Trade Policy Isn't Driving China’s Trade Surplus | Matthew Klein
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The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. Thank you. Just close the door. Got a very special conversation today. I'm speaking to Matthew Klein, founder of the Overshoot and Unbalanced. Matthew, welcome to Monetary Matters. Thanks for having me, Jack.

We're here in a year, 2025, where a lot of global imbalances in trade flows, in capital flows are being questioned, primarily admittedly by the U.S. Trump administration. You've focused on this issue for a very long time. You're the co-author of a book, Trade Wars or Class Wars, with Michael Pettis. I want to start by asking you, in the conclusion to that book, you say that trade wars are not

a conflict between countries. What do you mean by that? And if trade wars aren't a conflict between countries, what are they a conflict between?

So great question. In general, just to back up, trade, we think of countries as being these very important economic units and trade between them as being something very special. But I think it's actually very helpful to zoom out and just realize that there's a global economy. There are businesses and consumers all over the world who have transactions with each other all the time. And some of those people happen to be

within a line that's one country and some of those people will be within an area that's another country. And when those people interact, we call it trade or cross-border finance, but it's really all the same stuff happening globally. And so that I think is the important starting point. And our point in general is that you can have all sorts of relationships between different groups of people, different kinds of businesses, different economic sectors. And

Those can lead to imbalances within a society and those might be contained within that society. But what generally tends to happen because of all these linkages that connect basically everyone together, unless you're some, you know, hunter gatherer deep in the Amazon, um,

they spill over. And so what happens in one place will not stay in one place. And that can have all sorts of effects, unexpected or otherwise, on other societies. And then people in those societies might, okay, this is a problem. This country, the people here are doing something bad to me and to people in my country. When in reality, the actual mechanism is both more complex and not really that, that might not be what's happening at all. So, you know, we wrote that book originally

It came out in 2020. We wrote the manuscript in 2018, 2019. And back then, there were two motivations that are very related. One is this US-China trade conflict and economic conflict that was emerging in large part to the election of the first Trump administration, and then also the legacy of the Euro crisis, which at that point had been going on for 10 years. And in both of those places, we saw lots of national stereotyping and really negative portrayals of people in other countries and their motivations, which

we're not really either accurate or really helpful for understanding what's going on. So people would say, oh, the Chinese are taking our jobs. The Chinese, this is a master plan to hurt Americans or they're just doing it, whether it's a master plan or not. And our point was, well, actually, if you look at what's been going on within China over the past 30 plus years, there's been a lot of internal dynamics related to China's own domestic political economy. And

As a consequence of those things, those changes and those internal political conflicts, a lot of ordinary people in China have ended up worse off than they otherwise would have. And as a consequence, people in the rest of the world have also been made worse off. And then within the Euro crisis, again, the similar sort of dynamic of, uh,

It's not that the Greeks were taking advantage of the Germans or the Germans were being bad to the Greeks or the Spanish or whatever. It's really that there were groups of people within all these societies who are benefiting and much larger groups of people across these societies who are at the receiving end in ways that were hurting them. So it's not like, oh, Germany, their trade surplus with the rest of Europe was so...

great for Germany. It was actually mostly reflection of all these things that were going on in Germany that was harming a lot of ordinary consumers and workers there. And that was really our point. If you look at this and actually what's driving these things, you can have some sort of cross-country solidarity here, realizing what their actual economic interests are. And that was really the point of the book.

So rather than China's taking advantage of the U.S. or the U.S. is taking advantage of China, is it the elites in the U.S. and China are taking advantage of non-elites in the U.S. and China?

Broadly speaking, that's right. I mean, obviously it depends on what elites we're talking about, but in general, right? Like there's a symmetry of interest between people in say the US financial sector and people who are executives and owners of companies in the US that offshore or outsource to production in China. And then the people who own those companies, that offshore production in China, whether they're or people who are sort of

getting a taste of it, like local government officials, that sort of thing. And the losers on that, you see them in both sides too, right? It's not like people in China have done objectively badly over the past 30 years. Clearly that's not true. But relative to a sort of plausible counterfactual, the share of China's national income that goes to workers and consumers has fallen over time. And it's fallen over time not just as a, well, that's kind of weird, right? We actually point to various things and mechanisms that are put in place by the Chinese government, the Chinese party state,

that have contributed to this, whether it's essentially the sort of quasi-legal status of the hundreds of millions of workers in the coastal cities who had migrated from the countryside, who are not eligible to receive things like free education, healthcare, unemployment insurance, even though they paid taxes for those things. It could be the fact that historically, there's some change, right? But historically, you have various environmental regulations that are very friendly to businesses at the expense of people who actually live in the places that are producing and polluting these things.

