Just a couple of snippets from the “dark matter” debate.
From today’s Wall Street Journal — “Trading Shots”:
We are still getting emails about our Feb. 10 article on the theory, proposed by two Harvard economists, that there is “dark matter” in global trade that more than erases the enormous U.S. trade deficit. The economists suggested that, since the U.S. isn’t paying debt service to foreign nations and is in fact making more money on its foreign investments than foreigners are making by investing in and loaning money to the U.S., then the U.S. must not be a net debtor and instead must be earning investment income on some huge, invisible asset — dark matter.
One reader called PGL, a regular contributor to the AngryBear blog — which indicates PGL holds a PhD in finance — wrote: “Interesting article that covered a lot but not quite my favorite explanation . . . transfer pricing manipulation.” For those of us without PhDs, transfer pricing manipulation refers to the idea that U.S. companies are booking most of their profits in Ireland and other foreign countries where tax rates are super low. This was actually mentioned in the article, but not discussed at great length. “Though U.S. multinational companies seem to have an astonishingly persistent profitability advantage over their foreign counterparts,” we wrote, “that could be partly due to foreign companies understating their returns in the U.S. for political or tax purposes. Otherwise, you have to believe that foreign firms are simply terrible at doing business and should be put to pasture.”
And there is the new paper by Barry Eichengreen – “Global Imbalances: The New Economy, the Dark Matter, the Savvy Investor, and the Standard Analysis.” One of the arguments he pokes a hole in is the claim that the US can continue to run deficits because our economy is so much more productive, thereby drawing in foreign capital. If this were true, then it would run counter to a fact that the “dark matter” folks like to point out: the US has a higher rate of return on investments abroad than foreigner gain on their investments here. If we are drawing capital to our more productive economy, the differential should run the other way (high gains on investments in the US – not abroad).
He also points out (as does the WSJ story above) that the real issue may be transfer pricing:
In fact there is ample room for misstating income by using transfer pricing to shift profits between national subsidiaries — and considerable incentive for doing so to minimize tax liabilities
I won’t say its all transfer pricing — but that is a major issue, as I will discuss next week.