Morton J. Marcus is an economist formerly with the Kelley School of Business, Indiana University. His column appears in Indiana newspapers.
Just days before the big night, Elvin Elfenhousen, my confidential informant at the North Pole, told me, “The Big Guy’s in a daze. Santa thinks we may have overdone it on presents this year.”
“Tell me,” I said, “I won’t tell anyone.”
“Gas prices have been falling for weeks,” Elvin said. “It doesn’t matter to us; we don’t use gas to power the sleigh. However, gas prices were high when we started making this year’s gifts; Santa was worried consumers wouldn’t be spending much on presents.”
“And….” I encouraged him.
Elvin whispered, “Santa had us make our gifts a little bigger, a little brighter, adding more bling and sparkle.”
“Ah,” I said, “your own version of the Fed’s Quantitative Easing to make everyone feel better.”
“Right,” he replied. “But now the Big Guy’s afraid, with lower gas prices, consumers will buy so much more stuff for the holidays that our efforts will go unnoticed. And you know how he hates to be ignored or worse, unappreciated.”
I responded, “All this talk of greater consumer spending as a result of lower gas prices is mainly TV commentator gas. In the short term, consumers aren’t going to spend more; they’re just going to spread their spending around differently. What they save on gas, they’ll spend on other things, but it won’t make much of a difference.”
“You mean?” Elvin gasped. “This bonanza won’t increase overall consumer spending and cause inflation?”
“Most unlikely,” I answered. “Consumers don’t have more to spend; they can just spend more on things other than gas for their cars. It won’t raise prices unless there are capacity constraints.”
“How’s that?” Elvin asked.
“Where are consumers going to spend those extra dollars?” I said. “In my family, we’ll most likely spend them on bigger pizzas with more ingredients. If lots of dollars are freed up by the lower gas prices, we may actually buy more pizzas, soda and beer.”
“You know how to live,” Elvin remarked.
I ignored him. “How many more pizza workers will be hired? How much more in supplies will be needed? The pizzeria isn’t going to install a new oven or even new tables. This extra pizza buying is going to be spread over the whole country and will have little effect on individual stores.
“Yes,” I continued, “there are extra dollars for pizzeria owners, suppliers and employees. But those dollars come from reduced sales for gas stations and their suppliers. The net effect on the economy: probably zilch. It’s only in the long term, if gas prices stay down and bring down the prices of other goods, that we’d see more output and more investment.”
“It’s all going to turn out OK,” Elvin sighed. “Under each tree there’ll be Santa’s nicer gifts and only a few more presents folks wouldn’t have bought with higher gas prices. Then it’s still going to be a Happy Holiday for the Big Guy.”