While it is well-known that a big price increase or fall immediately affects consumption (when banana prices spiked after Cyclone Larry in 2006, people shifted to less-pricey fruits), there’s less knowledge about possible long-term effects.
That’s where Philadelphia Fed economists Christopher Severen and Arthur van Bentham come in.
They have looked at whether a spike in late 1970s oil prices left a mark on the spending and driving habits of people who were in their teens at the time. And they found it.
According to Severen and van Bentham, the jump in bowser prices over a short period of time (through to 1980 pump prices doubled) affected people who were just starting to learn to drive.
Unable to afford hooning around their local country town or suburb, this cohort of learners were years later less likely to drive to work than people who learnt to drive when prices weren’t soaring upward.
This same group was also more likely to take public transport and less likely to rack up the kilometres in their car (between 1440 and 1760 kilometres less a year) than those who learnt to drive when petrol prices were much more stable.
Across all manner of age groups and time periods, the evidence found by the two economists pointed to a long-run effect on those who in their formative driving lives were stung in the back pocket every time they went to fill up.
They said their research shows that experiences in a relatively narrow time-frame when someone first interacts with a particular good (in this case, petrol for the car) have long-run consequences on behaviour.
“The lack of an effect of gasoline price shocks after this formative window suggests initial contact may be more important than cumulative experiences for some behaviours,” they noted.
“We also demonstrate that relatively mundane experiences can be important; formative experiences need not be life-changing or extreme.”
University of California economists Ulrike Malmendier and Leslie Sheng Shen came up with a term last year that sums up well the findings of Severen and Bentham: “scarred consumption”.
The two Berkeley researchers looked at how personal experiences scar consumer behaviour in the long term, looking particularly at what a period of unemployment does for a person’s spending.
“Households who have lived through times of high local and national unemployment, or who have experienced more personal unemployment, spend significantly less on food and total consumption,” they found.
Their research took into account income, wealth, employment, demographics and the current jobless rate. They also found people who lived through periods of low unemployment spent more on food and total consumption.
Even when they do spend, people who went through high unemployment periods had different priorities.
“The data reveals that households who have lived through times of high unemployment are particularly likely to use coupons and to purchase sale items or lower-end products,” they found.
These findings are a tad disconcerting if you are the federal treasurer or the head of the Reserve Bank hoping people will get their spending mojo back quick smart.
As RBA governor Philip Lowe noted this week, there’s been no per person lift in household consumption over the past year despite pretty strong jobs growth.
It really hasn’t recovered since nose-diving in the immediate aftermath of the global financial crisis.
Dr Lowe reckons part of the answer is “subdued wage increases and strong growth in taxes paid”.
Maybe there’s a generation of Australians out there, stung by the impact of Cyclone Larry, who can’t stomach the thought of a banana smoothie.
The government is playing a part in dealing with the taxes issue via its recent low and middle income tax refund hitting bank accounts but that has yet to translate into a sharp lift in household spending.
And, as the Parliamentary Budget Office found in its report this week into long-term budget trends, the tax share paid by people earning between $20,000 and $58,000 is likely to soar over coming years notwithstanding the recent tax cuts.
The question neither the government nor the RBA has posed is how the global financial crisis may be playing on the minds of ordinary consumers.
Stories about how people brought up during the Great Depression were more likely to be tight with food and money are legion. Their children, the Boomers who didn’t have to go through the Depression and then World War Two, gave us the middle class and paved the way for a much more liberal approach to consumption.
The economy is much more than price signals, opportunity cost and welfare maximisation.
The Fed’s research and others like it point to the way the human factor can never be ignored when it comes to economic policy. Who knows? Maybe there’s a generation of Australians out there, stung by the impact of Cyclone Larry, who can’t stomach the thought of a banana smoothie.
Ross Gittins is on leave.
Shane is a senior economics correspondent for The Age and The Sydney Morning Herald.