Executive Times






2008 Book Reviews



Pop!: Why Bubbles Are Great For The Economy by Daniel Gross








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Along the lines of “there’s gotta be a pony in there somewhere,” Daniel Gross proposes an interesting thesis in his new book, Pop!: Why Bubbles Are Great For The Economy. Gross proposes that some bubbles leave behind a usable commercial infrastructure. His examples include the telegraph, railroad, internet and real estate bubbles as examples of this phenomenon. Here’s an excerpt, from the beginning of Chapter 6, “Real Estate,” pp. 132-134:


In the 1990s, dot-corns and fiber-optic companies were the economic analog to Miami Dolphins running back Ricky Williams—an inspired professional who carried the ball with flair, single-handedly powered the offense, and inspired comparisons to the all-time greats. Post-2001, those companies also turned out to be the economic analog to Williams—an erratic, pot-smoking slacker who left his supporters and promoters disappointed.

New Economy companies quickly slashed payrolls and capital investment budgets as they were revealed to be frauds, cheaters, and number fudgers. In a matter of weeks, Enron went from 20,000 employees to a few dozen, and WorldCom axed 60,000. Thomas Philippon of New York University and Simi Kedia of Rutgers Business School found that the hundreds of publicly held companies that restated earnings in 2000 and 2001, many of which were in the tech/fiber-optic/dot-corn megaplex, cut between 250,000 and 600,000 jobs in 2001 and 2002. And the loss of high-paying jobs at WorldCom and Enron was only par­tially offset by the creation of jobs in the high-paying white-collar criminal defense sector.

While the economy-wide recession ended in November 2001, the domestic business investment recession deepened. "Real business fixed investment fell for nine consecutive quarters between the first quarter of 2001 and the first quarter of 2003," economist Brian Wesbury noted in the Wall Street Journal. "This was the worst period of decline in business investment since the data were first collected in 1947." The slowdown wasn't simply due to broken-down technology infrastructure builders. As globalization picked up pace, U.S. companies were more likely to outsource. Large companies like IBM and Dell either cut or simply added a few positions in the comparatively slow-growing domestic market; they hired with alacrity in comparatively fast-growing markets like India and China. Between 2001 and 2004, U.S. foreign direct investment outflows would rise from $142 billion to $224.1 billion. And so, middle managers who had fled Microsoft and General Electric in pursuit of dot-com wampum and casual dress codes often found the doors shut when they tried to return.

As a result, the United States lost payroll jobs for two more years after the recession ended. There were fewer private sector jobs in January 2005 than in January 2001, making George W. Bush the first president since Herbert Hoover to see payroll jobs decline in a full term. Of course, the job loss between 2000 and 2004 was nowhere near as gruesome as it had been between 1928 and 1932. And for that Bush could thank the rapid emergence of the Pop! dy­namic in the housing and housing-related credit sectors.

Most of Bush's biblical allusions sailed far over the heads of the Washington press corps, which generally believes the New Testament is a spin-off of the New Republic. But in a visit to the Gulf Coast in late August 2006, Bush used biblical language to sum up the positive impacts of the about-to-burst housing bubble. "And I suspect that what you'll see, Toby, is there will be a momentum, momentum will be gathered. Houses will begat jobs, jobs will begat houses." (And unto them option ARM mortgages shall be given. Verily, with resets and points few in number and monthly payments, lo into the third generation.)

A host of macroeconomic trends had spurred real estate in many markets to an enviable record in the 1990s. Between 1994 and 1999, for example, prices of existing homes rose by a healthy 4.4 percent annual rate, spurred by declining interest rates, the revival of cities from New York to San Francisco, graying baby boomers buying re­tirement homes, and broad economic growth. But starting in 2001 and 2002, the market took off like cyclist Floyd Landis on the seventeenth stage of the 2006 Tour de France. Once again, as with the prior Pop! cycles, a spreading sense that new rules were in effect and the mass willing sus­pension of disbelief led to an adrenaline-fueled spiral into mania.


Those readers who enjoy and appreciate counterintuitive arguments will find a lot to like on the pages of Pop! As illustrated in the excerpt, Gross’ writing style is lively, which will also appeal to many readers.


Steve Hopkins, April 21, 2008



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The recommendation rating for this book appeared

 in the May 2008 issue of Executive Times


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