Here’s a post that’s been in the works for a very long time – basically, going back to the Shift Key two–part interview with Brian Deese, in freaking March. As I mentioned in a previous post, I was immediately intrigued when I heard Deese using language – excess savings, in particular – that I remembered from Matt Klein and Michael Pettis’s 2020 book Trade Wars Are Class Wars. I was also transported, slowly and then quickly, back to the debates I remember from Twitter at the time of its release and immediate reception as well as epic back and forths in the group chat (more than three days running) about whether excess saving was even a thing, if savings were just residuals, what it could mean to acquire excess reserves, and more. I remember online roundtables about the accounting frameworks Klein and Pettis relied on in the book (and their broader conclusions, too), and the revelation by one Twitter-famous participant and critic of the book that he hadn’t read beyond the third chapter in the book that laid out Klein and Pettis’s important argument about excess savings.
I also remember not having time to read it when it was in the midst of peak buzz. Don’t get me wrong: I ordered my copy back in June 2020 (nearly four years ago!), but it coincided with some annoying publication news that had me hunkering down with my existing papers for tenure-track reasons, and acting as an observer of, rather than a participant in, the discourse on the book.
My approach to reading the book since 2020 has been more strategic than anything. When I was writing a chapter about whether trade surpluses are desirable, I read and relied on big chunks of the book. Hearing Brian Deese refer explicitly to key ideas in this book – namely that policy makers should prioritize households and working classes in any attempts to revive domestic economies and respond to the climate change crisis – made me pick it back up. Robinson Meyer has already written about the significance of this book as a guiding light of Biden administration’s responses to all things economic and industrial since 2020; I’ll merely repeat my still-held opinion that whether a country should target trade surpluses is ambiguous, especially given the dangers of climate change. However, I think that there is so much to celebrate (and a bit to critique) about this book, several years out, and this post is my stab at that, as well as my attempt to dig into why this book drives (or seems to drive) a lot of people crazy.
First, there are many things that I really appreciated about the book. I think that the first chapter, “From Adam Smith to Tim Cook,” is a tour de force about the peculiarities at best, and semantic trickery at worst, of trade accounting. I could have happily read a book all about the strategic decisions by multinational firms to locate headquarters in global tax havens, and the resulting skewed trade numbers for those tax shelters and port cities. I have basically infinite desire to read about the origins of trade regimes, protectionism and developmentalism, and mercantilism/neomercantilism. Klein and Pettis do not disappoint on this front! A deeper dive into the microstructures of how trade transformed at the global level would have been amazing, is all I’m saying. Klein and Pettis do a great job highlighting how the arcana of accounting obscures origins and exploitation within the supply chain, both in high-income and low-income economies, and the downstream effects of those changes for consumer demand and more.
I also really admire how the authors focus on the material impact of monetary policy and financial practice, in a subversion of ‘monetary veil’ arguments. Chapter 2, “The Growth of Global Finance,” is practically worth the price of admission alone for its timeline of major financial crises around the world from the 19th century through the present. Klein and Pettis subvert the monetarist theory with their argument that periods in which central banks worked to ensure liquidity and access to money have been the best periods for global growth. Given the entrenchment of monetarist ideology, and the idea that money is a veil and/or the drive of inflationary dynamics, this is a really important contribution, and I think that the successes of the Federal Reserve’s novel strategies during the Pandemic in particular vindicate Klein and Pettis’s arguments. Similarly, the way that the Federal Reserve’s rate hikes have exacerbated sovereign debt and currency crises in developing economies since early 2022 have vindicated Klein and Pettis’s arguments in the other direction.
While there are many things I like about the book, the third major theme I appreciate is Klein and Pettis’s repeated arguments that while owners of corporations, financial executives, and political elites benefit from our (at least until very recently) neoliberal trade and finance frameworks that have prioritized profits, exports, and exploitation over need-driven approaches to development in both core and peripheral economies, workers and households in both poor and rich countries have suffered. Whether that refers to workers who were hurt by the Hartz reforms in Germany or deindustrialization in the US, the exploitation of workers in outsourced factories and maquiladoras, those locked out of welfare services due to Hukou in China, or those hurt by conditional austerity measures mandated by the IMF in the 1990s and beyond, Klein and Pettis illuminate how the global capitalist system has been rigged against workers and households around the world. Knowing that the Eurozone has continued to prioritize budget balancing and austerity since 2022, despite a brief window of optimism that it would use institutions like the ECB to enable more fiscal expenditure in the midst of the Covid pandemic, was a depressing feature for me while I read the last few chapters.
