Thursday, March 12, 2009

What do we multiply this number by? 

Household assets as a whole fell 15% to $65.7 trillion, unadjusted for inflation, compared to a decline of less than a percentage point to $14.2 trillion in total household liabilities. The net worth of American households � the difference between assets and liability -- was $51.5 trillion, down $11.2 trillion or nearly 18% from 2007.That sets Americans' total wealth back to levels lower than 2004. It was the first decline in American household net worth since 2002.

The Fed data signals the end of an era where Americans spent with an eye on their growing assets -- their homes, their retirement funds, their stock investments. Known as the "wealth effect," economists calculate that Americans spend about a nickel more for every dollar gained.
From the WSJ a couple of hours ago. Now I've usually done the wealth effect calculation at .03 rather than .05 when I teach macro in the classroom. Carroll, Otsuka and Slacalek estimate the housing wealth effect to be .02 in the short run and .09 in the long run. 5% of the loss in net worth would be $560 billion; between the second and fourth quarters of last year consumption fell $230 billion on an annual basis (see Table 2 here.) And this does not include additional stock market losses since the first of the year. It would be hard to believe consumption leads us out of the recession any time soon unless we see repairing of personal balance sheets.

I bet we'll see a spate of new papers on the wealth effect in the economics research literature this year.