Tale of Bursting Bubbles

What can you learn by comparing two bursting bubbles? A lot, it turns out.

Five Thirty Eight compares the effect of bursting of the dot-com bubble and the bursting of the housing bubble in Why the Housing Bubble Tanked the Economy and the Tech Bubble Didn’t. In terms of the amount of household wealth destroyed, the two bubbles are quite comparable. But look at the impact on consumer spending:

Despite seeing similar nominal dollar losses, the housing crash led to the Great Recession, while the dot-com crash led to a mild recession. Part of this difference can be seen in consumer spending. The housing crash killed retail spending, which collapsed 8 percent from 2007 to 2009, one of the largest two-year drops in recorded American history.² The bursting of the tech bubble, on the other hand, had almost no effect at all; retail spending from 2000 to 2002 actually increased by 5 percent.

The authors explain the reason for this. The housing bubble concentrated its losses on people with the least capacity to bear them. Consequently, they stopped spending. The tech bubble losses, by contrast, were concentrated in the rich, who easily could sustain the losses without cutting back.

The result? The housing bubble crashed the economy, whereas the tech bubble did not.

So, if those are the relative effects of taking money out of the pockets of the poor and the rich, wouldn’t putting money into the pockets of the poor have a much greater positive impact than putting money into the pockets of the rich? It’s hard to see how that wouldn’t be the case.

So much for screwing the masses in order to keep taxes low for those at the top.