On the good effects of an economic bubble…

David McWilliams’ book, The Pope’s Children: Ireland’s New Elite, accurately describes the economic boom and its social outworking for the Republic. Although McWilliams has since expressed concern about the sustainability of that growth, and in particular the massive growth in the housing market, it seems that even big bubbles are good for the economy in the longer term. At least, that is, according to Daniel Gross, who has just published a book called Pop!: Why Bubbles Are Great for the Economy.

Simply put, bubbles are how new commercial infrastructure gets built in this country. In the 1840s and 1850s, European governments slowly strung up telegraphs from large city to large city. But in the United States, bubble-drunk entrepreneurs rampaged throughout the countryside, stringing up competing and often redundant wires way ahead of demand. Most went bankrupt. In the 1880s, vast competing, and often redundant, rail networks were built way ahead of demand. By 1894 about a quarter of the rails were in bankruptcy. The 1990s saw an orgy of commercial infrastructure built for the Internet. We all know how that ended.

But Americans recover from failure very quickly. All that infrastructure wasn’t torn down—it was consolidated, taken over by new investors with lower cost bases, and reused. The cheap, pervasive telegraph led to American dominance in the national and international market in information—and long-lasting businesses like the Associated Press and the Chicago Board of Trade. The cheap, pervasive national railroad network led to an integrated market in goods and commodities—and long-lasting businesses such as department stores, mail-order retailers like Sears, and national brands from Coca-Cola to Procter & Gamble. The Internet pop has left us with Web 2.0—Facebook and Skype, MySpace and YouTube, and, most of all, Google. Each of these companies either was started or gained critical mass after the Internet bubble burst. Each gained tremendous scale overnight thanks to all the cheap excess capacity built during the 1990s bubble.

He’s not arguing there may not be pain, if or when the Republic hits an economic pain barrier, but the Ireland it leaves behind will not be the same as the one some of us remember from the late eighties. Indeed, the new Stormont government’s plans for economic regeneration and new transport infrastructure may well depend upon it.

  • cyllabub

    The bubble in the South has already run its course, as evidenced by the recent fall in banking stocks, which are exposed to huge amounts of unsecured debt. Bubbles may be good, but the fallout never is…..except for the hedge funds.

  • joeCanuck

    When bubbles burst we always hear about the money lost by investors etc.
    But, the thing is, money just doesn’t disappear. It’s still around, only someone else has it.

  • New Yorker

    Gross makes some interesting points but the ideal should be to avoid bubbles and pops and, if that is impossible, to manage them to lessen the damage.

    I read the McWilliams book and as I recall he ascribed much of the last few years prosperity to large personal consumer debt. Although house inflation is a big part of that debt, it is not all of it. We have the same situation in the US and we are in unchartered waters insofar as the effect of enormous personal debt and the implications if widespread personal bankrupcy occurs. What’s the opinion from Ireland on that possible occurance?

  • Arthur Andersen Fa Club

    What’s the opinion from Ireland on that possible occurance?

    A Bank Manager is a sensible soul – you will be lent an umbrella on a sunny day and be asked for it bank on a rainy day.