Wealth Connection

March 16, 2009

Wealth Connection


Economy: The Federal Reserve last week announced that Americans’ net worth took an $11.2 trillion hit in 2008 — the biggest on record. Some might say, “Why care? It’s ancient history.” But we should care. A lot.

Read More: Economy

The recent economic and budget news has included so many gargantuan numbers — many in the trillions — that we’re in danger of becoming a bit jaded by them. In such company, the wealth shrinkage might seem benign by comparison. It isn’t.

Net worth — basically, the value of everything you own minus the debt you took on to buy it — plunged 9% from 2007’s $64.4 trillion to $51.5 trillion last year. In the fourth quarter alone, Americans lost $5.1 trillion in wealth. Both are records.

This is more than just a paper reduction in wealth. Such a big shift affects our behavior, making us less prone to take risks, less able to borrow, less able to spend and more anxious about the economy.

This is known as the “wealth effect.” When wealth rises, we spend more; when it falls, we spend less. For each $1 change in wealth, spending changes by 5 cents or so, economists say.

Across the economy, such impacts can be enormous. An $11.2 trillion drop in national wealth, for instance, translates into a $560 billion drop in spending — about $1,963 for every American.

This is why economists worry about net worth. If we don’t do something about stemming the decline in wealth and encouraging wealth accumulation, our economy will continue to struggle.

They may be on to this at the White House, where there’s been a decided shift in tone away from the expressions of doom and gloom common in the initial weeks of Barack Obama’s presidency.

On Friday, for instance, President Obama told Americans the economy is “not as bad as we think,” and that he was “highly optimistic” about things in the long run. Compare that with his statement of early February, when he called the economic crisis “as deep and dire as any since the days of the Great Depression.”

His Treasury secretary, Lawrence Summers, who isn’t exactly known as Mr. Sunshine, had this to say last week: “Before, we had too much greed and too little fear. Now, we have too much fear and too little greed.” And, for the record, he said he already sees “modestly encouraging” signs of success.

Maybe it’s dawned on them that fear and worry are two of the biggest enemies of wealth. People will only invest, and push up prices of assets such as stocks, bonds and real estate, when they feel comfortable about the future and its prospects. It’s called optimism.

We’ve heard this before, of course. FDR said, “The only thing we have to fear is fear itself.” The problem is, people do have many things to fear — especially bad policies that will drag stock and home prices down even more, further eroding wealth.

We’re glad to see a change in the administration’s tone. But wealth will start to grow again only when policies change to include lower taxes on income and capital, much less government spending and far fewer regulations.

This would make all assets in America more profitable and therefore more valuable — the essence of wealth.


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