Wealth That Doesn’t Trickle Down

Bruce Bartlett explains why the rising stock market has had a limited impact on the rest of the economy:

The latest research – by the economists Karl E. Case, John M. Quigley and Robert J. Shiller – shows a $1 decline in housing wealth reduces consumption by 10 cents per year, whereas a $1 increase in housing wealth raises spending just 3.2 cents. This suggests that homeowners will spend $500 billion less this year than they would if home prices were at their 2006 level.

By contrast, changes in stock-market wealth have a much smaller effect on spending. Consumption rises or falls about 2.5 cents for each $1 change in stock market wealth. Therefore, the $4 trillion increase in financial wealth from 2011 to 2012 will add only about $100 billion to spending this year.