Consumers Were Not Spendthrifts, They Responded to Bubble Wealth

The sharp decline in the saving rate over the last 15 years was not some mysterious change in consumer attitudes, it was a predictable response to the temporary wealth generated by the stock and housing bubble. Consumption is strongly influenced by wealth, as people will spend based on stock and housing wealth. The decision of millions of people to spend more money in the last 15 years was a totally rational response to the large capital gains they had on their stock or houses. If someone gains $200,000 in equity in their home, there is no reason that they should not take a portion of this money to pay for a vacation, a new car, or some other discretionary expenditure. The issue going forward is not consumer attitudes, the issue is simply that people have lost around $6 trillion in housing wealth due to the collapse of the housing bubble and a comparable amount due to the stock market plunge.

--Dean Baker