Tag Archives: Columbia University

Net Worth is Down and that May Explain Why Stimulus Wasn’t Particularly Effective

This week saw the release of the Federal Reserve’s Survey of Consumer Finances. The news isn’t good. Median net worth fell 38.8 percent from 2007 to 2010. Predictably, the unhealthy diagnosis has occasioned a healthy dose of political posturing. For its part, the White House was quick to note that “the entire decline in household wealth took place before President Obama came into office” and that total wealth “has risen every year since he came into office.”

E21, in turn, pointed out that it was a little odd for the White House to emphasize the aggregate numbers rather than the median:

The claims made by the White House are disingenuous (at best) because they ignore the median U.S. household and focus instead on the increase in overall wealth, which has largely come from gains in the stock market. The White House is essentially saying that we shouldn’t worry about the plight of the typical family because Warren Buffett’s stock holdings have gone up in value by tens of billions of dollars since March 2009. The focus on aggregate household net worth is extremely comical when compared to previous statements made by the President and others in his Administration about the country’s lamentable concentration of wealth and income in the hands of a “fortunate few.” Someone should ask President Obama if this means we needn’t worry about income disparities anymore because total household income is up nearly 20% on an inflation-adjusted basis over the past 10 years?

Framing aside, there is an important policy implication of such a large fall in net worth. Richard Clarida of Columbia University explained this point way back in March of 2009:

There is a second reason while the bang of the fiscal package will likely lag behind the bucks. Even if the global financial system soon restores some semblance of order and function, the collapse in global equity and housing market values has so impaired household wealth that private consumption (which represents 60% to 70% of GDP in G7 countries) is likely to lag – not lead – economic growth for some time, as households rebuild their balance sheets the old-fashioned way – by boosting their saving rates.

In our working paper last fall, Veronique and I explained this point further:

The current recession has resulted in an unprecedented collapse in net wealth. In other words, it is a deep “balance sheet”‖recession. But with personal wealth diminished and private credit impaired, some economists believe that stimulus is likely to be less effective than it would be in a different type of recession. This is because consumers are likely to use their stimulus money to rebuild their nest eggs, i.e., to pay off debts and save, not to buy new products as Keynesian theoreticians want them to.

The White House is interested in escaping blame for the collapse in median net wealth. That’s understandable; that’s what White Houses do. It is harder to escape from the policy implications of a balance sheet recession.

Empire State of Mind

New York’s highest court recently decided two separate cases that centered around eminent domain abuse and the Fifth Amendment. In late November, the court allowed basketball tycoon Bruce Ratner to appropriate a good sized section of a Brooklyn, furthering his plan to move the New Jersey Nets franchise to a new arena. Last week, the intermediate appeals court stopped Columbia University’s attempt to gobble up much of the Manhattanville neighborhood north of Midtown. [Corrected 12/08.]

These cases highlight just how much of a mess eminent domain proceedings are in the wake of 2005’s U.S. Supreme Court decision Kelo v. City of New London. Supreme Court decisions are no stranger to controversy, but the outrage surrounding Kelo transcended party or ideology, and led to forty-three states adopting restrictions on their own eminent domain powers.

In the Brooklyn case, the issue is identical to Kelo. Bruce Ratner wants to tear down a significant portion of a vibrant neighborhood, and replace it with private economic developments including office towers, a shopping complex, and a basketball arena, which will likely be financed with a significant public subsidy.

Reason Magazine‘s Damon Root has an excellent analysis of the private property rights that Ratner and the Empire State Development Corporation trampled over: Continue reading