In economics and consumer theory, a Giffen good is one which people consume more of as price rises, violating the law of demand. In normal situations, as the price of such a good rises, the substitution effect causes people to purchase less of it and more of substitute goods. In the Giffen good situation, cheaper close substitutes are not available. Because of the lack of substitutes, the income effect dominates, leading people to buy more of the good, even as its price rises.
- Thanks Wikipedia
I was just reading an interesting article at Political Calculations which posed the interesting idea about debt being a giffen good. Their argument is that debt appears to be an inferior good (one which as income increases a consumers demand decreases), which could be a reasonable argument based on this leverage ratio by income graph.
The argument then is since debt is (at least for individuals) an inferior good how does the market react to an increase in the price of debt. The article examines this point via empirical data supplied by a number of newspaper articles, which offer examples of people consuming debt earlier as prices rise in order to prevent having to pay anticipated higher costs. So, the argument is as debt rises people consume more of it in order to escape later increases.
This provides an interesting thought exercise but in the end, I have to disagree with their conclusion. Debt is not a giffen good, over a year a consumer is going to consume the same amount of debt regardless of price, if they decided to consume that debt earlier in order to avoid later price increases that is consumer choice and a result of incomplete information, not a need to consume more. Further more, their are many substitutes for debt, working more or bankruptcy are two substitutes that come easily to mind. In my mind their is no doubt that debt is not a giffen good. Although, I would highly recommend reading the article atPolitical Calculations.
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