyond inflation itself. Here is an interview where they discuss their results.
So while gas prices aren’t the whole game, they do have a special importance. So how to get them down? The best thing to do is to build more transit and to switch to electric cars, and we need to do this as fast as we can. But this takes a lot of time, so we also need some other measures that work faster.
A new report by some folks at the Center for Public Enterprise suggest some very sensible measures — fare holidays for cheap transit, accelerated and streamlined approval of transit projects, and encouragement of more work-from-home. But it also has some suggestions that involve asking Americans to cut back — encouraging carpooling and reducing national speed limits. I fear that this approach would end up repeating the mistakes of the Carter administration — demanding that Americans cut back on their lifestyles has never been a great political move.
So to lower gas prices, we need some more palatable alternatives. In fact, there are a number of things we can do. The first thing, interestingly enough, is to raise interest rates.