Normally, when Americans' net worth goes up—say, because the value of their house or their stocks goes up—they spend more money, stimulating the economy. Economists call it the "wealth effect," and it might just have suffered an untimely death as a concept, observes Robert Samuelson at the Washington Post, because a report last year showed US wealth hitting an all-time high of $3 trillion, exceeding even financial limit heights, yet the economy is still in the doldrums. "Psychology has changed," Samuelson argues.
"Careless optimism has given way to stubborn cautiousness." The financial crisis made "people better appreciate that houses and stocks are risky assets. … They're more reluctant to borrow and spend against them, because today's gains could be tomorrow's losses." So the Fed's various efforts to boost home and stock prices aren't working. "People eager to borrow have faith in the future; people eager to repay debts worry about the future. We are prisoners to psychology." Click for Samuelson's full column. (More wealth stories.)
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