Trade wars are class wars – part two: global imbalances?

Trade wars are Class Wars by Matthew Klein and Michael Pettis has now been entered as one of the best books of the year by the FT and one to read over the summer by Martin Wolf, the FT’s economics guru. Wolf says thatThis is a very important book. Its central argument is that “A global conflict between economic classes within countries is being misinterpreted as a series of conflicts between countries with competing interests. The danger is a repetition of the 1930s, when a breakdown of the international economic and financial order undermined democracy and encouraged virulent nationalism. Policies that generate high inequality and excessive private savings must end if economic stability is to be restored.”

Klein-Pettis reckon that there is a ‘global savings glut’ in the world economy caused by rising inequality, low wages and consumption. I discussed this in the first part of my review.  But they also argue that policies of investment for export by countries like China and Germany create ‘global imbalances’ that encourage dangerous trade wars.  In this second part, I consider the validity of this view.

According to the authors, some capitalist economies are ‘saving’ too much ie not investing at home enough to use up savings and so export abroad, running up big trade surpluses. Others are forced to absorb these surpluses with excessive consumption and run large current account deficits and so we have trade wars as governments like Trump’s try to reverse this trend.

Klein and Pettis are saying that these imbalances are caused by the decisions of governments like China and Germany that seek to suppress wages and consumption (the class war) in order to boost investment and export surplus savings. As Adam Tooze, the radical historian, put it: the authors “divide the world into the surplus generators and the deficit countries. The strong causal claim is that imbalances are largely the result of social-structural change in the surplus countries.”

Pettis admits that China’s investment-driven and export-led policy was “not necessarily a bad thing. After five decades of anti-Japanese war, civil war and Maoism, China was hugely underinvested. By constraining the ability of households to consume a significant share of what they produced, the government effectively forced up the savings rate and channeled all of those savings into a massive investment program. China had the highest investment growth rate in history, and the highest investment share of GDP in history. As a developing country that was significantly underinvested, this was exactly what the doctor ordered.”

Following a growth model for developing countries that concentrates on investment (put forward by Alexander Gerschenkron for US development in the 19th century), the authors argue that “It’s a very successful growth model, but once you reach the point at which you can no longer increase investment at a great pace, you are forced to make institutional reforms.” But Klein and Pettis reckon that “The problem emerged when the Chinese economy could no longer absorb new investment productively. … Once China reached that point, consumption was too low to drive growth, and it entered into a state of excess production.”

This is surely nonsense. It’s just not true household consumption in China is being repressed. Actually, personal consumption in China has been increasing much faster than fixed investment in recent years, even if it is starting at a lower base.  Consumption rose 9% last year, much faster than GDP.

Even Pettis and Klein’s own empirical analysis reveals that there has been a rise in consumption as a share of GDP in China in the last ten years, even without recognising that this is a probable underestimate of the size of household consumption in the stats (which exclude many public services or the ‘social wage’).

Again, as I argued in part one of this review, it is not lack of consumption that is key to the ‘class war’; it’s profitability. In a capitalist economy, companies compete with each other to raise profitability through the introduction of new technologies.  But there is an inherent contradiction under capitalist production between a tendency for falling profitability of capital alongside rising productivity of labour.  As capitalists try to raise the productivity of labour by shedding labour with technology, and so lowering labour costs and increasing profits and market share, the overall profitability of investment and production begins to fall. Then investment collapses and productivity stagnates. I would argue that the recent drop in the investment share of GDP in China is due to the falling profitability (internal rate of return in graph) of the capitalist sector of the Chinese economy.

Klein and Pettis seem to be on stronger ground in their second case study of an excess saving surplus economy: Germany.  They argue that German politicians after the unification in the 1990s did not want to subsidise the real incomes of those from the east as it would damage profitability.  So they introduced (under a social democrat government) the Hartz reforms, which successfully repressed real wages and boosted profits.  This is something that I have shown in previous posts and Klein and Petts confirm that story.

But surely here we are also validating the real class war involved: namely between capital and labour over profits and wages; not as Klein and Pettis see the class war through restricted consumption?  Their idea is that “the excess savings of Germany and several other smaller European countries (such as the Netherlands) were offset by unsustainable credit and spending booms in countries such as Greece, Ireland and, above all, Spain. The global financial crisis ended that. Since then the entire eurozone has moved into a globally destabilising current account surplus, in a damaging attempt to turn the second-largest economy in the world into a bigger Germany in the midst of a global savings glut.”

