Abstract
In December 2020, thousands of freight trucks queued in Kent, England awaiting new customs rules in preparation for British exit from the European Union. “[If] the U.K. becomes a full third country without membership of the E.U., then you can expect full passport controls,” said the director of Getlink, the company that manages the tunnels beneath the English Channel. Around the same time, Donald Trump posted a forty-five-minute video statement to Facebook explaining the reason for his refusal to accept the results of the U.S .election. “The corrupt forces who are registering dead voters and stuffing ballot boxes are the same people who have perpetrated one phony and fraudulent hoax after another,” he explained. “These entrenched interests oppose our movement because we put America first.”
Both events embodied high-water marks of the seemingly inexorable flood of nationalist politics that had risen in the Anglophone world since the elections and referenda of 2016. Yet the response to the Covid-19 pandemic also brought forceful reminders of the capacity of states to shape production, employment, and, most evidently, incomes. Might all of this portend the eclipse of the idea of globalization, not just among the Donald Trumps and Boris Johnsons but also across the entire political spectrum? The expansion of government spending and borrowing seen in the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act and the Biden administration’s American Rescue Plan has taken place amid a broader rethinking among economists of the relationship of fiscal policy to a nation’s trade and financial position. Perhaps the most prominent product of these shifting ideas has been the publication of Trade Wars Are Class Wars, a study of global investment flows by Matthew Klein and Michael Pettis that is elegantly argued, eclectically well-documented, but unfortunately lacking in political and diplomatic history.
To understand whether we might be nearing the end of this era of globalization, it is useful to reflect upon how it began. One starting point is the poor economic performance across the advanced capitalist world during the 1970s crisis of stagflation. Since that time, the interpretation of the welfare state or the mixed economy as a kind of vampire on the productive energies of private enterprise seized political discourse among the North Atlantic economies. The orthodox explanation for the slowdown in U.S. growth since the 1960s is that the welfare state enabled excessive consumption. The government borrowing of the Ronald Reagan and George W. Bush years, the inadequacy of the Clinton and Obama efforts at “entitlement reform” (i.e., reducing social insurance obligations), and the profligate growth of U.S. household debt, according to this interpretation, have produced a persistent deficit in the U.S. current account—the measure economists use of money flowing into and out of a country, the balance of payments for trade and current investment. As U.S. borrowing by government and households draws capital into the country, drives up the dollar, and prices U.S. goods out of world markets, the proposed solution has been to encourage the country to save more and borrow less, easing taxes on wealth and top incomes and reducing labor income while reducing barriers to trade and investment to force market competition everywhere. In short, austerity and free trade will enhance domestic investment and international competitiveness.
Instead of increased dynamism, the legacy of a generation of belt-tightening and boot-strapping has been intensified inequality, stagnation and unemployment, and ever-larger trade deficits. Where austerity reaches political limits and growth continues to stagnate—as in the U.S. Rust Belt and northern England over the past decade—many workers have come to see international competition itself as the cause of society’s economic woes. Why has the upward distribution of income that was intended to boost private investment and pull economies out of the challenges of the 1970s produced its own perversions in stagnation and hostility to foreign trade? This is the problem Klein and Pettis seek to understand, and their conclusion turns the orthodoxy on its head: austerity is not the solution to our international trade woes but the cause of them.
In defiance of the textbook model upon which the neoliberal program was premised, the age of neoliberalism has in fact been characterized by persistent payment imbalances. That model, which has origins going back to the nineteenth century, looked something like this: currency flows into countries that export more than they import or produce more than they consume (current-account surplus) and out of countries that import more than they export or consume more than they produce (current-account deficit). Economists long taught that persistent surpluses or deficits in the current account must balance automatically by the exchange rate: surplus countries’ currency will appreciate, allowing their residents to import and consume more relative to their production; deficit countries’ currency will depreciate, boosting their exports and reducing their consumption. In either situation, it is the flow of goods that determines the flow of money.
But that automatic balancing has not occurred. Outside the United States, the major industrial and commercial centers of the globe piled up historic financial claims during the neoliberal era, with Chinese and German current account surpluses ballooning during the 1990s and 2000s. Yet the structure of the Eurozone prevents German surpluses from driving up the price of German goods, while Chinese exchange-rate intervention (funded by their dollar earnings) maintained the value of the Yuan well below rates that would have been determined by market speculators alone. At the same time, although the United States accumulated historic debts since the 1970s, the dollar has remained strong enough to persist as a world reserve currency, coveted by foreign central banks and everywhere pursued as the safest standard for storing value.
