Online Extra: Phantom GDP Meets Dark Matter

Statistics aren't keeping up with changing patterns of trade and may not give us an accurate picture of the U.S. economy

For the past several years, I have worried about the conflict between two apparently indisputable facts about the U.S. economy. The acceleration of productivity growth since the mid-1990s means that domestic production is about 10%, or $1.3 trillion, larger than it would have been if productivity had kept up its former pace. Meanwhile, our trade gap with the rest of the world has increased by more than $600 billion over the same period.

Taken together, these two facts mean that even though our national income took an enormous and unexpected jump, our consumption has risen even faster. This is like someone getting a big raise, going on a spending spree, and immediately falling into debt. While we all know cases where this actually happened, it's not the way the economy usually works.


  To make better sense of this paradox, I wrote a cover story last year that explored the possibility of the trade deficit being overstated (see BusinessWeek, 2/13/06, "Why the Economy Is a Lot Stronger Than You Think"). In particular, the story argued that the trade statistics, designed for an earlier age, did not entirely capture the enormous flow of intangibles such as business knowledge, management practices, and technological knowledge across national borders. In what amounts to a type of export, U.S. companies were sending these intangibles to their foreign suppliers and foreign subsidiaries as they set up global supply chains. Such outward flows were called "dark matter" by some economists because they were real but you couldn't see them in the data.

That was part of the way I could make sense of the contradiction between rising productivity and rising trade deficits. But since then, I have discussed in my blog another possibility: Perhaps economic and productivity growth over the past few years have been overstated. This week's cover story shows how rapid offshoring of goods and services is distorting the government's economic numbers. Some of the cost cuts and productivity gains in overseas supply chains are being booked as U.S. output—in other words, phantom gross domestic product (see, 6/18/07, "The Real Cost of Offshoring")

Dark matter and phantom GDP are related to each other. U.S. corporations help bring their foreign suppliers up to speed ("dark matter"), who then can ship low-cost goods back to the U.S. ("phantom GDP") This supply-chain loop is one of the realities of today's world but it's completely missed in the government data.


  In some sense, the statisticians can't be blamed: Patterns of trade are changing so fast that even the companies themselves may not be sure where all the components for their products are coming from.

But the real message is that our picture of the economy can't stop at the water's edge. In many ways, the factories in China and the outsourcing shops of India have become part of the U.S. economy—different than domestic businesses, of course, but very much tied by flows back and forth of intangibles, goods, and services. Many large corporations now think of themselves as global enterprises. We have to start thinking about the U.S. economy as a global enterprise as well.

By Michael Mandel

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