What if global trade isn’t really a fight between nations—but between classes? In the fourth episode of our Trade series, Nick and Goldy talk with economist and writer Matthew C. Klein, co-author of Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace. Klein argues that the real story behind trade imbalances isn’t about countries “winning” or “losing”—it’s about how elites hoard profits while workers everywhere pay the price. From China’s suppressed wages to Wall Street’s endless appetite for financial assets, this conversation exposes how the true conflict in trade is between labor and capital—and what it would take to build a more equitable global economy.
Matthew Klein is an economist, writer, and co-author of Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace. He writes The Overshoot, a publication focused on global economics and financial markets, and his work has appeared in the Financial Times, Barron’s, and The Economist.
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Nick Hanauer:
The rising inequality and growing political instability that we see today are the direct result of decades of bad economic theory.
Goldy:
The last five decades of trickle-down economics haven’t worked, but what’s the alternative? Middle-out economics is the answer because the middle class is the source of growth, not its consequence.
Nick Hanauer:
That’s right.
Announcer:
This is Pitchfork Economics with Nick Hanauer, a podcast about how to build the economy from the middle out. Welcome to the show.
Goldy:
I’m not sure when this episode will be airing, Nick, but at a time when Trump is playing Russian roulette with India, essentially loading 50% tariffs into his pistol in response to-
Nick Hanauer:
Who even knows?
Goldy:
Who even knows, because I thought he’s buddies with Putin.
Nick Hanauer:
Who knows?
Goldy:
God, it’s crazy. We’re in the middle of more very well-thought-out Trump trade policy. It really raises the issue of tariffs when people think about that, that’s what he’s doing, it’s a tax on imported goods. And allegedly, allegedly, Nick, a lot of this India aside is aimed at countries who have been treating us unfairly according to Trump.
Nick Hanauer:
Correct. Correct. Today on the show, we have somebody who takes a more nuanced view of all this.
Goldy:
There’s a more nuanced view of trade than the Trump administration. How is that possible?
Nick Hanauer:
Yeah, he’s a seven-year-old who-
Goldy:
Yeah, I tell you, we talking to a toddler to…
Nick Hanauer:
Yeah, who has an idea about trade.
Goldy:
Which happens to be more nuanced than Donald Trump. Okay.
Nick Hanauer:
No, not really.
Goldy:
Not really.
Nick Hanauer:
Matt Klein is not a seven-year-old. He writes about macroeconomic policy and trade, and he has a book out, it’s a few years old, called Trade Wars are Class Wars. His larger argument is that we think of trade happening between countries and between borders. And his point, I think, which is certainly mostly true, is that trade has a lot more to do with the relationship between owners of capital and workers in countries, and obviously-
Goldy:
Really?
Nick Hanauer:
Yeah.
Goldy:
In economics, that somehow it comes down to a relationship between labor and capital?
Nick Hanauer:
Yeah.
Goldy:
If only somebody had written about that.
Nick Hanauer:
Yeah, exactly. So anyway, I mean, it’s an interesting way to look at the problem and it raises the possibility of different kinds of answers or different kinds of policies that may address the challenges arising from trade imbalances or whatever it is.
Goldy:
But also importantly what we think of as trade treaties or trade wars or trade itself is a lot more complicated than that idiot in the White House makes it out to be.
Nick Hanauer:
Absolutely.
Goldy:
And really then most of us, I guess most normal people, would ever understand it.
Nick Hanauer:
Yeah.
Goldy:
So why don’t we talk to Matt?
Matthew Klein:
My name is Matt Klein. I write about the economy and financial markets. I have a publication called The Overshoot, and I am the co-author of the book, Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace.
Nick Hanauer:
Awesome. So why don’t you frame up your contrarian argument?
Goldy:
Contrarian, maybe to you, Nick. I don’t know.
Nick Hanauer:
No, no, it’s a contrarian argument.
Goldy:
Oh, okay. Your thesis.
Matthew Klein:
Yeah. No, this book came out in 2020, which means we came up with the idea in 2017 and wrote it in 2018, 2019. It’s become relevant, again, I think for obvious reasons. The view that we were trying to lean against… There were two views we were trying to lean against. One view was other countries are screwing over Americans and benefiting themselves in the process. That was one view we were leaning against.
That’s a view that’s, again, become relatively prominent in policymaking circles now. The other view we were also trying to lean against was this sort of Pollyannaish view that there’s nothing that was wrong with the global economy, financial system trading system up until say 2017, 2018. That view was also wrong for different reasons. And we were trying to provide a synthesis of what we think made sense and the point… The starting point is actually I think very uncontroversial. It’s just kind of how you add things up.
But the starting point is that everyone in the global economy, in the financial system are connected one way or another. Whether you think about it or not, every time you work, you spend, you save, you do anything, you’re interacting with lots of other people. Everything you buy is made in a lot of different places, the things you do and transmits across the global economy, all sorts of different ways in ways that we don’t think about. And it’s okay, we don’t think about it, that’s just the nature of the global economy.
Maybe if you’re a hunter-gatherer deep in the Amazon, you’re not connected to anyone else, but otherwise we are. And so what that means is that anything that happens anywhere in the world is necessarily going to have some impact on everyone else, whether or not it’s deliberate or what they expect the consequences to be.
