Matt Yglesias

The Cost of Energy Price Volatility

I’ve written a few times before about the risk of the current global recession interacting with energy price spikes in a dangerous way. Long story short, price spikes cause recessions, but currently there’s pretty good reason to believe that we’re in a situation where any resumption of growth will lead to a price spike. Amanda Logan and Christian Weller from the CAP econ team have a newreport out that takes a look at some of the broader problems with extreme energy price volatility, focused on the ways in which price spikes inhibit investment:

— There is an 83.3 percent chance that consumers will spend a smaller share of their disposable income on vehicles after they have just gone through a period of high price volatility. In fact, consumers buy about 1.6 percent fewer cars one year after experiencing a year-long episode of large energy price swings.

— Investment in residential structures — new home purchases and upgrades — dropped by 0.5 percentage points relative to gross domestic product on average after energy prices swung wildly for 12 months.

— There is a 91.7 percent chance that business investment in transportation equipment — such as trucks and tractors — as a share of gross domestic product will decline after extraordinary energy price volatility, largely because businesses will buy 11.0 percent fewer vehicles.

Logan and Weller argue for a strong renewable energy standard as part of the fix. I agree, and I’ll join Pat Garofalo who says “I’m still in favor of using the gas tax to smooth out the boom and bust cycle of prices, which, as Jason E. Bordoff and Gilbert E. Metcalf at the Brookings Institution write, would ‘provide a strong, stable price signal to encourage both conservation and alternatives to oil.’”

Obviously, there’s a political problem there. But it is worth underscoring the point that tax increases are going to be necessary in the medium term one way or another. And there’s not, as far as I’m aware, any easy-and-popular form of tax hike out there. But at the end of the day, while tax increases may not be popular (ask Bill Clinton in 1993) good economic performance is popular (ask Bill Clinton in 1996) so smart politicians are going to have to ask themselves what kind of tax measures can they put in place that will help facilitate good economic performance.