Stimulation Follies

High gas prices these days are a continuing shock to drivers. But what’s even more shocking, in my view, is the fact that some lawmakers propose to deal with the skyrocketing pump prices by sending more “stimulus” checks to residents, who can then use the money to pay for the expensive gas.

In Congress, Democratic lawmakers have proposed a bill that would send as much as $300 per month to families as long as the average price for gas in the country exceeds $4 a gallon. And in California, which has the highest average gas prices in the nation, Governor Gavin Newsom proposes to send $400 in direct payments per vehicle, capped at two vehicles, to all Californians.

We’ve apparently gotten to the point where the reflexive political response to every problem is to send checks to people. You can argue about whether such “stimulus” checks make sense in the face of a recession, or when people lose their jobs due to government-ordered pandemic shutdowns, but does any rational person actually think they are a sensible way of dealing with high gas prices?

Elementary economics teaches that commodity prices respond to the law of supply and demand and are a classic example of Adam Smith’s “invisible hand” that guides the setting of prices. The best way to deal with high gas prices is to increase the supply (something that will necessarily happen, in the absence of restraints on production, as producers seek to cash in on high prices) while letting the high prices have their inevitable dampening effect on demand. Consumers can modify their behavior to minimize their need for gas–by car pooling, by using public transportation, by consolidating their trips to the store, and by cancelling that driving vacation this summer, among others–and if they do so the “demand” side of the equation will fall. With increased supply and reduced demand, the “invisible hand” will move prices lower.

Stimulus checks to deal with high gas prices therefore are a colossally bad idea, because they artificially interfere with the “demand” part of the pricing equation. Consumers who get the checks will be less likely to engage in those possible methods of minimizing their use of gas, demand for gas will remain high as a result, and the demand pressure will help to keep gas prices at an elevated level. Sending stimulus checks as a way of dealing with gas prices is akin to smashing the fingers of the “invisible hand.”

Outside of California, it isn’t clear that the gas price-stimulus check proposal will get much traction; there are signs that Congress may recognize that such spending makes no sense under the circumstances. It remains to be seen whether Governor Newsom can convince the California legislature to adopt his approach–but if he does, Californians can expect to be dealing with high gas prices a lot longer than the rest of us.

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