Now, the other point we make, and again, this is not controversial by itself, is that different groups, different economic entities have different characteristics in terms of how they save and spend their income. So most people, individuals over the course of their lives, will spend basically everything they earn at points in time. That’s not true when you’re a kid, obviously you earn nothing but you’re still a source of spending. You get older, you save in various ways, you pay for others. And then when you get older still you’re drawing down your savings. But over the course of your life, basically you spend what you earn.
Very, very rich people are different. And, again, it’s not a question of it’s being their fault or anything, it’s just it’s mechanically becomes very challenging. If you’re someone like Steve Ballmer, Steve Schwarzman drawing billion dollar dividend check a year, you cannot spend that on goods and services even after taxes every year, and so you have to do something with it. A lot of times what you do is you reinvest, you buy financial assets. And that has implications for someone has to be issuing those assets.
If you’re buying a claim, could be a bond or a stock or something, someone is selling that. That means they’re raising money, they’re trying to spend more than they earn a point in time. Governments generally spend more than they earn. That’s okay generally, I mean obviously the specifics depend. Companies also, it depends, right?
Historically it was the case that companies drew on the savings of households in order to finance investments that couldn’t, make in the aggregate. Some companies didn’t, but on the aggregate that’s had happened. And there’s been a shift globally. It started in Japan around 1990, and then a lot of other countries after the tech bust in 2000, including the United States, where companies actually stopped doing the thing they normally did, which was they invested more than they took in retained earnings and it went the other way. And that’s been a meaningful shift.
And of course companies, they can be publicly traded, they can be privately held, but the beneficiaries of that, who’s affected by that, that’s, generally speaking, also they’re very rich. And so you have a shift in the distribution of income, a shift from workers to companies, a shift from most people to a few very rich people. That changes the balance between saving and spending, and then that has to be offset somehow. So if it’s possible for, say, a rich person to be able to buy financial assets, someone’s selling it… Now, maybe the governments are borrowing more to provide welfare benefits to people who don’t have as much income as they used to that sustains spending to keep the economy going, whatever, there’s basically an increase on both sides of assets and liabilities.
Now, this might all sound very uncontroversial or might just sound kind of boring, but the key point is here that all of this can spill out over the global economy. It doesn’t have to be contained within one country. And so you can have a shift in a particular country for whatever reason. We highlighted a few in the book, we focused on the US and China and Germany as models, and that can then spill over into trade issues. So it looks like from the outside, like, “Oh, these people over there are screwing us and we are hurting because of them,” when actually what’s happening is essentially they’re screwing themselves and that’s creating side effects for people elsewhere.
So in China, for example, after 1989, for a whole host of reasons, internal reasons mostly, the government did a lot of things that on a relative basis hurt most ordinary Chinese relative to elites, whether they were provincial officials, The Communist Party or whomever or for that matter, foreign investors in China. And that ended up, Chinese workers were relatively worse off Chinese consumers, relatively worse off.
Obviously they’ve been better off in absolute terms over time, but relatively worse off. And then that redounded to workers and consumers in a lot of China’s trading partners because suddenly those people who are getting paid less than they should have been for the work they were doing don’t have the money to buy as much as they should. And so people elsewhere who need money from selling things, they earn from selling things, they can’t because the market doesn’t exist in the size it should be.
So you say like, “Oh, cheap Chinese goods destroyed American jobs.” And it’s like, “Well, there’s nothing wrong with importing things from other countries.” The problem in this case was that Chinese exports came in and instead of generating income for people in China to buy more stuff, which is what should have happened, it didn’t. It was just recycled into either profits that went back to shareholders in the west or in Japan or it went into other things and the Chinese government basically just held onto it.
And then you can see this in other places as well. We talk a lot about how the dynamics played out in Europe, but that’s essentially the point. So it’s not like, “Oh, Chinese workers took advantage of American workers.” It’s that Chinese elites took advantage of Chinese workers and American workers got hosed as a consequence.
Goldy:
I guess it was a surprising point given the title of the book, I read Trade Wars Are Class Wars, and of course I’m thinking about the US and the rise of inequality here and how there’s clearly class warfare going on. We can talk a bit about how that is being supported. But you make the point that there’s class war in China, that they could not maintain this enormous trade surplus if not for the class war within China keeping savings high and consumption low?
Matthew Klein:
That’s right. And it takes a lot of dynamics. And by the way, you can look at Chinese economists, people in China, and they make a lot of these points. They don’t use the same kinds of language mostly for the most part, but I mean it’s not… I wouldn’t say it’s quite the consensus, but among a lot of academic economists, public facing economists in China, not necessarily key decision makers, but a lot of people within China who are free to speak their views, this is actually a pretty mainstream view at this point.
So you have a lot of things that suppress consumption. So for one of the most notorious is the hukou system or household registration. So a lot of people in China who work in the big factories in the cities and the coasts migrated there from rural areas. And a legacy of the Maoist system was that everyone, they’re tied to where they were born. It was supposed to prevent large scale population movements within the country because that was viewed as a precursor to a revolution.
This was loosened up in the ’70s and ’80s to allow people to move, late ’70s. But the thing is, even though they were allowed to move and work and do things, they still are sort of quasi-illegal immigrants where they are. They are not able to access a lot of government benefits, even though they pay taxes for those benefits. And there’s always the option of leaders in provinces or big cities that have a lot of these immigrants, these migrants, to kick them out.
So one of the things that was actually happening right before the pandemic, and we mentioned this in the book, was that Beijing and Shanghai, which are among the richest cities and most desirable places for migrant workers to move to. The leaders there are basically putting in population caps. Literally, you cannot have more than this number of people in this province.