It could be the way the financial system until relatively recently was structured to effectively transfer household deposits that were getting very low interest rates to subsidize business loans that were only available to favored companies and favored property developers at very low rates. Lots of particular mechanisms, the fact that adversarial unions are illegal in China. And so there are lots of things we can point to.

And again, like there's a great book that came out actually around the Santa Mara. So we couldn't, it was not available for us to cite it, but called Invisible China. It does a really good job by Scott Roselle and Natalie Hill. It does a really good job of actually laying out like what are some of the concrete consequences of this sort of over-focus on investment and exports compared to domestic consumption? Because these terms can seem abstract, right? And their point is, look, if you look, if you focus on

the fate of the hundreds of millions of people in rural China who, uh, do not live in the glamorous cities, then, you know, in some places, like it's actually quite bad, the outcomes, like very low literacy rates compared to other countries of comparable, you know, average GDP per capita, extreme levels of like child, um, illnesses for certain kind of very basic stuff. Uh, like

Ringworm is an example. I mean, lots of things where it's not sexy like building an office tower or high-speed rail, but you see like, okay, there are actually trade-offs here in this economic model. And so our point is that all of these things add up in ways that, again, it's mostly the people who are mostly bearing the brunt of this are people in China. The reason this is happening is because of China's own internal political dynamics and political economy, but it does have consequences for people outside. And that's basically the point of the book.

And even though it may be true that the U.S. has benefited in a variety of ways from open trade, your point is it's distributionally helps people who are executives of corporates who can offshore jobs and send jobs overseas for cheaper wages. People who are in the financial sector who are receiving financial flows from the rest of the world. Maybe it helps people in the media, maybe helps financial podcasters, maybe a

Maybe I have been a beneficiary, but there are lots of people who used to work in steel mills and used to work in factories that that stuff is now being made in China who don't benefit. Well, I would caution to say, like, it's not open trade per se. That's the issue. It's more that I mean, I don't think if trade had been closed, it would necessarily be better for people. I think the issue is that given that people are connected through trade and finance anyway and realistically, yeah.

you cannot cut yourself off from these things. As I said, unless you're a hunter gather deep in the bowels of the Amazon, like it's going to your, the trade, the relationship between what we think of as trade policy and trade openness and your actual exposure to the rest of the world, sort of there, there's no relationship there. And so I think the bigger question is given that we all are living together on this planet in a,

connected global economy and financial system, the way things have actually played out has been worse than they could have been. And they've been worse than they could have been in particular ways where some people ended up relatively better off, as you noted, and a lot of people ended up worse off. But I think saying like, oh, trade is good for these people, trade is bad, I think is like you could have had more trade or just as much

trade in terms of overall, but the way it's focusing on the specifics. And really that gets back to things like the distribution of income within these societies, their domestic political economy, and these other macro factors, which I think are actually much more important than what we think of as trade policy per se. Like what macro factors?

So for example, right, like the Euro crisis. Um, so before 2008 Europe as a whole, uh, basically, you know, if you, if you were to sort of add everything up together, um, it would look like it's pretty balanced economy, right? As a whole, the continent was basically producing as much as it was using domestically. There wasn't this dramatic increase in external, uh,

borrowing or what have you. But that masks the fact that within Europe, there are these really big pockets of imbalances where you have Germany and the Netherlands on one side, basically, and then you have places like Spain and Greece and Ireland and Portugal on the other side. And

The crisis happens, and then what changes? Well, the behavior of Germany and the Netherlands does not change. What happens is that you entirely have a one-sided adjustment where the countries that had been, the societies that had been basically offsetting the surplus pathologies of Germany in particular,

They suddenly are no longer able to do that for a whole host of reasons that we talk about in the book. And the net effect is that there's just less spending by businesses, by households, by governments. And that's bad for people in Europe, fundamentally. They're the biggest losers from this. They're living in a way that's worse for them. But also, you know, given the scale of the European economy, like Spain by itself is not big compared to the global economy. But if you add up all these countries together, the impact is actually quite large.

And noticeable for the global economy and that macro change, which again, Europeans were not thinking, as far as I know, about like what what the implications of various changes to fiscal rules would mean for trade balances there and what that would mean for their various trading partners in the rest of the world.

