About that “Wealth Effect”: Not so Much…

June 12th, 2013

Economists like to say that their discipline is the study of scarcity, or even the science of scarcity. But I’d like to suggest that — acknowledging that it’s a behavioral, social “science” — it’s actually the study of human reaction functions: If X happens, how do people (individually and as groups) react?

But unlike other scientists, rather than studying these reaction functions — human behavior — economists are prone to stating their results as a priori assumptions (and that, absent any solid quantification). You’ll be hard-pressed, for instance, to find Kahnemann and Tversky’s quite detailed empirical numbers on human risk-aversion incorporated into mainstream economic models (even though that research — from psychologists — earned the Nobel Prize in economics).

The wealth effect is a great example of this approach: “If people have more money, they’ll spend more.” Okay, that seems to make sense as an armchair proposition, but how much more, and what’s the likelihood across a heterogenous population?

Which leads me to share the rather eye-popping empirical result that prompts this post, a finding in a Royal Bank of Canada survey, reported by Pedro da Costa:

(Apparently the RBS research is proprietary, as da Costa doesn’t provide a link and I can’t find the study.)

If it’s true that U.S. monetary policy these days is achieving its effect largely or purely through the wealth effect, given these findings it’s not surprising that monetary policy isn’t having the profound effects that one might hope for.

Cross-posted at Angry Bear.


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