Freedomnomics

Article published Wednesday, February 23, 2011, at Fox News.

The Stimulus, Not Oil Prices, Is Hammering Consumers

By John R. Lott, Jr.

U.S. crude oil prices soared by 8.5 percent Tuesday, stunning financial markets. The financial media fretted that the oil price shock from the Middle East turmoil would slow or stop the fragile economic recovery. Crude oil prices soared even though gas prices at the pump are already the highest in any February since 1990. The reaction was swift, with the Dow Jones Industrial Average falling more than 178 points (1.4 percent) and NASDAQ and S&P 500 both also falling by more than 2 percent. This morning, with Libya teetering on the brink of civil war, gas prices continued rising.

While the media clearly and instantly understands the detrimental impact that higher oil prices have on the economy, the impact is really no different than President Obama's stimulus or his deluge of new government regulations, from the EPA to health care to financial markets. The logic for how higher oil prices will harm economic growth is pretty simple. U.S. companies that use a lot of oil are hard hit. They will raise prices, which partly passes on rising costs to consumers. But this will result in the firms losing business and laying off workers. Consumer spending shifts to other less energy-intensive goods and services, and these sectors will expand. The greater the increase in oil prices, the greater the shift in spending and job movements between these companies. But it takes time for people to move between jobs. That means more unemployment for some time.

Now take the $814 billion stimulus, plus all the additional jobs bills that have been passed. The stimulus moved money from where you and I would have spent the money to where the government wants it spent. By moving money from places where it is currently being spent to places where the government wants it spent, you also move the jobs. Again, just like the impact of the oil shock, the jobs that the government “creates” may be in different industries and they may be in different places. You increase subsidies even more for alternative energy, and of course those companies will expand, but the subsidies also mean that less will be spent on less politically correct energy sources.

The government might fund jobs in California, but the money has to come from somewhere, reducing the number of jobs in coal mines in Pennsylvania, West Virginia and Ohio, or oil fields in Oklahoma and Texas. Where will those people who lose their jobs go? They aren’t going to instantly pack up their cars and move to California. They may not even have the right sets of skills for the new government-created jobs. Wherever it is these displace workers end up, it will take some time, and during that time those workers will be unemployed.

Most likely the jobs in the alternative energy industry will hire many employees away from industries that have nothing to do with coal or oil. The movement of those workers, as well as the impacts that the changes have on related industries, will temporarily cause some increase in unemployment. Even if you know that you want to get a job in the alternative energy industry, which job do you accept? It takes time to find the job that fits your interests.

The impact of the massive number of new regulations is no different. Take the new financial regulatory law. Goldman Sachs was a big supporter of last year’s legislation. The legislation prevents many of the giant investment company's former competitors in the banking industry from continuing to compete against them. The result is that some jobs will move from banks to companies such as Goldman Sachs. That might be a relatively easy move to make, but again many people won’t move instantly from their current job to their new one and some people who had been working for banks won't find a new job like the old one that they had. The impact of the regulatory changes might be longer-term simply because, even though the law passed last year, it will be years before all the regulatory bureaus charged with figuring out the new regulations will decide what they will be.

Eventually the chaos created by the oil shock, as well as the stimulus and all the regulations will die down. But the process is the same. Because of its size, Obama's stimulus and regulatory changes are doing far more damage than any change that we have thus far had with oil prices.

John R. Lott Jr. is a FOXNews.com contributor. He is an economist and the author of "More Guns, Less Crime (University of Chicago Press, 2010), the third edition of which was published in May.".

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