USA Today tells us that the stock market dropped because investors are worried that consumers have bad attitudes and therefore will not sustain consumption. Consumers may have bad attitudes, but the real reason that they are not spending money is that same reason that homeless people don't spend money: they don't have it. The collapse of the housing bubble has destroyed more than $6 trillion in housing wealth. The plunge in the stock market has eliminated another $6 trillion. The predicted result of the loss of this much wealth would be a fall in annual consumption of more than $500 billion a year (@3.5 percent of GDP). In short, it would be very surprising if consumption had not fallen sharply. USA Today should find some economists who can explain this fact to readers so that investors can stop worrying and come to grips with reality.
--Dean Baker