That all said, there are different aspects of the book that I found challenging. The structure of the book is really hard to follow! On the one hand, this is a testament to the fact that Klein and Pettis are trying to do a lot of important things with this book. They are making a case that trade flows and capital flows have prioritized elites’ interests (industrial, financial, political) at the expense of workers and households around the world, and they are looking at these trajectories both at the global level from the 19th century through the present, and also telling granular case studies of major states in this universe, namely Germany, China, the US, as well as acknowledging the effects of these changes for both ‘emerging market’ economies and peripheral European economies. Ordering a book like this would be a challenge, given the temporal overlaps being described. However, the authors do wacky things like introducing a brief version of the Bretton Woods agreement and its implosion in the middle of the chapter about the US. It breaks up the flow, and would have probably been helpful before the case study chapters.
Unfortunately, I understood how many readers could be turned off by Klein and Pettis’s treatment of accounting, which opened their argument to critique. Do I think that the book is unreadable given its willingness to call investment- and/or finance-led growth an excess savings strategy? No. I definitely think it’s worth reading beyond the third chapter! But I also agree that Klein and Pettis’s treatment of how national, current, and financial accounts balance out is tricky to follow at best, and underbaked at worst. As someone who has written a few papers that delve into accounting and balance sheets, I do empathize! A more explicit walk through of the accounting formulas would have helped, perhaps in an appendix. But at the same time, Klein and Pettis’s emphasis on savings as determinants of investment was distracting, and may have worked against their overall arguments. As a friend of mine (Chirag Lala) noted, a more intuitive way of referring to the consequences of the growth strategies the authors describe would have been to focus on the relative multiplier effects of fiscal policy, trade, investment, and consumption, rather than making claims that often appeared ad hoc as to which countries’ deficits were unsustainable and which countries’ deficits were responsible for transformative global growth.
When all is said and done, though, I’m glad that the Biden is using Trade Wars Are Class Wars as a guiding text. There are many worse guides they could be using! And maybe someone in the administration can tell me how much weight they put on the accounting in chapter 3. That said… There are two extra interesting pieces of the narrative that I don’t have any pat answers for.
First, Klein and Pettis subvert Marxian exploitation theory in this book by arguing that the United States – the USA! – is exploited by developed economies as a source of dollar denominated assets (their exorbitant burden argument) and as a dumping ground for their respective gluts of output. (Adam Smith used the term “vent for surplus” to describe an economy’s exported output for which there is insufficient domestic demand.) I can see why this would drive scholars of the global economy, and especially developing economies, bonkers. But I think that ultimately Klein and Pettis make a good case for it! I think that this tension is at the root of a lot of the recent criticism I’ve read of the Biden Administration’s use of tariffs on particular foreign producers of green technology, like Electric Vehicles. Again, no pat answers; like Robinson Meyer, I have mixed feelings about how the Biden Administration has approached industrial policy, despite past support from development economists like Ha Joon Chang for the selective deployment of tariffs to support domestic production.
Second, I’ve written a lot about exorbitant privilege in the context of monetary sovereignty and fiscal space, and a central feature of my discussion of how the US government and the Federal Reserve have been able to succeed in extra spending in periods of global crisis have rested on that privilege. Klein and Pettis seem to me to argue that the US should give up some of that privilege, since households and exporters are implicitly and explicitly hurt by the resulting appreciation of the dollar relative to other currencies and all the downstream effects that follow. Maybe, as Stephen Marglin notes in Raising Keynes, this is an attitude adjustment I need to make: while Marglin is referring to the ability of economists and policy makers to accept a little more inflation in exchange for more and more consistent spending, maybe I need to accept a little more risk of bond vigilantism with respect to the US? Or maybe it would be a good thing if, as many economists I respect have argued, China is three steps from becoming the global currency hegemon. It could happen! It’s something that I think about more than a little, and will continue to going forward.
Nina Quinn Eichacker 