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The Affordability of Gas:

Nominal prices of gasoline are at post-WWII highs. Even in real terms, gasoline prices are high -- higher than the peaks of the early 1980s. Yet gasoline is actually more affordable than ever, according to Indur Goklany. In this post on The Commons Blog, Goklany notes that:

Relative to 1978, the price of regular gasoline has increased by 260 percent in nominal terms and 47 percent in real terms. However the price-to-income ratio has declined by 17 percent, i.e., it is more affordable today.

Silicon Valley Jim:
Good observation. This is true of almost every good whose price has increased faster than the rate of inflation. Incomes in nominal terms continue to rise faster than prices do, so real wealth increases. In material ways, Americans classified as poor are, in general, better off than my family, headed by a successful patent attorney, was fifty years ago. In terms of quality of life, of course, they usually aren't.
5.11.2006 1:17pm
amn (mail):
The problem with comparing the cost of gas to total income is that it doesn't take into account the increases of other goods, housing being the first that comes to mind. If the average family is spending 50% more on housing than they were in the 1970s, the available income is much less than total income.
5.11.2006 1:36pm
Pending grad:
One problem with this measure is that the income disparity between rich and poor has increased dramatically since 1978. In my opinion, a more useful comparison would be ratio between price and the income excluding the top quartile.
5.11.2006 1:52pm
Kevin L. Connors (mail) (www):
SVJ: "In terms of quality of life, of course, they usually aren't."

"Happiness" has far more to do with expectation than achievement.
5.11.2006 1:56pm
Rational Actor (mail):
As with most problems, you can find data to suggest that gas is either more "affordable" than ever or less "affordable" than ever. At the end of the day, however, the impact that the sharp rise in gas prices has on its "affordability" to people depends on (i) the relationship between their fixed cost structure (mortgage, car payment, phone, etc.) and their after-tax income; (ii) the percentage of their after-tax, after fixed-expense income consumed by gasoline purchase; and(iii) the ease with which they can reduce their mileage (there are probably others, but these come to mind quickly). For example, if someone spent 50% of their after-tax, after fixed cost income on gas when it was $1.50/ gallon, $3.00 gas is probably quite unaffordable. If, on the other hand, it represented 10% of such metric, the increased price is a mere nuisance that might require increased consumption of ramen noodles.
As I live in a city where mass transit is a better way to get to work than driving, I don't have a clue how this breaks out for most people in this country.
5.11.2006 1:59pm
Jared K.:
Also, "more affordable than ever" is a bit of a misnomer. It may be more affordable than in 1978, but it was certainly more affordable a year or so ago when it was a dollar less. Comparing one shortage to another is a misleading way of comparing eras, especially if there's abundance in between the two.
5.11.2006 2:31pm
Marcus1 (mail) (www):
Pending grad,

>One problem with this measure is that the income disparity between rich and poor has increased dramatically since 1978.<

A serious understatement. As illustrated by David Cay Johnston and others (and not to my knowledge disputed) gains in income over the last 30 or 40 years have been almost exlusively among the extremely rich. So yes, Bill Gates is doing better, but that doesn't mean anybody else is. In fact, they're not.

From one of Johnston's columns (he slices the data in a hundred different ways):
One way to understand the growing gap is to compare earnings increases over time by the vast majority of taxpayers - say, everyone in the lower 90 percent - with those at the top, say, in the uppermost 0.01 percent (now about 14,000 households, each with $5.5 million or more in income last year).

From 1950 to 1970, for example, for every additional dollar earned by the bottom 90 percent, those in the top 0.01 percent earned an additional $162, according to the Times analysis. From 1990 to 2002, for every extra dollar earned by those in the bottom 90 percent, each taxpayer at the top brought in an extra $18,000.
5.11.2006 3:01pm
Silicon Valley Jim:
If the average family is spending 50% more on housing than they were in the 1970s, the available income is much less than total income.

But if the average family is spending 50% more on housing in inflation-adjusted terms than it was in the 1970s, but average family income in inflation-adjusted terms has risen more than 50%, available income after paying for housing has risen. I don't know whether inflation-adjusted income has increased by more than 50% since the 1970s (it might well depend on where in the 1970s we start), but it very well might have. If, for example, average family income in nominal terms had increased at an annual rate that is 1.25% greater than inflation, average family income in inflation-adjusted terms would have increased 54.4% between 1971 and 2006.

One problem with this measure is that the income disparity between rich and poor has increased dramatically since 1978. In my opinion, a more useful comparison would be ratio between price and the income excluding the top quartile.

Do you have a source to support your contention that the income disparity has increased dramatically? Would the source include quartiles of income?
5.11.2006 3:02pm
Silicon Valley Jim:
First apologies to Marcus1 for seeming to ignore what he had posted. His posting appeared while I was typing.

