Rick Santorum on Monday blamed the housing crisis on high gas prices.
During a campaign appearance in Michigan, Santorum said the housing bubble burst in 2008 because people could no longer afford to pay their mortgages because of high gas prices.
"We went into a recession in 2008 because of gasoline prices," Santorum said in Michigan according to Buzzfeed. "The bubble burst in housing because people couldn’t pay their mortgages because of $4 a gallon gasoline."
Let's do some numbers, suppose the average U.S. household enjoys $2/gallon gasoline (average 2003 price = $2.02/gallon), drives 20,000 miles in a 20 MPG automobile. Annual household expenditure on gasoline is $2000, or about $167 per month. Since February 2004, monthly increases in gas expenditures, relative to the 2003 average, look like this:
The Santorum assertion would go like this, with an almost $150+ additional monthly expenditure on gasoline in the summer of 2008, households were unable to change their transportation habits, eat out less often and do other things so that they could pay their mortages. U.S. households stupidly refused to change their behavior and defaulted on their mortgages, triggering the housing crisis.
Further stupidity: I decided to estimate a regression of the percentage change of GDP (from FRED) on the percentage change in gas prices. The elasticity is 0.02, which means that a 100% increase in gas prices will lead to an increase in the GDP growth rate of 2% ... relatively healthy growth. Of course, this is stupid because GDP measures income, income is a factor of driving demand and my regression gets the causality totally wrong.
[clarifying edits triggered comments: additions, subtractions]
Oil price shocks can trigger recessions but that is not what happened in 2008 different than gas prices causing the housing market crisis. Continuing the Hill's story:
The official government take on the collapse, authored by the Financial Crisis Inquiry Commission, blamed Wall Street banks for taking on excessive risk via subprime mortgages, and government regulators for failing to sniff out the start of the crisis before it threatened the global financial system.
Republican members of that panel dissented from the official report, blaming a global credit bubble and lax government housing policy. But they didn't put the blame on high gas prices, either.
Certainly, higher gas prices could have contributed to some defaults for those households who signed variable rate mortgages that they could not afford when the rates went up. But, to say it was the trigger is to mislead.
Trying to undo a bit of the stupidity, I regressed the monthly percentage change in miles driven (DOT), roughly measuring gasoline demand, against the percentage change in gas prices and income. The data are from February 1986 to December 2011 (n=311). This is the simplest demand model that can be estimated. I can imagine a better model would include lagged gas price changes (short run vs long run) and inclusion of other important variables (along with doing some time-series econometrics). Nevertheless, the model explained 19% of the variation in the percentage change in miles driven and produced a price elasticity of -0.003 (p value = 0.072) and income elasticity of 0.13 (p value = 0.00).
According to this model a 100% increase in gas prices (2003 to 2008) would lead to a reduction in miles driven of 0.3% (i.e., very small) and that each percentage change in GDP leads to a 0.13% change in miles driven. I'm not sure what this model tells us in terms of the housing crisis and "great recession," but that might be the point. Connecting $4/gallon gasoline to the broader economy is very difficult, more difficult than noticing that $4/gallon gasoline happened and then the housing crisis happened and asserting that one caused the other.
Update: Make sure you read the follow-up post.