We have seen bubbles come and go (tech, housing, etc). Other sectors (education, healthcare) currently seem to draw a disproportionate amount of resources, if not downright bubblicious. So we end up with sectors that are really high as % of GDP, at the expense of other industries, when compared to other developed countries.
I would presume mis-pricing is an inextricable part of this, along with this or that market distortion. But I actually want to leave causes out of this discussion. All I want is some rough idea of how to arrive at a statement like, “this industry has 25% more employees that it should naturally have, while its products are 30% overpriced.”
The only thing I can think of right now is a simple empirical approach where you would just compare different economies, adjust for some variables, and so on. I wonder if there is a more “intrinsic” approach (to make a loose analogy to investing). Can there be anything more to this than looking at deviations from a trend line?
Another motivation besides asking ‘how much’ is that our episodes of mis-allocation seem to be clear mostly only in hindsight. But while a bubble is in progress, it’s difficult to tease out how much the changes in supply & demand are for good rather than some temporary mania.
Or put more casually, if there is a tulip craze under way, and society’s best and brightest minds, along with the best real estate and commodities are diverted to the tulip industry, how can we say this arrangement is NOT justified? After all, the demand would be real, driven by the population’s desire to own tulips. So what if someone values a tulip bulb as much as a house; who are you to question how a person assigns the relative worth of things? After all, isn’t this the price arrived at by the market? You might be accused of imposing value judgments if you tried to call this out as a bubble. (Granted, there was probably loose lending behind the tulip bubble, so maybe we have to include monetary topics.)
Also, I know I’m going to get a lot of “bubbles wouldn’t happen if the government doesn’t distort the market” type of responses; or the opposite, “gov’t regulation is needed to prevent bubbles.” I’m familiar with that debate and it is NOT what I’m after.