But any proper analysis of the Euro imbalances will find that it was not a result of Germany needing to export its ‘excess savings’, but the result of Germany’s more superior technology and productivity, enabling it to expand exports throughout the EU at the expense of its other weaker member states.  In my view, global imbalances in trade and capital are the result of the higher productivity and technology base of the major companies in the ‘winning’ economies leading to a transfer of profits to the strong from the weak.  It’s not a transfer of excess savings to excess consumption across borders; but the transfer of value and surplus value from the weaker capitalist economies to the stronger.  Indeed, that is precisely the nature of imperialism: the unequal exchange of value, not a savings-consumption imbalance.

To show this in relation to the Klein-Pettis thesis, I decided to take closer look at the savings-investment imbalances. Over the last 30 years, China’s savings rate rose 25.8%, but its investment rate rose more, 26.8%; so no savings glut there, at least over the long term. Indeed, in the global boom period of 1990s, China’s investment rate rose much faster than its savings rate. There were no large surpluses on the current account.  Only in the short period of 2002-7 did China run a large net savings surplus. In my view, this was because investment and production were switched sharply into exports as China took advantage of its cost superiority on its entry into the WTO.

In the case of Germany, in the boom decade of 1990s, the German savings rate fell along with the investment rate as West Germany absorbed the East.  Indeed, the investment rate was higher in the 1990s and Germany ran current account deficits. The big rise in net savings took place after 2002 with the start of the euro and the Hartz reforms.  Germany’s investment rate rose but not as much as the saving rate, as Germany ran big surpluses with other EZ countries.

In the case of the US, between 2002-18 the savings rate actually rose by 1%.  It was the investment rate that fell by 3.2%.  Indeed, in the post GR period since 2008, the US savings rate has risen 21.3% while the investment rate has fallen 0.5%.  Again, the so-called savings glut thesis has only some validity in the short period of 2002-7.  Then Germany and China savings rates rose 25-30% while the US rate fell 4.2%.  But otherwise in the 21st century, the savings glut imbalance is a myth.

China’s net savings rate (current account surplus as % of GDP) is now no higher than in the late 1990s. It’s true that Germany’s surplus savings rate has risen significantly.  But the US savings deficit is no higher than at the beginning of the century – so it is no victim of these excess savings economies. The Klein-Pettis thesis is limited in validity to a short time period and is really old hat now.

Klein and Pettis argue: “The rest of the world’s unwillingness to spend — which in turn was attributable to the class wars in the major surplus economies and desire for self-insurance after the Asian crisis — was the underlying cause of both America’s debt bubble and America’s deindustrialisation.” But this is historically inaccurate. Since the 1970s, the US had been losing market share in manufacturing and trade and running current account deficits, not just after the Asian crisis. The cause of this decline is down to the relative weakness of US productivity growth, not Asian excess savings. Moreover, US manufacturing companies had shifted their production abroad during the 1980s.

Share of manufacturing world trade (%)

And yet, Klein and Pettis want to position the US as a victim of Asian and German economic policy. As Adam Tooze says, “One could read this as an apology for the protectionist turn of American politics in recent decades. You are showing that there is, in fact, a hidden macroeconomic rationale to the desire of American policymakers to ward off other people’s imbalances.

But rather than a victim of excess savings economies, the US, as the hegemonic imperialist power, gains extra value from trade and capital flows; tribute from mainly the peripheral economies of the global south (including China); and even to some extent from the likes of Germany. The US is not the victim and China and Germany are not perpetrators of crises.  Instead, the victim is labour everywhere; and the perpetrator is capital everywhere.  Both American and German workers are being exploited by capital and that’s the basis of the class war; while how that surplus value is distributed and shared by capital is the basis of the trade war.

Klein and Pettis argue that “America doesn’t control its current account; it doesn’t control its net overall macroeconomic savings balance.”  That’s true.  But it does not need to. On the contrary, as an increasingly rentier economy, it can extract ‘rent’ or surplus value from other more productive economies through both its external current and capital accounts. And it can do so better than, say, the UK because it is still the hegemonic power that controls the international reserve currency, the dollar; and it has the financial firepower and military might.  It is the Roman empire of the 21st century – in its declining stage, but not yet collapsed.