But they had big consequences. So this was sort of domestic macro policy. And what they were thinking of as being sort of an internal concern about public debt sustainability actually had very substantial negative consequences for other countries, whether or not they thought about them. And that's what I mean by macro factors. So when I said open trade has been good for some, bad for some, you disputed that. Yeah, I guess what I meant to say, and thanks for making me be more precise, is

open trade with persistent imbalances that are caused by imbalances, trade imbalances that are caused by imbalances in demand and investment, consumption and investment that are policy induced and persistent. And now I want to move on. Matt, do you think, I think, you know, I'm sure like you, I talk all the time to people who you could call mainstream economists. And I think in mainstream economics, there is a view that not only are

are, you know, trade surpluses and capital deficits and vice versa. Not only can they be a good thing, but they're never a bad thing. And I think you maybe agree on the first point, but don't agree on the second point. So you write how sometimes, you know, surpluses and deficits are neither good nor bad. Talked about what's the difference of a good trade deficit or a good, I guess, a

capital surplus, where, for example, in the 19th century, Europe, and particularly Great Britain, exported huge amounts of capital to the United States. You say that was a good thing. Norway, for example, was a poor country in the 1960s. It imported huge amounts of capital from the rest of the world.

And you say that's a good thing. Actually, it's funny enough, they now have a huge sovereign wealth fund. And actually, the head of the sovereign wealth fund is actually kind of a competitor. He's a financial podcast as well. So why were those good? But what we currently have in the United States, where we also import huge amounts of capital, why is that perhaps a bad thing? And what's the difference between a good and a bad imbalance?

Right. So just to, again, sort of zoom out here, when we talk about what an imbalance is, it's basically there's societies are capable of producing so much at any given point in time.

And then the question is, is the aggregate value of what you're producing sufficient relative to what, you know, you'd like to be able to have? Now, in sort of some abstract sense, like, obviously, we'd all want to have more, right? But then the question is, okay, well, if you want to have, you want to spend more than you are earning, you have to finance that somehow. So then it's saying, okay, well, how much more do we want it relative to the cost of, you know, getting it, whether it's selling shares or borrowing or what have you?

And in general, right, this is not sort of a universal rule, but in general, you can say like there are places that have better growth prospects because they are, maybe they're poor and they are catching up. You know, that sort of classic case would be, I mean, Norway, right? We mentioned that one. Norway is a poor country. Then they discovered offshore oil and gas. So then they knew they would, they could become a rich country, but developing offshore oil and gas is extraordinarily expensive. And so,

How would Norwegians be able to pay for that by themselves? Well, you could do sort of the Stalinist approach of basically you starve the peasantry to generate, you know, exports of grain, get hard currency to import the tech and machinery you need. But

That is not sustainable in a democracy. And, you know, it might not even have worked, right? It's not as if they had a big grain surplus in Norway anyway, right? So the other thing you could do is say, well, you can go to people in the rest of the world and say, listen, we have this great opportunity here. Will you help us do it? Well, we promise you a nice cut of the future returns. And this is how finance is supposed to work, right? That's the whole point of a financial system is that you can do things like this. It doesn't have to be cross-border, right? It works within countries too. And that's what they did. And it worked out very well.

um you can south korea is another great example right like nowadays and it's been true for you know almost 30 years uh set we think of south korea as a sort of perpetual surplus country you know stereotypical like asian sabers right

But that actually is not what characterized the history of South Korea for the bulk of the time it was transforming from a very, very poor country into what is now a rich country. From the end of the Korean War until basically the Asian financial crisis, South Korea ran persistent trade and current account deficits, which means that people in South Korea on the whole were spending more than they earned.

and financing the difference by selling claims one or another, whether it was FDI or debt or what have you. And that worked out very well for them, right? Like they became, they knew that they needed to supplement their domestic productive capacities with foreign productive capacities in order to grow and develop. And they did, and it worked out very well. You can also look at the post-communist transition states of Central and Eastern Europe and the Baltics, right? They did this too. And again, it worked out very well for them. So,

This can all work well. The development of Australia and Canada and the US in the 19th century. And again, all of these places, this can be a very good model. It's a way of, you know, nowadays, not nowadays, right? After World War II, there was a view in particular of development aid as a way like we can make poor countries rich, we give them money. And I'm not saying there's anything wrong with that, but like you can have the private sector do that too, historically, and this is how it would work, right? But it's the same concept of,

A society is not necessarily able to produce, you know, what is necessary in order to facilitate the most growth. So you supplement it from abroad. And if you have a place that's older and richer and more advanced, maybe it's beneficial for them to sort of give things away. Right. They get they get a claim in return, but, you know, it's a mutually beneficial transaction.

