Do I Deserve A Wedgie?

My Feb. 13 economics cover story provoked a lively, ongoing Web discussion

Imagine throwing a rock down into a deep well and listening hard for the faint splash. That's how I used to feel when I wrote a story back in the dark ages of the 1990s. Aside from a smattering of letters, I had no way of gauging reader reaction or even knowing whether my articles were being read at all.

Things have changed -- oh, have they changed. The well of isolation has turned into a rushing waterfall of online comments, discussion, thoughtful criticism, and attacks on my knowledge of economics. From my perspective, at least, it's all for the better.

Case in point: the response to my Feb. 13 cover story, "Unmasking the economy," in which I argue that official government statistics mismeasure the knowledge economy. In particular, I outlined why business investment is higher than the official numbers show due to the fact that spending on intangibles such as R&D and product development is not picked up in gross domestic product. Moreover, savings is higher than conventionally calculated, and the trade deficit omits what Harvard University economist Ricardo Hausmann has called "dark matter," the net export of American business knowhow and other unmeasured intangibles.

The cover inspired a wide variety of positive and negative reactions. Representative Rahm Emanuel (D-Ill.), chairman of the Democratic Congressional Campaign Committee, sent a letter to his congressional colleagues urging them to read the story. Emanuel's goal: to build support for a nonpartisan commission to study possible improvements to the economic statistics.

By contrast, a week after the BusinessWeek cover appeared, New York Times op-ed columnist Paul Krugman disapprovingly wrote, without mentioning names: "Some people insist that the U.S. economy has hidden savings that official statistics fail to mention."

The story has provoked passionate, ongoing discussions on BusinessWeek Online; on my blog, Economics Unbound; and on other economics sites. When I printed out all the online comments and posts having to do with the cover, I ended up with a stack of about 200 pages, almost a small book.

I didn't do an exact count, but my sense is that the remarks and posts, taken all together, are running roughly two to one against the story. Plenty of people were complimentary, but a larger number had strong negative opinions about the article. "Voodoo economics," "lame," "extremely misleading," and "naive" were some of the adjectives they used to describe it. "Are you joking?" one person wrote in a comment. "C'mon, dude, I was beginning to think you were smarter than the typical journalist."

Many criticisms and comments, however, raised interesting questions. I have been addressing them on my own blog and will continue to do so.

Rather than leaving the entire conversation online, my editors asked me to bring selections from it to our print readers. Below are selected blog posts and comments on the three main themes of the story: intangibles, savings, and dark matter. Given the limited amount of space here, I tried to represent a range of responses -- the good, the bad, and the ugly.

Still, these excerpts only scratch the surface of the discussion. If you want to dive deeper, go to my blog. There you'll find links to every post mentioned below, plus many more places where the story's themes are being talked about.

This is an experiment. Tell us whether bringing a Web discussion into the magazine works, and, if so, what we can do better next time. And if you have more thoughts about the economy, bring 'em on.


The government's decades-old system of number collection and crunching captures investments in equipment, buildings, and software, but for the most part misses the growing portion of GDP that is generating the cool, game-changing ideas."

"Unmasking the economy"

Economic-evaluation measures are lagging reality in the economy. Badly. This landmark article supports that idea with incredible clarity and eye-popping statistical support. --Tom Peters,

Brand equity, training? Anyone who has worked in a corporate environment can really tell you how "useful" some of these expenditures truly are. --Alexander Chiu, commenting on

The notion of using intangibles to calculate GDP has been around for some time. And most economists believe it is a bad idea because such numbers are inherently unreliable. They are intangibles -- unknowns. To allow subjective analysis to seep into our GDP statistics would be, in effect, to Enron-ize the national account. --Gal Beckerman,

What BW fails to grasp is that most people aren't thinking about the economy; I'm not sure if all that many people even have an opinion on the macro issues. But they do have a sense of their own financial situation: Are they getting ahead, are they falling behind, is their standard of living rising or falling, how much confidence do they have about the future, etc. On that score, much of the country has become increasingly pessimistic. --Barry Ritholtz,

Seeing that Mike Mandel and Chris Farrell are two of the authors goes a long way in understanding what it's about.... Both of these guys are so far out of touch with Main Street -- one of these days some laid-off worker is going to give both of them a wedgie. --Tim Iacono, commenting on


Calling things by their right names has clear advantages. Persisting in the fiction that government and household spending on R&D, training, and education is only consumption is to misunderstand the knowledge economy."

"Unmasking the economy"

I don't know if these measurement shortcomings mask an American savings rate that, in fact, is much higher than it is conventionally believed to be. Maybe; maybe not. But I do know that these problems reviewed by Mandel are important enough to cause you to pause before you panic at the next report of Americans' low, low, low rate of savings. --Don Boudreaux,

Some people insist that the U.S. economy has hidden savings that official statistics fail to capture. I won't go into the technical debate about these claims, some of which resemble arguments used not long ago to justify dot-com stock prices, except to say that the more closely one looks at the facts, the less plausible the "don't worry, be happy" hypothesis looks. --Paul Krugman, The New York Times, Feb. 13

I'm not an economist, but it seems to me that one problem with Mandel's argument is that we're not investing in human capital. Government spending on universities has been slashed, leading to huge increases in tuition and much greater burdens on individuals and families. --Rebecca Allen, commenting on


The same intangible investments not counted in GDP, such as business knowhow and brand equity, are for the most part left out of foreign trade stats, too. [Ricardo Hausmann, director of Harvard's Center for International Development,] describes these cross-border flows of knowhow as 'dark matter."'

"Unmasking the economy"

There is no doubt that the U.S. does better exporting intangibles than exporting tangibles. But that is a low bar for a country that imports twice as many tangible goods as it exports. The only question is, does it all add up. I suspect not. --Brad Setser,

I don't see how it matters who the debt is to, if the money is well spent. If the education spending is worthwhile (which it may not be, of course), then the U.S. should welcome Chinese investments into our education. The fact that the individual getting the education has to pay back some of their future earnings to Chinese creditors, as opposed to American creditors, won't really matter to them. --Joseph Weisenthal,

Assuming that "dark matter" does exist, and that it exists here and not in a galaxy far away (where it probably does exist), one may raise a question [about] who will be paid for that dark matter. How will dark matter impact the income and lifestyle of the bottom 80% of Americans? --Piotr Berman, commenting on

The theory is clearly delusional bubble thinking, but it's so new that economists haven't had time to assimilate it and show exactly why it's delusional bubble thinking. --Walt Pohl, commenting on

By Michael Mandel

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