The Klein-Pettis thesis leads to the conclusion that wages are too high for capital. “In the current environment, the argument against increasing wages is too strong: higher wages reduce competitiveness and cause the benefits of higher wages to flow abroad. If you pay your workers more, consumers in your country will consume from abroad, because prices have to rise. If you believe that the problem is a sort of massive beggar thy neighbor problem—in which every country improves its relative position by putting downward pressure on wages, either directly like Germany did under the Hartz reforms, or indirectly through weak currencies and subsidies—then it’s very difficult to raise wages.” Yes, but that’s capitalism.“In fact, you get a situation in which each country benefits by lowering wages.” Exactly, because this boosts profits.

Of course, Klein and Pettis argue that low wages cause crises, given their underconsumption theory (see part one of this review). If so, what is the answer to low wages? Pettis: “In order to address the problem of wages, we have to prevent the unfettered flow of capital. We need some sort of protection. But rather than trade protection, I would argue that we need to impede capital flows.”  And the US needs to invest more.

So we must try and make US capitalists invest more by restricting the flow of foreign savings into the economy with capital controls. But will US companies raise investment while profitability remains low?  Of course, for our authors profitability is irrelevant; what matters is reducing ‘excess consumption’ in the case of the US.

For Klein and Pettis, this is the solution to crises. As Klein puts it in explaining where Lenin’s theory of imperialism differs from Hobson’s. “Lenin’s understanding of Hobson was that capitalism inevitably leads to imperialism, which generates conflict among the capitalist powers. But that wasn’t Hobson’s actual argument. He argued that there are problems in the distribution of income and purchasing power within the major European capitalist countries, and that this explains imperialism. That’s an important difference. Hobson’s interpretation was that there are middle courses between overthrowing the entire system and tolerating exploitative international relationships, and we agree. We don’t argue that we’re in an inevitable crisis of capitalism, but rather that the problems we face can be solved using the kinds of redistributional tools that policymakers have used in the past.”

For Klein and Pettis, there is nothing wrong with the capitalist mode of production and investment for profit. It’s just the imbalances of savings and consumption they generate. Boost wages and reduce inequality and all will be well as the global imbalances disappear and aggregate demand rises. As Klein and Pettis say: “Trade war is often presented as a war between countries. It is not: it is a conflict mainly between bankers and owners of financial assets on one side and ordinary households on the other — between the very rich and everyone else.”

For them, the class war is between ‘bankers’ and ‘households’, not capital and labour. And the coming imperialist trade wars are between excess savers and excess consumers, not between rival imperialist powers over the share of profits extracted from labour globally. Which is the more accurate explanation of class and trade wars: the Klein-Pettis Hobson one or the Marxist one?

20 thoughts on “Trade wars are class wars – part two: global imbalances?

  1. ““In fact, you get a situation in which each country benefits by lowering wages.” Exactly, because this boosts profits.” – It boost potential profits. Profits are only boosted if on the one side wages are low and on the other side there is some demand (f.e. credit financed consumer demand of workers) which allows profits to be realised.

  2. There is an interesting and important two part essay by Robert Brenner in the May/June edition of the New Left Review. The first part is free on line. Brenner is a marxist and attributes the capitalism’s crisis to finance capital’s responses to weak profitability (bail out of financial capitalism in 2008 and industrial zombi capital in 2020), He doesn’t think that will work to stimulate investment because US industrial capitalism remains unprofitable despite its protocol-Hartz like reforms beginning in the 1980’s. He seems to believe Federal Reserve (representing the leading capitalists of the country) are just winging it because they have recognized that they have no solutions. I’d like to hear your take.

    Also, taking into consideration (1) David Harvey’s declaration of the absolute necessity of saving (democratic imperial?) capitalism and his virtual declaration of war on a (monstrously) “imperial” China (2) alongside your pointing out here that China is different from the imperial powers in that both its savings and investment rates have risen during the neoliberal period, and that wages have risen rather than fallen–should we now see the defensively armed China as “imperialist”, worse even than the US? Should the disorganized left of the 21st century, abandon and even attack China? as the 20th century’s disorganized left abandoned the Soviet Union (which despite its war loses and encirclement and nationalistic warts, made the liberation movements not only possible but, for a while, empirically sustainable.?

