May 8 (Bloomberg) -- Every asset bubble leaves a new collection of bubble literature in its wake.

Some of the books go on to become classics: John Kenneth Galbraith's ``The Great Crash,'' for example. Others (``Dow 36,000'') are remembered for their curiosity value. Still others are just plain curious, as in, what was the author thinking?

Daniel Gross's ``Pop! Why Bubbles are Great for the Economy'' has to be assigned to this third category, because it's based on a flawed premise. The author, who writes Slate's Moneybox column, believes investment bubbles that leave behind a usable commercial and consumer infrastructure are ultimately a net positive for the economy.

How does the real estate bubble, currently deflating, comport with this thesis? Not well. It's painful to watch Gross shoehorn those many-times-flipped condos into his usable- infrastructure framework.

``The bubble achieved a goal that billions of federal dollars, and 30 years of good intentions, could not: gentrification and renewal in formerly some of the most wretched spots of cities,'' such as the South Bronx, Gross writes.

What happens when those gentrified inner-city blocks are dotted with For Sale signs on unoccupied foreclosed homes? It's called urban blight. How do those unproductive assets become productive? The author doesn't say. (Gross's publicist might want to reconsider book-signing events in the once-hot housing markets of Phoenix, Las Vegas and Fort Myers, Florida, where homeowners aren't likely to see much greatness in the bubble's aftermath.)

Better Fit

Gross's argument works better -- superficially, at least -- when applied to information-technology bubbles: telegraph in the 1840s and 1850s, fiber-optic cable in the 1990s. After the fall, the excess capacity was absorbed by a new set of entrepreneurs.

In other words, out of Global Crossing's ashes came Google, which was able to pick up equipment, office space and talent on the cheap.

``The stuff built during infrastructure bubbles -- housing and telegraph wire, fiber-optic cable and railroads -- doesn't get plowed under when its owners go bankrupt,'' Gross writes. ``It gets reused -- and quickly -- by entrepreneurs with new business plans, lower cost bases and better capital structures.''

Companies and wealth disappear; the broadband infrastructure remains. Only 5 percent of the nation's capacity was in use in 2001, according to Gross.

Isn't there a cost? Investors overpaid for resources that were underutilized, sometimes for years. Price signals were distorted, in the same way they're distorted by inflation. Destruction of wealth is never good.

Rails to Nowhere

If economics is about the allocation of scarce resources, how can overbuilding and underutilization be a plus? Perhaps these resources could have been better employed elsewhere.

A case in point is the 1880's railroad boom, which sucked up vast amounts of natural and human resources in its race to connect the continental U.S.

``Western railroads were built through largely vacant land, seeking to create demand and American settlement rather than to serve it,'' Gross says. ``New redundant roads were built solely for the purpose of being sold to competitors.''

Rate wars, over-indebtedness, financial chicanery to hide the losses: It all ended in financial panic and protracted recession. One-quarter of the railroad industry was in receivership by 1894, according to Gross.

Not to worry. ``By cutting inventory and freight costs, the railroad paved the way for large-scale retailers,'' such as Montgomery Ward and Sears Roebuck, which could purchase goods in bulk and distribute them cheaply to customers across the country.

Call the Cops

The destruction of wealth and the inefficiency of miles of unused track were apparently a small price to pay for access to a buggy from Sears.

The 1920s stock-market bubble and the 1929 stock-market crash pose an obvious challenge to Gross's theory. The Great Depression wasn't great -- for anyone. Still, he manages to find a silver lining.

``The importance of the investment and credit bubble of the late 1920s -- the long-term advantage it created -- lay almost wholly in the response it stimulated,'' he writes. The New Deal, with its myriad rules and regulations, made it ``safe for people to invest again.''

Of course, it made it harder for businesses, especially small companies, to raise capital, according to Jim Powell, author of ``FDR's Follies.'' A depression, he says, was ``the worst time'' for government to interfere.

FDR's policies, including increases in taxes of all description and artificial props under prices and wages, kept unemployment high until the war effort put America to work, according to Powell and other Depression scholars.

Besides, if bubbles are so good for the economy, as Gross claims, why bring the feds in to regulate? Just let 'em rip.

Gross, an accomplished journalist, needs to be able to answer questions such as these if he wants to keep his theories from going pop.

``Pop! Why Bubbles Are Great for the Economy'' is published by Collins (232 pages, $22.95).

(Caroline Baum, author of ``Just What I Said,'' is a columnist for Bloomberg News. The opinions expressed are her own.)

To contact the writer of this column: Caroline Baum in New York at cabaum@bloomberg.net.

Last Updated: May 8, 2007 00:01 EDT