And then there were slum clearing, which you could argue maybe that there were unsanitary conditions or whatever and housing… But the net effect was they’re kicking out a bunch of these migrants, and this was like 2018, this was happening, 2019. And the fact that this can happen and the fact that, again, there’s this very regressive tax system where you’re paying for benefits like healthcare and unemployment insurance and education, but you don’t get any of them, that obviously is a big problem.
And this affects hundreds of millions of people. And this is a well-known thing, and people keep talking about how they want to reform hukou. And it’s like the official policy of the Chinese Communist Party to try to change this, but nobody really wants to. There’s one province now that’s looking into doing some changes within the province. I mean, the joke is, that I’ve heard from others, is it’s the places nobody wants to move to are making it easier to come.
So that’s like a big one. But there are other things too. The social safety net in China has expanded over time. It’s not as if nothing has changed over time, but it’s still the case that it’s relatively threadbare. In particular, unemployment insurance is a really obvious one. You saw this during the pandemic where something on the order of 50 to 70 million people in early 2020 lost jobs, and then they moved to the countryside.
You saw this again in 2022 with lockdowns, because there was no alternative. And there’s issues with healthcare and other retirement savings benefits. So all of this, that has an effect of saying, well, you have to save.. If you can’t trust the government to be there as an insurance in these outside risks, you have to do it yourself. And that’s very expensive, that means you’re spending less, you’re living below your means.
Then the fact that adversarial unions are illegal in China. This is a known thing. I don’t know if it was at this point, it was 10 years ago, whatever. There was a bunch of very earnest students in Chinese universities who went, back when Xi Jinping was trying to bring Marxist thought back into the curriculum, were thinking, “Yes, we’re going to go do this. We’re going to go organize workers because that’s what it says.” Then they literally disappeared. We don’t know what happened to them. So there’re like lots of things like this that kind of add up
Goldy:
Matt, this is so strange because Trump rails against China, and yet this sounds like exactly the sort of country he’s trying to build.
Matthew Klein:
Yeah, I mean you can also look at a lot of other things too. The sort of companies will say, “Okay, you can export this, but you have to give me a cut.” That’s also-
Goldy:
Yeah.
Matthew Klein:
Or the attacks on museums and universities. Yes, there are lots of things. Yes.
Goldy:
My God, people accuse him of being orange, but it turns out he’s red.
Nick Hanauer:
So. Matt, there’s a level at which you cannot be wrong, right? It’s tautological. The more people get paid, the more they can consume. But one of the features of your argument that seems implicit is that there has been sort of this deliberate effort to create excess capacity which then you… Because if you don’t have the consumption in your own place, you’ll export that capacity elsewhere.
I guess my own view is, certainly in the modern economy, is that there is no such thing really as a circumstance where there either isn’t or shortly will be excess capacity if there’s demand. The demand for more demand is infinite. Is it true that countries suppress domestic consumption in order to run surpluses?
Matthew Klein:
I don’t know if it’s that. I think it’s more…
Nick Hanauer:
Because I don’t think that’s true.
Goldy:
You don’t? Why.
Nick Hanauer:
Because I guarantee you it’s not true, because as a matter of policy, if you were to visit every United States senator and ask them that question, they wouldn’t even know what you were talking about.
Goldy:
But this is a blueprint, Nick. This is what developing countries do.
Matthew Klein:
Well, there are a couple of different things happening. So one thing I think that’s important, and it’s an important part of the narrative of our book is the Asian financial crisis, ’97, ’98, I think sad a really big impact. I mean, it wasn’t the first thing that had an impact in this regard, but essentially a lot of countries saw that if they didn’t insure themselves against a balance of payments crisis…
And essentially what that means is if you were in a situation where you regularly borrow money from foreigners to make investments in your own country, which is normally fine, but if something happens for whatever reason, foreigners stop doing that, and then you have a big crisis, the International Monetary Fund, the IMF, exists to smooth that out to make it less painful. And what happened in ’97, ’98 was that they did the opposite. And there’s a whole bunch of retrospectives on why that happened or whatever. Leave that aside.
The point is it made it a lot worse, and every country that experienced it, every country that was nearby that saw it from a distance said, “We don’t want this to happen to us.” And you can see that very clearly. There’s a turning point and a lot of behavior of governments. And I don’t blame them for that, but the net effect, it was a negative outcome. So it’s basically if they say, “We can’t depend on these international institutions to help in a crisis, we need to provide self-insurance,” that becomes very expensive over time.
At any point in time may not look that bad, but essentially that is the problems you’re talking about of repressing consumption for the sake of a surplus. And it’s not because the surplus is valuable in and of itself, it’s because you’re trying to build up this net position of… And hopefully a sense of sort of financial safety where you don’t owe more to the rest of the world than you have in assets, where you have a big stockpile of reserve assets. And you can see that starting after ’98.
You see it happening, by the way, also after the Euro crisis within European countries, where again, a lot of places it didn’t occur to them this could happen, and then it did happen, and then you see this huge swing in behavior which was not voluntary. Then it became voluntary, right? You see it throughout Central Eastern Europe, throughout Southern Europe. And that had big impact too. And in fact, in terms of the magnitudes comparable to the Asian surpluses.
