Bubble Standard

by Don Boudreaux on August 7, 2006

in The Economy

Today’s New York Times column by Paul Krugman befuddles me, for a variety of reasons.

One reason stands out, however: Krugman’s choice of a benchmark against which to measure the sufficiency of today’s investment spending.  Here’s what Krugman writes today:

The key point is that the forces that caused a recession five years ago
never went away. Business spending hasn’t really recovered from the
slump it went into after the technology bubble burst: nonresidential
investment as a share of G.D.P., though up a bit from its low point, is
still far below its levels in the late 1990’s.

And here’s what Krugman wrote in the New York Times on September 2, 2001:

During the years of booming stock prices, which were closely linked to
euphoria about the ”new economy,” businesses invested frantically,
sinking vast sums into information technology. Now, of course, many of
those businesses realize that they invested far too much.

If the late 1990s were cursed by an investment bubble — and I agree with Krugman that they indeed were so cursed — why should investment levels from those years be the benchmark against which we measure investment today?


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