Trade wars and class wars: part one – the global savings glut?

This review of a new book is in two parts as there is much to say. Here is the first part.

Trade wars are class wars‘ is the title of a new book by Matthew Klein and Michael Pettis. Matthew C. Klein is the Economics Commentator at Barron’s. He has previously written for the Financial Times, Bloomberg View, and the Economist.  Michael Pettis is professor of finance at Peking University’s Guanghua School of Management and a senior fellow at the Carnegie Endowment for International Peace.

The book has a provocative title but it’s apposite, given the growing global rivalry between the US and the China with the implementation of trade tariff and technology war, as the US tries to curb and reverse the rising share of trade and hi-tech production that China has been achieving and using to widen its influence globally; at the expense of an ageing and relatively declining US hegemony.

The subtitle of the Klein and Pettis’ book is “how inequality distorts the global economy and threatens international peace.” Klein and Pettis argue that the origins of today’s trade wars emerge from decisions made by politicians and business leaders in China, Europe, and the United States over the past thirty years. Across the world, the rich have prospered while workers can no longer afford to buy what they produce, have lost their jobs, or have been forced into higher levels of debt.  Rising inequality has weakened aggregate demand; and a global ‘savings glut’ generated by countries like Germany and China are creating huge global imbalances in demand and supply that threaten economic crises, increased protectionist rivalry and international peace.

The essence of the problem for Klein and Pettis is “the greater eagerness of producers to sell than of consumers to buy”. According to them, this is at the heart of the imperialist rivalry globally. The authors revert openly and clearly to the thesis of John Hobson, the anti-semitic, social reformist writer and economist of the early 20th century.  They update the Hobsonian thesis for the 21st century. As Pettis puts it: “Our argument is fairly straightforward: trade cost and trade conflict in the modern era don’t reflect differences in the cost of production; what they reflect is a difference in savings imbalances, primarily driven by the distortions in the distribution of income. We argue that the reason we have trade wars is because we have persistent imbalances, and the reason we have persistent trade imbalances is because around the world, income is distributed in such a way that workers and middle class households cannot consume enough of what they produce.

Thus, we have a straightforward underconsumption theory of crises as presented by Hobson. What is added by the authors is the concept of a ‘global savings glut’, or the reciprocal of a lack of consumption, which generates ‘global imbalances’ between those countries running systematic trade and income surpluses (China, Germany) with others (the US) running chronic deficits. This imbalance of consumption and saving between the major economic powers is the essential cause of future crises and even wars, according to the authors.

What is missing from this analysis is what is missing from all underconsumption theories; namely investment ie capitalist investment.  Consumption is not the only category of ‘aggregate demand’; there is also investment demand by capitalists. Indeed, Marx argued that this was the most important factor in driving growth of production in a capitalist economy – and even Keynes sometimes agreed.  I have shown in several posts and papers that it is capitalist investment that is the ‘swing factor’ in booms and slumps – a fall in investment leads capitalist economies into slumps and leads them out.  Consumption is a lagging factor, and indeed changes in consumption are small during the cycle of boom and slump compared to investment.

Moreover, using IMF/World bank data, if we look at investment rates (as measured by total investment to GDP in an economy), we find that in the last ten years, total investment to GDP in the major economies has been weak; indeed in 2019, total investment (government, housing and business) to GDP is still lower than in 2007. In other words, even the low real GDP growth rate in the major economies in the last ten years has not been matched by total investment growth.  And if you strip out government and housing, business investment has performed even worse.

The national savings ratio of the advanced capitalist economies in 2019 is no higher than in 2007, while the investment ratio has fallen 7%.  There has been an investment dearth not a savings glut.  In my view, this is not the result of a lack of aggregate demand caused by rising inequality and the inability of workers to buy back their own production. It is the result of the declining profitability of capital in the major capitalist economies, forcing companies to look overseas to invest where profitability is higher (the investment ratio in emerging economies is up 10% in the last ten years – something Klein and Pettis do not note.). As usual with Keynesian and post-Keynesian analyses, the movement of profit and profitability is ignored.