In other words, this is a story of international political economy. Foreign producers need U.S. consumers, and in managing their exchange rates, they need U.S. financial assets. Perversely, it is inequality within countries that compels governments to depend on foreign markets for sales and employment at home. As Klein and Pettis argue, “The distribution of purchasing power within a society affects its economic relations with the rest of the world.” Because national savings and consumption are determined by the distribution of income, maintaining full employment in highly unequal societies has required either domestic borrowing to finance consumption and employment (as in the United States) or an export surplus (as in Germany or China)—in effect production at home at the expense of production abroad. Chinese and German surpluses are the counterpart to U.S. deficits. One cannot exist without the other.
This process of global capitalist integration has generated tremendous instability within countries. It has both produced and depended on growing inequality in the United States, Germany, China, and elsewhere. And this, in turn, has spawned not just seething popular resentments but also grave structural risks. The credit and foreign investment–fueled bubbles of the Clinton, Bush II, and late Obama years are the results of this inequality. This is what former Chair of the Federal Reserve Ben Bernanke famously declared a global “savings glut” or former Treasury Secretary Larry Summers described as “secular stagnation.” It is a world in which pension funds, insurance companies, and banks the world over are unable to earn but for increasingly speculative and debt-dependent investments. As Klein and Pettis write, “windfalls of cheap money produce the same responses everywhere.” When the very wealthy become very liquid, their control of those funds is liable to cause problems for the rest of us.
There is a lesson here in the world of economic concepts. What we think of as the deliberate choice of “saving” for the individual is, for the society as a whole, a residual: savings are what is left over from production after decisions about consumption and investment have been made. If consumption out of a given level of production falls, savings rise. Similarly, if savings rise at the expense of consumption, there will be excess production that must be either exported or reduced. No matter how much the state of Ohio saves, it cannot raise employment in the absence of investment and consumption spending. And who controls investment? The revelatory character of Keynes’ writing during the Great Depression stemmed from this diagnosis, that any attempt to raise employment by increasing savings “necessarily defeats itself.” As the government expenditures of World War II confirmed, it is investment—not savings—that creates new income.
The neoconservative charge of the 1970s and 1980s, which fueled Reaganism and its ghastly after-images, can be seen, in retrospect, to have been a way for the wealthy to displace blame for their own underinvestment and the depressive effect of their savings on national consumption. Pettis and Klein suggest that the structural crisis of mixed economies—persistent low investment, secular rise in unemployment, and growing sovereign debt—has been a result of this historic misrecognition. Rather than the consequence of a growing public sector or excessive U.S. borrowing, they locate the cause of falling private investment in the prosaic force of low consumer and government spending.
Klein’s and Pettis’ intervention into this debate is most welcome, but their account may have benefited from greater attention to the era when governments actually pursued government spending and full employment. In particular, they might have probed more deeply the complex politics and diplomacy of exchange-rate adjustment. What we have come to call neoliberalism was rooted in the political struggle to maintain full employment during the brief experience of the managed-currency, mixed economies of the North Atlantic established by the Bretton Woods agreements. Maintaining fixed exchange rates, full employment, and stable prices compelled national governments to intervene to an unprecedented degree into the wages, profits, and investments of their private corporations—and to coordinate their control over investment flows eliminating the free market in international finance. Neoliberalism was a solution to this conflict within nations between welfare states and private capital: export-oriented growth and domestic austerity were devices to raise private investment, alternatives to the welfare state’s encroachment on capital income and the privileges of wealth.
In fairness to Klein and Pettis, historians themselves have only begun to process the political economy of this “golden age.” Still, the historical shortcomings of the book are reflected in the programmatic thinness in the recommendations Klein and Pettis offer. The only thing blocking “higher productive investment” today, they write, are the “irrational political constraints” of the German, Chinese, and U.S. “elites.” As a solution to raise Chinese and German consumption, they propose a number of “policy changes.” For China, these entail “liberalizing reforms”: strengthening private property rights against the state, universalizing the social security system, “privatization, the legalization of unions, and other measures . . .” In the United States and Germany, they propose raising taxes, redistributing income, and embarking on a vast program of infrastructure and social investment. This is all well and good, but national governments attempting to raise domestic consumption today will confront the familiar historical problems of domestic class conflict and international diplomacy: which industries will be reorganized, which exchange rate parities will be targeted, who will absorb surpluses, and on what terms?
The trouble with the perspective of the current account is not its understanding of the income flows and their components, which is lucid and revealing, but its reduction to a “policy suggestion” what are in reality the political and historical forces influencing the patterns of world development. Apprehending historical forces today will require great and directed social upheavals, myths and visions capable of capturing offices, transformative legislation, and coercion of business executives into changing their ways or losing their place in society. As the North Atlantic ruling class attempts to preserve its role against the Chinese challenge, it will undoubtedly benefit from the perspective Klein and Pettis offer here. But without a political constituency in organized labor and an internationalist perspective, it is difficult to see just how far the current Keynesian revival can go in any one country—much less the international investment management full employment will require.
