Global Keynesians
Barron’s economics columnist Matthew Klein and Peking
University economics professor Michael Pettis have written a widely discussed book bemoaning
the global savings glut that they believe to be the cause of the increase in
trade tensions over the past two decades. And it is the high rate of savings by
the wealthy that reduces aggregate demand globally thereby suppressing output
and wages. It is Keynes’ classic under-consumption view of the world. Klein and
Pettis try to prove their point by examining the economies of China, Germany
and the United States.
But before that they go through a
serious history of trade policy and economic crises from the 1820’s on.
Unfortunately they make a few mistakes along the way. They admire Henry Clay’s
American System of tariffs, internal improvements and national bank. However
they ignore the secret sauce of American protectionism in 1800s, that being a
tidal wave of immigration. Instead of importing products, America imported
labor, much of it skilled. When immigration was cut-off in the 1920s and record
high tariffs were imposed, the economy collapsed into the Great Depression.
Along the way the authors surprisingly have some nice things to say about the
gold standard.
Klein and Pettis early on cite Keynes’
discussion of how well the French economy fared with the payment of an
indemnity arising out of their defeat in the Franco-Prussian War. What they
leave out is that the excess savings generated by the French economy in the
1850’s and 1860’s was the source of funds. Hence what the Asian nations and
Russia learned after the 1997-98 crisis, was the need for central banks to
establish precautionary balances. It is those balances that make nation
resilient to the vagaries and vicissitudes of the international economy. And as
Klein and Pettis rightly note, the Asian and Russian response to the crisis
greatly contributed to the savings glut.
The overarching thesis of the book is
that capital flows drive trade flows. Simply put a trade deficit in the U.S.
requires a capital inflow and a trade surplus in China requires a capital
outflow. The authors use accounting identities to make their point. However
accounting identities do not define causation because other items are not held
constant. For example an increase in government spending, other things being
equal increases GDP, but other things do not remain equal as consumption or
investment or exports could be simultaneously reduced.
The authors make a very straight forward
case that China should reduce its exports, which line the pockets of the
Communist Party Bigs and the industrial elite at the expense of the workers. In
turn the economy should shift towards domestic consumption through a policy of
higher wages and a stronger social safety net. That all makes sense, but the
high wage-stronger social safety net policy is inimical for the trade deficit-prone
United States. All that would do is increase the U.S’s trade deficit.
Klein and Pettis also offer up other
polices one of which is akin to modern monetary theory. Simply put, if the world
is short of safe assets, the U.S. should sell all the bonds the rest of the
world is demanding. They leave unsaid the impact of that policy on the foreign
exchange value of the dollar. They also believe that the Dollar Standard that
the global economy is now is instead of it being an exorbitant privilege, it is
now an exorbitant burden. They would substitute Keynes’ Bancor, an idea that
failed at the 1944 Bretton Woods Conference, but it is certainly worthy of
discussion today.
There was one line in the book that
really intrigued me. The authors note that the three areas of intense
government involvement; housing, healthcare and higher education are the
primary drivers of U.S. inflation. I would suggest that it would be in keeping
with their concern about the immiseration of the U.S. working class to focus
their next book on this topic.
To sum up, the Klein-Pettis book is being
taken very seriously in policy circles and it could very well have a real
influence on a potential Biden Administration. It is worth a critical read.
For the full Amazon URL see: https://www.amazon.com/gp/customer-reviews/R4B7PKBQT8DPR/ref=cm_cr_arp_d_rvw_ttl?ie=UTF8&ASIN=B087TJKJRQ
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