The question is whether that is what's driving imbalances more recently. And the answer is sometimes, depends where you look, but in the case of the US and other rich English-speaking economies like the UK and Australia and New Zealand, it seems not so much, right? I mean, there is a period of time in the late 1990s in the United States where you can plausibly say, okay, well, we basically struck gold in this country somehow. And so everyone wants to do a piece of that.

You could plausibly say the past couple of years and maybe even now, maybe not right now, but like, you know,

A few months ago, right? In the U.S., the same thing, right? And so that could plausibly justify people from, say, Europe and Japan buying and buying U.S. assets more than the other way around. But it doesn't really describe any other multi-year stretch of time in the U.S. when you think of the world as a whole, right? The U.S. was actually doing quite badly from, say, 2000 to 2008. It was not doing well, particularly from 2008 until after the pandemic, before COVID.

1996, not doing so particularly well, right? So this idea that it's all, you know, it's purely just, you know, sort of benign natural outcome of, you know, profit seeking investors just, you know, going what is the most logical places to put their mind and maximize returns. It's not obviously the case that there seem to be other factors at play here. And I think one of those is just this quest for

a degree of safety among different kinds of savers, whether it is official and quasi-official institutions that are trying to accumulate reserves or just individual rich people in various countries who are looking for places to put their money, whether it's like Miami apartments or US treasury, whatever. These are the kinds of things or London apartments. And so that can have distortions and that's part of what we talk about in the book.

So the United States over consumes or it consumes a huge amount and it under saves, it dis-saves. And as a result, the rest of the world is has to save and then recycle those savings into the United States. I'm not sure I'd phrase it quite that way. I mean, part of, well, so sort of annoying technical things in like the economics jargon, saving is literally just production minus consumption. So, you know, those things would have to be, but, but the problem is over consume. I mean, there's a,

It's a loaded term, right? Over-consume relative to what? And so, I mean, one thing I find striking is that if you're not looking at consumption as, say, a share output, which I think can be misleading, usually consumption in absolute terms, per person, what has it done over time? What you can see is that in the periods when people say, wow, Americans are consuming so much,

The growth of consumption relative to some kind of longer term trend that people thought was normal has not been particularly high. It's not like the times in the current account deficit really expanded as consumption really grew a lot in absolute terms. It was just kind of chugging along. The thing that was different, and this is particularly noticeable in the 2000-2008 period, is that income growth was weak.

And so, you know, you can think of it, I mean, this is sort of an extreme, but it's relevant, right? Like if you are working and you earn wage income and you pay your expenses out of your wage income and you kind of have roughly in balance, maybe save a little bit, right? And then you lose your job. You can cut your consumption quite a bit because, you know, you don't have as much money, but you can't cut it to zero because you'll die. Like you need to eat. But if you don't have any income, right, maybe you get some unemployment benefits or whatever, like you have to either borrow or run down your savings.

And, you know, in a certain sense, that is what happened, you know, not, not to that extreme. Right. But that's like the kind of thing that happened to the U S over large stretches of time when we have this current account deficit and not just the U S by the way, again, like the UK, I think is a really good example. UK is a great example also, because you talked about the, you know, appeal of growth story. Like the UK has never been considered an attractive growth story by anyone in the world since 2007. And yet persistent current account deficits over that time. And sometimes, you

larger relative to the UK economy than the US. So again, this is a country that's literally no productivity growth since 2007, no growth of business investments since 2016 Brexit vote, and yet they have been running large, persistent current account deficits. And why is that? Well, I mean, look, this gets back to why do these things happen? You could say it's because people in the UK are just determined to spend more than they earn, and everyone else in the rest of the world is just

forced to lend to them right but like why would they be forced to lend them it's not as if they're offering particularly attractive returns um the the yields and you know inflation adjusted yields that you can get on uk assets and this is true true for the u.s in general right and not particularly attractive they might be attractive relative to certain other places uh if you're comparing it to like switzerland or germany or japan until recently right like sure um but

Not relative to, I mean, in theory, right? You can say, wow, there are all these like fast growing emerging markets, better demographics, better productivity growth, like,

It seems like that would be the place you want to, I mean, the places that in the 19th century were, you know, the Canada of the 19th century, right. Or the South Korea of the second half of the 20th century. Right. And those places, I mean, they are sometimes attracting inflows, right. But first of all, they have to pay through the nose to get them. And second of all, not in anywhere like the actual quantity of financing going to these places relative to what's going to us and UK is just much, much smaller. Yeah.

