Wealth and the economy

Dean Baker is on NPR’s case again.

NPR Misinforms Listeners About Cause of Car Sale Slump

In the Morning Edition top of the hour news summary (not on web), NPR told listeners that car sales are down because of low consumer confidence. Wrong!

Car sales are down because consumers have seen $6 trillion in housing bubble wealth and have also seen around $8 trillion in stock wealth disappear. The reduced spending is the result of reduced wealth. Consumers need to rebuild their wealth, hence they are not buying things like cars.

The impact of wealth on household consumption is a well-studied economic relationship. NPR’s reporters should be familiar with the concept. This matters because happy talk will not get people to start buying cars again. The problem is much deeper.

—Dean Baker

I’m posting this as a continuation of the theme: no light at the end of the tunnel. The pessimistic economists keep asking where the recovery is going to come from. In the face of big drops in personal wealth, it’s going to take more than “confidence”.

Here are a couple more datapoints, this time via The Big Picture:

  • The net worth of American households – the difference between assets and liabilities — 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 is the first decline in American household net worth since 2002.
  • Americans’ homeowners’ equity as percentage of the value of their homes fell to 43% in 2008—lowest since before WWII.

Lots more where those came from.

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