In this podcast, Yakov Feygin, Associate Director of the Future of Capitalism Program speaks with economist Michael Pettis about his latest book, Trade Wars Are Class Wars.
Pettis argues that trade surpluses arise not from cultural reasons, but rather from distortions in the way income is distributed. A trade surplus simply means that households are not consuming as much as they are producing, allowing for their production to be consumed elsewhere. Thus, countries that run persistent trade surpluses restrain the real wages of their populations, driving domestic inequality. This “beggar thy neighbor” strategy simultaneously increases inequality in trade deficit nations by destroying their high paying jobs. Surplus countries such as China and Germany must increase their workers’ ability to consume in order to discontinue this cycle. Without such a rebalancing, the world will remain mired in economic stagnation and growing inequality.
Pettis was one of the first economists to argue that China, with its closed financial sector, and its government’s willingness to rescue financial institutions is unlikely to suffer a financial crisis. Instead of classic financial bubbles, Pettis fears that without redistributive reforms that increase consumption, China will find itself like Japan: financially stable, but economically stagnant.
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