Arnold Kling

Reverse Wealth Effect

Arnold Kling, Great Questions of Economics
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Morgan Stanley's Dick Berner says that the weak stock market has increased personal saving and restrained consumer spending.

Don't look now, but the "wealth effect" is at work in reverse, pulling down spending growth.. We estimate that the stock market decline trimmed about 1 1/4 percentage points from spending growth (year on year) in 2001 alone.

Berner cites a paper written last April by Federal Reserve economists Dean Maki and Michael Palumbo on the behavior of the wealthiest households.

We show that the groups of families whose portfolios were boosted the most by the exceptional stock market performance over the latter half of the 1990s are the same groups whose net saving flows fell the sharpest from 1995 through 2000.

Discussion Question. According to the study, the top quintile accounts for 80 percent of wealth but less than 50 percent of spending. What does this say about their saving behavior compared to the rest of the population?

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