And so those are the kinds of things that make me think, okay, this is mostly a push factor in terms of where the, um, you know, financial asset demand is coming from where the sort of excess production, not excess production in the sense of like they should produce less, but just they're not consuming enough at home. Um, where that's coming from rather than, oh, you know, Americans and British people have just an insatiable appetite to buy things. Like everyone wants more stuff, right? It's not, it's not like there's some unique cultural characteristic that's different. It's,

There were times not that long ago when Americans and British people had trade and current account surpluses. I don't think the culture has changed fundamentally. The economic fundamentals of distribution of income and other things were different. And I think that's where it's worth unpacking and focusing on those kind of things. So talk about the distribution of income between countries. You're saying that's what is at the heart of this. It's a big part of it, right?

So basically, most people, individuals, over the course of their life will spend everything they earn. Obviously, points in time, it's different. There are points in time when you're borrowing more, like to buy a house or pay for school or whatever. There are points in time where you're saving a lot to pay those things back and save for retirement. And then you're retired and you're paying it down. But over time, in general, it's supposed to be more or less spent what you earn.

very, very rich people are different. And, you know, I'm not like their fault or anything. It's just like, it's mechanically impossible to spend that much money on goods and services, you know, to use a extreme case. Like Steve Schwartzman gets a billion dollars in your dividend income, right? Like you can't spend a billion dollars, even after taxes, right? Like that's just an extraordinary amount of money. So you're going to buy financial assets, which like, not like a moral judgment, it's just like how it works. And so if you have a situation where you have a shift in the distribution of income to people like that from other people, you know, that

That has to, first of all, that only works if everyone else keeps spending, right? Because if people just lose money and they spend less, then the other people can't make more money, right? That's not an actual shift in, you know, that's just a, that wouldn't happen to be a shift in the distribution. So what actually happens in practice is more, some people, a smaller group, are buying more financial assets.

in the aggregate, and then everyone else is issuing more financial assets. They're borrowing against it. Now, maybe it's not households individually. It could be the government borrowing more transfer payments or whatever. There are different ways of looking at it. But basically, that's the kind of thing that has to happen.

And meanwhile, they're companies, right? Like in the ad, the corporate sector historically has been a net issuer of financial assets. You go back far enough in time and that makes sense. Intuitively you think, okay, it's sort of as basic, simple model, like household save that. And then like companies will raise financing and they make investments that has stopped being true. And a lot of places have various, you know, since, you know, different starting points. So starting with Japan around 1990,

then the U S and Germany and Korea around, you know, 90s basic Korea after the financial crisis and then U S and Germany after the dot com bust, uh, other places after the Euro crisis. Uh, and that's been a persistent shift in corporate behavior and you add that up enough countries that again, big difference. Right. And so that can take different forms. It could be that companies are just choosing to spend less on CapEx. It could be they're paying less in wages, whatever. Right. Um,

That has had a persistence. So you have a shift there, either a shift in distribution of income in the corporate sector, shift of behavior in the corporate sector. That has an impact. And then there's governments, right? You can subdivide this further if you want, but like as a simple example, governments. Now, normally you think, again, governments, they run budget deficits. Maybe they make infrastructure investments. Maybe they, you know, something counter-structural, whatever. Like there are lots of ways you can think about it. If for some reason, some governments in some places either feel constrained or ideologically compelled to do it,

strength their deficits independent of anything else going on, which is something that was particularly noticeable in Europe.

Since 2008, I mean, starting in Germany before that, but then again, that's going to have, it's a shift in the distribution of income effectively to the government sector. And you can say who wins from that, it's sort of more complicated. But again, like these changes, they will all affect the balance between spending and income within a society. And those changes will spill over to other societies.

And so that's, you know, that's why it's important to look at how, you know, the changes in the shift in the distribution of income. It's not necessarily like from rich households to poor households and vice versa. It could be that. It could be other things. You know, there's some overlap, right? Like corporations are generally, or businesses writ large, are generally owned and controlled by the very rich people who are also, you know, a shift in their income. So, you know, you could say, oh, well, there's no shift in the household distribution of income. Therefore, it's not happening. But if there's a shift from households to corporates, then yeah, it probably is, right? Like, especially in places like Germany where,

A lot of house rich households own businesses directly, their family owned companies, and they use those effectively as our personal savings vehicles. And so that's the kind of thing that we're looking at and saying, okay, this is like what, what you need to be paying attention to. It's not the only thing, right? Like in the U S for example, and to a certain extent in the UK,

You also saw a shift in the distribution of income in general among households and from households to corporates that you think would lead to a shift into persistent surplus. And we write about this in the book. It looks actually a lot like what you would have expected based on the German experience since 2000 in the US, and yet it didn't play out that way. And there are a lot of reasons for this. We talked about it. I mentioned some already in terms of the foreign investors' demand for the

these kinds of assets on the openness of our financial and asset markets more generally.

