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Matthew C Klein

Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace Hardcover – May 19, 2020

by Matthew C. Klein (Author), Michael Pettis (Author)

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Winner of the 2021 Lionel Gelber Prize: A provocative look at how today’s trade conflicts are caused by governments promoting the interests of elites at the expense of workers

“The authors weave a complex tapestry of monetary, fiscal and social policies through history and offer opinions about what went right and what went wrong . . . Worth reading for their insights into the history of trade and finance.”—George Melloan, Wall Street Journal

"This is a very important book."—Martin Wolf, Financial Times

Trade disputes are usually understood as conflicts between countries with competing national interests, but as Matthew C. Klein and Michael Pettis show, they are often the unexpected result of domestic political choices to serve the interests of the rich at the expense of workers and ordinary retirees. Klein and Pettis trace the origins of today’s trade wars to 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. In this thought‑provoking challenge to mainstream views, the authors provide a cohesive narrative that shows how the class wars of rising inequality are a threat to the global economy and international peace—and what we can do about it.

Longlisted for the 2020 Financial Times & McKinsey Business Book of the Year Award and named a Best Business Book of 2020 by Strategy + Business

Print length

288 pages
Language

English
Publisher

Yale University Press
Publication date

May 19, 2020
Dimensions

6.13 x 0.88 x 9.25 inches
ISBN-10

0300244177
ISBN-13

978-0300244175
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Globalization/Class Wars?

Reviewed in the United States 🇺🇸 on June 21, 2020

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I have the hardback with 232 pages not including Notes and Index. The book is well-written, but, to its credit, it contains economic research and analysis that requires the reader to stay focused. Nonetheless, it didn't take too long to read it.

The wealth of the 1% versus the wealth of all others lies at the heart of the authors' argument. As the book cover says: "How Rising Inequality Distorts the Global Economy and Threatens International Peace." I'll let the authors speak for themselves: "A core argument of this book is that the distribution of purchasing power within a society affects its economic relations with the rest of the world. People who cannot afford to buy what they produce must rely on foreign demand for their output." Pg. 176.

The focus is largely on the U.S., China and Germany. In China and once again I'll let the book speak for itself: "The financial system, in other words, produced a massive and sustained transfer from the Chinese people to large manufacturers, infrastructure developers, real estate developers, and provincial and municipal governments. The transfer was worth about 5 percent of Chinese GDP each year between 2000 and the start of interest rate liberalization around 2013. With such cheap capital, it is not surprising that entities with privileged access to loans embarked on a massive investment spree, often with little concern about the quality of the projects they were financing." Pg. 112.

Germany had much the same policy response particularly after the reunification with the former East Germany. "Although many in the former communist bloc eventually benefited from convergence with their richer Western neighbors, the after reunification proved traumatic for many Germans in the the East and the West. Poverty and insecurity rose, especially for Germans with jobs. Workers at the top saw rapid income gains even as most other Germans experienced outright wast cuts. National income shifted from workers to the owners of capital." Pg. 131.

In both China and Germany, this shift in income from workers to elites arose from deliberate policy choices. The book examines these same effects in the U.S. It also looks at the effect of the dollar being the world's reserve currency and concludes that rather than the reserve currency status being an "exorbitant privilege" it has rather become an "exorbitant burden."

The book has two authors, Matthew Klein, a writer in Barron's, and Michael Pettis, a professor at Peking University. I am surprised that Dr. Pettis is able to work at Peking University and write about the Chinese economy with the clarity that he does. Perhaps the Chinese permit more freedom of speech than I expected. Mr. Klein writes a regular weekly column for Barron's which he does well.

If you find your interest whetted by the quotes above, I think the book will reward your time to read it. In particular, the comments about Germany were enlightening and, to me, surprising about the effects of German elite's policies on the lives of average Germans. I recommend the book highly.

If the effect of globalization interests you, I have read and recommend the following books: Twilight of the Elites by Christophe Guilluy (effect on France), Trade, Conflict and the Perilous Road Ahead, by Michael Pettis (one of the two authors of Trade Wars are Class Wars) with a principal focus on China, The Nationalist Revival by John Judis (focuses on the political push-back against globalization), The Levelling by Michael O'Sullivan (Irish author that looks at a range of issues including a disturbing historical background on globalization - World War 1 may have had its genesis in a late 19th and early 20th century push-back against an earlier version of globalization) and The Only Game in Town by Mohamed El-Arian (examines the Federal Reserve's role).

59 people found this helpful

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Global Keynesians

Reviewed in the United States 🇺🇸 on July 8, 2020

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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.

