The Upside of the Tech Bubble

Felix Salmon’s op-ed piece detailing the declining importance of American stock markets is well worth the read.  I think it is especially interesting in light of the general push toward defined contribution benefit plans.  My suspicion is that most participants in such plans feel they “need” to be heavily invested in US equities, and equities funds most likely dominate other options.  If Salmon’s assessment of stock markets is correct, I think this means that the public is being pushed into a retirement dead end.  I would appreciate some follow-up on how the average investor should manage their 401k plans in this environment.

In a follow-up blog posting, however, I think Salmon goes a bit far when describing the tech stock bubble of the 1990s:

The NYSE is place for algorithms and speculators to make bets on financial assets. It last funneled real amounts of money into the broader economy during the dot-com boom, leaving behind a lot of Aeron chairs and little else.

I have gone back and forth on this topic, ultimately concluding that the tech bubble was not all that bad.  To be sure, there were some spectacular failures – comes to mind.  But when you scrape away the detritus, you find the building blocks of all the technology that is increasingly integrated in our everyday life.  The bubble-driven intensity of activity in information technology almost certainly accelerated its development and adaptation. Many news ideas were explored; some failed, some succeeded.  The successes, however, outweighed the failures, leaving productivity much higher as a result (that this productivity has not translated into higher real wages, however, remains a disappointment).

Also note that much of the spending during that period was dedicated to capital that depreciated very quickly.  Consequently, the impact on future consumption/production was limited.  The excess computer produced in 1999 was nearly worthless just a few years later.  Time for a replacement, bubble or not.  Housing, obviously, is very different – the capital is long lived, locking resources into place for decades.

In short, the tech bubble was a wild ride, but I am wary about declaring it an absolute failure of the capital allocation process. 

Originally published at Tim Duy’s Fed Watch and reproduced here with permission.