    1. correction: too many typos to correct, but in the first paragraph “Protocol-Harz like reforms” should read Proto-Hartz-like reforms”

  3. It’s painful to see that the civilization that once produced Hegel and Ricardo is now producing Matthew Klein and Michael Pettis.

    The decline is striking.

  4. Isn’t this what Martin Sandbu and Dani Rodrik address by calling for the removal of tax incentives for using debt – the anti insurance tool, and sectoral wage boards?

  5. I think the economic development in Germany from 1870 illustrates the neccesity of imperialism. Because of globalized monopoly capitalism. In the beginning of the curve 1870 there is the long depression, caused by general or globalized monopoly competieition. Which could not be lifted by the market itself. Enters the German state and starts giving out social security (old age pension 1889) and buying battleships (1890). And Germany also takes part in the scramble for Africa.
    To make the population pay for this – to rize the profit quota – there had to be war – the threat of painful death and mutilation. Germany is only one example among many. But the german curve is easier to read than for most other countries. The diagram illustrates the function of working hours per “economically active” or employed person a year on the vertical and the number of hours worked divided by number of inhabitants on the horizontal.

  6. MR said:

    “Actually, personal consumption in China has been increasing much faster than fixed investment in recent years, even if it is starting at a lower base.”

    The Chinese now have deliberate policy of rebalancing the economy away from exports to internal consumption. Consumption is rising because of deliberate government policy.

    1. “Yes, but even before the explicit policy it was rising faster than GDP.”

      This would be expected as domestic per capita income increases.

      Surely this is a normal feature of a rapidly developing economy.

    2. I can’t seem to get into the run of your critique – it seems very messy to me.

      I guess my problem is that I have been thinking along the lines of Klein and Pettit (viz. “there is a ‘global savings glut’ in the world economy caused by rising inequality, low wages and consumption”) for several years myself.

      I am also stuck with the opinion that your Marxist perspective (“the unequal exchange of value”) is where you start and there’s no letting it go and you’re endeavouring to push the facts into a shape that suits your priors.

      ” An investment led growth model includes faster consumption too but apparently klein and Pettit don’t think so”

      Do they explicitly say so or it is that they don’t believe that model applies at this time in economic history?

      1. Henry – good questions. My posts may be messy but it was the best I could do to argue that the global savings glut thesis and imbalances arising from that is not the way to look at the development of class wars and trade wars globally. Rising inequality and stagnant wages are a product of the drive for higher profitability is my view. Actually I argued that there has not been underconsumption, but underinvestment due to falling profitability.

        Yes, Klein and Pettis admit that China’s investment growth model worked for a while (actually a very long time) but they reckon it won’t work from now on because of the need to raise consumption. The Western model of high consumption, low wages and high personal debt has been a disaster so why anybody would want to switch to that, I dont know. Also as I said, the investment model actually brings with it higher consumption gained from rising wages and employment – at least in China.

        As for trade wars, in my view the Marxist model of a battle over the sharing out of surplus value appropriated from labour globally by the multi-nationals through unequal exchange in trade (and in value chains) seems a better model than the some global imbalance between ‘savers’ and ‘spenders’.

        Klein-Pettis are ‘ pushing the facts’ and so am I. But which is closer to the truth?

      2. Maybe the simple answer regarding who is closer to the “truth” is in asking and answering two questions: who owns the means of production and for what purpose? Bourgeois economists as such never ask for the obvious reason that they lead to obvious, but distasteful conclusions regarding capitalism and the nature of their own employment within it.

      3. I should add that Keynes himself did ask that question, but when it led to euthanasia of the rentiers (and who knows what else), he placed himself firmly in the camp of the educated bourgeoisie. In other words, economic questions are in essence social ones.

    3. I think you are saying that investment has shifted to developing countries (mainly those in Asia) because of declining profitability in the West.

      Or could it be that the capitalists in the West saw greater opportunity for profit by shifting production to the East. There may have already been declining profitability at home but as the East opened up new opportunities arose. It may have also been that as production shifted to the East, production in the West continued to grow less profitable than before. So the decline in profitability in the West was, in part, due to globalization and increasingly so. Not quite the other way around as you would have it.

