consumption

Its acceptance is as widespread as its justification is important, for it provides the rationale for the Federal Reserve’s unprecedented monetary expansion since 2008. While critics may dispute the wealth effect’s magnitude, few have challenged its conceptual soundness. Such is the purpose of this article. The wealth effect is but a mantra without merit.

Our grandparents believed in the value of thrift, but many of their grandchildren don’t. That’s because cultural and economic values have changed dramatically over the last generations as political and media elites have convinced many Americans that saving is passe. So today, under the influence of Keynesian economists who champion government spending and high levels …