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Thrift Helped Get Us Into This Mess

"Wealth effect" is playing out in reverse

By Sarah Quinn, Newser Staff

Posted Nov 25, 2008 10:09 AM CST

(Newser) – Three factors are playing into the financial crisis, and it's time to recognize the culprit that accompanies the burst housing bubble and banking meltdown, Robert J. Samuelson writes in the Washington Post. The wealth effect—"the tendency of people to adjust their spending as their wealth changes"—is reversing, with Americans scrambling to save in the face of falling stock prices and home values. The consequences could be dire.

Personal wealth is down $9 trillion, and "every dollar's change in wealth causes people to change their spending by 5 cents," Samuelson notes. If that's true, the US economy will be out $450 billion in consumer spending. The only solution, says Samuelson, is new demand: We need Asian countries "to consume and spend more so that their imports increase."

[Images (3)]

[Quotes (2)]

A lot full of unsold Chrysler vehicles at a dealership in Dormont, Pa., on Nov. 11, 2008. (AP Photo/Gene J. Puskar)

Specialist Ned Zelles works at his post on the floor of the New York Stock Exchange on Nov. 17, 2008. (AP Photo/Richard Drew)

A specialist works at his post on the floor of the New York Stock Exchange on Nov. 6, 2008. (AP Photo/Richard Drew)

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Americans are less upset by hardships they've experienced than by those they imagine. - Robert J. Samuelson

If the swing toward saving is too sharp, consumer spending wouldn't just weaken; it would collapse.
- Robert J. Samuelson

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Thrift Helped Get Us Into This Mess