Michael Pettis: Our argument is fairly straightforward: trade cost and trade conflict in the modern era don’t reflect differences in the cost of production; what they reflect is a difference in savings imbalances, primarily driven by the distortions in the distribution of income. We argue that the reason we have trade wars is because we have persistent imbalances, and the reason we have persistent trade imbalances is because around the world, income is distributed in such a way that workers and middle class households cannot consume enough of what they produce. [...]
That's an important difference. Hobson’s interpretation was that there are middle courses between overthrowing the entire system and tolerating exploitative international relationships, and we agree. We don’t argue that we’re in an inevitable crisis of capitalism, but rather that the problems we face can be solved using the kinds of redistributional tools that policymakers have used in the past. [...]
mp: That's why it's interesting to go back to Hobson. He argued that the reason England and other European countries exported capital abroad was not military adventurism, but income inequality. You had incredibly high savings because much of the income was concentrated among the wealthy, and so England had to export those excess savings and the accompanying excess production. Imperialism enabled it to lock in markets for both of those exports. Hobson’s prescription was that increasing the wages of English workers such that they’re able to consume what they produce would make imperialism unnecessary—and this is where I see the connection to today. [...]
mk: Right. The Hartz reforms were named after Peter Hartz, who was also the head of HR at Volkswagen. During this period, there was a belief shared on both sides that the only way to preserve employment and induce growth was through a combination of wage and hour cuts. Much of this was rooted in the way German unification occurred. The belief was that there would be this incredible growth story when you brought West German technology, management, capitalism, and democracy to a new population with a shared language and history. But for a variety of reasons it didn't work out that way. The German government lost a lot of money underwriting this whole process and that soured a lot of people on the possibilities for fiscal policy to generate growth.
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