You may if you are particularly devoted recall the analysis in Slash and Grow – about whether exports, households or investment can lead us out of recession. The bearish view is that households can’t, because they are very indebted and need to keep saving, after a credit crunch has shown them how dangerous it is to be reliant on debt. Oh, and the banks also don’t want to offer credit, as they fear for their capital ratios.
But you might also argue that it is not just gross debts but net wealth that matters. To use the archetypal example, it does not matter if I have debts of 3 times my income if I also own assets of 5 times. The wealth effect is something long investigated as one of the channels through which assets affect economic demand.
Mark Thoma on Economist’s View has a graph relating US wealth to its savings rate (and the savings rate is the inverse of the consumption rate). As you would expect, it is downward sloping – the wealthier the economy, the less it needs to save. Now the US has had a much worse housing bust than we have. From their current position the US is expected to increase its savings rate from 5 to 7%, according to the graph. But the UK is in a different position – housing up 10% in a year, and our savings rate already much higher.
So the question is can the UK expect more growth from its relatively wealthy households? My answer – as I observed in Credit Where It’s Due – is not necessarily. Yes, wealth has recovered. But it is still too concentrated in the top deciles, where the propensity to consume from added wealth is much lower. I keep coming back to the idea of wealth taxes as an answer to more than one problem ….