Signs of economic recovery abound in Las Vegas — rising employment, tourist volume, taxable sales, home prices and a falling unemployment rate. Visitor spending, however, continues to lag, slowing our recovery.
The recent dramatic decline in crude oil prices, however, bodes well. Prices dropped from about $100 a barrel in July to a low of about $44 on March 6. Lower crude prices lead to lower gasoline prices and cheaper travel to Las Vegas by car. Spending less on gas also puts more money in the pockets of visitors and residents alike. Increased discretionary income could be spent on food, shopping, entertainment, gaming and so on.
But the net effect of falling gas prices on consumption depends on a 65-year-old theory of consumer spending by Milton Friedman, a 1976 Nobel Prize-winning economist. He wrote the theory of consumption spending — the permanent income hypothesis — that challenged Keynesian orthodoxy at that time.
Permanent income theory distinguishes between the effects of ongoing and one-time income changes on spending. Finding $100 in a jeans pocket, for example, provides a one-time increase in purchasing power. A pay raise, however, provides an ongoing boost.
Friedman argued that consumers would save (or pay down debt) from temporary increases in income, and spend only from permanent increases. Politicians, when looking for a quick way to increase consumption spending and boost the economy, frequently try giving one-time tax rebate checks to consumers. President George W. Bush included such a tax rebate ($300 per person) in his 2008 Economic Stimulus Act. Such rebates don’t often work, though: Empirical evidence suggests that about 80 percent is saved and only 20 percent consumed.
If most consumers see the income boost from lower gas prices as temporary, any effect on spending will be small. And although consumers see this extra purchasing power frequently — each time they fill up the tank — they also know gas prices are volatile. In Las Vegas, pump prices were between $3 and $4 from early 2011 to summer 2014, then fell dramatically from about $3.85 to about $2.17 in late January. As of March 16, the average was $2.88 per gallon. The recent increase is due largely to last month’s explosion at an Exxon-Mobil refinery near Los Angeles, which reduced refinery output. This month, crude oil fell from around $50 per barrel to $44.
How long do you think gas prices will stay low? Has the recent rise affected your answer to this question? How much of the extra purchasing power will you save and consume? These are the fundamental questions.
Stephen Miller is a professor of economics at Lee Business School at UNLV and chairman of the board of directors of the Economic Club of Las Vegas.