What this episode is about
“Made in Germany” sweeps the globe, yet a typical German household is far less wealthy than a Spanish one. China’s trade surplus is much bigger than Germany’s, yet household consumption there once fell below 40% of GDP. When a country runs a huge surplus year after year, is it really just because its people work hard and its factories are strong?
This episode covers the Lionel Gelber Prize–winning Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace, by Matthew C. Klein and Michael Pettis.
The authors’ answer goes against common sense: at bottom, a trade surplus means something is wrong with how income is divided at home. Ordinary families spend most of what they earn, but the rich, big companies and the government can’t spend all of theirs. When wages, interest on savings and welfare are squeezed, and wealth keeps flowing from ordinary families to companies, the rich and the state, domestic consumption can’t absorb what the economy produces. The extra goods have to be sold abroad, and the unspendable savings have to be lent to foreigners.
Part of Germany’s and China’s excess savings flowed to southern Europe, and even more poured into the U.S.: it pushed up the dollar, crushed American manufacturing, got packaged by Wall Street into mortgage-backed securities, inflated a housing bubble, and finally burst in the 2008 subprime crisis. China, Germany and America look like they’re at each other’s throats on the trade battlefield, but underneath they’re gears in the same machine: the few who profit in each country have complementary interests, and the cost lands on ordinary people everywhere. Tariffs won’t end trade wars, the authors argue. The only way out is to give the income that was taken back to ordinary households at home.
Highlights
- An iron-clad identity: trade surplus equals savings minus investment—and excess savings come not from culture but from income distribution
- The other side of Germany the “model student”: the Hartz reforms held down wages, the tax system favored the rich, the “black zero” budget let public infrastructure decay, and cheap money flooded into Spain to blow up a property bubble
- Where China’s huge surplus comes from: financial repression, low labor compensation, the hidden tax of the hukou system, a regressive tax structure and an undervalued currency
- Why the world’s excess savings flood into America: the dollar’s status, a shortage of safe assets, the subprime bubble, and the Rust Belt’s “deaths of despair”
- The real conflict isn’t between countries but between the few in each country who hold capital and power and their own ordinary citizens
Jump to a section
- 00:00 The book’s counterintuitive conclusion
- 01:52 The euro crisis: did lazy southern Europe really drag down thrifty Germany?
- 03:52 Common sense turned upside down: surplus equals savings minus investment
- 05:34 Excess savings aren’t about culture—they’re about income distribution
- 08:09 Germany: the Hartz reforms, a tax system for the rich, and the “black zero”
- 13:15 How German savings inflated Spain’s bubble
- 15:26 China: financial repression, low wages, hukou and the tax system
- 21:42 Why excess savings poured into America—and how they blew up the subprime bubble
- 27:26 America’s price: the Rust Belt, “deaths of despair,” and Trump’s rise
- 29:13 China, Germany and America: gears in the same machine
- 30:23 The real opponents: each country’s elites versus its ordinary people
- 31:40 The way out: give the pie back to ordinary families
The book
- Title: Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace
- Author: Matthew C. Klein, Michael Pettis
- Publisher: Yale University Press
- Publication date: 2020
- ISBN: 9780300244175
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