Wealth defined with real people in mind
Via the Washington Post comes this idea of economic incentive:
But research by noted economists Karl Case, John Quigley and Robert Shiller found the households were more powerful affected by declines in wealth than increases. An unexpected 1 percent drop in housing prices caused a permanent 0.1 percent decrease in spending, that study found. But a similar 1 percent rise in housing prices boosted consumer spending by only 0.03 percent.
“Rising wealth is gratifying, but the loss of wealth is terrifying,” said Mark Zandi, chief economist at Moodys.com. “Households spend somewhat more freely as their nest eggs grow, but they slash their spending when their nest eggs shrink.”
William Emmons, chief economist for at the St. Louis Fed’s new Center for Household Financial Stability, said that many of the most vulnerable households began to treat credit as another form of income during the boom. After the bust, they were forced to dramatically rethink their finances, resulting in more cautious spending.
Emmons said many families have not experienced any recovery — or are even still losing wealth. Young Americans, those with few skills or are unemployed may not have been able to rebuild any wealth. He noted that though the number of foreclosures has dropped significantly, it is still more than double the pre-crisis amount.
St Louis Fed also said Gen X was worst hit, so we’ve terrified a generation…
well, the article sounds a little more like my own experience than most of the stuff i see written by economists who appear to have gone straight from junior high school to ph.d. to non partisan expert without ever looking out a window at, much less living in, the real world.
i don’t want to get too enthusiastic. these things have a way of degenerating into academic discussions.
just like every other grand economic theory, or even the not so grand, that explain everything except the body on the sidewalk.
“William Emmons, chief economist for at the St. Louis Fed’s new Center for Household Financial Stability, said that many of the most vulnerable households began to treat credit as another form of income during the boom.”
Well DAHHHHHHH! Was this not the message to the consumer? Do readers here at AB not remember the postings and comments on whether the house should be considered and investment and saving or not?
The only, and I believe important thing missing from such a statement is the qualifier regarding people needing to use their house equity to keep their standard of living level as wages stagnated and declined.
So…of course people have not experienced any recovery. The house and the equity based on remaining mortgage is not really savings or wealth as in a financial paper is. The house/home’s true value is found in it’s utility function. A function that is not available for conversion into money if one wants to economically survive.
This is the direct result of running deficits that were two small for too long, damaging net private savings. The only way to fix this situation is to have some sort of debt jubilee and/or a properly sized/sustained deficit expenditure to maintain demand, income thus increasing private saving. If not we will muddle along. Unemployment may come down, but the quality of pay and savings demands will not be met.
(G-T) = (S-I) – NX
G = Gov Spending
T = Taxes
S = Saving
I = Investment
NX = Net Exports
Left side is government, right side is the (99% plus the 1%) 100%.
With a consolidated private sector including the foreign sector, total private savings has to equal private investment plus the government budget deficit.
In aggregate, there can be no net savings of financial assets of the non-government sector without cumulative government deficit spending. The 1% can withstand a decline in net savings, the lower classes cannot and some will get better mileage than others.
We probably need to be running budget deficits of 10% of GDP for the next three years, and targeting it at spending that benefits the 99% before you will see incomes rise and full employment.
Daniel
I am not sure of the wisdom of maintaining your standard of living as your wages decline.
Matt
debt holiday sounds nice. but i’d rather see the gov tax the people hollering about the deficit and use the money to create jobs.
with you debt holiday i’m not sure who it is who won’t get paid, or what lenders might feel a little nervous about lending.
Coberly,
Wasn’t qualifying the public’s response to declining wages. However, I can accept it as a logical response when one is not able to see the forest. Especially when the whisper in the ear is to only mind the trees.
Becker
wasn’t blaming you. but the people whisperers are not the friends of the people.
as for “logical”… well, logic is what you make it. but borrowing and spending, while perhaps a perfectly sound course for the government to take during a depression, has never been a sound course for individuals to take in good times or bad.
(and speaking of logic just in case joel is watching… that last proposition can easily be over-interpreted into something stupid. one needs to learn not to do that.)
In the 1990s it turned out that shares of corporations were not wealth.
In the 2000s it turned out that real estate was not wealth.
So, what is wealth? I’m guessing having a lobbyist in Washington so the government can bail you out when you screw up your investment strategy.
Kalebert,
Wealth is in the eye of the beholder. Actually, I think it depends on if the item held has personal, life sustaining utility to it. A home has such, shares and real estate in general not so much.
Even trading a home for another is not so much improving ones wealth position as it is improving one’s utility.
Kaleberg
i think you answered your own question: “wealth” is the power to hold on to what you have… which is mostly power over the productive energy of the people. or maybe in the new days with robots and abundant energy it will just be power over the machines.
now i agree with Becker that “life sustaining utility” ought to be sufficient wealth for most of us. but with the bad guys gathering wealth/power, it’s not safe for us to stop with “enough.”
is a puzzlement.
again, please don’t over read my casual remarks. “enough” really doesn’t stop at “life sustaining.” a hot bath is really nice. so is a tractor to help with the plowing. but at the point we are driving around in circles to make money to buy cars to drive around in circles while the water becomes undrinkable and air a burden to breathe… we have gone too far.
real wages, nonsupervisory workers, 1964-2008
https://plus.google.com/photos/106703961701137172594/albums/5195760215722236945/5200404157632314674?banner=pwa&pid=5200404157632314674&oid=106703961701137172594
Wealth? For a very few, those appropriating the worker created surplus value ‘contained’ within both materials and services.
can anyone explain this:
http://www.bls.gov/news.release/prod2.nr0.htm
it’s on 1st quarter labor productivity and costs
it says the real hourly compensation in manufacturing was down 8.3% (annualized rate) – even worse in durable mfg, down 9.4%…