35 people found this helpful

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johnh

outstanding analysis

Reviewed in the United States 🇺🇸 on April 18, 2023

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The authors have efficiently stated the history, causes and possible approaches to resolving global economic imbalances. Greed is a valid part of market forces, but in excess it distorts optimal outcomes. Leaders and managers should not treat modern capitalism as a zero sum game in which they only get more by forcing everyone else to get less.

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G Well

Excellent read extremely timely

Reviewed in Canada 🇨🇦 on November 20, 2020

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My order arrived on time and as requested. Happy Camper/ Reader

William Podmore

Splendid study of the way capitalism is damaging the world's economies

Reviewed in the United Kingdom 🇬🇧 on September 4, 2020

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Matthew Klein is the economics commentator at Barron’s. 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.

Their argument is that “trade wars are an almost inevitable consequence of globalization as it has been practiced. Peoples who fundamentally share common interests are being set against each other because the ultrarich have been successfully waging a class war against everyone else.”

So, trade war “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 everybody else.”

The authors point out that “deepening globalization and rising inequality have reinforced each other. Businesses across the world use international competition as an excuse to push for lower wages, weaker environmental and safety regulations, preferential tax regimes, and regressive transfers. Squeezing ordinary households has, apparently, been much easier than increasing productivity, investing in infrastructure, and improving health and education.” Across the world – the EU, China, the USA – the picture is the same.

EU governments, first Germany and then the rest, slashed labour market protections and pushed millions of people into low-paying part-time jobs. This shifted purchasing power from workers, who spend most of their income on goods and services, to the ultrarich, who instead accumulate financial assets.

They state that “Europe, not China, has become the biggest threat to the world economy …” Why? Because the EU has damaged so many of its members’ economies, causing havoc unmatched in China. “By exporting excess savings to its European trading partners, rich Germans forced people in Spain, Greece, Italy, and elsewhere to borrow more than they could reasonably afford. That turned out badly for both the creditors, who have lost hundreds of billions of euros on bad assets, and for the debtors, who have since suffered levels of unemployment unprecedented in modern European history.”

Similarly, “Systematic transfers of wealth from Chinese workers to Chinese elites distort the Chinese economy by strangling purchasing power and subsidizing production at the expense of consumption. That, in turn, distorts the global economy by creating gluts of manufactured goods and by bidding up the prices of stocks, bonds, and real estate. Chinese underconsumption destroys jobs elsewhere, while inflated asset values lead to devastating cycles of booms, busts, and debt crises.”

The USA also destabilises the world economy by favouring the salting away of assets over investing in the production of new value. “Many American companies making money by selling goods and services overseas therefore generate foreign direct investment income from their operations abroad, rather than export earnings attributable to the United States. About two-thirds of this income officially came from seven tiny countries known to offer tax benefits to American multinationals: Bermuda, the Cayman Islands, Ireland, Luxembourg, the Netherlands, Singapore, and Switzerland.” Subsidiaries of these companies have parked trillions of dollars in tax havens in the last twenty years.

China seems to be doing more to remedy this than the EU or the USA. China points the way forward that an independent Britain should take. “Import substitution has succeeded thanks in part to Chinese government policies that have systematically encouraged Chinese businesses to substitute foreign production for domestic production …” It has its ‘Made in China 2025’ agenda. We need a domestic industrial base to make a success of our newly found independence.

8 people found this helpful

Tengal2012

Interesting book

Reviewed in Italy 🇮🇹 on April 22, 2021

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I don't agree with everything that's inside this book but roughly speaking it's a good assessment and synthesis of the macro history of the world even though it has a slightly left of center academic bias.

It is also a very good analysis of the chinese and south east asian model which so many tout but don't fully understand.

Gabriel Stein

Well worth reading

Reviewed in the United Kingdom 🇬🇧 on January 5, 2021

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Michael Pettit is the world’s greatest authority on sectoral financial balances. In this book, he an Matthew Klein show that imbalances cannot be rectified by tariffs; that huge current account surpluses hurt the workers in the surplus countries; and suggest a way out. You may disagree with their proposals, but you should read the book.

One person found this helpful

Brian Yarwood

Excellent Solutions to Our Economic Inequalities

Reviewed in the United Kingdom 🇬🇧 on July 30, 2021

Verified Purchase

But you only have observe that wealthy privileged
wish to steal all the baubles so the suggestions here
will never happen until the working people wake up
and realise that are just slaves for privileged few.

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Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace Hardcover – May 19, 2020

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