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Worthy Reads from July 4, 2019

Wolf: What Trade Wars Tell Us—Noted

The highly esteemed Martin Wolf reviews an excellent book by Klein and Pettis. And yet what Klein and Pettis have to tell us is old news: it was first reported by John Hobson, in one of the very first few years that began with the digits “19“. Hobson's point in those long ago days was that Victorian capitalist plutocrats liked to save in assets they thought were secure, rather than risk their wealth in enterprise. They had already made their piles, and their principal fear was that they might lose them and hence lose their position. Somebody else in society must therefore take on the job of nurturing and spending on enterprise and investment at the appropriate scale: the Gilded Age plutocracy simply will not do it consistently.

It is true that investments and expenditures can be highly negative sum for society, if they take the form of colonial imperialism or militaristic arms races. They can be somewhat negative sum, if they take the form of trade war tariffs and quotas and investments promoted as a part of monopoly inducing inappropriate industrial policy. They can be positive sum for society, if they take the form of social welfare, social insurance, and suitable industrial policy.

But a more comprehensive look reveals that political parties that find a way to make such expenditures tend to survive and retain power, and those that do not do not. And those societies that do, thrive:

Martin Wolf: What Trade Wars Tell Us https://www.ft.com/content/f3ee37e0-b086-11ea-a4b6-31f1eedf762e: ‘Trade Wars Are Class Wars... [by] Matthew Klein and Michael Pettis argues that what has been happening to trade and finance can only be understood in the context of domestic pathologies... severe global imbalances, unsustainable debt and monstrous financial crises.... The foundation of this excellent book is the theory of “underconsumption”, proposed by the British analyst John Hobson in 1902...

...“For decades,” note the authors, “real borrowing costs have been below long-term forecasts of real economic growth and remain around zero.” This combination of extraordinarily low real interest rates with weak global demand and low inflation is a prime symptom of underconsumption or, in modern parlance, “a savings glut”... income has been shifted to wealthy people who do not spend what they earn....

The book’s core is the analysis of the history of China, Germany and the US over the past three decades.... The role of the US as supplier of the world’s safest and most liquid assets is vital. We are trying to run a global economy with a national money. It has long been known that this is problematic. It has not become any less so.... The beginning of any sensible policy is clear analysis. The imbalances that caused the eurozone crisis, the debt explosions in the US and peripheral Europe, and again in post-financial-crisis China go back to two fundamental failures: the distribution of income away from the bulk of the population towards wealthy elites and the unique global role of the dollar. The obvious solution to the first failure is to distribute income to people who will spend it....

In the eurozone, this will probably require the creation of a central fiscal authority with capacity to redistribute resources. In Germany, it will require higher government spending on investment and welfare. In China, it will require the reform of property rights, improved rights for migrants to urban areas, a better social safety net, the ability of workers to organise and a shift of taxes on to the rich.... If we do not recognise and respond to these challenges, we may find ourselves persistently mired in the world of imbalances and trade wars. This is not a good place to be. We should escape…

.#noted #2020-07-03

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