A confession: When authors preface their book by favorably quoting the proto-Keynesian underconsumptionist John Hobson, I become immediately biased against the contents of the pages that follow. But accepting the assignment to review the book imposes on me a special obligation to cast such a bias aside. I did so. I really did. But in
the end the bias would have proven justified.
Trade Wars Are Class Wars has a few good moments, as when the authors expose
the errors that underlie Peter Navarros fear of the U.S. trade deficit with China. But
what readers get mostly is a hash of old-fashioned Keynesianism and mercantilism,
flavored with milk from some modern sacred cows.
The theme is easily summarized. Rising inequality means that an ever-larger
portion of income goes to the rich. Because the rich have a higher propensity to save
than the nonrich, savings grow excessively as consumer spending shrinks dangerously.
The resulting excess of global savings is driven chiefly by countries that run trade
surpluses, such as China. Reduced consumption as a result of inequality is exacerbated
by government policiesagain, such as those in Chinadirectly intended to enrich
elites by taking purchasing power away from ordinary people. As a consequence, todays
global economy is glutted with production capacity that churns out excess quantities of
goods year after year. The authors describe the result in words that cannot help but
make any economically literate person wince: Over the past several decades, demand
for goods and services has therefore become the worlds scarcest and most valuable
resource (p. 225).
Surplus economies such as Germany and China force their excess savings and
production on deficit economies, especially the United States. The consequence of
this imbalance is economic hardship for all but the elites both in surplus countries and in deficit countries. Increasing distress of the impoverished masses in surplus countries
and rising anxieties of the indebted and unemployed masses in deficit countries fuel
hostility to globalization. Thus are sparked destructive trade wars.
So goes the thesis. But is it sound?
Its clear why living standards are kept artificially low in surplus countries, whose
governments obstruct their citizens access to consumer markets and force these citizens
to subsidize exports. Having to pay more for food, furniture, and fun and having to fork
over more to fund favored exporters who ship subsidized wares abroad necessarily leave
ordinary citizens with fewer resources for their own enjoyment. Pity these people, truly.
Its unclear, however, why the result is also lower living standards for ordinary
people in countries that receive these bounties from abroad. Excess production, after all,
implies that lots of stuff is being produced. Those who get this stuff surely benefit from
it. (We can safely infer this conclusion to be valid from the fact that those who get this
stuff voluntarily spend their own money to get it.) The fact that the benefits captured by
the recipients in, say, America are likely smaller than are the costs imposed on foreigners
by their own governments to make these benefits to Americans possible does not mean
that these benefits for Americans arent real and positive.
Yet Matthew Klein (a writer for Barrons) and Michael Pettis (professor of finance
at Peking Universitys Guanghua School of Management) harbor no doubt that ordinary
Americans are suffering grievously as a result of Americas incessant trade deficits
and correspondingly hefty inflow of savings and goods from abroad.
As evidence of this suffering, Klein and Pettis simply repeat the long-familiar trope
about Americas stagnating middle class. Were told that American workers are still
much worse off than before the 2000s (p. 179) and that the gains enjoyed by Americas
ultra-high earners . . . came at the expense of those lower down. Americans in the
bottom half of the distribution have experienced essentially no income growth since the
late 1970s after accounting for taxes, inflation, and cash benefits from the government
But this trope is wrong. Starting with Michael Cox and Richard Alms volume
Myths of Rich and Poor (New York: Basic Books, 1999) and continuing through
Michael Strains book The American Dream Is Not Dead (West Conshohocken, Pa.:
Templeton University Press, 2020)with research in between by (among many others)
William Cline, Terry Fitzgerald, and Scott Winshipthe evidence shows beyond any
reasonable doubt that neither real median household incomes nor real wages have
stagnated. (On page 42 of his book, for example, Strain presents evidence that the
inflation-adjusted average real wage for production and nonsupervisory workers in the
United States on the eve of the COVID-19 pandemic was about 18 percent higher than
it was in the year 2000.)
Klein and Pettis are free to argue against and then to reject Strains and other
researchers findings. But they are not free, if they wish to be taken seriously, to ignore
these findings that are so unfriendly to their books thesis. Yet ignore them they do.
The authors also ignore data on the state of American industry. While reading the
book, I lost count of the number of times Klein and Pettis refer to Americas deindustrialization
as if it were an established fact. Its anything but.
Start with the real value of manufacturing output and industrial capacity in the
United States. Writing about the economy since 2008, the authors assert that
the fortunes of American producers have been even worse than in the 2000s
(p. 214)the evidence for which, they say, is that as of the end of 2018, manufacturing
output and manufacturing capacity were both lower than at the previous peak in
2008 (p. 214).
