Maybe the answer to $5 gas is higher pay

When I started in government in the late 1970s, I worked on energy and inflation. Both were bigger problems then than now. I learned then that presidents get blamed for gas prices and other inflation but can’t do much about them. So, here’s a suggestion: The Biden administration should spend less time pretending it can lower gas and other prices and more on helping people afford them — through higher pay.  

In the 1970s, every president had an anti-inflation program: President Nixon had price controls. President Ford had WIN (“Whip Inflation Now”) buttons. President Carter had airline, trucking and rail deregulation, which eventually lowered prices, and voluntary wage/price guidelines, which probably didn’t. Several presidents released Strategic Petroleum Reserve (SPRO) oil and asked the Saudis to pump more.  

The Biden administration also has a plan.  It started with supply-side measures: unclogging ports, urging veterans to drive trucks and encouraging competition in drug pricing and meatpacking. Most are sensible but won’t do much anytime soon.  

Then it went after gas prices: sales from the SPRO, allowing more drilling, complaining about oil company profits, going back to the Saudis hat in hand and now proposing a temporary gas tax cut. None of this will bring back $3-a-gallon gasoline.   

Here’s a different approach: encouraging a wage catch up. Rather than continuing to demonstrate that they, too, can’t stop rising prices, perhaps the president and other Democratic politicians could focus on something they can affect: wages.   

To be sure, wages have been rising, but they’re far from catching up: Average wages in May were 5.2 percent higher than a year before, but average prices were up 8.6 percent. If average wages had kept up for the past year, they would have been $1/hour higher. (The same calculation done for the past two years is almost $2/hour.) Furthermore, there’s evidence that, because of what they actually buy, low-wage earners are hit hardest by inflation. To avoid the greatest hardship from inflation, therefore, wages – at least for lower-wage workers – should rise.  

This is definitely not conventional economic thinking. Most economists, more worried about inflation than inequality, are hoping that wage increases will lessen. They know wage increases complicate the Federal Reserve’s already complicated tasks.   

Nonetheless, with a policy of encouraging at least a one-time catch up of wages, the administration could make some progress on goals it cares about:  

Raising the minimum wage: President Biden has repeatedly spoken in favor of raising wages for working Americans. The administration has taken steps both to raise federal wages and to encourage others to raise theirs. But there’s ample room to do more. In 2021, for example, federal contractors were required to pay a minimum wage of $15/hour, but that same year Amazon, which established a $15 minimum three years earlier, said its actual average 2022 starting wage would be $18, plus roughly $3.50 in benefits. If a $15 minimum wage made sense two years ago, it doesn’t now. How about a new minimum of $16 or $17? 

Helping workers organize raises wages: As Amazon and Starbucks workers remind us, one of the important ways to raise wages is to organize a union. At Apple, merely threatening to do so in a couple of stores got Apple workers everywhere a $2/hour increase. Here, too, the administration has taken some steps to support both easier organizing and more collective bargaining, but much more is possible.  The National Labor Relations Board elections process remains cumbersome, slow and subject to myriad legal distractions and delays; speeding it up would make returning to work more attractive, reduce labor market bottlenecks and scare businesses pre-emptively into raising wages.   

Another benefit of this approach is that it reinforces market forces instead of fighting them. Wages are already rising because one of COVID-19’s many aftermaths is that workers are less willing to work at their old jobs and their old pay. Rather than making claims about inflation-fighting that are immediately proven false, elected officials could instead support and encourage wage increases that are both popular and already beginning to occur.   

There are, of course, plenty who oppose rising wages: businesses enjoying higher profit margins, the minority who don’t like unions and, sadly, economists who think we’d relive the 1970s.   

Would catching up lead to a wage-price spiral — or prevent one?  In the 1970s, both unions and businesses built inflation into their contracts. Union contracts had cost-of-living adjustments (COLAs) that automatically raised wages whenever prices rose. Many commercial contracts had COLAs, too, so both wage increases and price increases automatically fed on each other, leading to a “wage-price spiral.” Economists shorthand this process as being one of inflation “expectations.” But a major part of the problem was that a large part of the economy had pre-programmed COLAs. Inflation back then was on auto pilot.   

The world today is, thus far, quite different. Far fewer workers are union members, and unions play a much weaker role in the economy. Furthermore, almost none have contracts with COLAs. Indeed, one of the benefits of encouraging one-time wage increases would be to create an alternative to restoration of COLAs. It’s also important to note that CPI-based COLAs are today also far rarer in commercial supply contracts.   

It’s no surprise that President Biden and most other Democratic politicians want to say they’re doing something about inflation, but every visit to the gas pump or grocery store shows that, whatever they’re doing, it’s not nearly enough. Maybe, instead, they could help the millions worried about high gas prices get the pay raises they need to afford them.   

Joshua Gotbaum is a guest scholar in economic studies at The Brookings Institution. He was previously assistant secretary of Treasury for economic policy, an official in the Department of Energy and special assistant to the president’s advisor on inflation.