Thanks for the review. Pettis does expound on his theories in his other books, but they are far less fun to read than this (Klein is a good writer). AFAIK the theory has never been written up as an academic theory paper. In his other writings he has called for America to tax foreign purchases of T bonds.
I have read a bunch of books on mercantilism over the years. My conclusion, echoing Noah’s last point, is that liberal democracies should not enter into a liberal-mercantilist trade deficit unless they are trying to promote growth in the other country (eg after WWII). They should particularly not play the game if the mercantilist country turns fascist.
Apr 27, 2022·edited Apr 28, 2022Liked by Noah Smith
Great piece though I would argue that it isn't entirely obvious that it is in middle-class and working-class interests for a cheaper dollar. It most certainly is if you work in an exporting sector (that is highly sensitive to global prices) and don't consume much foreign goods, but an accountant who buys a lot of east Asian consumer electronics or a teacher who wears lots of Bangladeshi clothes, a hairdresser who is partial to imported German beer, or a foie gras loving engineer at Raytheon may have different views about that.
There is no need to end the USD's reserve currency status, even if that were possible (which it is not). The Fed and/or the Treasury could just buy foreign assets to supply the rest of the world with the USD they need, rather than forcing them to sell us stuff and not buy anything in order to get the USD they need to run the globalized economy.
Thanks for this review. I am currently working on getting through this book. I think it should have been 700 pages with lots of stories, illustrations, graphics, etc to help explain the concepts. Way too dense. Some very important ideas and concepts, but this information needs to be way more accessible.
>>>What if China’s persistent current account surpluses aren’t just a sop to well-connected industrialists, but also a strategy to build its manufacturing base at the expense of America’s<<<
I do think there's likely some of this dynamic present. However, I always recommend looking at the actions of the Party through the lens of "Which course of action is consistent with their staying in power?"
China has been exporting its way to economic growth for more than four decades at this point. And a big part of why they continue to attempt to do so is path dependency and fear—fear of mass unemployment. A big rise in joblessness might destabilize the system. And so, when it comes to the economy, Beijing is characterized far more by timidity than boldness. They really are terrified of a color revolution. Xi himself has been utterly candid about this. In China there's been plenty of talk in recent years of enhancing the domestic consumption sector. But I don't think they have the stomach for a full-throated effort in this regard. And so in the main, they stick with what has been working tolerably well (although less and less well with every passing year, it seems).
哎呀! You had me till the end. Not everything needs to be shaped in the broader context of a power struggle between America and China. Chinese leaders have reasons for doing things other than trying to defeat America.
On sectoral balance identities: aren't those analogous to physics conservation laws (such as Kirchhoff's current law)? They specify the subspace of state space where the system is allowed to evolve, but without separate dynamical equations, actual system evolution is underspecified. For instance, a static economy -- no change in any state variable -- satisfies the sectoral identities but it's not real or anything one should care about. What we care about is the dynamics: what changes when other stuff changes, at what rates, etc.
>>>middle-class and working-class Americans don’t even realize that it’s in their class interests to do it at all<<<
Would a weaker dollar really be in the interests of working-class Americans? To the extent that such a situation makes US exports more attractive to foreigners, it basically means that Americans will be working more for foreigners and less for themselves, right? (That is, the US would be exporting a higher percentage of its output). And imports, of course, would become pricier for Americans. No more fancy European beer for you, Joe Sixpack!
Obviously engineered and/or predatory weakness in other currencies vis-a-vis the dollar can be disruptive, depending on circumstances, and yes, in such times layoffs mount. That is indeed bad for the working class. Krugman (since Noah mentions him) has written a lot about this dynamic as it pertains to the Chinese Yuan during America's Great Recession.
Still, broadly speaking there doesn't seem to be much evidence that the purported excessive strength of the dollar due to its reserve currency role disadvantages Americans relative to people in other high income countries. US growth and employment seem to stack up pretty well against most of the rich world. Productivity is high. Per capita GDP in the US is lofty. And so on.