Well, yes. The real value of U.S. manufacturing output did indeed hit its all-time
high in the fourth quarter of 2007, just before the housing bubble burst (see the graph
Manufacturing Sector: Real Output, FRED Economic Data, updated June 3,
2021). It was then 17 percent higher
than it was when China joined the World Trade Organization in December 2001 (a
fact that alone casts doubt on the deindustrialization thesis). Unsurprisingly, real
manufacturing output then fell from the first quarter of 2008 through the third quarter of
2009that is, through the Great Recession. But it then began to rise again. By the end of
2018, it stood only 2 percent lower than it was at its pre-recession peak. Manufacturing
output did fall in 2019, in part because President Trumps trade war restricted American
manufacturers access to imported inputs (Aaron Flaaen and Justin Pierce, Disentangling
the Effects of the 20182019 Tariffs on a Globally Connected U.S. Manufacturing
Sector, Finance and Economics Discussion Series 2019-086,Washington, D.C., Federal
Reserve Board, 2019).
Likewise, U.S. industrial capacity isnt disappearing (see the graph Industrial
Capacity: Total Index, FRED Economic Data, updated May 28, 2021). It hit its all-time peak in the first quarter of
2020, having risen steadily to that point, without a dip, since the first quarter of 2011.
Combine these facts with two others that Klein and Pettis ignore. First, the U.S.
unemployment rate on the eve of the COVID pandemic was at a fifty-year low. (In
January 2020, it stood at 3.5 percent.) Second, according to the U.S. Census Bureau, in
2019 the percentage of American households earning annual, inflation-adjusted incomes
of $100,000 or more (in 2019 dollars) was at 34.1 percent, an all-time high (see
Historical Income Tables: Households, last revised September 8, 2020).
The alleged misfortune of American workers (p. 212) is mythical. If there is a
global glut of savings and output, its likely helpingand its certainly not
Klein and Pettis complement their poor knowledge of the facts with their poor
grasp of economics. Their economics is an extreme version of what used to be called
hydraulic Keynesianism. Consider this representative passage: The persistence of the American current account deficit can only be explained by excessive savings abroad and
the U.S. role in absorbing these excess savings (p. 214).
Throughout the book, the authors write of America absorbing capital and
goods from abroad as if America were attached to other countries by a series of tubes
through which flow savings and goods. When China and other countries save too much
and produce more than their citizens are willing to consume, the excess must flow
somewhere. As the theory goes, for a variety of reasonsnot least of which is the dollars
role as global reserve currencymost of this excess is pumped into America, and we
Americans are forced to absorb all that is pumped onto our shores.
Poor us, having to absorb year after year after year lots of capital and goods from
Nearly completely absent from the analysis are microeconomic factors that better
explain the persistence of U.S. current-account deficits. Despite its imperfections, the
United States remains an attractive place for foreigners to choose to investan attractiveness
that undoubtedly prompts foreigners to choose to save more than they
would otherwise. Similarly, the production of tradable goods outside of America is done
largely because non-Americansled by price signals and the desire to earn profitschoose to produce the goods that they then choose to export.
Also at work, of course, are choices made by individual Americans. Every asset sold
by an American is one that an American chooses to sell, presumably because the price is
right. Similarly, every import purchased by an American is one that an American chooses to purchase, presumably because the price is right. To write, as Klein and Pettis do
throughout, of the level of savings rising largely because of rising income
inequalityand of savings, imports, and exports flowing from country to country as if
they were akin to hydraulic fluids mindlessly moving from higher-pressure to lowerpressure
locationsis not to do serious economics. Its merely to give the appearance of
The global trading system does have many problems, including mercantilist
policies pursued by both Beijing and Washington. But such policies, contrary to Klein
and Pettiss assertions, are problems largely for the countries that practice them. If there
is excess production in China, thats mostly a problem for the Chinese, not much for
people outside of China. If there are excess savings in Germany, thats a problem for the
Germans, not for people outside of Germany.
But recognition of this reality is rare. Klein and Pettis are not much more sophisticated
in their understanding than are the economically ill-tutored masses who
cling to the fallacy that imports are harmful if they are consistently greater than exports.
Such people cannot get their heads around the fact that home-country resources released
by imports from particular lines of production do not have to be used to produce
exports in order to be put to other productive uses.
Reading the Klein and Pettis volume not only reveals that Romper Room
Keynesianismremains fashionable but also reinforces my long-held belief that the world
would be a much better place had no one ever thought to measure international trade flows. A world without international trade accounts would be one with less excess
production of economically uninformed books.