In which Krugman relies on his faulty memory:
So: I’m old enough (you kids get off my lawn) to remember the rise of self-service gas stations, which coincided with the oil shocks of the 1970s. Suddenly gas was much more expensive — and drivers, eager to limit the blow, were willing to pump their own to save a few pennies.
At the time, being either in or fresh out of grad school, I thought, wait, this makes no sense: the decision to pump your own gas is about making a tradeoff between money and your own effort, and should have nothing special to do with the price of gasoline per se. Yet people acted as if they had a limited budget for fuel, as opposed to an overall budget constraint, and responded to a rise in gas prices with a seemingly irrational effort to hold down the size of that sub-budget.
Given that the only purpose for Krugman’s brain is, at this point, to rationalize stupid leftist economic policies, it should come as no surprise that his memory has subverted actual reality in order to make a stupid point about how Keynesian policies are still useful.
The reality of the 1970 oil shock is twofold. First, Nixon took the US off the gold standard while the OPEC tied the price of oil to gold. Unsurprisingly, the US inflated its currency and the cost of oil shot up. Incidentally, this is how it works even today. The rise in the cost of gas is due primarily to inflation and not stagnation in supply or increases in demand. To verify, simply look at the historical price of gas in, say, 1950 dollars. The price has remained pretty stable over time. The reason why it has spiked considerably in recent years is the same reason it spiked after 1970: inflation.*
Second, the solution to the problem in the 1970s was price controls. It was not consumers deciding to save money through self-service. It was suppliers deciding to increase margins by eliminating unnecessary labor. In fact, the reason why my maternal grandfather lost the gas station he owned was because he didn’t switch to self-service, and the price ceilings made staying in business unprofitable in lieu of labor costs. Thus, the choice between full-service and self-service gas stations was a choice that was heavily influenced by government interference in the form of inflation and price controls.
Therefore, Krugman’s inability to understand why people switched to self-service gas stations is the result of his own ideological blinders which preclude him from ever considering that government interference might lead to inefficient market outcomes. Or, to state it another way, Krugman is such an ideologue that he cannot even begin to consider that the Keynesian methodology might be wrong. Hence his confusion.
* On a side note, the call for increased drilling is pure nonsense perpetrated by neo-con shills. In the first place, increased supply will never completely mitigate the consequences of inflation, generally speaking. In the second place, increasing drilling is pointless unless there is also an increase in refining capacity, which is even more difficult in lieu of the current regulatory regime.