Bubble Standard

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Jaeric

Krugman is guilty as charged of producing biased analysis.

But on the other hand the current administration argues that its tax cuts

have generated greater investments and savings -- a supply-side miracle.

But as of yet there is essentially no evidence that the supply side tax cuts have worked. Of course there is significant evidence that the Keysenian aspects of the

tax bush cuts worked very well.

If you are going to acuse Krugman of producing biased analysis you also have to accuse Kudlow and all the other supply-siders of being biased.

From the economic bottom real nonresidential fixed investment

is now up 14.5%.

By comparison at the same point in

the cycle it was up 33% in the 1990s,


21.3% in the 1980s and 51.8% in the 1960.

Capital spending this cycle is the weakest in the post WW II era as in nominal terms it has only grown from a little under 10% of gdp to 10.4% now. Since 1965 it has been less then 10.5% of gdp less then one-third of the time.

From the economic bottom real nonresidential fixed investment

is now up 14.5%.

By comparison at the same point in

the cycle it was up 33% in the 1990s,


21.3% in the 1980s and 51.8% in the 1960.

Capital spending this cycle is the weakest in the post WW II era as in nominal terms it has only grown from a little under 10% of gdp to 10.4% now. Since 1965 it has been less then 10.5% of gdp less then one-third of the time.

Clinton likes to take credit for the 90's stock market boom and the budget surpluses from late in his administration. But the budget suplus came about because of huge cap gains from selling all the bubble stocks, leading to the crash of 2000-2001. cant have it both ways

Kevin an Mcwop...You're both right. Some businesses saw the new tech as a new tool to be used, while others saw the new tech as the new business...Mix that with over investment and you will get your bubble. Some will continue on afterwards, and some (if not most), will fall to the sides and vanish.

BTW, I worked at a "dot com" in the late 90s. They would have hired a monkey if it could hit a computer with a stick.

Kevin, not anecdotal. How many fortune 500 companies (the list actually extends way beyond that) had websites, and the infrastructure to run those sites in 1993 - none, zero, nada. How many do now? All of them, and they have not liquidated any of that equipment, becuase most of those companies are still in bsuiness. Their purchases dwarf that of little businesses that went belly up. Our business has 600 clients that went on a tech buying binge during the late nineties to take advantage of new technologies. The ramp up is over.

And why should a company "never be founded"? Isn't that a bit obtuse? Myspace might have sounded like a dumb idea to some too. Businesses fail, always have and always will, but I think that enterprising spirit is a good thing.

Mcwop, your anecdotal example of one person's experience hardly discounts a nationwide phenomenon. It is abundantly clear that there was far too much business investment in the late 1990s.

That is why so many speculative companies evaporated, along with their invested equity, assets, and jobs. You could fill a catalog just from my own city of companies that really should never been founded and that had no hope of profit, being created, heavily funded, going public, hiring hundreds of people, then imploding. (And I don't even live in California!)

I have a friend wbo has a house full of stacks of second-hand routers, firewalls, computers etc that he bought for nothing at local liquidations. Needless to say they are not being employed productively as intended.

If a company spends all its funding on "business investments", makes no money, runs out of cash, and goes bankrupt, then by definition too much business investment has occurred. And there was an awful lot of that a few years ago.

Very good, Professor Boudreaux. Paul Krugman's hatred of the current administration has diminished his logical abilities.

You are all expecting far too much from Krugman. ;-)

Krugman is wrong, or simply misunderstands the technology investment of the 90's. I purchased much of that technology he speaks of, and we did not invest too much. We simply have bought all the stuff we needed, and currently do not need to buy at the same levels.

Remember, much of what was purchased were brand new technologies (e.g. internet servers) used to build net infrastructure. We had no internet site in the early 90’s, and had to build that stuff from scratch – requiring a lot of labor and equipment (multiply that by every business in existance in th U.S.). The expensive stuff is done, and now we can build on that more cheaply. It is a bad benchmark to use, because it was a once every 10-12 year technology infrastructure leap.

Ha, classic! Nothing like nailing a guy with his very own words. Funny there's that whole genre of punditry in which people conveniently forget (when it serves their argument) that the dot-com era was a ludicrous, unhealthy bubble of over-investment and over-employment in vapor companies.

You got to wonder, surely Krug is just being extremely dishonest. Or is it possible he's totally forgotten his public positions of just a few years ago? Is he insane? Is he an amnesia patient?

I seriously doubt Krugman's right. If you want a baseline outside of the technology bubble, you'd have to go further back than 1997.

If what you say is correct, then 12.6% is a bubble but 11.7% is the baseline against which the future should be compared? Sounds pretty marginal to me.

Of course, if you're getting your economic analysis from Krugman in the first place... ah, but that's another story.

Calculated Risk,

Perhaps I'm misreading your comment, but I never denied -- and certainly never meant to deny -- that Krugman is wrong to say that nonresidential investment is far below late 1990s' levels. Indeed it is.

My point, instead, is to suggest that late 1990s levels of investment are an inappropriate benchmark given that, as Krugman himself acknowledges, those years were witnessed a bubble in investment spending.

When Krugman wrote "far below its level in the late 1990's", maybe you should have checked the numbers.

Nonresidential investment as a percent of GDP was 10.4% in Q2 2006. That is the same level as 1994. As a percentage of GDP, this ratio reached 12.6% in Q3 2000.

I agree it would have been clearer if Krugman wrote that nonresidential investment had only recovered to '94 levels (as a percent of GDP), but Krugman is correct - it is "far below the late '90s levels". In '97 it was 11.7% - perhaps that is the period Krugman is using as his benchmark.

Once again, Krugman is correct.

Good catch by all. I saw it too.

Krugman's lament: bad ideas haven't recovered to their peak.

If Krugman has seen new evidence that caused him to rethink his position, he saw it in the midst of writing the paragraph (from today's column) quoted above. Note that even in that column -- in that very paragraph -- he refers to the bursting technology bubble.

Or he might have seen some other evidence that caused him to rethink his position.

Why? Because Krugman is an apologist for the Clintonistas and hates Bush so much it skews most, if not all, of his "economic" analysis. It's a shame.

PR