So I think in that sense it is a… I’ll may not frame it the way you were saying. I don’t think people target export surpluses for the sake of export surpluses per se, but I think that self-insurance argument is a real one. Separately though, it’s also true that if you have a situation, a political economy that for whatever reason is suppressing domestic demand and your businesses want to sell things, you are going to have some kind of a trade surplus. That trade surplus might not be because your exports are doing phenomenally well. It might just be that your imports are very weak, but it is what’s going to happen. And you see that, by the way, in places-
Nick Hanauer:
Well, only if your products are good enough so others will buy them.
Matthew Klein:
Well, not even that, it just has to be someone somewhere else has to be willing to buy. It doesn’t even have to whether the products are good enough. And then this is why, we talk about this in the book, there have been some places in general in the world, the US is among them, basically the rich English-speaking democracies, which for a variety of reasons have been willing to be the sort of consumers of last resort to prop up global demand, but only up to a point.
Even after the global financial crisis, the US was still the sort of hinge player, but not as much as before. And that’s why the whole global economy was so much weaker after 2008 than before. And so you’re seeing this again, by the way. Europe is having a very kind of live debate about what they can do in the face of the turn in US policy over the past eight months.
And one of the arguments that’s been made, people were making this before, by the way, but it’s become more compelling, is, “Well, we have this big trade surplus, which basically means we’re not spending as much as we could be at home. Maybe we should do that because we have plenty of things we need that we haven’t been buying and building.” And so that’s sort of a positive take. Because there is an opportunity to fix things. It’s just historically it’s been more of a hurdle to increase spending in places that have this sort of political economy problems than to do anything else.
Nick Hanauer:
Yeah, but that doesn’t have anything to do with trade surpluses, that has to do with a desire to maximize profits for capital owners. Those two things turn out to be the same.
Matthew Klein:
Well, that’s the point [inaudible 00:19:49]
Nick Hanauer:
But the motivation.
Matthew Klein:
No. Yeah, I agree. I mean, the point in the book is that those turn out to be the same, right?
Nick Hanauer:
Yeah. Yeah.
Matthew Klein:
That’s why I would say trade wars are class wars. I don’t think people really look at the trade thing by itself necessarily is more trades are residual. I mean, essentially, if we zoom out a little, economists and statisticians and everyone, we draw these lines on the world to divide the global economy up into units that are intelligible. And we generally draw those as countries, and that’s where the statistics come from, our national authorities, but you don’t have to do it that way. It can be misleading to do it that way.
I mean, that’s just how the data are collected and presented, so it’s easier to think about it that way. But if you think about the global economy as a whole, then the trade stuff, as I said, it just happens to be where things end up at the end of the day. But the bigger story is the inequality picture leads to the imbalances of indebtedness and then under production or under consumption, whatever, and that’s how it all adds up. And then some of it spills over national borders and that leads to trade, and then it leads to where Americans can say, “The Chinese are screwing us,” when the story is more complex.
Nick Hanauer:
Yeah, yeah, yeah. Again, both things can be true.
Matthew Klein:
Yeah.
Nick Hanauer:
The Chinese may be very deliberately screwing American workers, which they very much are and meant to, but they’re also doing that by screwing their own workers.
Goldy:
Right. So they’re capitalists is what you’re telling me?
Nick Hanauer:
Yeah. Yeah, yeah.
Goldy:
It’s just all about screwing the workers.
Nick Hanauer:
Yeah, yeah, yeah.
Goldy:
I buy your argument in the book about… And like I said, I hadn’t thought about it that way before, that there’s a class war in China, and that is the only way you’re able to generate a surplus like that is to suppress domestic consumption. Because if you’re not suppressing domestic consumption and people will buy stuff there, it’ll drive up prices, it won’t be as cheap. You won’t export it as much. That all makes sense to me.
But it also feels like when you’re not having a trade war, there’s a class war. The trade treaties that the US negotiated over the past 40 years feel like class wars on the American worker. So if trade wars are class wars and trade treaties are class wars, it looks to a lot of people like trade as a class war.
Matthew Klein:
Sure. I mean, look, part of it is what makes for a good snappy title for a book, right?
Goldy:
Yes.
Matthew Klein:
Part of it is what is a trade war anyway? You could argue, I think, and I mean this has been our perspective and writing it, is that really you just have contentions about trade, even if they don’t lead to tariffs or whatever, or big imbalances in trade that then lead to some people losing their jobs or whatever. That is trade war. I mean, again, I don’t want to get too in the semantics here of the definition. But I mean, our point was that, to make a less compelling book title, imbalances in trade and financial flows are related-
Nick Hanauer:
Suck.
Matthew Klein:
… to changes in the distribution of income across countries and within countries.
Goldy:
See, now you’re speaking to a wonk like me.
Nick Hanauer:
Yeah, yeah. So we’re of course in violent agreement with the general proposition that radical inequality is not helpful to societies, that the less of it there is generally the better things go for everybody. Short of that generalization, what should we do? How should we think about things differently? And as a matter of policy or politics, what path should we be on?
Matthew Klein:
So I think from the American perspective, and Michael and I concur with… I mean he lives in Beijing, but he’s also American. I mean, one way of looking at this is… a lot of people in the rest of the world for their own reasons are doing things that are bad for them, and that creates spillovers that hurt us. And so the question is what could we do to minimize the harms of those spillovers, contingent on the assumption we can’t change their behavior?
I mean, it would be nice obviously if that changed, but you don’t know, right? And so there’s no perfect outcome because the best thing is other people change what they’re doing, but if they don’t, you can say, “Okay, well the number one thing to worry about is if they’re not spending enough, that should not lead to job losses an unemployment?
