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No One Told the NYT About the Housing Bubble

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Sunday, 02 January 2011 09:31
A chart accompanying an NYT piece on the difficulty of saving shows the sharp decline in the national savings rate in the 90s and the 00s. The piece suggests that this is due to the increased difficulty that people have in saving. The more obvious explanation is that the wealth created by the stock bubble in the 90s and the housing bubble in the last decade led people to consume more and save less. The effect of wealth in increasing consumption is one of the most widely accepted behavioral effects in economics.
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Starve the Least with Tax Cuts to the Wealthy
written by izzatzo, January 02, 2011 9:40
The effect of wealth in increasing consumption is one of the most widely accepted behavioral effects in economics.


Exactly. It's refreshing for Mr Whose Your Nanny to finally acknowledge the correct nanny role of liberating free markets with recent tax cuts. They will stimulate consumption demand by way of the wealth effect on the wealthy towards full employment recovery.

Viva la Austerianism! Starve the Least!
Dean likes tax cuts for the wealthy?
written by pete, January 02, 2011 12:32
Since the wealth effect is "widely accepted" then more wealth=> more consumption, so the recent extensions of lower taxes on the wealthy should have been a no brainer to stimulate demand. Really. But on the other hand, of course, bubbles are not wealth, and by definition bubbles are not even perceived to be wealth...so here the analysis breaks down. This is the recurring logical flaw in this blog. Bubbles are seen to be wealth (pensions would have been fine if the bubble continued) and yet not wealth (Greenspan/Bernanke caused a horrible bubble...with Krugman's blessings and Shiller and Baker's warnings). Pick one...but if you believe there was $8T in real wealth destroyed in 2008, then it was not due to a bubble.

Sorry Dean, this is one u got wrong
written by professor dick, January 02, 2011 4:37
Savings rates dropped before the housing bubble, and while the bubble contributed, the main contribution was wage stagnation coupled to the explosion of credit card availability. People continued to consume more as they aged as they had in the past, but wages no longer kept pace, while the universal availability of credit meant that the need to save to buy later no longer applied. Instead of saving, people had to pay off their cards.

I'm less certain about this, but it seems to me that the cost of maintaining middle-class consumption levels has risen, even if the cost of individual items encompassed by it (cable, large screen tvs) have not. This would also depress savings, if true.
...
written by liberal, January 03, 2011 7:04
pete wrote,
Since the wealth effect is "widely accepted" then more wealth=> more consumption, so the recent extensions of lower taxes on the wealthy should have been a no brainer to stimulate demand.


Only if you assume that everything is linear, which of course it is not. Presumably the wealth effect declines with increasing wealth.
aha! wealth effects actually declince with wealth...
written by pete, January 03, 2011 10:56
This is an interesting spin. Apparently then, there is a wealth effect, but only for the poor. But of course, the poor have gotten poorer since the founding of the Great Society, so they should be spending less? Especially in the 90s-00s, apparently, ergo, no wealth effect, particularly in the "bubble" which according to most only "bubbled" to the rich, who do not have much of a wealth effect? So confusing when arbitrary assumptions are made, it just is an infinite spin game.
...
written by AndyfromTucson, January 04, 2011 4:39
Tax cuts for the poor and middle class will stimulate much more consumption than tax cuts for the rich. The rich consume whatever they want already and no tax cut is going to make them consume more.

The wealth effect on consumption doesn't depend on whether or not the wealth is "real" or bubble flavored. All Dean is saying is that when people think they are wealthier they spend more.

The saving rate dropped before the housing bubble, but since that was during the dot.com stock market bubble it doesn't disprove the wealth effect.

The easy availability of credit card credit will have a much bigger effect on consumption if people feel that their assets are growing enough in value to cover the increased debt.


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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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