Why the housing bubble tanked the economy and the tech bubble didn't

The poor cut spending much more for the same dollar decline in wealth. This fact is one of the most robust findings in all of macroeconomics, and has been confirmed in the context of housing, fiscal rebate checks, and credit card limits. It also makes intuitive sense. If Bill Gates loses $30,000 in a bad investment, he’s not going to cut back his spending. If a household with only $30,000 suffers a similar loss, they’re going to massively slash spending.

Macroeconomists have traditionally ignored distributional issues, grouping all households into a a single “representative agent.” This assumes that differences in spending responses to wealth shocks don’t matter, which is at odds with the empirical findings.

In other words, traditional macroeconomic models place no importance on the fact that the poor pull back on spending much more than the rich when their limited wealth takes a hit. For example, former Federal Reserve Chairman Ben Bernanke described why academics doubt the importance of distributional issues in his book on the Great Depression, suggesting that differences in spending propensities because of wealth would have to be “implausibly large” to explain the decline in spending in the 1930s. Some economists would make a similar point about the most recent recession.

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