How High Gas Prices Could Help the Economy

$4 gasoline and 9 percent unemployment may lead to increased fuel efficiency of commercial vehicles and help businesses grow


The two biggest numbers in American politics are gas prices, which remain over $3.79 for a gallon of regular in 19 states, and unemployment, which stands over 9 percent nationwide. Those numbers are obviously related. If we changed the politics of how we respond, we could actually begin to use one to solve the other.  Last month saw a mutually-assured-destruction pact as Senate Dems and Republicans floating equally beside-the-point oil bills. Both flopped. A bipartisan approach to solving some of our energy costs--though we can't do much about gas prices in the short-term--could boost the economy and our long-term competitiveness.

Gas prices play both a real and psychological role in causing employment.  A recent poll of small business owners found that a quarter said that high fuel costs had caused them to lay off workers or reduce their hours, and 47 percent said they'd avoided hiring because of gas prices. The cost of fuel may literally displace some workers, but it has an even bigger psychological effect, creating an air of uncertainty that discourages job creation.

To get a better sense of the whole problem, I interviewed last weekend a small business owner named Brent who runs an air conditioning repair business in Albuquerque, New Mexico. Since 2006, he's laid off 12 employees, and is now down to just himself and one employee. Together, they're spending $1200 a month on gasoline to get to jobs in a relatively new cargo van, and a truck that average about 10 mpg. Behind payroll and insurances, gas has become his third largest expense.

In addition to spending more getting to jobs, gas prices send ripple effects through his other costs---increasing the prices of the products Brent installs, while triggering fuel surcharges on equipment he rents. Meanwhile, Brent has to underbid contracts to stay in business. Rising costs and falling bids have reduced the profit margin on his bids from 10-15 percent during the boom years to 3- 5 percent today. He's changed the way he operates, too: A few years ago, he always replaced broken equipment with new. Now he fixes it or makes do without. All of these decisions have effects beyond Brent's business alone.

As Brent explains, gas prices are major contributors to uncertainty--and that uncertainty keeps him from hiring more workers. "If gas rises to $5 a gallon, I just have to bow down to the pump"  Brent says. "They've got us by the gonads. This is how we get around--and that's the bottom line."

One strategy to increase employment, then, would be to decrease spending on gasoline and reduce the uncertainty of gas costs for small business owners. What Brent would really like are service vehicles offering better mileage. Both of his current GMC vehicles have 6 cylinder engines that designed for speed that he doesn't need. Brent would prefer something capable of lots of stops and starts, powerful enough to pull a trailer, but fairly pokey on the highway. " I'd like something with lower torque, not necessarily where we're going zip-a-dee-doo-dah."

As an energy strategy, encouraging Detroit to triple the fuel efficiency of business trucks and vans seems to make a lot of sense. While automakers have focused on increasing fuel efficiency of household cars--from the Prius to the Volt to the Tesla--service vehicles actually drive nearly 3 times as many miles per year as household vehicles. As a consequence, increasing the fuel economy of a cargo van from 10 mpg to 25 mpg would reduce yearly gasoline consumption from 2500 gallons to 1000 gallons per vehicle, saving Brent, for example, $5940 per year at today's gas price in New Mexico. In 2008, the last year for which numbers are available, business and government fleets purchased 780,000 light and medium trucks--so this has the potential to scale up to considerable gas savings quickly. What's more, these vehicles generally stay in service for five years or less, so the turnover is far faster than household vehicles that stay on the road for 15 years or more.

As an employment strategy, making service vehicles efficiency leaders will definitely provide business owners with savings when gas prices are high, and more important, prevent them from feeling insecure: like they have to  "bow down to the pump." This, coupled with other improvements in the economy,  could encourage business owners like Brent to bring in another employee.

How to do this? The US approach to vehicle efficiency is limited to either regulatory showdowns (like the upcoming struggle over whether to increase CAFE by 3 percent or 6 percent) or X-Prize type contests. When lawmakers give tax incentives for green cars, they end up giving tax breaks to the people who make over $100,000 a year and can afford a Prius or a Volt--or an increased gas bill.  What we need is an approach that allows a competitive market to develop. And at the moment, the market is focused on the consumer vehicles, where the juicy tax breaks are.

I think we need a fundamental change. Rather than tax incentives, the government should offer credit--low- or zero-interest auto loans--to purchasers of the most efficient cargo vehicles. The Small Business Administration, which already has years of experience providing loan guarantees to banks, should be the initiator. For small business owners, getting very-low-cost loans for vehicles saves them a lot of money, because they don't have to get commercial loans with high APR's. For the taxpayer, this scheme has benefits because, unlike Cash For Clunkers, the money is returned to the treasury in the form of loan payments. In effect, the government is helping businesses pre-pay for energy efficiency and pay it off over time, rather than paying unpredictable gasoline prices over time. This has multiple positive effects for the economy.

Increasing the fuel efficiency of fleet vehicles refocuses dollars from gasoline (which provides relatively few jobs) towards manufacturing more efficient engines, which provides jobs with multiplier effects. A 2005 study published in Energy Policy (pdf) found that aggressively increasing fuel economy for cars would result in a net gain in jobs, though it would also involve lots of upheaval. Interestingly, the five states with the most to gain from such a move are also states that currently have relatively high levels of unemployment: Michigan, Ohio, California, Indiana, and Illinois. Under the (much larger and longer term) scenario proposed in the study, those five states alone would gain more than 150,000 jobs by 2020.

Finally, starting a program to aggressively increase the fuel economy of fleet vehicles sets a precedent for pushing more technology into the vehicles that get the heaviest use. Using government loan guarantees to stimulate a market for electric, natural gas, hybrid, or other innovative vehicles will benefit the country as a whole, and small business in particular, but the money will be repaid to taxpayers. It will provide an incentive to Detroit to move faster, without the partisan deal making, or tax credits that distort markets.  Investing in engines rather than gasoline has other benefits as well. For one thing, burning a gallon of gasoline imposes many social costs: it creates pollution which creates health care costs, produces greenhouse gases, refining and shipping carries risks of spills in water and air, and dependency upon some foreign suppliers of oil has military and foreign policy implications.

Unfortunately, "bowing down to the pump," has become a habit for policy makers, but we absolutely have to find a way to lower the impact of gas prices on our economy, and particularly employment. In that survey of small business owners, 38 percent said that gas prices could threaten their ability to be in business. There may be some hyperbole in those numbers, but can we afford to take chances with the oil market?

Image Credit: Wikimedia Commons