Bubbles Great for the Economy
Slate and NYT columnist Daniel Gross has written a book, Pop! Why Bubbles Are Great for the Economy, due out next week. Financial Times has a reportedly reviewed it quite favorably but, alas, said review (“A heresy wise investors might embrace”) is behind a subscriber wall.
Tyler Cowen pronounces it a “stimulating book, worth your time and money.” His précis of the argument:
Bubbles leave behind an economic infrastructure that spurs later growth. The telegraph and railroad bubbles of the 19th century gave birth to modern communications and transportation. The fiber-optic bubble of the 90s paved the way for YouTube and MySpace. Might we need a “green bubble” to solve current energy problems?
Of course Gross is smart enough not to defend all bubbles. Perhaps bubbles are best when an economy has the potential for breaking through to a new high-growth mode; that would cover today and the mid- to late 19th century. I am less convinced by his treatment of the 1920s bubble, which he cites as beneficial in paving the way for the New Deal. I see a smoother economic path as having brought the better parts of the New Deal without so many of the overreactions.
Gross argues that government should support many bubbles instead of choking them off. At the very least, bubbles are underrated
It would be hard to conceive sparking the New Deal, aka the socialization of the American economy, as a sign of market forces working. Otherwise, the argument (as summarized) strikes me as quite plausible.
The Internet bubble paved the way for a massive Web-based economy and innovation. The cyclical housing bubbles provide capital for tearing down dilapidated housing and otherwise upgrading neighborhoods. The fact that investors who jump in late and are not prudently diversified get hurt doesn’t negate these benefits.
UPDATE: Kevin Drum observes that “market forces working” isn’t the same as “good for the economy” and thinks the New Deal was the latter:
Modern economies have a hard time operating efficiently without a fair amount of regulation, and the New Deal provided exactly that: the SEC to ensure transparency in financial markets, the FDIC to restore trust in the banking system, unemployment insurance and a minimum wage to provide at least a minimal buy-in to capitalism from the working class, and much else. The New Deal may have had its overreaches, but 70 years later I think everyone not to Tom DeLay’s right agrees that moderately regulated capitalism works better than unregulated capitalism, and that framework was what the New Deal provided.
I don’t disagree. It may well be that Gross meant “New Deal” in the sense Drum does (the creation of regulatory checks on banking and stock speculation) rather than in the sense I think of it (various make-work projects like the WPA, CCC, TVA, and the like plus Social Security and other social welfare programs). Indeed, that would make more sense in terms of his thesis.
I’m not sure what Tom DeLay believes in, if anything, so I’m not sure where I’d place myself in relation to him on the economic philosophy spectrum. I’m squarely in the Friedman-Hayek mode, of preferring maximal freedom with the government there to check gross excesses and to provide a safety net for the truly needy.