Politics & Policy

Gas Bags

Why the money pundits were wrong in 2007.


Two thousand and seven was the year of the “R word” — recession. How many times did you hear a network reporter drone on about how high gas prices are about to “hit the consumer,” predicting that retail sales must eventually drop in response to $3 gas? If you watch network TV, the answer is quite a lot. But weeks, months, and quarters went by and strong consumer-spending habits showed little sign of abating. Meanwhile, gas prices have held near historical highs. We got to the end of a whole year of high gas prices and the consumer never quit and the economy never went into recession.

The recessionistas have been disproved, although they’ll never be discouraged. They will continue their dirge starting, well, today. Through 2008 they will ask, “When will high gas prices kill the consumer?” And the answer will remain the same: never.

Gas-price hikes will never, ever, ever cut into consumer spending. It’s a mathematical impossibility. Here’s why: Gas prices are a component of consumer spending.

You see, when gas prices climb from $2 a gallon to $3 a gallon, one of the components of retail spending goes up. Gas stations are retail establishments. People make money working at gas stations (which now generally serve as convenience stores). People make money managing the corporations that own these stores. And, of course, people make money by owning shares in these companies.

Sure, if people spend more money on gas, they may very well spend less on soft drinks. But that’s a substitution, not a decrease in overall spending. The spending simply shifts from one retail category to another.

So why don’t we ever hear this? Well, with a few notable exceptions, mainstream TV commentators don’t know the facts, which often are buried in the details. You can’t just read a financial press release from a government organization (or worse yet, the blurb about the press release) and understand what the data are saying. A Larry Kudlow, a Steve Forbes, a Dan Yergin, a John Rutledge, an Art Laffer, a Brian Wesbury — these folks actually read the reports, including the tables in the back. They look at rows of numbers; in the case of a consumer-spending report, they note the row that is devoted to gas stations.

Meanwhile, the network pundits only study the lingo that will keep them on the air: “hit the consumer,” “Arab Street,” “connect the dots,” “quagmire,” “sub-prime meltdown.” The only numbers they master are the phone numbers of their favorite producers.

Good at getting on the air is not remotely the same as good at getting it right.


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