But that's, you know, it was an offsetting force, um, you know, that there was in fact a real, uh, impulse to what you would have thought is like a surplus. Um, you know, the savings blow to the richest, the phrase that, um, um, uh, uh, at of me on and I'm your Sophie and Lou Straub used, but it was offset by what was going on in the rest of the world. And so basically you had this effectively the savings rate, household savings rate of like the body 90% of the industry. So most people, you know, went deeply negative and

at a time that everyone else had other shifts going on. So it's kind of offset the jump pattern. Okay. Now, where does China come into this? So China, again, the shift in distribution income has been quite substantial over the past, basically since 1989. And this is something we talk about a lot in the book. And I mentioned a little bit earlier, but a lot of government policies, which again, I don't think it was explicitly aimed at trade per se,

I don't know, maybe any of them were, but they had the net effect of suppressing income growth of most Chinese people relative to income growth for China as a whole. It's not that income growth in Chinese people was not very strong and positive. Again, it's like obviously true that Chinese people are a lot richer now than they were in 1989, but relative to the trajectory of the Chinese economy, much less than you would have expected. And that reflects a lot of policy choices.

And so, you know, again, the beneficiaries there, it's a mix. Like it could be exporting companies. It could be companies that are connected, uh, you know, favorable credit terms to, you know, develop infrastructure or property. It could be local governments themselves, which until pretty recently, like until say 2021 or whatever, we're big beneficiaries because of their ability to, um,

you know, make money from land sales to developers and leverage off of that and their collection of assets. And so all of this was, again, it was a shift in the distribution of income away from sort of ordinary Chinese workers and consumers and retirees towards much smaller subsistence population. And what's interesting is that you can see that it kind of bottomed out for a while, like around 2010.

And sort of 2010, 2019, it seemed like things stopped getting worse. And that is consistent with the fact that, and some things were actually improving. And that's consistent with the fact that China's trade on current account surplus, which had been expanding sort of relentlessly until about 2007, 2008, contracted a lot during the financial crisis and then stayed relatively low until the pandemic.

Since the pandemic, we've seen kind of a big reversal. And again, it's instructive to look at what actually happens. So unlike the US or Europe or Japan or Canada or what have you, the Chinese government did not provide subsidies or any kind of support really to consumers.

Or workers, for that matter. Instead, there was some support for loans for producers to keep selling things abroad, but that's basically it. And so you have a situation where, again, I mentioned that you have hundreds of millions of people working in the cities on the coast who don't have legal residence to be there, don't have access to the normal government benefits they pay taxes for.

And we don't have the exact numbers here, but like something on the order of like 50 to 70 million of those people during the pandemic.

went back to being subsistence farmers in the interior because that was the only way they could stay alive and feed themselves. And then you had a second round of lockdowns, pretty aggressive in 2022, and lots of other things that were sort of all part of this pattern. And what we've seen pretty consistently over the past few years in China, up through now, is that the recovery as a whole has been very weak in China. The recovery in consumer spending has been much weaker than the recovery as a whole, which is already weak.

So even though like industrial production in China is like 6% below trend, it looked like sort of 2013, 2019 trend or whatever. It's like 6% below give or take. And super spending is like,

15% below China. It depends on exactly how you define it, how much of it's nominal versus inflated, but still, there's a big gap there. And that's reflected in the fact that imports have basically not grown over several years. Exports have grown, right? And exports have grown for two reasons. One is that foreign demand isn't better than China. And two, that if you're producing relatively more, your production growth is more than your domestic consumption growth, even if it's weaker than it would have otherwise been.

you know it's going somewhere right and so that's people talk about chinese over capacity and dumping like i find those terms kind of confusing in this context because

Because China's own domestic economy has been so weak, it's not so much that there's just... I mean, maybe you could argue in certain sectors there's actual overcapacity. You say China's domestic economy has been so weak, you mean Chinese domestic consumption has been weak? Yes. Although the domestic economy as a whole also, relative to what would have been expected, you can look at forecasts people made on the eve of the pandemic and what would China be doing, whether it's Chinese government forecasts like the IMF or whatever.