Nick Hanauer:
Okay, can I stop you there, because I think that’s an interesting argument because it implies that what you might distinguish between two countries that you’re trading with, both countries might have cheap goods, but one country may be generating a massive surplus that could be redistributed to people to absorb some of that capacity, and the other country could just be frigging poor, and that you might change your trade relationship with those countries based on that. Does that-
Matthew Klein:
I’m actually going to zoom out because I realize there’s even a bigger takeaway from the book, which is that a lot of what we think of as trade policy should not be the starting point for thinking about trade imbalances. Because trade is fundamentally a consequence of these bigger macro forces, a lot of things that matter the most… I mean, China’s hukou ecosystem is not a trade policy, but it’s clearly very important for the outcome. I mean, it’s not the only thing, right?
Nick Hanauer:
Yeah.
Matthew Klein:
There are lots of things and you can point to other countries as well.
Nick Hanauer:
The wages they pay their workers and the degree to which they-
Matthew Klein:
Well, I would also point out the surplus story is not just poor countries screwing over workers in a certain way. I mean, Europe has an enormous surpluses. Japan has enormous surpluses. Korea has enormous surplus, Taiwan. So there are different reasons for all these places, but I mean it’s not as if you look at, say, Denmark and [inaudible 00:25:35] workers in Denmark are really underpaid. There’s other things happening here, and yet you sort of have to look at the whole suite of things that are different…
Again, we do sort of deep dives in a couple places in the book with saying, “Look, every place is different, but it’s helpful to get a sense here.” But I mean, stepping back and saying, okay, you don’t necessarily want to do… Changing our trade policy with the country is necessarily a first order solution, I think, to this. One of the issues is let’s say you want to reduce imports from a place that has a big trade surplus, aside from the fact that those goods might be nice to have, the other problem is what do you do? You’re going to make them more expensive, and then maybe we do buy fewer of those items.
The people in that country, they’re going to sell less. They’re going to have even less money to buy stuff. And so that doesn’t actually help you. It only helps you to the extent that leads to a change in behavior somewhere else. But if you don’t know that it will lead to change in behavior, then all you’ve done is actually made things worse for people by increasing their taxes effectively. We say this in the book, using tariffs to address trade deficits can not work or even have sort of the opposite effect of what you want. It doesn’t address global imbalances.
And the extent that it would address imbalances, it would do it by reducing consumer spending in the US because of the tax increase, and that’s a negative sum outcome. If the problem is globally there’s not enough spending outside the US and then you solve that by reducing spending in the US, that’s not the best outcome.
So, yeah, the first thing is that just making sure that whatever underspending outside the US doesn’t lead to underemployment in the US. The second thing is then making sure that when you do that, the financial arrangements you come up with are sustainable. So, for example, the period before the global financial crisis, we weren’t at full employment. We were closer to it than we were after the global financial crisis, but there’s still room for improvement.
But the way that we got there was essentially we had a huge housing debt bubble. People were borrowing a ton against home equity to finance consumption. And at the peak of that, where something like 10% of consumer spending was financed by mortgage equity withdrawal, which is insanely high, that’s not sustainable. Because it’s one thing to take on debt to make an investment that will then lead to higher incomes over time, lower spending because you own your house or whatever, you don’t have to pay for rent, but that’s not what was happening there, and it blew up pretty catastrophically.
So if you start from the presumption that there is this persistent underspending in the rest of the world that leads to persistent over-accumulation by foreigners of US financial assets, which is if, but if you take that as a starting point, then it makes sense that the federal government would be essentially taking the side and issuing debt to foreigners and then using that to pay for things and give people money in the US as an offset.
The cost obviously is that federal debt keeps rising relative to GDP, or could keep rising relative to GDP. It would make deficits look unusually large, but it would be relatively preferable to the alternatives. And then the last thing that I would say is if this is happening, you don’t want to have involuntary deindustrialization where because of this weird thing that’s going on in the rest of the world and the US government, in this hypothetical, doing what it’s trying to do to kind of keep it from messing up the U.S domestic economy too much that the manufacturing sector, the tradable sector just implodes.
And so that might require protection. It might require some subsidies. I don’t know. That’s sort of a trickier question to get into what the best approach is, but that’s the kind of thing you’d want to be thinking about as an aside. And I think you could argue there’s benefits from sort of a productivity perspective, like innovation. We live in the physical world, and there’s advantages to actually being near where you make things for learning about them.
You could argue there’s a national security imperative of being able to make a certain amount of things in your country domestically. But I mean, that’s sort of what I would say is kind of like the zooming out. What would you do unilaterally if you had our view of what the world economy like? And you could argue, by the way, this is kind of what the Biden administration was actually doing.
Goldy:
Yeah.
Matthew Klein:
I mean, I would also say one other thing would be, and I think the US would be uniquely positioned to do this, is given the known issues with how countries perceive the risk of going to the IMF and this sort of problem, the international monetary system of the self-insurance, there has to be something done to address… or there should be something done to address that. But that’s a lot more challenging, I think, because essentially you basically have to be willing to lose money.
You have to be willing to make loans to entities that might not pay it back, or give grants for that matter. And I think long-term, the cost of that would be a lot lower than what we actually have happen, which is you don’t lend them money and then they self-insure and they don’t buy things the whole rest of the time. Or they don’t self-insure and they blow up and then they really cut their spending. Good luck to the politicians trying to make this argument of…
Nick Hanauer:
Yeah, yeah, yeah.
