CEPR - Center for Economic and Policy Research


En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press Robert Samuelson Tells Us We Need a High Stock Market to Rescue the Economy

Robert Samuelson Tells Us We Need a High Stock Market to Rescue the Economy

Monday, 14 June 2010 06:44

There is a well-known stock wealth effect. Economists usually estimate that annual consumption increases by 3-4 cents for each additional dollar of stock wealth. This was the basis for the strong growth of the late 90s. The stock bubble created $10 trillion of wealth causing consumption to soar and savings to plummet.

Robert Samuelson notes this stock wealth effect in his column today and tells us that we have keep the stock market happy in order to have a recovery. Actually, he's missed most of the story. Consumption in the last decade was driven by the housing bubble, not the stock market. At its peak in 2007, the stock market had just reached the same nominal level that it had been at 7 years earlier at the peak of the bubble. Since the economy was more than 40 percent larger in 2007 (in nominal dollars) than it had been in 2000, the stock market was not a big factor in driving the extraordinary consumption boom that was in turn driving the economy.

This instead was explained by the housing bubble, that gets only passing mention in Samuelson't piece. The housing wealth effect is usually estimated at 5-7 cents on the dollar. At its peak in 2006, the bubble had created $8 trillion in housing wealth. This translates into $400 to $560 billion in additional consumption each year. If the bubble does not reinflate, this consumption is not coming back. (It's not clear that it would be desirable in any case, baby boomers need to save for retirement.)

By comparison, the wealth that will be generated by modest increases in stock prices will have relatively limited effect on consumption. The market was valued at close to $20 trillion at its peak in 2007. Its current valuation is around $14 trillion. If it were to rise by 10 percent, this would generate another $1.4 trillion in stock wealth, which would translate into $42 billion to $56 billion in annual demand, after a lag of 1-2 years. This will have a very limited impact on the economy, so the idea that we have to keep the stock market happy to sustain the economy has no basis in reality.

Samuelson also somehow has the saving rate having increased to 16 percent following the stock market's crash in 2008-2009. This is his invention, it does not show up in the data. The saving rate peaked at 5.4 percent in the second quarter of 2009. The main reason for the uptick that quarter was the distribution of tax rebates from the stimulus, much of which was not spent right away.

Comments (7)Add Comment
Kinderberger on stock market and investment
written by J. Holt, June 14, 2010 9:04
To Dr. Baker:

One point brought up by Kindleberger in his book "Manics, Panics, and Crashes" is that there is a relationship between investment spending and the stock market valuation of a firm. The higher the value of a firm's stock the cheaper capital is to purchase, Kindleberger finds. Thus, a speculative bubble can help fuel investment. But, as we all know, a stock market gains may cause investment not in plant and equipment but , rather, in speculative ventures. But, this comment by Kindleberger doesn't override your post's point which is the small amount of additional spending caused by a stock market valuation increase.

J. Holt
written by skeptonomist, June 14, 2010 9:10
Samuelson must have read my comment under 'Consumer Spending.." a couple of days ago - he is always quick to push the interests of the Establishment. As Dean says he is off the mark as far as consumer spending is concerned, but the stock market does have a disproportionate effect on confidence in other aspects of the economy, especially those involving speculation. A bubble in the stock market typically increases the attitude that one can get rich quick, or that "everyone is getting rich" and encourages all types of speculation. Samuelson and many other pundits can't tell or don't care about the difference between this and confidence in real productive investment.
written by Scott ffolliott, June 14, 2010 9:25
Double, double toil and trouble Fire burn, and cauldron bubble.
written by AndrewDover, June 14, 2010 1:39

Probably the reason that Mr Samuelson and Mr Baker differ on the savings rate is that Samuelson is only talking about the wealthiest 20 percent of Americans, whereas Dean quotes rates for 100% of Americans.

"Samuelson also somehow has the saving rate having increased to 16 percent following the stock market's crash in 2008-2009. This is his invention, it does not show up in the data."


"The wealthiest 20 percent of Americans represent about 60 percent of consumer spending, says Zandi. These same people are most heavily invested in the market. When the market rises, they feel wealthier, save less and spend more -- and vice versa. In mid-2007, their savings rate plunged to 1 percent of disposable income; but when the market dropped, savings jumped to 16 percent and spending suffered."

written by not_a_capitalist, June 14, 2010 2:42
"There is a well-known stock wealth effect."

Translation: the rich get richer.

written by izzatzo, June 14, 2010 6:24
Uh huh. That's for the wealthiest 20% who drive 60% of consumption spending. Consider the context, aggregate macro spending in a deep recession. Samuelson and Zandi are telling us the rich overspend and undersave at 1% in a boom to make it worse, then underspend and oversave at 16% in a bust to make it worse as well.

If this were an article to justify trickle down economics by Samuelson and Zandi, they'd be claiming there's no static rich class, there's only different people with temporary gains or losses in income, from which much or little is saved respectfully, in order to maintain more stable levels of consumption over periods of boom and bust.

Therefore the numbers on the 20% wealthiest would be presented as a statistical aberration, in the sense that it's all temporary, rather than a result of accumulated market power and concentrated wealth over time by the same privileged individuals. Instead, over time, individually, they're said to behave in the opposite direction than when in a boom or bust, saving much of an income gain, and saving little when income declines.

So the 1% and 16% just happen to catch a cross section of whomever was "randomly rich and saving or not" at the time, but even then, the "temporarily rich" aren't trickling down on anyone but themselves as they inflict even more damage on the business cycle, pushing the economy in the wrong direction on both ends.

The rich don't "need" a high stock market to rescue the economy by saving less and consuming more. The economy as well as the stock market needs more growth and aggregate demand, despite efforts of the rich to suppress it with absurd measures of austerity that actually send the stock market in the wrong direction in the first place.
written by Ethan, June 15, 2010 10:14
Keep up the good work. Don't worry about the first time readers who don't understand from where you are coming. But, how do you have the time to be so thorough and first so many times? Congrats!!

Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.


Support this blog, donate
Combined Federal Campaign #79613

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.