Relative to income, spending is strong. Relative to the long-run growth trend, spending is weak. One view is no more valid than the other. The Times should make clear what standard it is using to assert weakness, but it is not the case that spending is strong by every reasonable standard.

What gets left out in this "I'm right! - No, I'm right! approach to argumentation is that income growth is weak.

I have to say (again) that Dean's attribution of the decreased savings rate since around 1980 to bubble wealth effects is dogmatic and does not consider alternatives. One alternative is the increased availability of credit through credit cards. If the latter is the explanation, then savings rates will not increase when and if prosperity returns. At any rate, the ability of lenders to push credit on consumers has not been diminished and they will be doing their best to decrease the savings rate.

«The saving rate fell sharply due to the wealth effects associated with the run up of stock prices in the 90s and house prices in the 00s. With this wealth now gone,»

As before: the run up of asset prices does not create new wealth, it merely creates new purchasing power, that is in effect spendable money (if the capital gain is monetized), and money is not wealth.

In effect the «wealth effects» you mention are just loose monetary policy (not necessarily interest rates, more availability of credit) effects, and monetary policy in itself just changes the availability of numeraire, not of goods or services.

Sure, someone who is given as a free gift a capital gain of $100k on a $100k will probably spend a good chunk of it, but she/he has created no new wealth, just got some extra purchasing power. Which will be temporary if the free gift of spending power is taken back.

There are wealth effects, and illusory-wealth effects, and both affect demand, but the two are not the same, as a lot of people who happily spent their real estate illusory-wealth with HELOCs found out.

«Dean's attribution of the decreased savings rate since around 1980 to bubble wealth effects is dogmatic»

It is indeed conventional economics, but there are graphs that look amazing seen together of savings rates, HELOC volume, and disposable income.

What is most damning is the nearly simultaneous inversion in the trend lines of all of them at the same time the house price trend line inverted too, and while causation is not correlation, the impression one gets is that it is at the very least an amazing coincidence :-).

I buy a house thinking it is overvalued and intend to flip it because I think it will even get more overvalued before I flip. There is no wealth there, and I know it, I am just buying a lottery ticket. Bubbles do not create wealth...Dean is simply wrong here.

It's silly to argue that one has the right view, when the whole basis of the argument is over definitions. It is sillier still to do so without acknowledging that the argument is over definitions. Some of the comments here insist that Dean is wrong because Dean used the word "wealth" wrongly. In fact, Dean used the word "wealth" in a fairly conventional way. "Wealth" is one of those loaded terms that end up steering discussions into sterile territory. Dean is not required to adopt somebody else's definition of "wealth" in order to make his point.

skeptonomist,

Dean is not being dogmatic if his view comports with available data. If you look at mortgage equity withdrawal figures during the period in question, and contrast them with data on revolving consumer credit, you'll find that an historically large share of household borrowing was associated with home equity. Dean's view comports very well with the data. If you had cared to check, you could have known that.