Dark Matter Revisited


Monday’s discussion of the BusinessWeek cover story on "Economic Dark Matter and Why the Economy is Stronger than You Think" generated some buzz — at least going by all the comments.

Funny thing is, that post hardly discussed the specific problem with dark matter, and instead criticized the misleading way BusinessWeek characterized the issue via its headlines. 

Today’s online WSJ takes a deeper look at the core issue, in "Is ‘Dark Matter’ in the Deficit?"  Its a great debate about the intellectually intiguing question of why, despite all of the structural imbalances, the US economy hasn’t fallen apart. (I manage to get in a few amusing quotes).

Of course, economies don’t behave like stocks — miss a quarterly number, and get cut in half. Macro-Economic issues are, well, macro — they are bigger, more complex, and take much longer for their full cycles to play out   

But the concept of Dark Matter makes for a brilliant and handy excuse for all manner of bad government policies — Federal deficits, negative account balances, excessive spending, vanishing savings rates, etc. Not to worry, Dark Matter will make up the gap.   

Here’s the Ubiq-cerpt:™

"Physicists for decades have used "dark matter" as Spackle to fill pesky anomalies that seem to defy theories about gravity, the Big Bang and more. Recently, economists have proposed a similar fix for apparent anomalies in U.S. economic data. Unlike dark matter in space, dark matter in economics is a concept that has been mostly derided by other economists. If it’s real, though, it might be no joke for investors.

If you want to immerse yourself in the wonk-fest that is dark matter, feel free to read the recent paper, by Harvard economists Ricardo Hausmann and Frederico Sturzenegger, identifying the stuff. In a quantum nutshell, their theory is meant to explain something that has bugged economists and investors for years: A persistent trade deficit has built up a mountain of U.S. debt, taking America’s balance sheet from about $400 billion in the black in 1980 to about $2.5 trillion in the red in 2004. When Average Joe is up to his eyeballs in debt, he sacrifices his income to whittle away debt. Uncle Sam, on the other hand, still nets about $30 billion more a year on his foreign investments than he shells out to foreigners in debt service and other payments.

Dismal scientists have long warned that this affront to the natural order can’t be sustained, that the U.S. must pay off its debts, suffering all manner of horrors, including a hobbled economy and weaker U.S. stocks, bonds and dollars. But that day of reckoning hasn’t come, and Messrs. Hausmann and Sturzenegger think they know why: The U.S. has a vast, imaginary asset — dark matter — that not only wipes out its debt but provides a surplus that generates that $30 billion a year in investment income.

Working backward from the $30 billion, Messrs. Hausmann and Sturzenegger tried to put a value on that dark-matter generated surplus. By using what they thought was a reasonable rate of return on an investment — 5% a year — they decided that surplus must then be $600 billion. Thus the U.S. since 1980 has accumulated $3.1 trillion that, if accounted for, erases that $2.5 trillion in debt and then some.

And, what is this dark matter? Mostly, the Harvard researchers say, it is simply a deep well of good old American know-how — the consistent ability to export, say, Kentucky Fried Chicken restaurants to Moscow that are more appealing and profitable than Rasputin’s House of Chicken and Waffles. According to this theory, foreigners have been pouring money into the U.S. in hopes of tapping that well again and again."

Its a great discussion; I’ll ask Mark if they can move the entire piece to the public site.

UPDATE:  February 10, 2006 11:38am

This is now on the free WSJ site.


Is ‘Dark Matter’ in the Deficit?
Spackle for Economic Anomalies Looks to Explain How U.S. Operates With Massive Debt
WSJ, February 10, 2006

What's been said:

Discussions found on the web:
  1. PigInZen commented on Feb 10

    So the premise is that our being American is simply worth something large and vast? Is this the ultimate in ponzi schemes?

  2. alan commented on Feb 10

    The New Paradigm: Years back we use to call economics the dismal science. Now we’re gonna call it the dark matter science!