And you compare that to what's actually happened. So this is for the aggregate economy, not just for consumption. They've had a huge shortfall. It's actually probably one of the biggest shortfalls in the world since the pandemic. Now, you can still say, oh, well, they're growing 5% a year. Like, that's really great, right?

Sure, I'm not disputing that, although even if you take those numbers at face value, but relative to what's expected, huge shortfall, which is a big difference from, say, the United States, which at least up until very recently has grown more than what was expected on the eve of the pandemic. And so that's a big contributor to these things. And so the rise of the return of China's trade and current account surplus properly measured.

um has been quite substantial the past few years and it's consistent with sort of our overall understanding of what how these mechanisms work so china's uh current account surplus and its trade surplus in particular is is growing uh enormously why is that a problem a lot of economy most economists as you know will say that that's not a problem why is that a problem well look there are two reasons one is it's a symptom of a problem for them right so you know as a

someone concerned about humanity as a whole. Like, I know what's happening here. Like, it's very clear in the Chinese data and it's bad for them. Like, Chinese people could be living better. So that's, that's problem one.

Problem two is if you're not in China and suddenly there's all this stuff coming in that is essentially being produced and sold below cost for whatever reason, that potentially can impair the viability of your own business and employment. And that can be a real problem. People talk about the second China shot. Now, again, I don't think...

you know, what you do about it, there's a lot of options, right? You could say, we're just going to ban imports from China. I think that's not helpful to be honest. I think there are things that are more constructive and we've talked about them. I think, um,

the simple thing is like look you know if they want to send us stuff fine but just make sure that we're also still buying enough you know homegrown things i think the actual i think the inflation reduction act is actually a pretty good way of threading the needle there if like we're going to import a lot of things some of those things you know we're going to give some preference to american-made things or us-made components that's now being gutted so who knows but that was the idea um

So, you know, it's interesting, actually, you see the reaction in Europe has actually been much more extreme with saying like, oh, our car industry is going to be obliterated by this flood of Chinese exports. And again, like how much of that is something I think it's reasonable to say, like, you don't want to destroy an industry that employs, you know, tens of millions of people and, you know, all this other stuff. Just let it evaporate overnight because you just weren't paying attention. And again, like, I think the ultimate, the bigger problem is like what's going, what's been happening in China, but, you know, in and of itself, right? Like,

These things can be managed up to a point, but it's important to know that this is actually happening. And, you know, you have a trillion dollars, you know,

more being produced in China than is being consumed, used in China domestically, give or take, that has to go somewhere. And so some places can manage that better than others. But it's important to know that that's a phenomenon that's happening. And as I said, the biggest losers from this are people in China who are living below their means. But then, you know, there are also people who potentially are in a situation where their own businesses might, you know, for no fault of their own, just like get wiped out because of these other problems. And

Why are they living below their means? Why can't they borrow money? Why can't they spend? That's a big question, right? So part of it is, so first of all, they have borrowed a lot. Actually, if you look at total debt to GDP within China, you know, all the different sectors have aggregated. It's actually quite high. But not household.

No, including households. Household, okay, okay. So actually, so I mean, the household debt to GDP by itself is not that high in China. Household debt to income actually is quite high because income is a share of GDP is still low. So if you look at household debt to income in China, like the best measures we have, it's actually like around where the U, I think it's actually higher than the US is now. Well, so that's an issue, right? Like there actually was a huge increase in household debt in China. So basically you can kind of

Look at stages, right? So before the financial crisis, domestic debt in China was quite low, but there was an implicit increase in debt associated with their growth, which is the rest of the world, far and a lot, to buy things from China. That broke down after 2008. There's a big increase in domestic debt. Some of that is counted as corporate for various reasons. Some of it's counted as government, whatever, like that. Then you get to like 2014-ish. Government has decided for various reasons, okay, we overdid that.

let's try to slow things down. Debt growth slows in the aggregate. Fixed asset investment growth slows. But then they're saying, oh, we want to increase household consumption because they kind of, I mean, it's not like the things I'm saying are alien to Chinese officials. Like you talk to or read things that are written by any kind of

