Equity and Energy

Rising Energy Prices and the Living Standards of Lower Income Americans

Mark N. Cooper

• Publisher: Routledge
• Year: 2019
• Print ISBN: 9780367170318
• eBook ISBN: 9780429717130
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

Arguing that the energy price policies of the 1970s represented a major equity/efficiency trade-off and led to a dramatic decline in the living standard of lower income Americans, this book presents a comprehensive data-based assessment of the plight of lower income households between 1973 and 1983.

1
Introduction: A Decade of Despair

In the pell mell rush to analyze every aspect of the energy "issue" in the turbulent aftermath of the 1973 Arab oil embargo, hundreds of major studies have been written about the general implications of rising energy prices — for the economy, national security, the environment, and alternative energy options.1/ In retrospect, what is remarkable is that none of these treatises devoted more than superficial attention to that segment of society which has borne the greatest brunt of the 400 percent increase in prices: low and lower middle income households. This study seeks to reverse that imbalance.

Rather than being another analysis of the general economic impact of rising prices, this report is devoted to a comprehensive analysis of the numerous direct and indirect ways that rising energy prices have eroded the living standard of lower income Americans. For them, it has truly been a decade of despair.

To be sure, such a study is long overdue, but because of a number of recent developments and the unresolved nature of the price/impact problem, the need for a study such as this is particularly pressing. First, the economic issue has been largely resolved. After a decade of honest debate, conflicting analyses, and some self-serving obfuscation, it has become overwhelmingly clear that rising energy prices have wreaked havoc on our economy. Both the popular press and more academic policy analyses have recently recognized the awesome impacts that are caused by rising energy prices.

As Business Week magazine declared in its March 22, 1982 issue.

Reeling from the twelvefold price increase from 1973 to 1981, the industrial nations--nurtured on more than a century of cheap energy--not only went plummeting into two recessions but also suffered further as inflation rates soared to record levels.2/

Several months later, in July 1982, the Atlantic Institute joined with a number of scholars at Harvard and MIT to reach a similar conclusion:

With oil so important in the economy, the two oil shocks inevitably had to have a dramatic impact upon the fortunes of an industrial world that had become dependent upon this fuel. And these shocks did have pervasive effects, both in that which can be measured--inflation, recession, and unemployment--and that which cannot so easily be measured--eroding confidence and growing discontent.

These are the consequences we struggle with today. The oil shocks appear to have ended the era of high growth and full employment — what has been called the era of "flamboyant growthmanship." In its place, they have initiated a new and uncertain and uncomfortable era of "stagflation," a dual visitation of high inflation and low growth.

Indeed, the two surges in oil prices clearly have been a driving force behind today's stagflation. Curiously, though, some analysts have gone into very considerable intellectual acrobatics to deny this obvious reality, with the result that a part of recent economic debate has been strangely irrelevant.3/

Although there are some analysts who continue to resist this conclusion, it is sufficiently clear and well-documented to be taken as a basic fact of the economic life of the 1970s. We can safely begin with this conclusion as a premise--rising energy prices caused tremendous economic losses during the 1970s. Given that, we can move on to examine what those losses meant to specific subsets of the population. Our analysis starts at the most logical place for social impact analysis--an assessment of the impact on the most vulnerable group in society, lower income households.

There is a second reason why the need for this study is particularly pressing at this moment--record energy price increases remain a critical issue. Although Americans would like to believe that energy price shocks are behind us, that is decidedly not the case. Some, such as the above-mentioned policy analysts at the Atlantic Institute and Harvard, believe that future price shocks will come from abroad in a similar form to those in the 1970s. We are just as concerned about price shocks that are domestic in origin because most of the energy price increases suffered by Americans in the 1970s did originate domestically.4/ In 1982-83, strong efforts were made to have Congress raise energy prices significantly by accelerating the decontrol of natural gas5/and/or imposing a fee on imported crude oil and/or by levying taxes on energy consumption in general.6/These measures would have involved transfers of economic resources on a scale that rivaled those of the 1970s,

Whether domestic or foreign in origin, the threat of energy price shocks is not a thing of the past. Social impact analysis is urgently needed so that it may be used as a foundation for sound policy decisions, since these decisions can affect the likelihood or size of future price increases and can influence which sectors of the population will bear the burden.

There is a third reason why the need for this study is urgently pressing at this moment. The tremendous impact of the second (and larger) of the oil price shocks (1979-81) is only now becoming apparent and the data necessary to conduct a proper social impact analysis is finally becoming available.

