Back in mid-May we recommended Pop! Why Bubbles are Great for the Economy, a provocative take on the consequences of financial bubbles by Daniel Gross of Slate/Newsweek.
Here's the excerpt we shared in that earlier post, which first appeared in Slate (with our emphasis added):
Looking back through the last 150 years, a familiar pattern emerges. A wonderful new technology or economic idea arrives. A few good years of solid growth help engender a sense that things are different and that new rules apply. Hype and rosy projections—from Irving Fisher's 1929 prediction of a "permanently high plateau" to Dow 36,000—justify investing at stratospheric levels. The trend, previously confined to the business community, crosses over into popular culture. Everyone's buying stock, investing venture capital, refinancing a mortgage, installing compact fluorescent light bulbs. And then, pop! The bubble bursts, heroes become goats, and bankruptcies spread. As corruption and venality are exposed, self-loathing and recriminations rule the day. (See: subprime lending, spring 2007.) And that's when all the moralizing narratives about the tragedy of bubbles get written.
But this is only half the story! After all, the process of growth and innovation doesn't end when a bubble bursts. The Internet wasn't unplugged and shut down in 2002. In fact, once you gain a little historical distance from bubbles, it is clear that some bubbles—some, not all—leave behind something that is a little bit boring but extremely useful: infrastructure. The bubbles that have left behind commercial infrastructure have been incredibly important contributors to America's remarkable long-term economic performance.
That italicized passage occurred to us as we read and discussed BusinessWeek's "Bonfire of the Builders."
Gross's key insight was that for all the financial (and human) dislocation wrought by bursting bubbles, the productive ones helped create world-changing instruments of future economic growth. Unfortunately, the housing boom of the last few years hasn't done anything of the sort.
Homes don't provide infrastructure; they require it, in the form of roads, power, water, sewer systems, schools, &c. Though the precise extent and impact of the housing meltdown won't be known for some time, we now have the financial dislocation associated with a bursting bubble and essentially nothing in the way of productivity-enhancing infrastructure to show for our trouble.
The railroad/telegraph/Internet bubbles were clearly overwrought and the extremes of each seem deeply irrational in retrospect. But at least they left something useful behind!
We recommend BusinessWeek's entire housing package (links to the other stories are available here).
Daniel Gross, "Pop! Why Bubbles are Great for the Economy," Slate, May 9, 2007
Mara Der Hovanesian, "Bonfire of the Builders," BusinessWeek, August 13, 2007