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December 4, 2014

The complicated economic benefit of lower gas prices

December 4, 2014

You’ve probably noticed and appreciated the recent fall in gas prices—about 40 percent down from their summer peak. Many headlines have touted the drop’s short-term benefit to the economy, stimulating spending by leaving more money in consumers’ wallets.

And the economic benefit may be even greater than current headlines suggest for very low-income workers. The simple version of the story is that low-income drivers spend a greater share of their income on gasoline, other things equal, so they will benefit disproportionately from any decline in prices. Indeed, for the lowest-income workers, the biggest transportation expenditure lately has been gasoline.

But the story is inevitably more complicated than that. Last year my colleagues and I published a study investigating whether very low-income workers who had access to cars ended up living in better neighborhoods with better jobs. The short answer: definitely maybe. We used existing random control trial data and found strong evidence linking low-income people with cars to better outcomes.

As the study’s director, Rolf Pendall, wrote, “The importance of automobiles arises not due to the inherent superiority of driving, but because public transit systems in most metropolitan areas are slow, inconvenient, and lack sufficient metropolitan-wide coverage to rival the automobile.”

Could falling gas prices catalyze that beneficial relationship between driving and outcomes? Again, it’s complicated. For families that already have access to a car, lower gas prices may encourage a wider job search, incentivize taking more shifts, or free up resources that enable better outcomes in other ways.

But if the real effect at play is whether low-income families have access to a car at all, then falling gas prices might not be much help. It’s expensive to buy and maintain a car and the marginal savings at the pump would not help much with the initial acquisition.

It is because of all of these qualifications and caveats that my coauthors and I are really careful about how we discuss our findings. To quote Pendall again:

More research is needed to determine if the relationship is causal or associative, that is, whether the car is the catalyst or if there is something deeper at work, of which the car is simply one manifestation. Cars are expensive to purchase and to maintain, even more so for families with severely limited resources. A low-income household that is somehow able, inclined, or afforded the opportunity to buy a car might also do many other things to get ahead. Motivation, opportunity, or both could be key.

That’s why I hope our local, state, and federal policymakers will use this economic respite at the pump to make innovative new policy, rather than simply tout consumers’ fatter wallets.

For example, as the Tax Policy Center’s Howard Gleckman wrote recently, lower gas prices make now the perfect time to raise the gas tax for the first time in nearly 20 years. Higher gas taxes would paradoxically benefit low-income drivers too—roads and bridges in better repair would make driving faster and more efficient, and reduce wear and tear on cars. We might also consider alternatives to the gas tax, like a vehicle miles driven tax, which might be easier on low-income drivers (but might not, either) and better for the environment.

Perhaps more important, however, let’s combine support for low-income drivers with strong investment in new public transit. Many low-income workers still rely on transit—and transit is simply ineffective in too many places. The benefits of better transit to low-income workers (and most everyone else) are extensive.

What we do know is that today’s gas taxes and infrastructure investment are not sufficient to keep up with our needs, and lower gas prices will encourage yet more driving. It's time to get creative.

Follow Zach McDade on Twitter: @zmcdade

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