As our analysis shows, lower income Americans have suffered through a decade of devastation in which energy prices eroded their living standard far more than the living standard of other segments of the population. In fact, the potentially disastrous impacts of a third or fourth oil price shock that analysts (such as Daniel Yergin in the Harvard/Atlantic Institute study) suggest could befall large numbers of middle class Americans have already afflicted lower income Americans in many very real and painful ways as a result of the first two energy price shocks (1973-75 and 1979-81).7/ This point cannot be stressed enough. What many careful and compassionate analysts fear may happen to the middle classes in the next oil price shock, because energy now claims a larger share of their income and plays a larger role in their consumption, has already happened to lower income Americans, because energy was already claiming a large part of their income and playing a large part in their consumption just prior to the first two energy price shocks. This is the harsh reality that is missing from the earlier studies. This is the reality of the decade of despair that we describe in this new study.

An Overview of the Results

We document that over the period from 1972 to 1982, energy prices took a huge bite out of the household income of lower income families--far larger than that of the middle or upper classes. Further, we show that the loss of household purchasing power is only one of many ravages of rising energy prices. In this study we add two new dimensions to the analysis of the role that rising energy prices have played in eroding the living standard of lower income Americans. We suggest that rising energy prices have undermined the viability of the lower income rental housing stock and have robbed local governments of the resources necessary to provide lower income Americans with the public services on which they rely. When the various elements of the problem are integrated, they serve to portray a grim picture of extreme hardship.

Moreover, as we describe in Chapter 2, it should be stressed that we are not talking here about the plight of the poorest of the poor. Our analysis focuses on the bottom third of the income distribution scale--roughly 23 million households with incomes below $10,000 in 1979. It is a very large and vulnerable population made up primarily of the poor and the near poor and the elderly and near elderly who are retired or disabled.

Indeed, as discussed in general terms in Chapters 2 and 3, rising energy prices pose basic moral and economic problems for American society — the moral dilemma of how to ensure access to a basic necessity; the economic dilemma of how to sustain growth when the price of a vital commodity utterly disrupts economic activity.

After posing these issues in the early chapters, the remainder of the work demonstrates that the responses to these problems in the 1970s were disastrous for the lower income population.

As described in Chapters 4 through 6, the central problem that lower income households face is that they consume much less energy than non-lower income households, yet they are forced to devote a disproportionately larger share of their income to energy expenditures. Low income households (the poorest 13 percent of the population) consume about 25 percent less energy at home and lower middle income households (the next poorest 20 percent) consume about 15 percent less energy at home than non-lower income households (the richest 66 percent). Low income households consume about 75 percent less gasoline and lower middle income households consume about 50 percent less than non-lower income households.

Yet, over the period of 1972 to 1980, low income families saw their bills for direct household energy consumption (i.e., energy used in the home plus gasoline or diesel fuel used for private, personal transportation) increase from 17.3 percent of their income to 36.6 percent. Lower middle income families saw their direct energy bills rise from 9.4 percent of their income to 19.2 percent. By contrast, the direct energy bills of non-lower income households increased from only 5.2 percent to 8.0 percent of their income.

This dismal record of the erosion of income of the lower income households can be expressed in a number of other ways as described in Chapter 6. The aggregate loss of purchasing power by lower income households due to rising prices for household energy was approximately $75 billion between 1972 and 1981. Direct energy assistance offset this loss by at most about $7 billion. General income maintenance programs delivered at most another $5 billion through increases in benefits that were caused by energy-price-induced inflation. Thus, income was anything but maintained and, if one listens to current rhetoric, that was the heyday of income maintenance.

This is not to imply that only the low and lower middle income groups suffered. The decade was difficult for all groups. However, even after income transfers are taken into account, it is clear that lower income groups bore a much heavier burden. The real purchasing power of low and lower middle income households, after energy expenditures and inflation are removed from income, declined by almost 19 percent between 1972 and 1979. This entire loss of real purchasing power can be attributed to rising energy prices. For the non-lower income population, the loss of purchasing power, after inflation and energy expenses are taken into account, was only 10 percent. Thus, the low and the lower middle income households lost twice as much in real purchasing power to spend on non-energy goods and services as the middle and upper income classes.

Policy analysts and policymakers have been fighting for almost a decade about these numbers. Our objective in this detailed analysis of these impacts is to lay to rest, once and for all, any doubts about the awesome magnitude of the impact of rising energy prices on the household budgets of lower income Americans. We hope that this study will dispel any lingering misimpressions about whether the income transfer programs, in their present form, can sufficiently mitigate the impact of rising energy prices on lower income households.

