Charles Wheelan, Ph.D. The Naked Economist

Gas prices are at $4 a gallon and still headed north.

So far, the obvious things have happened: SUV sales are plummeting, airlines are mothballing gas-guzzling planes, Americans are driving fewer miles for the first time in modern history, and mass-transit ridership is growing everywhere.

Higher Cost, Less Use

That's pretty much what economics would predict. When something gets more expensive, people try to avoid the pain. The best way to avoid the pain of higher gas prices is to use less of it.

I will add, perhaps gratuitously, that the behavioral changes we're seeing now are exactly why we should have implemented a carbon tax (with offsetting income tax or payroll tax cuts) 10 years ago. Given that we have to raise revenue somehow, we ought to do it by taxing behaviors that we would prefer to discourage. An income tax discourages work; a carbon tax discourages pollution. Which one makes more sense to you?

Those who pay the most under a carbon tax are those who are the most intensive energy users -- and therefore impose the greatest environmental costs on the rest of us. Making them pay more seems fair to me, provided there's some cushion for low-income workers who have no choice but to commute long distances.

The Long and Short of It

But I digress. The point of this column is that are still a lot more shoes to drop as the result of high oil prices. We've only seen the first wave of behavioral changes. If gas prices stay high -- and I have every reason to believe they will -- then we can expect a series of other social changes that are less obvious and longer term.

Economists speak about the "short run" and the "long run." Believe it or not, these are actually technical terms. In the "short run," many factors of production are fixed, meaning that individuals and firms can only modify their behavior in some ways. A person can start taking the train to work in the short run, for example, but he can't easily sell his house and buy a smaller condominium with a shorter commute.

In the "long run", everything is up for grabs -- where we live, how we live, how we get around, and even where we go. Smart folks ought to start thinking about what happens when energy prices are four or five times what they've been for most of the automobile age. It's not rocket science: Prices go up, and rational people and firms try to avoid those higher costs.

Rational Steps

Here's my list of what this means in the long run:

1. Dump the McMansion.

There's been so much wreckage across the real estate market that we've neglected likely trends. The ironclad law hasn't changed; it's still "location, location, location." But the definition of a good location is certainly different if gas is $4 a gallon -- let alone $6 or $8.

Those giant houses 50 and 60 miles from the metro core now have three strikes against them: 1) Low-density development is rarely near public transit; 2) The resulting commute by car is wickedly expensive; and 3) The whole point of living that far from a metro area is to get a bigger house, which is now more expensive to heat and cool.

Other neighborhoods will emerge as a lot more attractive. We'll hear real estate agents say things like, "And you can walk to the train station." Americans might even develop more of a taste for condos and apartments. Nothing lowers the utility bill in the winter quite like having a common wall on two sides and heat wafting up from the apartment below.

2. Firms might begin to make business location decisions based on the commuting costs of their workers.

Suppose you're considering two jobs: One is in a building three blocks from the commuter train station, and the other is in an office complex 21 miles away from anything except cornfields. How is that decision affected by $6 gas?

In 1989, the retailer Sears closed its headquarters in the Sears Tower, a Chicago skyscraper, and moved 5,500 workers to a lower-cost campus in suburban Hoffman Estates, 30 miles from downtown and virtually inaccessible from most parts of the region by public transit. That kind of thing just isn't going to happen as much anymore. Sure, firms will still be looking for low-cost real estate, but they usually need high-quality workers even more -- and mandating long, expensive commutes is a good way to lose scarce human capital.

3. If you add it all up, the next several decades will be relatively good for cities -- at least compared to the last half century.

Part of this is driven by more expensive gas, as described above. But there are other forces at work, too. Worsening traffic congestion will make long commutes more costly in terms of time, not just money. Many aging baby boomers will seek urban culture and entertainment offerings (and more diverse housing choices) as they find themselves "empty nesters." Violent crime -- often one of top reasons for fleeing cities -- has been falling steadily for more than a decade. Both Chicago and New York City had the fewest number of homicides in 2007 than in any year since the mid-1960s.

The suburbs are not going to shrivel up and die. They tend to be lovely places, and most urban areas still haven't managed to cobble together decent public schools for middle-class families. But for the first time in a long time, basic economic forces will favor density over decentralization.

4. There will be a huge "first mover's advantage" in alternative energy.

At some point, we'll develop a better source of energy than oil. I don't know if that will be 10 years from now or 50. But it's going to happen, and the nation that's first in making that important discovery (or series of discoveries) will enjoy a huge economic windfall -- not unlike what the Internet has bestowed on the United States, and on Silicon Valley in particular.

If we want to be that "first mover," then the U.S. government should be investing Manhattan Project-type sums in alternative energy research. The private sector does a terrific job of turning knowledge into products, but only near the end of the product chain. Basic research -- the kinds of discoveries that are essential to progress but can't be patented -- is the catalyst for that process. Let's not forget that the Internet grew out of work that began in the Defense Department and was cultivated at Stanford and Berkeley.

An Expensive Irony

There is some irony in all of this. "Smart growth" advocates have been calling for these kinds of policy changes for decades: More redevelopment in existing urban centers (as opposed to new "greenfield" sites far from existing infrastructure); higher-density housing around transit modes; more coordination between new housing and public transit; and so on. It's ironic that $4 gas will encourage all of those things for reasons that have nothing to do with altruism.

Of course, it's also true that if we'd implemented more of those policies in the past, such as more investments in public transit, then high gas prices wouldn't be biting us as much as they are now.