Matthew Klein:
But I think that’s also an important thing.
Goldy:
Oh, wow. Imagine.
Matthew Klein:
But we have reverse moral hazard now where you have this big flow of entities historically that… trying to save. And so there is a perfect answer, but I think there’s a better one than what we have.
Goldy:
Yeah, I was just surprised earlier when you said that the IMF exists in order to make these crises less painful. And that’s just not the history that I know of the IMF. So you’re suggesting that we could-
Matthew Klein:
Well, if you look at the history of why it was created, right?
Goldy:
Why it was created, as opposed to how it’s been used for 40 years. And so you’re suggesting that if we actually use the IMF the way it was intended, then there would be less of an incentive to keep these large foreign reserves to avoid having to appeal to the IMF. Then you don’t have to have such large surpluses in order to keep these large currency reserves, et cetera, and that benefits to everybody and makes for a more stable system with less pain.
Matthew Klein:
That’s right. And there’s a reason why they do it, by the way. It’s not like it’s a secret, which is they have a very clear mandate to not lose money. Now, they could do that by basically anytime they come in, they just wipe out any private lenders who came before, but then who runs the IMF private lenders?
Goldy:
Yeah, private lenders.
Matthew Klein:
The countries, the private… Yes. So it’s kind of tough. They’re very constrained. So we can say they make everything worse, but it’s not like this is a mystery of how this happens. It is very clear why it works out this way.
Goldy:
I want to get to just a kind of basic economics question, because we’re doing a whole series on trade, and this has come up in other episodes. David Ricardo’s model of comparative advantage is so much simpler than what you’re describing. I don’t know. In your opinion, is it a thing? Did China have this huge trade surplus because it had a comparative advantage over the US or does… I mean maybe a created one in the process?
Matthew Klein:
Comparative advantage doesn’t say that you have trade surpluses. It tells you what make and what you trade. And also, by the way, we mentioned this in the book… And it’s funny to go back and actually read how we originally described it.
Goldy:
I know.
Matthew Klein:
Yeah, you read the book, right? I was surprised actually, because I don’t know, I just thought I was going to say, “Oh, this is what people thought.” And then he actually adds a lot of caveats to what he thinks are the necessary conditions for comparative advantage to hold. And one of the big ones is that you don’t have capital mobility. He explicitly says, “The canonical example is you make cloth in England and wine in Portugal and all this, even if you could make it more cheaply in Portugal, but if you could move the capital to Portugal, which I hope they don’t, by the way,” it’s what he says, basically, “You shouldn’t, it’s a good thing they don’t. Then you make everything in Portugal and nothing in England.” I was like, “Oh, okay.”
Goldy:
And Adam Smith says, you most likely won’t because you won’t move capital overseas because you want to keep it near you.
Matthew Klein:
And then it makes sense.
Nick Hanauer:
That turned out not to be true.
Goldy:
Ricardo made his living actually trading capital. I mean, he didn’t make things. He wasn’t a manufacturer. He was a financial trader.
Matthew Klein:
Right. What he mentioned the story, I think was moving the factory. But yes, that’s right.
Goldy:
Yes.
Matthew Klein:
And to be fair, 200 plus years ago, you can’t supervise a factory far away, and there were active wars over the sea lanes. It was a different time, but I think it’s relevant. Also, there’s the question of is the comparative advantage fixed? I think it’s pretty clear the answer is no. The story of economic development is that comparative advantage can change. That’s also important.
I don’t think Ricardo’s theory as he expressed it is wrong. I don’t even know what that means to say it’s wrong. I mean, very logically puts it. But is it useful for… Right? I mean, the question is, there are elements of it I think are true and that are important, right?
Nick Hanauer:
Yeah, in the idealized case of… it is true.
Goldy:
Two countries trading two products. Oh, the math works.
Matthew Klein:
I mean, it’s very useful for your own life, right? It’s like, “Does it make sense for me to fix my toilet versus calling a plumber?” That’s comparative advantage. Even if I could fix my own toilet, look at the YouTube videos, is that worth my time and effort and stress or whatever versus… That I think is the real usefulness of the Ricardian theory now, but that’s different from what it tells you about trade policy or global imbalance and that stuff.
Goldy:
But this is true about many economic areas, that things that make sense for a household don’t make sense for an economy. If everybody’s saving, as we know, people have to spend. So one person’s expense is another person’s savings.
Matthew Klein:
Yes.
Nick Hanauer:
So, Matt, let’s turn for just a few moments to present times. Are you a big fan of our current trade policy?
Matthew Klein:
No. No.
Nick Hanauer:
Can you provide us some commentary?
Matthew Klein:
I mean, there’s a whole lot of things, right? So I mean, I laid out earlier what I thought would be the optimal or close to optimal given constraints approach based on our framework. And I mean you can just that to what we’re doing now, and it’s totally different. We spent a lot of time in the book talking about how tariffs are not helpful and that looking at bilateral trade balances are not helpful. There are a lot of reasons for why doesn’t make sense.
So the US has a trade surplus with Australia. Australia has a trade surplus with China. China’s a trade surplus with the US. Clearly, the bilateral picture is confusing. It also works in the financial picture, by the way. The US if you look at the word of the direct financial flows, we borrow money from Europe and Japan based on Canada. We don’t borrow money from China officially.
Even the trade balance between the US and China directly, it’s not that big. And yet if you look at the global picture, the US is a big trade deficit. China is a big trade surplus. They basically add up to be the same, and the rest of the world kind of balances out to zero. That’s basically the short version. So clearly you want to have a global perspective. That’s not what they’re thinking at all right now.