Klein and Pettis like to refer to the work of Mian and Sufi who emphasise rising inequality from the 1980s, a shift in income from the poorer to the top 1%, leading to a rise in household debt and a ‘savings glut’.  But the latter do not explain why there was rising inequality from the early 1980s and they ignore the rise in corporate debt which is surely more relevant to capital accumulation and the capitalist economy.  Household debt rose because of mortgage lending at cheaper rates, but in my view, that was the result of the change in nature of capitalist accumulation from the 1980s, not the cause.  Actually, in their new work, Mian and Sufi hint at this. They note that the rise in inequality from the early 1980s “reflected shifts in technology and globalization that began in the 1980s.”  Exactly. What happened in the early 1980s?  The profitability of productive capital had reached a new low in most major capitalist economies (the evidence for this overwhelming – see World in Crisis, the co-edited by G Carchedi and me).

If we are measuring ‘aggregate demand’ by consumption globally, there has been no decline; on the contrary, household consumption in the major economies rose to new highs as a share of GDP.  What ended this speculative credit boom was the turning down in the profitability of capital from the end of the 1990s, leading to the mild ‘hi-tech’ bubble burst of 2001 and eventually to the financial crash and Great Recession of 2008. A ‘savings glut’ is really one side of an ‘investment dearth’. Low profitability in productive assets became a debt-fuelled speculative bubble in fictitious assets.

Crises are not the result of an ‘indebted demand’ deficit; but are caused by a ‘profitability deficit’. The ‘class war’ that Klein and Pettis argue is the cause of trade wars is related to the exploitation of labour by capital for higher profitability, not a lack of domestic consumption caused by low wages.

Klein and Pettis follow John Hobson in his argument that ‘imperialism’ (or trade wars for our authors) was the result of capital being forced to seek new markets overseas because of the lack of consumption demand at home.  Pettis: “It’s interesting to go back to Hobson. He argued that the reason England and other European countries exported capital abroad was not military adventurism, but income inequality. You had incredibly high savings because much of the income was concentrated among the wealthy, and so England had to export those excess savings and the accompanying excess production. Imperialism enabled it to lock in markets for both of those exports. Hobson’s prescription was that increasing the wages of English workers such that they’re able to consume what they produce would make imperialism unnecessary—and this is where I see the connection to today.”

This is what Hobson reckoned for the late 19th century. But the evidence does not back this up. The UK was the leading imperialist power of the 19th century. The great economist J Arthur Lewis summed up the driver behind Britain’s imperialist ambitions in the late 19th century. “In the low level of profits in the last quarter of the century we have an explanation which is powerful enough to explain the retardation of industrial growth in the 1880s and 1890s… we have here also, in low domestic profits, the solution to the great mystery of British foreign investment, namely why Britain poured so much capital overseas…  home industry was so unprofitable in the 1880s through the squeeze on profits between wages and prices.” Lewis shows that during the long depression, nominal wages fell, but as prices fell more, real wages stayed up at the expense of profits.  (See my book, The Long Depression).

As the Marxist economist of the 1920s, Henryk Grossman said of Hobson’s thesis: It is not enough to account for capital export in terms of the lack of profitable investment opportunities at home, as the liberal economist and pioneering critic of imperialism, John Hobson put it”“[W]hy,” then, “are profitable investments not to be found at home?…..The fact of capital export is as old as modern capitalism itself. The scientific task consists in explaining this fact, hence in demonstrating the role it plays in the mechanism of capitalist production.” It is the race for higher rates of profit that is the motive power of world capitalism. Foreign trade can yield a surplus profit for the advanced country.

From about the 1980s onwards, the rate of profit in the major economies reached new lows, so the leading capitalist states again looked to counteract Marx’s law through renewed capital flows into countries that had massive potential reserves of labour that would be submissive and accept ‘super-exploiting’ wages. World trade barriers were lowered, restrictions on cross-border capital flows were reduced and multi-national corporations moved capital at will within their corporate accounts.  This explains the policies of the major imperialist states at home (an intensified attack on the working class) and abroad (a drive to transform foreign nations into tributaries).

