Slate's Bizbox
moneybox: Commentary about business and finance.

Pop!Why bubbles are great for the economy.

By Daniel Gross
Posted Wednesday, May 9, 2007, at 5:35 PM ET

View the Bubble Hall of Fame, take a Bubble Quiz, and buy Pop! Why Bubbles Are Great for the Economy.

(Continued from page 1)

During bubbles, a second type of infrastructure is built, too: the mental infrastructure. The money raised during bubbles doesn't just go into the incinerator. It is spent on marketing, advertising, promotion, hype, and brand awareness. Bubble-era companies, desperate for traffic, discount furiously, pay rebates, offer free shipping, and run their businesses on negative margins—all as part of a heroic effort to coax consumers and businesses to spend their money in fundamentally different ways. The telegraphs slashed per-word rates to compete with the mail and with each other. The railroads slashed freight rates to compete with canals and rivers, and with each other. In the 1990s, the entire e-commerce sector spent furiously to persuade consumers and businesses to take the leap of faith and buy stuff—stocks, books, airline tickets, pet food, groceries, diamonds, chemicals, you name it—online.

Most of the pioneering Internet bubble-era companies failed as businesses. But they succeeded in making millions of people believe that it was safe, efficient, and desirable to conduct business online. That mental infrastructure didn't disappear after the bust. People didn't suddenly stop buying things online in 2001. According to Forrester Research, e-commerce more than doubled between 2001 and 2006, to $211.4 billion. Post-bust innovators were able to tap into both a commercial physical infrastructure (near-universal broadband) and a huge installed base of customers. Thus, businesses that were stillborn during the boom (Webvan, advertising-supported video sites) can thrive after the bust (FreshDirect, YouTube).

Today the services-driven U.S. economy is showing a remarkable capacity to blow and deflate bubbles quickly. With the assistance of Federal Reserve Chairman Alan Greenspan, we transitioned seamlessly from Internet bubble to real-estate bubble to alternative-energy bubble in just six years. That makes the mental infrastructure more important than ever. Take the housing bubble that just popped. Millions of people will get hurt—and hurt badly—as housing prices fall and ARMs are reset higher. The upsides of bubbles are always hardest to see when things are collapsing. (Raise your hand if, in 2001 and 2002, you thought an Internet search and advertising company would be worth $146 billion in 2007.) But the mental and commercial infrastructure surrounding real-estate credit will remain. The culture of refinancing, which proved a huge boon to the economy throughout the 1990s and first half of this decade, will stay with us. So, too, will important bubble-era services like Zillow that empower consumers.

These efforts to make a virtue out of some of the worst tendencies in the American economic character may sound like a naive exercise of hope over experience. But in my book, experience should give us hope—even if the housing bubble continues to wreak damage on the economy and the alternative-energy space is getting bubbly. It is possible, even rational, to be both short-term gloomy and long-term optimistic. Those who believe that the nation's experience with bubbles is all gray cloud and no silver lining need to ask where we would be without the irrational exuberance. Without the disasters of Global Crossing and Worldcom, would we still have Google?

VIEW AS SINGLE PAGE
Print This ArticlePRINTDiscuss this in The FrayDISCUSSEmail to a FriendE-MAIL
Share on FacebookPost to MySpace!Share with MixxDigg ThisShare with RedditShare with del.icio.usShare with FurlShare with Ma.gnolia.comShare with SphereShare with Stumble Upon
Daniel Gross is the Moneybox columnist for Slate and the business columnist for Newsweek. You can e-mail him at . He is the author of Pop! Why Bubbles Are Great for the Economy.
Illustration by Mark Alan Stamaty.
Join the Fray: our reader discussion forum
What did you think of this article?
POST A MESSAGE | READ MESSAGES
Washington Post
The Washington Post
OPINIONS
A Grand Tour
David Broder | While the stars align for Obama, McCain is looking like the odd-man-out on foreign policy.
Annette Heuser: A Honeymoon
PLUS » Achenblog: The New Capitalism Socialism