Two important and widely held views have been discredited
By Scott Sumner
Ever since 2000, American’s views on the economy have been heavily shaped by two ideas:
1. There was clearly a big tech stock bubble in 2000.
2. There was clearly a big house price bubble in 2006.
It’s possible that there was some sort of a bubble in each case. But as of today, there is no strong evidence for either proposition. It is not true that tech stocks were clearly overvalued in 2000, and it’s not true that house prices were clearly overvalued in 2006.
The tech bubble theory was based on the assumption that stock prices had gotten so high that they could only be justified in the tech industry went on to dominate the US economy, and at least some tech stocks would have to become massive successes, in order to offset the inevitable attrition of tech start-ups that did not do well.
Today, it seems like the optimistic forecasts were basically correct. Not necessarily exactly correct, but close enough that one can no longer claim that the extreme optimism of 2000 was clearly unwarranted. Big American tech companies completely dominate our stock market, and indeed they dominate the global stock market in a way that was almost unimaginable in 2000. At least unimaginable to most individual humans; the “wisdom of crowds” somehow foresaw this future.
The same is true of housing. Real housing prices are now just 1% below their 2006 peak. So it’s no longer clearly true that houses were greatly overvalued in 2006. Instead, other theories are equally plausible. Perhaps NIMBYism combined with permanently lower interest rates does justify permanently higher real house prices in the 21st century. Perhaps the 2006 immigration crackdown and the subsequent tightening lending standards and the steep drop in NGDP during 2008-09 caused the slump, and house prices are now returning to their appropriate level. The new normal of the 21st century. Or maybe this is another bubble. Who knows? But as of today, we can see that real house prices were not clearly overvalued in 2006. It’s at least debatable.
The two theories that have been discredited played a major role in shaping the views of Americans, including economists. Now that these theories have been discredited, Americans should revise their view of what happened to the economy over the past 20 years. Will they do so? Probably not.
This is an invitation for bright young academics that are not blinded by popular prejudice to take a fresh look at the whole bubble theory, especially the way these ideas shaped our view of the business cycle.
PS. Ever since I began blogging more than 11 years ago, I claimed that bubble theories were wrong. But I’m not going to take credit for predicting the strong surge in tech stocks and house prices—I did not anticipate this.