Just to make sure that readers did not worry that the Post was becoming too open-minded (see the note on Europe below), the Post ran a column on efforts to promote savings in the U.S. that completely ignored the stock and and housing bubbles. This is close to mind-boggling since the wealth effect on consumption is one of the most widely accepted theories in economics. The conventional estimates show that a dollar of housing bubble wealth translates into 4 to 6 cents of additional consumption each year. The effect with stock wealth is estimated at 3 to 4 cents on the dollar. With $8 trillion in housing bubble wealth created by the extraordinary run-up in house prices over the last dozen years, we should have expected to see a decine in annual savings in the range of $320 billion to $480 billion (3.2 to 4.8 percentage points of disposable income). Those who are concerned about a lack of savings by households probably should begin their list of policy prescriptions by telling the Fed to fight the growth of irrational bubbles. Every other item to promote savings that appears on the list in the Post piece is trivial in comparison.
--Dean Baker
