With Record Wealth Why Aren't We Spending More?

Robert Samuelson had an interesting column in The Washington Post this weekend explaining why American households, despite possessing record levels of wealth, aren't spending at record levels.

"The “wealth effect” isn’t what it used to be. For those who have forgotten, this refers to households’ tendency to spend some part of their increased real estate and stock market wealth and thereby boost the economy. During the boom years, Americans borrowed lavishly against rapidly appreciating home values. One Federal Reserve study estimated the extra cash at $700 billion annually from 2001 to 2005. Now psychology has changed. Careless optimism has given way to stubborn cautiousness. Wealth gains don’t translate into similar amounts of higher spending."

Samuelson posits two possible explanations for why consumers aren't boosting spending as quickly as in the past: 1) that consumers are being more cautious after the Great Recession of the last few years, and 2) that consumers are more focused on paying down their debt (perhaps because of explanation #1). Both explanations are reasonable and both conform to previous evidence.

What does this mean though? In the short-run, this unfortunately means that the Fed's ongoing efforts to keep interest rates low will likely have little stimulative effect on the economy as low interest rates won't be enough to stimulate greater spending. In the long-term though, these greater levels of savings must translate into greater levels of investment...boosting economic growth over time.