Little worries now, big worries later

There’s no way to sugar coat this one: The Commonwealth has not yet felt the full brunt of high gas prices. So, speaking of gas, I want to gas-on about some economic stuff here, namely, the difference between the short-run and the long-run.

When it comes to gas prices, right now you’re pretty much seeing just the short-run gig: It’s merely the sting your wallet feels when you gas up the island-beater or take your regular CUC beating. As a result of the higher prices, you buy less gas and you cut back on the aircon use at home. Your demand for gas and electricity has not decreased, but your consumption (“quantity demanded” as economists say) of them has decreased.

That’s the short-run. The market hasn’t really changed structurally; its feet are still in the same place, but the price vs. quantity gig is shaking its bootie around. If prices snapped back to their old levels, your consumption would, likewise, snap back to its old level, too.

The long-run isn’t so simple.

The long-run is what we encounter after stuff works its way through markets, which, in economic terminology, is when the supply functions (think businesses), or demand functions (think consumers), actually change. In other words, the market doesn’t just wiggle its bootie, but it actually starts dancing one way or the other down the stage.

In this case, high fuel prices mean, for example, that some businesses will close. Now consider the unhappy outcome if you’re one of the employees who loses their jobs. Among other displacements in your life, your demand for gas and electricity will fall because now you’re making less money. This is called the “income effect.” It’s a fancy term for what we know intuitively: When you ain’t got no money, you ain’t going to buy much stuff.

Following the scenario further, there you are, sitting at the beach, unemployed. You’re sifting through the letters from collection agents, when your cousin calls you on the cell phone and tells you that an asteroid just hit OPEC headquarters, and gas prices have just plunged to their old, happy level, say $2.00 a gallon. Yippee! You’d just love to gas up your F150 pickup truck and take your pals to Marpi, but you sold your truck for rent money last week and bought a scooter instead.

Result: Even at $2 a gallon (thank goodness for that asteroid!), you won’t be buying the same amount of gas that you used to buy at $2 a gallon before the price spike hit.

That’s a profound matter (for economists, at least). Your demand has, indeed, changed, since you’re buying a different quantity of gas (now vs. before) when the price point in the same ($2 in this example). But this change, I’ll note, was not a function of the spike in gas prices. It was an indirect result, yes; but that’s different than a function, a point I have to make because if I don’t my economist pals will torment me, then I’ll have to get violent, and, well, these things get ugly.

Anyway, this (I hope) illustrates the long-run. Things change, and they don’t just snap back to “normal” when (or if) the triggering event (a gas price spike, in this example) returns to its initial level. Sure, one unemployed guy on the beach won’t matter much in the overall economy, so feel free to extrapolate that to a bunch of unemployed guys sitting on a bunch of beaches after a bunch of businesses close down.

OK, we’ve flogged that example for as much as any of us can stand, so there it is.

Why do I lay this rap on you? Because the pain you feel at the pump is mere trivia compared to what might be brewing in the bigger, long-run scheme of things. And, yeah, we hear a lot about fuel woes and airlines these days, with layoffs, closures, bankruptcies, or whatever, and the ominous signs for tourism and travel are obvious, but I fear that’s still just the tip of the iceberg.

Modern economies are so fiendishly intertwined with financial complexity, toxic debt, massive distortions, and outright fraud that that I, for one, think that risk has not been fully accounted for. High fuel prices might trigger a lot of profound economic changes, and maybe we’ll all be sitting on the beach, unemployed, in the foreseeable future.

As painful as the short-run is, the long-run is getting even more worrisome. I don’t know if I should buy a scooter now, or a donkey later.