(I reckon living standards are the median are higher in a number of other rich countries than in the US, but surely that's got little or nothing to do with the strength of the Greenback, and everything to do with policy choices in Washington involving things like the tax code, education, redistributive programs—that sort of thing.)
I don't want to sound glib or pretentious but... isn't that obvious?
Isn't it (in a simple/narrative reading) a matter of supply and demand? When China opened up, it threw on the (international labor) market many tens of millions, maybe hundreds of millions of workers i.e. it massively increased the supply of labor. Prices (i.e. wages) went down.
Now, I think that's both a correct understanding but also very simple and a proper account of the events since 2000 would add a lot of nuance (like, sectors of the economy competing internationally versus domestic focused sectors).
To go further, this is another way of saying that increasing international openness/competition is very similar to opening oneself to immigration.
Aha! will you quickly exclaim. But, as proven by tons of empirical studies, immigration doesn't damage natives' earnings. Your simple Supply-Demand narrative is broken. But is it? Yes, in an economy that is growing (like the US) and that seems to be able to select its immigrants to a degree (seasonal/uneducated workers for agriculture/tourism and educated ones for higher paying jobs), then, yes, immigration is a powerful economic multiplier. But, if an economy is growing slowly and with difficulties, then pouring more labour on it probably won't help - labour isn't the constraining factor.
You can have the same analysis with the addition of women to the workforce. It's obviously a social good but I wouldn't be the first one to suspect that this helped collapsing the possibility of a single salary being enough to sustain a family like it used to...
Seems weird to me to argue the "exorbitant privilege" is actually bad for America. People really want our dollars and we're the only ones that make them. That's good for us! Also it gives us tons of diplomatic power!
Feels like the problem is (as many are), ultimately that the gains are unequally distributed. So we should have some more redistribution.
The historians’ consensus is that capitalists in all major WW1 belligerents opposed the war. The notion this war was fought to please the upper classes is absurd and ahistorical.
Thanks for the review. Pettis does expound on his theories in his other books, but they are far less fun to read than this (Klein is a good writer). AFAIK the theory has never been written up as an academic theory paper. In his other writings he has called for America to tax foreign purchases of T bonds.
I have read a bunch of books on mercantilism over the years. My conclusion, echoing Noah’s last point, is that liberal democracies should not enter into a liberal-mercantilist trade deficit unless they are trying to promote growth in the other country (eg after WWII). They should particularly not play the game if the mercantilist country turns fascist.
Great piece though I would argue that it isn't entirely obvious that it is in middle-class and working-class interests for a cheaper dollar. It most certainly is if you work in an exporting sector (that is highly sensitive to global prices) and don't consume much foreign goods, but an accountant who buys a lot of east Asian consumer electronics or a teacher who wears lots of Bangladeshi clothes, a hairdresser who is partial to imported German beer, or a foie gras loving engineer at Raytheon may have different views about that.
There is no need to end the USD's reserve currency status, even if that were possible (which it is not). The Fed and/or the Treasury could just buy foreign assets to supply the rest of the world with the USD they need, rather than forcing them to sell us stuff and not buy anything in order to get the USD they need to run the globalized economy.
Thanks for this review. I am currently working on getting through this book. I think it should have been 700 pages with lots of stories, illustrations, graphics, etc to help explain the concepts. Way too dense. Some very important ideas and concepts, but this information needs to be way more accessible.
Yay! I've been waiting for this.
Thanks for this
>>>What if China’s persistent current account surpluses aren’t just a sop to well-connected industrialists, but also a strategy to build its manufacturing base at the expense of America’s<<<
I do think there's likely some of this dynamic present. However, I always recommend looking at the actions of the Party through the lens of "Which course of action is consistent with their staying in power?"
