Gas Is Cheap, Government Is Not
by Jerome F. Winzig
One of the amazing phenomena of contemporary American life is an almost complete lack of perspective. Our news media and our politicians are prone to panic attacks at every passing event. One example is this year's rise in retail gasoline prices. It is true that the increase has left many truckers who are locked into long-term contracts in a difficult quandary. There is no denying that the increase has been rapid and dramatic. Prices have gone from under a dollar a gallon to $1.60 and more in three months.
According to the evening television news programs or the headlines in the daily newspapers, gasoline prices are at an "all-time high." Members of Congress from both political parties hold news conferences in front of gas stations. Some demand that a favorite scapegoat, the oil companies, be investigated for "price gouging." Others insist that we pressure members of the Organization of Petroleum Exporting Countries (OPEC) to stop "illegal price fixing." A few seem to think we should force oil-producing countries to sell us oil at a price of our own choosing.
Several major facts are conveniently ignored or glossed over. When adjusted for inflation, the low 95 cent per gallon prices of late 1999 were incredibly low. (In fact, they were the lowest prices in the 81-year recorded history of gasoline pump prices.) In 1999 dollars, the price of gas in 1981 was $2.46 per gallon. In constant dollars, gas prices today are still lower than they were in the mid-1950s.
Are our memories really that short? Or do we choose to remember only what we want to? In the 1950s, my father used to drive into the gas station and say, "Two bucks regular, please." At the time, gasoline was about 27 cents per gallon. However, in 1955 the median income was $4,248 for a one-earner family and $5,477 for a two-income family. By 1988, median income was $36,579 for a one-earner family and $68,605 for a two-earner family. If gas prices had kept up with family income, we would be paying between $2.32 and $3.38 per gallon.
There are reasons why politicians want to call today's gas prices a "crisis" and blame it on big oil or OPEC. They don't want to provide an historical perspective on today's gas prices because that would also highlight other important changes having to do with the role of government. In 1955, the average family paid between 17.3 and 18.2 percent in federal, state, and local taxes. By 1998, the average family was paying between 37.6 and 39 percent in taxes.
Even more striking is the increase in the Social Security/Medicare tax. This tax hits low-income and middle-income Americans the hardest, since it applies to the first $72,600 of everyone's income. In 1955, the combined employer/employee Social Security tax was just 3 percent, or just $146 per year for an average one-earner family. (There was no Medicare tax yet.) Today, the total Social Security/Medicare tax is 15.3 percent. That's an increase of 410 percent, with the average two-earner family paying $8,638 per year.
Other significant changes have also occurred over that same period of time, changes that demonstrate the efficiency of America's private industry and agriculture. The average two-earner family used to spend 21.4 percent of its income on food; today the percentage is 8.9%. The portion of family income devoted to housing and household expenses has dropped from 21.5 percent to15.9 percent, and the portion spent on clothing has dropped from 7.7 percent to 3.9 percent. At the same time, most Americans have better homes and nicer clothing than they did in the 1950s.
The most serious change has been the drastic drop in the savings rate. In 1955, Americans saved 6.5% of what they earned. By 1998, the U.S. savings rate had dropped to just 0.4 percent. That is far below many nations that, not incidentally, have been catching up to the United States in the meantime. This leaves many Americans vulnerable to even small economic downturns. It also has the potential of making them entirely dependent on the government for retirement at the same time that Social Security faces bankruptcy.
Today's gasoline prices will not stay high because it is not in the self-interest of OPEC to continue limiting the amount of oil they sell. Doing so would prompt corporations and countries to start using other sources of energy and would undercut OPEC's position. So, all we have to do is wait for a few months.
But taxes and the role of government will stay high, even when the damage and economic distortion they cause increases. High taxes have helped create a nationwide shortage of low-cost housing. In order to avoid taxes, people buy increasingly larger homes. Single people occupy two and three bedroom homes because the mortgage interest deduction makes it possible. In many states and cities, a homestead tax exemption helps even more. At the same time, apartment owners pay capital gains taxes and higher property taxes while low-income people struggle to find affordable housing.
Minnesota receives only 75 cents in federal expenditures for every dollar it sends to Washington. New Jersey receives just 68 cents, the lowest in the country. New Mexico, on the other hand, receives $1.94 in federal outlays for each dollar it pays in federal taxes, and the District of Columbia receives back an astounding $6.26 in federal outlays for every dollar sent in.
If taxes were lower and fairer, and if our savings rate were 6.5 percent instead of 0.4 percent, the impact of a temporary increase in gas prices would be easier to handle. In the meantime, a little common sense would go a long way. Most of us can plan ahead to run more errands in fewer trips. Some of us can take the bus. A few of us can carpool temporarily without undue difficulty. With the onset of spring, lots of us can walk or bike instead of driving. And all of us can tell our legislators to correct what they have done over the last 45 years.