In this study we also explore two new fronts in the debate over energy and the lower income population. InParts 3 and 4 we argue that rising energy prices have played a major part in disproportionately eroding the quality of life of the lower income population by causing a systematic deterioration of basic services on which that population depends — specifically, rental housing and the provision of local public services. Unlike the estimate of lost household purchasing power, we cannot produce a specific impact estimate in this area. We make these assertions in a different framework from the household budget arguments. We offer the first specification of a hypothesis in the boldest terms that we can. We realize that different approaches and more detailed analyses might modify the argument. We are convinced, however, that they would not alter the basic thrust of our conclusions.

The housing argument is laid out in Chapter 7. Energy prices were a major factor contributing to the collapse of the economic viability of the lower income rental housing market. As operating costs were driven up by energy prices, increased rents outstripped the ability of lower income households to pay. The limited ability of a community to meet the pressures of rising shelter costs caused by rapidly increasing energy prices poses an overall threat to the housing quality of the entire community.

This is our version of the "rent gap" hypothesis with the spotlight on energy. As rising energy prices make housing unaffordable for the overall population of the community, landlords find it generally more difficult to replace lost income. Uncollectables mount, but evictions lead to vacancies, not replacement tenants, because those who can afford the rent are hard to find. As individual units cease to generate income, either because they are vacant or because rents go uncollected, cutbacks in services may occur.

This threatening economic condition is compounded by the fact that conservation investments have proven difficult to implement in rental housing. Therefore, rising energy prices are likely to place greater pressure on the tenant community because conservation investments are less likely.

We stress the fact that our explanation for the mounting financial pressure on the lower income rental market and the special problem that it creates is not driven by good or bad intentions of landlords or tenants. Rather, it assumes only the presence of rational actors in a situation in which institutional arrangements and economic constraints combine to create and compound a social problem. Energy prices are one of the major economic constraints.

Whether one believes that the other constraints on the ability to collect rent are artificially imposed by rent controls and/or the structure of income maintenance programs and/or the simple fact that in a sluggish economy the lower income population cannot maintain its income, there is no doubt that massive pressures have been placed on the housing market by rising energy costs. Energy prices were pushing costs up from below while the recessions caused by energy price shocks and other factors were setting limits from above on the ability to pay. The rental housing market was squeezed in the middle.

We have examined data on the rental housing market for both the public and private sectors, as discussed inChapter 8. In the private sector, in 1969, rents for households in the bottom third of the income distribution were about $80 per month. Energy costs were approximately 14 percent of net operating expenses for rental units at that time. By 1979, the average rent for the poorest one-third of the population had risen to $200 per month and energy costs had jumped to 30 percent of net operating expenses. In fact, energy costs accounted for about 40 percent of the total increase in operating costs. When one component of costs increases that explosively, other aspects of the budget will suffer as well. This is the same logic applied above to households.

The rapid rise in operating costs resulted in two somewhat different forms of pressure on the rental market.

First, as operating costs rose faster than rent increases, landlords were squeezed. Expenditures by landlords to maintain and improve properties were cut back and the housing stock deteriorated. Ultimately, abandonments increased. Survey evidence shows a dramatic deterioration in the condition of lower income rental housing and a rapid jump in reports of abandoned buildings in lower income neighborhoods between 197 3 and 1979--precisely the period of the energy price shocks.

Second, although rents did not rise as fast as operating costs, they did rise faster than the income of lower income households. The result was a squeeze on the economic resources of tenants. The most direct measure of this pressure can be seen in the rapid deterioration of housing stock over this period and from the fact that in 1980 almost two-thirds of all lower income households, compared to about one-half in 1973, were forced to devote 35 percent or more of their income to shelter costs (rent plus utilities).

In the public sector, the impact of rising energy prices was determined by a number of factors embedded in the financial structure of public housing. Utility costs were funnelled directly into subsidies but non-utility costs were not. As the aggregate level of subsidies rose, pressure mounted to hold costs down and non-utility expend...

Table of contents

• Cover
• Half Title
• Series Page
• About the Book and Authors
• Title
• Copyright
• Contents
• List of Tables
• List of Figures
• Acknowledgments
• 1 INTRODUCTION: A DECADE OF DESPAIR
• PART 1: BASIC ISSUES
• PART 2: HOUSEHOLD IMPACTS
• PART 3: RISING ENERGY PRICES AND THE LOWER INCOME RENTAL HOUSING MARKET
• PART 4: RISING ENERGY PRICES AND THE DELIVERY OF PUBLIC SERVICES
• METHODOLOGICAL APPENDIX
• FOOTNOTES
• BIBLIOGRAPHY
• INDEX