And then would tariffs work? Again, they extent that tariffs work, it’s by reducing the income of… Whatever happens is they’re reducing either the income of the people in your own country, reducing the people in the income directly, because you just pay higher prices and you buy less of it, or you buy less other things that aren’t tariffed. Or reduces the income of people in foreign countries because they lower their prices or you just buy fewer of their items.
But either way, that’s going to redound back to people in your country because if they make less money, foreigners pay the tariffs, then you still lose out. Unless they change their behavior, which so far no one is really, you still lose out because they’re buying fewer of your exports, one way or another. Then there’s a whole separate thing of like, “Oh, we’re going to loosen export controls that were put in place for national security reasons so that we get a cut.” What does that even mean? It’s both corrupt and totally ineffective.
It’s effective at being corrupt, I guess, but not… It completely undermines the whole point of having export controls in the first place. What else is there? Oh, yeah, the investment pledges. That doesn’t make sense. If you asking people make promise to buy more of your financial assets, which is what the deals that the Europe and Japan did, that is not going to reduce the… I mean, aside the fact those pledges are not going to play out because the numbers are just completely out of scale is what makes sense.
Goldy:
Bonkers, yeah.
Matthew Klein:
If they were to happen, that would lead to a larger trade deficit. And maybe you could say, “Oh, well, they’re going to buy a fewer US Treasury bonds and make more greenfield investments in US factories.” First of all, it’s not what the memorandums from the US side even imply, but even then, we have the resources in our country to do these things, and the extent that we don’t, we’re going to import more goods to do it. So again, this is not very well thought through at all, and it’s I think negative sum.
Nick Hanauer:
That’s a kind way to put it. Why do you do this work, Matt?
Matthew Klein:
Well, that’s an interesting question. I mean, I started out being interested in this stuff in summer of 2008. I got an internship at an investment firm that I was fortunate to get it.
Goldy:
It great timing.
Matthew Klein:
Yeah. And it was fascinating. I didn’t really know going, I mean, it seemed like it would be interesting. And I was introduced to global macro issues, and I thought, “This stuff is really interesting.” And then this was the summer of 2008, and then the whole gullible economy blows up. I still know very little, but I know a lot more than I did six months earlier and a lot more than a lot of other people who hadn’t had the experience that I had. And I thought, “This is really interesting.”
I went back to work there and I tried to soak up as much as I could from the people there who knew a lot about what was going on, and I realized this is really important stuff and people should know it and understand it. And to the extent that I can provide a better understanding, that can be very helpful to people because maybe we can avoid having these kinds of catastrophes happen again. So that’s why I do what I do.
Goldy:
That’s great.
Nick Hanauer:
What’s your next project?
Matthew Klein:
Well, I mean, right now my day-to-day job is I provide a research service. I write research notes about what’s going on in the global economy and mix of-
Goldy:
Yeah, nothing much.
Matthew Klein:
Yeah, so there’s a lot, right? That keeps me pretty busy. In theory, another book would be fun, but I’d have to figure…
Nick Hanauer:
You don’t have another one in the hopper?
Matthew Klein:
No, no. It’s just like what’s going on now is plenty.
Nick Hanauer:
It’s just pretty absorbing.
Matthew Klein:
Yes.
Nick Hanauer:
Well, listen, thank you very much for being with us. It’s a fascinating conversation.
Matthew Klein:
Thank you very much for having me.
Goldy:
My main takeaway, Nick, was Matt reassuring you early on that it’s not your fault, just because you can’t possibly spend all the money you have, to make up for all that inequality in the US. It’s not your fault, I just want you to know that, Nick.
Nick Hanauer:
There you go. There you go.
Goldy:
It’s not your fault. What was your takeaway?
Nick Hanauer:
Well, I mean, I think Matt makes really interesting points, but I question whether the shape of the economy, of the global economy, is governed by a yearning for surpluses more than just a yearning for profits. And I think that the motivations, the power constructs that govern how the stuff fits together depend on motivations, and I very much think that that’s super important to just keep in mind. That’s the first thing, and the second thing is that-
Goldy:
You’re saying that there’s a yearning for surplus, which may not be entirely rational. Trump wants a surplus. He thinks it’s a good thing to have a trade surplus.
Nick Hanauer:
Yeah, but-
Goldy:
Because that shows we’re strong, we’re productive.
Nick Hanauer:
But economic policy in the United States is mostly about generating outside returns for shareholders. Right?
Goldy:
Right.
Nick Hanauer:
We have not raised the minimum wage in this country. We’re not trying to suppress consumption. That’s not part of the..
Goldy:
We just don’t care.
Nick Hanauer:
We trying to suppress… No, exactly. We’re trying to suppress wages.
Goldy:
And we’re doing that for the purpose of increasing profits.
Nick Hanauer:
Yes, exactly. Yeah.
Goldy:
Right. The people with power and wealth want to increase their power and wealth.
Nick Hanauer:
But the other thing I just wanted to raise is that I do think that trade policy, it isn’t just about what happens between workers and capital owners in various countries, because the truth is that China really was absolutely determined to build an economy which could employ all their people. Absolutely, pulls out the stops to do that irrespective of what international norms or rules are. And so trade policy has to acknowledge that reality.