      This shifting of jobs to the East saw incomes of labour in the West decline. In the West, increasingly, capitalists continued to enrich themselves (as profits were repatriated) as workers in the West suffered immiserization.

      It is clear that globalization has altered income and wealth distribution in the West. The only way that workers in the West can continue to consume the production coming from the East is to supplement their incomes with debt.

      It seems to me that there’s a little of Klein/Pettit and a little of Marx in
      the economic history of the last 50 years.

      “..the coming imperialist trade wars are ……. between rival imperialist powers over the share of profits….”

      I’ve modified your sentence to say what I imagine you believe.

      If this is a correct explication of your position then it doesn’t entirely make sense.

      The profits largely go to the western firms that have invested in the East. The host country benefits from technology and management skills transfer and the multiplier effects of western investment.

      The trade wars are not about profits. In the case of China, they are about strategic containment of China by the West.

      I personally would agree with K and P that global imbalances cause trade wars but I would say the current spat between the US and China is not about trade imbalances but about strategic containment.

      The other element is that China has gathered up trillions of dollars in trade surpluses. It uses these dollar balances to fund its Belt and Road Initiative. One way to inhibit the progress of China’s BRI is to limit its ability to fund it with trade surplus dollars, hence the US/China trade war.

      1. BTW I wrote this before seeing your response.

        Maybe we can agree on a few things.

      2. The strategic containment of China is not unrelated to imperialist profits by the West, its a precondition. China and Russia are the only countries not subordinated to western imperialism. Whether China will end up being an imperialist country or not is irrelevant since western imperialists are not guided by “ideological solidarity” but by material class interests. You wont see those measures taken against, say, India or Brazil, because these countries, although large and rich, are completely subordinate to western imperialism – both having quasi-fascist leaders at the moment as a response to the BRI. Therefore, they do not pose a threat for the long-term dominance of western imperialism.

  7. The strength of this website is that it connects us to all the contemporary and important discussions being held in bourgeois circles.

    Is Michael’s interpretation correct? He is both right and obstinately wrong. He is right to focus on the trajectory of the rate of profit as the arbiter of economic life. The use however of the primitive metric, the rate of return, fails to expose a lot of detail in the economy particularly turnover and the growth or otherwise of circulating capital. Where he is wrong is to consider that the period of globalisation ended in 2008, whereas history will show it ended between 2014 and 2016. And it ended then because of the collapse in the rate of profit from a peak equalling 1996 and 2006, resulting in a fall which has and will endure for an unprecedented 8 years.

    He is also wrong to fail to distinguish the growth in surpluses in the productive sphere and the savings rate as it appears in the SNA. The savings rate in the SNA is a moving feast, it can either represent unspent profits or underutilised credit facilities. It is essentially a balancing item which paradoxically rises when investment rises otherwise the T accounts would fail to balance. Michael has written often about how less than 1000 corporations dominate the world economy and within these corporations, though unevenly, surpluses grew until 2014 because the rise of the mass of profits plus depreciation eclipsed the expenditure on fixed and circulating capital.

    Has there been a crisis of under-consumption? No, not when he top 10% of earners consume as much as the bottom 80% of earners. In the USA, since 2014, the economy has been driven primarily by the increase in personal consumption expenditures, focused on the top 10% and satisfied by imports.

    Germany was repurposed as an export machine, made possible by two factors, an undervalued Euro courtesy of the south, and cheap intermediate inputs from the south and central Europe. But the German success story is over. It was based on helping China industrialise, and now that fixed investment there is barely growing, and when growing is mainly satisfied by Chinese companies providing the means, the German model has come adrift.

    As for the surpluses generated by China, that too is rapidly diminishing as countries in Asia with lower wages out compete Chinese companies. So from that point of view Michael is right. Its profits stupid. The ending of the period of globalisation may have cost the USA a quantum of profits, but it has cost Germany and China their exports. The two opportunist authors Michael has examined above are writing about an economy that no longer exists and their remedies would only exacerbate the downward trend.

  8. “as an increasingly rentier economy, it [the US] can extract ‘rent’ or surplus value from other more productive economies through both its external current and capital accounts.
    I would be thankful if you elaborated on this here or in a future post.

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