Table 682 of the 2006 Statistical Abstract of the United States shows median family income in constant dollars, i.e., adjusted for inflation as $44,452 in 1980 and $62,281 in 2003. That's a 40.1% increase, and let me emphasize that we're dealing with the median, not the average. 50% of families reporting had a family income greater than or equal to those numbers.
5.11.2006 3:10pm
Rational Actor (mail):
Silicon Valley Jim - there are tons of sources documenting the increase in income disparity in the US since the 1970s. Here is a link. http://falcon.arts.cornell.edu/ams3/rich1.html

And, what was the index used to account for inflation? CPI. If it was, I suggest you do some research on the reliability of CPI as a measure of true inflation.... Start with a google search on "hedonic adjustment".
5.11.2006 3:18pm
AppSocRes (mail):
Assume someone travels 30,000 miles per year (That's a lot of miles!). Also assume this person gets a very lousy 25 miles per gallon and experiences a $1.00 increase in the per gallon price of gasoline (going from $2/gal to $3/gal. The annual increase in this hypothetical gas bill will be (assuming no alteration in driving behavior) $1,200. Assume total after tax income of about $45,000 (roughly the median). Then we're talking a reallocation of household resources amounting to less than 2% of disposable income. Even with my fairly extreme assumptions this is not a big deal.
5.11.2006 3:56pm
Rational Actor (mail):
AppSocRes - I am not sure where you get your data. According to the census, median HOUSEHOLD income (PRETAX) was $44,389 in 2004. In other words, half of all HOUSEHOLDS, i.e. some with multiple adults driving multiple vehicles, earn less than that amount pre-tax. After tax, it will be substantially less. Second, I think that your fuel efficiency estimates are off. 2004 average passenger car efficiency was 22.4mpg; light trucks come in a lot lower. Third, as I noted above, people need shelter, food and certain other basics before paying for their gas. Accounting for those factors, I think, would suggest that while for most people it is an inconvenience, there is some portion of the population for whom it is more problematic.
5.11.2006 4:17pm
Marcus1 (mail) (www):
Silicon Valley Jim,

I'm pretty sure you read the table wrong. $44,452 represents the median income for all families in 1980 in constant dollars. The corresponding number for 2003 is $52,680, not $62,281. The growth, thus, is slightly less than half your number: I believe 18.5%. There tables are available here.

Guess what else, though? The figure for "Male house-holder, no wife present" had a pretty different growth: $37,042 in 1980 to a whopping $38,032 in 2003. By my math, that's a growth of about 2.6% over 23 years.

I don't know the details of Johnston's methodology, but this seems pretty strongly corroborative. Seems to suggest pretty strongly that 1). we have a lot more dual-working households, but 2). the median income has barely budged at all. In fact, it seems to prove the point quite nicely: comparing the rise in gas price to average income growth gives an entirely false picture of how the average family is actually doing.
5.11.2006 4:41pm
Rational Actor (mail):
AppSocRes -
It looks like my data was in 1980 dollars; $65k is the median in nominal $. Irrespective of that, I think that you need to incorporate fixed costs into the analysis of % of "disposable" income.
5.11.2006 5:06pm
Silicon Valley Jim:
Marcus1 -

You are correct that I read the table wrong. The number is $52,680, rather than $62,281, which was the number in the adjoining column. Thank you for the correction.
5.11.2006 5:22pm
just me:
Two major factors should be kept in mind when attempting to compare average or median "family income" over decades":

1. Family/household size/structure have changed dramatically. E.g., far fewer fams with 5-6 kids, more 1s and 2s. Also, tons more seniors, and every Grandma in an apartment is a whole "household." Yes, pills can get expensive, but running that one-person household is not as pricey as running the Brady Bunch.

2. Many goods that we buy now, especially housing, are not comparable to their 1974 equivalents. Look up the data on square footage of houses, for example. It's not just the McMansions. Many median-income, and below-median families are mortgaging themselves to the hilt to buy houses that are 50% or 100% bigger than what people in their relative income range once lived in.

And leisure and vacations! Check out the data on what percent of folks ever flew at all in 1972. I know many blue-collar families who consider the Disney trip to be a constitutional right. And in 1975, the family vacation may have been driving in the wood-paneled station wagon two states over to stay with an aunt and uncle and sleep on the floor.

At the end of the day, the hedonic question may be whether many or most of us measure our happpiness RELATIVE to (1) our expectations or (2) our surroundings, with the surroundings largely shaping many expectations. Having the only Geo Prizm in town, when everyone else has a bicycle, might be pretty cool. Having the only Geo, while everyone else has a Lexus, might not be.

Me? I'm feeling rich today - I have a broadband link to the VC. Woo hoo!
5.11.2006 5:28pm
Charles Iragui:
Could it be that the frustration with gasoline prices is linked more to volatility than actual financial distress? Most items that people consume are not subject to much price volatility: the producers make sure of that to keep their customers happy. Oil companies would probably do the same thing if they could, but they cannot, so they are subjected to political hazing.
5.11.2006 6:08pm