A recent paper by two economists at the US Federal Reserve, Joseph Gruber and Steven Kamin shows a widening gap between corporate savings (or profits) and corporate investment in most of the major economies (Gruber corporate profits and saving.) But Gruber and Kamin demonstrate that this was because rates of corporate investment “had fallen below levels that would have been predicted by models estimated in earlier years”.  With the exception of Japan, since 1998, corporate savings to GDP have been broadly flat. But there has been a fall in the investment to GDP ratio in the major economies, with the exception of Japan, where it has been broadly flat. So the gap between savings and investment cannot have been caused by rising savings.

There has NOT been a global corporate savings (or profits) ‘glut’ but a dearth of investment.  There is not too much profit (surplus savings), but too little investment. The capitalist sector has reduced its investment relative to GDP since the late 1990s and particularly after the end of the Great Recession.

As profitability fell, investment declined and growth had to be boosted by an expansion of fictitious capital (credit or debt) to drive consumption and unproductive financial and property speculation.  The reason for the Great Recession and the subsequent weak recovery was not a lack of consumption or a savings glut, but a collapse in investment.

19 thoughts on “Trade wars and class wars: part one – the global savings glut?

  1. The only way that underconsumption theory can be kicked into the long grass is to use Total Sales or Gross Output. The “Marxist” fixation on Gross Value Added to the exclusion of Gross Output is of concern. When measured against gross output personal consumer expenditures fall from 70% down to 30% and below. The balance of 70% represents capital, of which circulating capital is the larger element. Further, because the rate of turnover fluctuates over the course of the business cycle, circulating capital is far more volatile, therefore more consequential than consumer spending in determining the direction of the economy.

    Secondly, we should not pay too much attention to the savings rate as it appears in the National Account (SNA). It is the balancing item in the T accounts. The SNA, correctly, does not take into account credit growth, but much of investment is funded by credit. Thus, the growth in investment creates a paradox dragging up the savings rate. Robinson Crusoe would be very confused. Take China. Does anyone believe for a second that the net savings rate in China was 46% as recently as 2015? Course not, not when you have a credit impulse at the time of over 20%, that is credit growth exceeding GDP growth by over 20% directed towards fixed investment. (See table 3.14 in the 2019 China Statistical Year Book http://www.stats.gov.cn/tjsj/ndsj/2019/indexeh.htm) Now that investment is falling, guess what, so is the savings rate in China. There is another element to consider, depreciation. As the organic composition of capital increases, so the weight of depreciation grows, forming a bigger part of the savings rate. But strictly speaking this is not savings but a replacement fund.

    Having said all this regarding the so called “savings glut” I would draw your attention to corporate finances. Here the data is crystal clear. Since the maturation of globalisation in the mid-1990s, corporate cash flow (depreciation plus post tax profits) has far exceeded corporate investment both fixed and circulating. I have produced numerous graphs on this subject on my website. This all reversed by the end of 2015, the definitive end to globalisation due to the fall in profitability.

    Which brings me to my final point. A challenge. I am inviting Michael to a Zoomibar debate on whether it was 2008 or 2015 that marked the end of the globalisation boom. Both you and I are data driven. From where I sit, viewing the proximate peaks in the rate of profit of 1996, 2006 and 2014, I cannot reconcile, on a world scale, a depression having broken out after 2008, not when it is accompanied by of all things, a commodity super-cycle ending in 2014.

    1. There’s no problem in Marxism between “Gross Value Added” and “Gross Output”. Profit is literally surplus value beyond a certain point. Therefore, they are the same thing in substance.

      To put it in other terms, in order to “add value”, you have to first generate an output large enough so it can revalorize the already existing capital and be a surplus. You admit it when you highlight the importance of depreciation to the valorization process of capital.

      In both cases, the human factor (what you call “personal consumption”) is irrelevant (unless you want to measure the degree of exploitation of labor). The authors of the book reviewed here are clearly talking about the relation between Nation-States, not between capitalists and workers; they are essentially stating capitalism, if you take out inequality (caused by greed of the capitalist classes) has no entropy — so they are clearly not worried about the degree of exploitation of labor.