I may have said it on the pod before, but in the old times when I was doing a ton of business in China, the degree to which the government supported industry in an effort to grow their domestic industry and shrink ours was just astonishing. And there was no way… It was impossible for a private company to compete with that. That’s just a fact.
Goldy:
I want to use an analogy, Nick, that I think you’ll really get and appreciate. Amazon, your old buddy Jeff, right?
Nick Hanauer:
Yeah.
Goldy:
When he was building Amazon, he could have turned on the profit spigot at any time, but he didn’t for years. It took him a… because he just reinvested, he retained earnings.
Nick Hanauer:
But mostly he wanted to keep prices low to raise sales, right?
Goldy:
Raise sales, right. But he was investing in capturing markets.
Nick Hanauer:
Yeah, capturing market share.
Goldy:
In reducing his own costs, he made a lot of capital investments in the shipping part of it and the AWS and all that other stuff.
Nick Hanauer:
Yeah, correct. Correct.
Goldy:
But he did not show a profit for a very long time, even though he could have.
Nick Hanauer:
Yes, correct.
Goldy:
But eventually he showed a profit.
Nick Hanauer:
Yeah.
Goldy:
Okay? Now, historically, this is how countries develop. They suppress domestic consumption and they build their economies.
Nick Hanauer:
Okay, but, Goldy, I don’t think that sentence is true. People do not suppress domestic consumption. They suppress wages to keep-
Goldy:
Which suppresses domestic consumption.
Nick Hanauer:
Yes, to keep-
Goldy:
Okay, I skipped that step. Okay.
Nick Hanauer:
Okay, which important.
Goldy:
But if you look at the industrialization first of Great Britain, the US, various European… It was absolutely the Satanic mills and all that. It was absolutely-
Nick Hanauer:
Yeah, all of it was on the back of exploiting workers.
Goldy:
Of workers.
Nick Hanauer:
Right.
Goldy:
And after World War II, the US was very happy having these trade deficits eventually with Japan and Germany and the European allies and South Korea in order to rebuild those countries so that they’d be strong partners. I mean, that was not just trade policy, that was foreign policy.
Nick Hanauer:
Correct.
Goldy:
Right? We created that. And we did that with China too, under the idea that a developed China would become a democratic China.
Nick Hanauer:
Correct.
Goldy:
That eventually China would liberalize that there was no thing as capitalism with Chinese characteristics, that that was a fantasy that The Communist Party had, and that eventually it would fall. So the thing with China is it’s developed, a lot of it is developed, and it’s not turning on the consumption spigot. It is maintaining low wages, it’s maintaining control, and it’s maintaining this large trade surplus and these huge reserves of dollars, mostly, foreign reserves. And that may be China and other countries because they’re afraid of the IMF. It could be in Germany’s case, because of a unique pathology of the German psyche coming from the 1920s and ’30s, they’re terrified of inflation and…
Nick Hanauer:
Okay, but just go back to China. But the reason that China is doing that is twofold. I mean, it’s probably changed. In the beginning, it was the only strategy they had available. Right? They had, whatever it was, 800 million or a billion more people, they put them to work at factories at whatever the prevailing wage was, which is borderline zero, and-
Goldy:
They lifted a couple of hundred million people out of abject poverty.
Nick Hanauer:
Yeah. More than that, I’m sure, right? There are very few desperately poor people in China today. I mean, it’s not perfect, but it’s a highly developed place. But they’re not suppressing consumption today. They have two issues at play. Obviously, their strategy has worked extraordinarily well in the sense that it has substantially weakened all of their biggest global competitors. It’s substantially weakened us, it’s substantially weakened the European Union. And so that stands as powerful political motivation to continue that strategy. I would be amazed if they changed it.
And the other thing, of course, is that now they also have to contend with the people who directly benefit. And so China now has probably the same class of immensely wealthy factory owners and capitalists that we have, and those people are in positions of power, and they don’t want to pay workers anymore now either. Right?
Goldy:
Mm-hmm.
Nick Hanauer:
So the chances that China is going to one day, they’re going to be like, “Well, okay, we don’t need to do this anymore. We’re going to triple everybody’s wages,” that’s not going to happen. Right?
Goldy:
You know, it’s funny, Nick, I think that in a way, if you think about what these countries are doing, everybody says they believe Adam Smith and David Ricardo, but the truth is the modern economy is very mercantilist.
Nick Hanauer:
A hundred percent.
Goldy:
Instead of hoarding gold, they’re hoarding dollars, and euros and a handful of… But mostly it’s the global reserve currency. And everybody believes that whoever has the most dollars wins. And Trump seems to think that as well, right?
Nick Hanauer:
Mm-hmm.
Goldy:
And that’s how the whole economy, global economy seems to be working to the detriment… When we say to the detriment of people everywhere. Again, we understand that China has developed and its people are much better off now than in absolute terms than they were 40 years ago. The issue here is relative terms.
Nick Hanauer:
And just like American workers, they have probably in many ways gone backwards relative to the people at the top.
Goldy:
Right.
Nick Hanauer:
Right?
Goldy:
And they don’t have a functional democracy. Oh, wait,
Nick Hanauer:
Exactly. Oh, well. Well, Karl Marx would think all of this was hilarious, probably, don’t you think?
Goldy:
Probably. No. Well, let’s put it this way, I think he’d use a German word-
Nick Hanauer:
Schadenfreude.
Goldy:
Yeah, maybe something like that. Anyway, if you want to read more from Matthew Klein and his co-author, Michael Pettis, we will provide a link in the show notes to their book, Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace.
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