A new book is receiving well-deserved attention. Trade Wars Are Class Wars by Matthew Klein (a former colleague) and Michael Pettis (an always enlightening observer of the Chinese economy) argues what it says in the title, or as they pithily explain in the introduction: “A global conflict between economic classes within countries is being misinterpreted as a series of conflicts between countries with competing interests.”
An excellent way into the argument before you read the book — which you should — is an interview with the authors by the sharp Adam Tooze. I am not about to give you a review of the book (I still have to read to the end) but I want to draw your attention to some rewarding public conversations that Klein and Pettis have already triggered.
One of the better aspects of Twitter is how it can quickly make exchanges between experts globally available. Reactions to the book have been a case in point. In two Twitter threads, economists have picked up on one of the key puzzles thrown up by Klein and Pettis’s argument: if there is a global savings glut, how come there has not been a global investment boom to absorb the greater desire for saving?
Amir Sufi sets out the problem and encourages fellow academics to investigate. He references Klein and Pettis’s suggestion that the answer has to do with weak expectations for demand growth (which could presumably be rooted in the savings glut itself), which discourages investment even when financing is cheap, and points out that this jars with standard economic models.
It is important to clarify what the puzzle is. On a global level saving and investment must balance. So it cannot be that the world as a whole invests less than it saves. To be precise, then, the question is why an increase in net saving exported as capital from surplus economies has not been matched by higher investment in deficit economies but instead by lower domestic saving and higher consumption. To simplify, why has the exported capital from “savings glut” countries been consumed rather than invested by the importers?
(This way of stating the problem, by the way, suggests it is too one-sided to condemn surplus countries exclusively. When economies run up current account deficits while their rates of public and private investment drop, this must also reflect their own internal dynamics. I also disagree that capital exports from surplus economies have falling employment in deficit countries as the “inevitable consequence”, as Klein and Pettis suggest. The only advanced economy that saw consistently falling employment — outside of recessions — in the period in which global macroeconomic asymmetries grew was the US, and that had much to do with its own specific pathologies.)
Sufi also highlights Klein and Pettis’s main theme that “inequality is closely linked to financial excesses” and that current account surplus is often a result of national incomes being shifted away from the lowest paid. This is an important and under-appreciated analysis. It is also a corrective to the popular notion that undervalued exchange rates are the root cause of cross-border asymmetries; understanding the domestic distributive dimension suggests that exchange rate regimes may have little influence on surplus economies’ tendency to export capital.
Luca Fornaro picks up Sufi’s thread, offering a number of possible mechanisms to explain the failure of investment to respond to increased savings. One is that weak demand can hold back investment when macroeconomic policy fails to unlodge pessimistic expectations. (We need not accept that central banks are unable to do this to believe in this mechanism, just that they are unwilling to stimulate enough.)
Another is a “financial resource curse” through which net capital inflows into technologically leading economies such as the US shift their productive structure towards non-traded activities that may be less investment-intensive. This would be a specific case of the broader problem that beyond a certain point, financial deepening is bad for growth because it allocates capital to less productive uses. The third possible mechanism is that investment incentives are weakened by more market concentration which, in turn, may have been encouraged by low interest rates. (Fornaro’s Twitter thread links to research investigating all three possibilities.)
The jury is still out, but I want to add one policy-relevant reflection that applies in all cases. If investment fails to respond to the global savings glut for any (or all) of these reasons, they can be addressed through national policies. It is a problem that can be solved even while cross-border macroeconomic asymmetries persist.
Weak demand expectations are, of course, influenced by domestic policy, and can be addressed with more aggressive aggregate demand management. Even a given macroeconomic stance can be made more investment-friendly by changing the composition of public budgets (more public investment spending) or the incentives for investment given by the tax system (more favourable deductibility for capital spending, wealth taxes that favour higher-productivity assets).
A financial resource curse is more plausibly linked to overall (gross rather than net) lending than cross-border asymmetries, and there are plenty of regulatory tools to direct finance towards more productive investments. The same is true for combating market concentration and monopoly power.
Get these domestic policies right, and it is no longer clear that large net capital flows between countries are something we should worry about as much. There are good reasons as well as bad ones why some countries should want higher net savings than others, so a perfectly balanced world should not be a goal. Where there are bad causes, such as inequality, those should, of course, be addressed. But if the global savings glut could be made to lead to a global investment boom, that would not be a bad thing to have.
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