Friday, October 21, 2005

AlterNet: Running on Fumes

"...In economics there is a mythical beast known as a Giffen Good. A Giffen Good is a basic commodity that absorbs a large proportion of a poor population's income. As its price goes up, more and more income is absorbed, leaving less for anything else. Because it is a staple, as other staples are forgone what little money is left over gets spent on the higher-priced good that's causing the financial chaos in the first place. Nobody's quite sure if such a creature exists. The Victorian-era British economist Sir Robert Giffen, after whom it is named, argued that potatoes during the Irish potato famine fit this bill for the starving Irish. Since potatoes already made up the bulk of their diet and consumed most of their income, as prices rose due to the potato shortages, what little discretionary money they had for meat and other food disappeared. No longer left with enough for even morsels of meat, the peasants desperately threw their remaining pennies back at the potato vendors for a few more spuds, thus driving prices of the scarce commodity up still further. More recently, two economists at Harvard's John F. Kennedy School of Government, Nolan Miller and Robert Jensen, have made similar claims about rice consumed by peasants in southern China.

Obviously, at some point, soaring potato prices would have curtailed absolute demand simply because nobody would have had enough money to buy any, and the "normal" laws of the market would have been restored. Giffen's point, however, was that prices would have to rise beyond all reasonable levels before that critical peak was reached and demand for a scarce commodity began slacking off.

Extending the argument to gasoline, it is at least possible that, as gas eats up a higher percentage of poverty-line rural workers' incomes, drivers will scrimp on things such as their quarterly oil change, their 30,000-mile tuneups, as well as minor repairs to their vehicles. They will likely also defer the purchase of new cars. People will, in other words, probably drive older, less well-maintained cars, one side effect of which will be decreased gas efficiency and the need for even more gas to get them to and from work than they were consuming earlier in the price cycle. Kerr's old Explorer gets only twelve to fifteen miles per gallon; her husband's 1974 truck gets even worse mileage. In a rational world, both would be able to buy more fuel-efficient vehicles. In the Siskiyou County of 2005, however, neither can scrape together enough to make the upgrade......"

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