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Posted by: Michael Mandel on December 28
Anybody who wants to understand today’s global economy needs to read this paper: “U.S. And Global Imbalances:Can Dark Matter Prevent A Big Bang?” by Ricardo Hausmann and Federico Sturzenegger of Harvard.
To me, this paper hits the nail on the head. Let me summarize it.
*The international trade statistics are great at tracking flows of goods, and okay at tracking flows of services
*The trade statistics are terrible at tracking cross-border flows of intellectual property. For example, when Intel sets up a chip fabrication plant in Ireland, that country reaps the benefit of Intel’s designs, and all of Intel’s accumulated wisdom about how to run a fab successfully. In effect, a massive amount of intellectual property has been exported to Ireland, without showing up in the trade statistics at all.
*These massive and unobserved exports of intellectual property—“dark matter”—imply that the U.S. is actually running a much smaller current account deficit than the official data shows.
*In addition, U.S. assets abroad are really worth a lot more than we thought, because the official calculation doesn’t include the value of the intellectual property. That explains why it appears that U.S. investments abroad appear to earn a much higher rate of return than foreign investments in the U.S.
Hausmann and Sturzenegger write:
In a nut shell our story is very simple. The income generated by a country’s financial position is a good measure of the true value of its assets. Once assets are valued accordingly, the US appears to be a net creditor, not a net debtor and its net foreign asset position appears to have been fairly stable over the last 20 years. The bulk of the difference with the official story comes from the unaccounted export of knowhow carried out by US corporations through their investments abroad, explaining why the US appears to be a consistently smarter investor, making more money on its assets than it pays on its liabilities and why the rest of the world cannot wise up. In addition, the value of this dark matter seems to be rather stable, indicating that they are likely to continue to compensate for the measured trade deficit.
Globalization has made the flows of dark matter a very significant part of the story and the traditional measures of current account balances paint a very distorted picture of reality. In particular, it points towards imbalances that are not really there, making analysts predict crises that, for good reason, remain elusive.
Dark matter also sheds a different light on the often discussed savings puzzle. According to the official statistics, the US appears as a profligate consumer with dismal savings. However, these numbers understate the US savings rate by the amount of dark matter it exports and overstates the savings of the rest of the world by the amount of dark matter it imports.I will write more about this paper. But for now, it makes a lot of sense.
Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.