For the past few months, the biggest obstacle to the economic recovery has been rising oil prices. A few other global shocks have also hit, but gasoline directly affects the U.S. economy more than the others. Oil likely caused a dip in consumer confidence in March. It also appears to have small businesses feeling more pessimistic. This sounds like the recipe for a slower recovery, or worse -- a double dip. But are we overreacting?
The New Yorker's James Surowiecki thinks so. He notes that Americans actually spend relatively little on gasoline:
High oil prices are generally bad for the U.S.--oil spending goes largely to foreign producers, leaving less money for American goods and services--but if you look just at the dollars involved the terror they inspire is somewhat mysterious. Gas is a relatively small percentage of most household budgets, and prices are now about eighty-five cents a gallon higher than they were twelve months ago, which translates into a few hundred dollars more a year. That's not trivial, particularly for lower-income Americans, but it's not devastating. In fact, it's less than the increase in income that most Americans will get this year as a result of the new payroll-tax cut.
He goes on to suggest that by "watching the dollars pile up" at the pump, Americans suffer greater psychological distress than fiscally harm. So the problem of high gas prices might be more easily explained by behavioral economics than by microeconomics.