China has been exporting its way to economic growth for more than four decades at this point. And a big part of why they continue to attempt to do so is path dependency and fear—fear of mass unemployment. A big rise in joblessness might destabilize the system. And so, when it comes to the economy, Beijing is characterized far more by timidity than boldness. They really are terrified of a color revolution. Xi himself has been utterly candid about this. In China there's been plenty of talk in recent years of enhancing the domestic consumption sector. But I don't think they have the stomach for a full-throated effort in this regard. And so in the main, they stick with what has been working tolerably well (although less and less well with every passing year, it seems).
哎呀! You had me till the end. Not everything needs to be shaped in the broader context of a power struggle between America and China. Chinese leaders have reasons for doing things other than trying to defeat America.
On sectoral balance identities: aren't those analogous to physics conservation laws (such as Kirchhoff's current law)? They specify the subspace of state space where the system is allowed to evolve, but without separate dynamical equations, actual system evolution is underspecified. For instance, a static economy -- no change in any state variable -- satisfies the sectoral identities but it's not real or anything one should care about. What we care about is the dynamics: what changes when other stuff changes, at what rates, etc.
>>>middle-class and working-class Americans don’t even realize that it’s in their class interests to do it at all<<<
Would a weaker dollar really be in the interests of working-class Americans? To the extent that such a situation makes US exports more attractive to foreigners, it basically means that Americans will be working more for foreigners and less for themselves, right? (That is, the US would be exporting a higher percentage of its output). And imports, of course, would become pricier for Americans. No more fancy European beer for you, Joe Sixpack!
Obviously engineered and/or predatory weakness in other currencies vis-a-vis the dollar can be disruptive, depending on circumstances, and yes, in such times layoffs mount. That is indeed bad for the working class. Krugman (since Noah mentions him) has written a lot about this dynamic as it pertains to the Chinese Yuan during America's Great Recession.
Still, broadly speaking there doesn't seem to be much evidence that the purported excessive strength of the dollar due to its reserve currency role disadvantages Americans relative to people in other high income countries. US growth and employment seem to stack up pretty well against most of the rich world. Productivity is high. Per capita GDP in the US is lofty. And so on.
(I reckon living standards are the median are higher in a number of other rich countries than in the US, but surely that's got little or nothing to do with the strength of the Greenback, and everything to do with policy choices in Washington involving things like the tax code, education, redistributive programs—that sort of thing.)
I don't want to sound glib or pretentious but... isn't that obvious?
Isn't it (in a simple/narrative reading) a matter of supply and demand? When China opened up, it threw on the (international labor) market many tens of millions, maybe hundreds of millions of workers i.e. it massively increased the supply of labor. Prices (i.e. wages) went down.
Now, I think that's both a correct understanding but also very simple and a proper account of the events since 2000 would add a lot of nuance (like, sectors of the economy competing internationally versus domestic focused sectors).
To go further, this is another way of saying that increasing international openness/competition is very similar to opening oneself to immigration.
Aha! will you quickly exclaim. But, as proven by tons of empirical studies, immigration doesn't damage natives' earnings. Your simple Supply-Demand narrative is broken. But is it? Yes, in an economy that is growing (like the US) and that seems to be able to select its immigrants to a degree (seasonal/uneducated workers for agriculture/tourism and educated ones for higher paying jobs), then, yes, immigration is a powerful economic multiplier. But, if an economy is growing slowly and with difficulties, then pouring more labour on it probably won't help - labour isn't the constraining factor.
You can have the same analysis with the addition of women to the workforce. It's obviously a social good but I wouldn't be the first one to suspect that this helped collapsing the possibility of a single salary being enough to sustain a family like it used to...
Seems weird to me to argue the "exorbitant privilege" is actually bad for America. People really want our dollars and we're the only ones that make them. That's good for us! Also it gives us tons of diplomatic power!
Feels like the problem is (as many are), ultimately that the gains are unequally distributed. So we should have some more redistribution.
The historians’ consensus is that capitalists in all major WW1 belligerents opposed the war. The notion this war was fought to please the upper classes is absurd and ahistorical.