Monday, June 09, 2008

The $4 barrier and rural America

As reported in the New York Times, the breaking of the $4/gallon barrier for gasoline is taking an extraordinary toll on rural America:
Man driving tractor
, Miss. — Gasoline prices reached a national average of $4 a gallon for the first time over the weekend, adding more strain to motorists across the country.

But the pain is not being felt uniformly. Across broad swaths of the South, Southwest and the upper Great Plains, the combination of low incomes, high gas prices and heavy dependence on pickup trucks and vans is putting an even tighter squeeze on family budgets.

Here in the Mississippi Delta, some farm workers are borrowing money from their bosses so they can fill their tanks and get to work. Some are switching jobs for shorter commutes.

People are giving up meat so they can buy fuel. Gasoline theft is rising. And drivers are running out of gas more often, leaving their cars by the side of the road until they can scrape together gas money.

Pumping gasThe disparity between rural America and the rest of the country is a matter of simple home economics. Nationwide, Americans are now spending about 4 percent of their take-home income on gasoline. By contrast, in some counties in the Mississippi Delta, that figure has surpassed 13 percent.

As a result, gasoline expenses are rivaling what families spend on food and housing.

“This crisis really impacts those who are at the economic margins of society, mostly in the rural areas and particularly parts of the Southeast,” said Fred Rozell, retail pricing director at the Oil Price Information Service, a fuel analysis firm. “These are people who have to decide between food and transportation.”
Some longstanding staples of agricultural economics warrant reexamination as rising fuel prices squeeze rural consumers:
  1. The concept of the price squeeze is known throughout many sectors of industrialized economies. The agricultural variant is often called "the agricultural treadmill" — farmers, as it were, sell at wholesale but buy at retail. The diversification of rural economies hasn't so much softened the blow as spread the pain to all residents. Everyone is feeling the squeeze of lower returns on rural labor, coupled with higher retail prices on consumer goods across the board.

  2. Gas pumpsEngel's law holds that as a consumer's income rises, the proportion of that income spent on food declines. In other words, demand for food is relatively inelastic, and relative to other goods, food is an inferior good.

    Substitute fuel for food in Engel's law, and the relationship still holds. Raising the price of food or fuel is tantamount to exacting a very regressive tax, whose impact falls most heavily on the poor.

  3. Old-time agricultural economics stressed parity, the goal of maintaining farmers' purchasing power relative to a historic baseline. If one unit of agricultural output used to purchase a certain level of consumer goods, then parity prescribes price and/or income supports designed to maintain rural purchasing power at that level as consumer prices rise. A broader notion of parity in diversified rural economies would extend the concept to nonagricultural workers in rural communities.

  4. Speaking of conventional farm policy, federal commodity programs since the New Deal have striven to prop up commodity prices in order to raise farmers' incomes. Commodity prices have skyrocketed, and the result, for large swaths of the rural population, is misery. Rural economic welfare has long rested on pillars besides farm incomes.

  5. Transaction cost analysis, the heart of economic analysis of law, still matters. The naked, awful truth is that basic geography is driving economic distress in rural communities: greater distances demand more fuel, and fuel is costing more in relative and absolute terms.