  3. jm commented on Feb 10

    The proper paradigm is not anything so exotic as “dark matter”. It’s just good ole’ vendor financing fraud by the Asian mercantilists, imitating Nortel and Lucent on a massive scale. They loan us the money to buy their exports, regardless of our inability to ever repay, and book the loans as assets. Management (i.e., the governing elite) look like geniuses. As there is no independent agency to force an honest accounting, the fraud can and will continue for a very long time.

  4. Emmanuel commented on Feb 10

    I sure would love to see how exporting “dark matter” will rescue the US from its current hole. The most reasonable response: it can’t.

    The Bureau of Economic Analysis, keeper of the international-trade data questioned by Messrs. Hausmann and Sturzenegger, has no plans to even try to measure dark matter. “I’m really uncomfortable about trying to take implicit differences and label them as having a certain cause and then putting them into our accounts,” said BEA Director Steven Landefeld. He says he has been hearing dark-matter-like theories since he joined the BEA in 1991.

  5. Lord commented on Feb 10

    I think it really has more to do with tax law and earnings shifting to avoid taxes. This inflates both the size of the deficit and the amount of income earned abroad. Both may be phantasms.

  6. Eric A. commented on Feb 10

    You have to admit, whoever first thought of using an exotic scientific phrase like “dark matter” in economics deserves at least a few points for creativity.

    The fudge-factor method of accounting is useful for identifying overlooked quantities in an empirical exploration. But the failure of our equations to balance out should ultimately send us back to the real world, hunting for more measurable quantities, rather than just theorizing about what the fudge factor might represent. In the case of cosmology, we’ve exhausted the currently accessible observable quantities and still have a discrepancy, hence the theoretical idea of invisible extra matter. But in the case of the global economy, one might wonder whether it is merely the willingess to gather and report concrete data about human economic activity that is lacking.

    Secondly, why evoke the image of “dark matter” if all you mean is “accounting via fudge factors”? Beyond some cheerful analogies mentioned by the authors, like

    “the world is more stable than you would think if it were held together only by the gravity emanating from visible matter”,

    I think there are some other, more implicit aspects of the theory of dark matter relevant to the metaphor: 1) it requires specialized expertise or genius to think of and discuss; 2) it is a revolutionary theory which has nevertheless gained some credibility among experts; 3) it has name-and-concept recognition in the general population; 4) it is unintuitive and mysterious; 5) it is difficult or impossible to measure directly. These characteristics create many ulterior incentives to use the metaphor, none of which are in the direction of seeing reality as clearly as possible.

  7. seamus commented on Feb 10

    Well done, Eric A.

    It smells a little bit like Intelligent Design to me — an unobservable, unprovable fiction.

    I honestly don’t get exactly what they’re even trying to prove here. What is “dark matter” beyond the mere willingness for foreign creditors to keep lending to America?

  8. calmo commented on Feb 11

    What is this thing called Love( Dark Matter)? -an adulterated version to be sure.
    I’m glad it is getting the attention it deserves if BEA Director Steven Landefeld says these ideas have been circulating since 1991. It helps that the piece is both well written and sensational (and is released from a reputable source and not some rumor mill as suggested).
    The piece asks a natural question ‘how can US foreign investments do so much better than their counterparts? (and concludes that the earnings on these investments point to much larger investments than booked) [Like the discovery in physics (to which there are few economist detractors) of Dark Matter, S&H announce they have a solution to the problem: incomplete accounting. We discover to our joy that our foreign holdings are much larger than previously stated.]
    So not too far off jm’s view above, but there are reports of a rather abrupt decline in the quantity of economic matter lately.
    It may be dark, but is it sticky?

  9. moonbiter commented on Feb 17

    From my admittedly non-expert point of view, this whole “economic dark matter” theory sounds a lot like:

    1. wishful thinking and/or
    2. bullshit.

    The hammer hasn’t dropped yet, and these guys are just trying to tell themselves that it won’t because to admit otherwise would mean they would have to worry.

    And no one likes to worry.

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