      Credit is just the increase of velocity of money-capital beyond the really available quantity of money in circulation. From there you can infer if certain credit is fictitious capital with a life on its own or not. Michael Roberts has some of those graphics showing the “growth per debt”.

  2. I don not understand all this talk about “saving glut” as the reason for trade imbalances. Instead I look at the problem from the production side. From the 1980s onward production was shifted to china and the developing countries in search of higher profits. Trade imbalances are the result of that. The US, EU and Japan all have trade deficits with China. Pettis and Klein’s over hyped book doesn’t have anything new to say on the subject.

      1. In fact the real question to be asked is why there is suddenly talk of trade and also economic war, primarily in the US. I think this is because the US state as the collective agent of the global capital is really concerned by the expansion of Chinese business in the world. The US is right in its perception of a great danger to western capital emanating from China. One of the strategic goals of destabilizing the Middle East is preventing Chinese expansion in the region.

  3. Whilst you remind us that Hobson was anti-semitic, let us remember that Lenin found his research useful. Also relevant in Lenin’s study of imperialism is his emphasis on the inevitable clash of monopoly capitalist powers. Your discussion of Britain omits the contradiction with Germany that resulted in World War One. Today the contradiction between the U.S. and the PRC intensifies – and they happen to be the two largest exporters of capital in the world today.

  4. Sorry, slightly different question.
    When Marxist economists calculate the rate of profit,if we were to convert that to a concept that is familiar in finance capitalism, would that be comparable to “return on fixed assets”?

    1. More and less. The Marxist definition is the surplus value divided by advanced capital (constant capital ie fixed assets and raw materails etc plus variable capital (cost of labour). How you measure and include each of these categories is a continual matter of debate. The return on fixed assets (which can be measured in different ways) is a reasonable proxy for the Marxian rate of profit and I use it when comparing countries as it is the easiest data to get.

  5. ‘The UK was the leading imperialist power of the 19th century.’

    A question for you, if we are to understand imperialism in the leninist view, as the highest stage of capitalism, the merger of finance and industry, the dominance of monopoly power and the transition from free competition to monopoly control, the consolidation of upstream and downstream industries into the monopoly framework, and the extension of monopoly power to further regions of the planet for control of resources, can we correctly subscribe imperialism to 19th Century Great Britain?
    It was only at the turn of the century, late 1890’s, early 1900’s that Imperialism, the highest stage of capitalism came to dominate the practices of capitalist powers.
    It may seem a rather insignificant query, but interested in how terms such of these can be interchangeable.
    Also great article as always!

  6. I am regular reader of your blog and i find that you are the most valuable marxist economist of our time. I request you to write on the role of IMF and world bank specially in context of 3rd world countries. Application of their policies and control over these economies. And how they serve the purpose of multinational companies and finance capital. I hope you will consider my request or suggest me some readings regarding this issue Asif Rashid from pakistan

    On Sun, Jun 21, 2020, 1:21 PM Michael Roberts Blog wrote:

    > michael roberts posted: “This review of a new book is in two parts as > there is much to say. Here is the first part. ‘Trade wars are class wars’ > is the title of a new book by Matthew Klein and Michael Pettis. Matthew C. > Klein is the Economics Commentator at Barron’s. He has pre” >

    1. Asif thanks. yes the role of these “Bretton Woods” institutions in supporting global capital and imperialism over the last 75 years is important. Ill try. But there are some posts on my blog that do cover the role to some extent.

  7. “the investment ratio in emerging economies is up 10% in the last ten years”
    what stats are you referring to Michael?

  8. Dear Professor Roberts, I have been a follower of yours for years. I would like to ask you, what close possibilities do you see of a collapse of the dollar and the federal reserve?

  9. I have an additional question, in case the dollar collapsed as a world currency of exchange, what would be the effects on the North American and world economy, and, especially this, how would it affect relations with China?

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