Why is consumer sentiment so low? As Democrats cater to dissatisfied voters with redistributive policy proposals, there may be an alternative explanation. Kevin A. Hassett discusses the relationship between high gas prices and the sour sentiment among American consumers. This analysis suggests that the presidential candidate who can wield an effective plan to subdue gas prices may the one ahead in November.

Senior Fellow  Kevin A. Hassett

Over the past two months, consumer sentiment has settled in at the lowest level in almost thirty years. The stark drop in sentiment is at odds with many other economic data points. Economists now believe, for example, that economic growth in the second quarter was around 2 percentage points, hardly a cause for deep depression. The unemployment rate hovers around 5.5 percent, about its postwar average.

What explains the low sentiment despite the moderate economy? Democrats and Barack Obama offer a populist story: While the economy as a whole has not done that poorly during the Bush years, the little guy has fallen farther and farther behind. Mr. Obama suggests that the weak sentiment is a call for a major change in economic policy. Americans yearn, the story goes, for massive new redistributions.

The attached chart suggests a stark and simple alternative story: high gasoline prices are killing the national mood.

The chart begins in January 2004, and plots the price of gasoline against consumer sentiment. Since the relationship is an inverse one--high gasoline prices lead to lower sentiment--the right hand scale is inverted as well. Back in 2004, the gasoline price was a smidgen above $1.25 a gallon, and consumer sentiment was soaring. Over the next four years, the gasoline price jumped to almost $4.25, and sentiment dropped to its lowest level since Jimmy Carter was in the White House.

If high oil prices are really behind the low sentiment, then it is hard to imagine what Republican policy is to blame. Oil and gasoline prices, are, after all, mostly set in world markets, and have nothing to do with the top marginal tax rate. Americans don't yearn for Jimmy Carter's tax rates, they just want gasoline prices to go down. This makes Obama's solution a puzzling one. Tax hikes on the rich will not reduce gasoline prices. Oil exploration, anathema to the Democrats, is the best way to accomplish that.

The huge effect of gasoline on sentiment is something of a puzzle. According to the Bureau of Economic Analysis, gasoline only made up about 3-1/2 percent of the average U.S. consumer budget in 2006. Higher prices have certainly pushed that number upward, but gasoline continues to be a tiny fraction of overall spending.

Americans probably respond more to gasoline prices because tanking up is a uniquely painful experience. One stands at the pump and watches the bill increase penny by penny, a click at a time.

Angry voters have historically been a rational lot. Given the magnitude of the gasoline effect, it is hard to imagine that they won't vote next November for the candidate that offers the best plan to reduce future gasoline prices.

Kevin A. Hassett is a senior fellow and the director of economic policy studies at AEI.