The wealth effect is commonly applied to two groups of people: those who perceive themselves to be richer and those who actually are richer.  The slate article is really only trying to address the first group.  Its questions whether feeling richer (due to assets like your house going up in price) really lead individuals to spend more money.  For a piece that's supposed to "debunk" a myth, it does a horrible job.  It doesn't provide any convincing data or give any detailed analysis.  It jumps to the conclusion without any proof at all.

The article doesn't address the other group related to the wealth effect: Those who actually are richer.  It doesn't try to touch that at all.  Yet we're supposed to believe that the wealth effect has been officially debunked!?

The wealth effect is commonly applied to two groups of people: those who perceive themselves to be richer and those who actually are richer.  The slate article is really only trying to address the first group.  Its questions whether feeling richer (due to assets like your house going up in price) really lead individuals to spend more money.  For a piece that's supposed to "debunk" a myth, it does a horrible job.  It doesn't provide any convincing data or give any detailed analysis.  It jumps to the conclusion without any proof at all.

The article doesn't address the other group related to the wealth effect: Those who actually are richer.  It doesn't try to touch that at all.  Yet we're supposed to believe that the wealth effect has been officially debunked!?

The wealth effect is commonly applied to two groups of people: those who perceive themselves to be richer and those who actually are richer.  The slate article is really only trying to address the first group.  Its questions whether feeling richer (due to assets like your house going up in price) really lead individuals to spend more money.  For a piece that's supposed to "debunk" a myth, it does a horrible job.  It doesn't provide any convincing data or give any detailed analysis.  It jumps to the conclusion without any proof at all.

The article doesn't address the other group related to the wealth effect: Those who actually are richer.  It doesn't try to touch that at all.  Yet we're supposed to believe that the wealth effect has been officially debunked!?

It also doesn’t factor in the HELOC ATM machine effect people were using. 100-200k a year EXTRA tax-free income for everyone! Hummer or BMW or a vacation anyone?

It also doesn’t factor in the HELOC ATM machine effect people were using. 100-200k a year EXTRA tax-free income for everyone! Hummer or BMW or a vacation anyone?

The author is an ignoramus, and I think the original poster was being tongue in cheek.

I managed to get a hold of the mortgage equity withdrawal raw data, and modeled what would happen to the economy if the ATM effect went into reverse. It all can be summarized as, what is the effect of reversing the growth of the pool of mortgage debt, which grew from 50% of GDP at about 1999 to 79% of GDP today.

Bottom line was growth was impaired by a couple of percentage points per quarter through 2008, assuming that the reversal happens over this year. Then growth resumes whatever underlying trend it follows, save for any change in the rate at which the pool of mortgage debt changes in size.

Incidentally, the pure “wealth effect” was estimated at 10%, and I did not include this in the calculations. I figured that the wealth effect was buried in the mortgage debt change, as the funding for wealth effect spending has to come from somewhere.

The author is an ignoramus, and I think the original poster was being tongue in cheek.

I managed to get a hold of the mortgage equity withdrawal raw data, and modeled what would happen to the economy if the ATM effect went into reverse. It all can be summarized as, what is the effect of reversing the growth of the pool of mortgage debt, which grew from 50% of GDP at about 1999 to 79% of GDP today.

Bottom line was growth was impaired by a couple of percentage points per quarter through 2008, assuming that the reversal happens over this year. Then growth resumes whatever underlying trend it follows, save for any change in the rate at which the pool of mortgage debt changes in size.

Incidentally, the pure “wealth effect” was estimated at 10%, and I did not include this in the calculations. I figured that the wealth effect was buried in the mortgage debt change, as the funding for wealth effect spending has to come from somewhere.