By Karl Smith
by Adam Ozimek
Stories like this always make me think that in hindsight we will wonder how a growth bubble in China wasn’t obvious to everyone:
This is not how things were supposed to be when the $57-million airport opened in late 2007. Local officials were so confident that tourists would flock to this beautiful, mountainous county in southwestern China that they made the terminal big enough to accommodate 220,000 passengers annually, and built a runway capable of handling a 140-seat Boeing 737.
But only a few charters and budget carriers have established service here. A grand total of 151 people flew in and out of Libo last year.
Today's oversimplified recession narrative is one of the limitations of the free market and deregulation.
This is inappropriate for a bubble that emerged in the highly regulated, highly subsidized, and highly government manipulated housing market. And yet it retains some aspect of truth in that many agents acted on what looks an awful lot like irrational beliefs, and governmental intervention was neither a necessary nor sufficient condition for the housing bubble.
Here is my prediction: When the Chinese growth bubble bursts, the oversimplified recession narrative will be one of the limitations of public works projects. Again, there will be some truth to this, but the lessons will be inaccurately applied to developed countries with governments that can be a) be held accountable by democracy, and b) have a lot more experience doing effective public works. And the narrative fallacy will have stuck again.