Most Chinese economists, think tanks and universities, very mainstream people within the Chinese discussion, they basically agree with all these things. They say, okay, let's do more household consumption. So instead of the more straightforward approach, what you think is straightforward, which is let's make sure households get a higher share of national income, because that's hard. They say, let's make it easier for households to borrow. And so household debt to GDP, like,

just goes straight, I mean, straight up. Something on the order of like, you know, from 15% to say 60%. Right. In the span of a few years. When again, like given what household income is a share of GDP, there's like the increase in household indebtedness for households is quite, and then that stops because it's like, well, it turns out that was not great. Then you have this sort of real estate crackdown you have in the past few years. And so there is an extent to which using more debt by itself

It would be challenging. I mean, the central government in China has very little debt on its balance sheet. So in theory, it could issue more debt. In practice, if it did that, what would it be doing? Taking the debt off of local government balance sheets or state-owned enterprises? That might help on the margin, but that's not going to really be the thing that moves the needle. The bigger issue is like,

You should look at the labor share of non-financial corporate value add, which is a reasonable way of saying how much our workers paid relative to the value that they produced. In China, the latest data we have from just a couple of years ago, so I don't think it's that out of date, it's like 40%.

which is quite low. You look at like the US or Europe or Japan, whenever we're talking, you know, 60%. And that's a big difference. And so, I mean, things like that. But of course the issue, and this is something that people in China have said for a long time, including very top officials, it's something we talked about in the book. You have a system that evolved and developed over decades at this point to favor certain sectors over others, to transfer resources from households to those favored businesses, local governments,

If you want to increase the household share of income, you have to unwind those things. But the problem is the people who have benefited over the years have become, and again, this is a term that, um, you know, Chinese officials have used, uh, vested interests and they don't want to reverse those things. And so you look at like, Paul, isn't it weird that China, despite, you know, whatever people might think of it as like a socialist with Chinese characteristics, whatever the income tax is basically nothing. Um,

Most of the tax revenue, there is no property tax.

Most tax revenue comes from consumption taxes, from payroll taxes, from things sort of like tariffs. Basically, a very regressive system, as an example. Why has that not changed? They've been . Meaning that if you're low income, you pay higher taxes as a percentage of your income than if you're a multi-millionaire. When you buy a pack of gum, it's de minimis. Right. Certainly compared to a lot of other societies, yes.

And so, you know, why is that not changed? Right? Like, it's fascinating that there has been this intellectual consensus within China for so long. And so many senior Chinese government officials have certainly spoken and given as if they understand all these dynamics, and yet we haven't seen these changes. And so that suggests to me that the various vested interests, however defined, are very effective at blocking the kinds of changes that would really move the needle here, which is tough because of course, if you think that like they have to change, like

I mean, they say they want to, right? And they're not. So that creates a lot. I mean, if you're the rest of the world, you'd figure out how to manage that. That's partly why it can be something that you're paying a lot of attention to is what actually is happening in China will not stay in China. And if it doesn't change, they're not going to change it. And it has its own malign issues for, as I said,

China's internal domestic reasons, like you as a third country, you have to figure out what are you going to do to avoid their problems affecting me? Even if you're not saying like they're doing it deliberately.

And so the household share of income as a percentage of GDP in China is small. So who is taking the slice of the pie, the government and then the corporate sector? Because when I look at Chinese, the corporate sector, obviously there are some high profile stocks that a lot of Americans are invested in, but like the big stocks, like the big banks and, you know, they typically don't have huge profit margins that I've observed. Oh, no, that's that's in fact, like

one of the fascinating things is that stock market in china is basically flat for 20 years right i think that's one of the great you know it's a good example of uh you think like this is a great if you've known 20 years ago how much china is going to grow and you compare it to other countries it's like in terms of gdp growth technology everything but wow it's a great place to invest i bet it's even better than what people were priced in and you would have lost one you're very investing anywhere so this goes to show how investing is hard um that's why i defined it but uh

But to your point, when we talk about the corporate sector income, it could be profits that are distributed to shareholders. It could be profits that are not distributed to shareholders. It could be interest. And so these are some of the other things. It could be also companies, some of which are not listed. So there's a mix of things there. But I mean...

you know how that gets played i mean one of the issues with china my understanding is that one of the reasons why the stock returns have been so bad is because stock issuance has just been very high it's different from you know some other markets where you know companies are not net issuers of shares like the us right basically not been net issuers of shares since like

the 80s. And any incremental financing is debt financing. In China, it's a bit different for whatever reason. So that's part of it. But it's also, again, if you retain earnings, you don't pay them out. Or you're very debt-focused because the debt is relatively cheap. So there are other ways it can show up. And local governments are also a big recipient historically. Again, now it's a little trickier to think about what that's

how they're doing, because again, the property bust has hit them very hard. But I mean, that's a story. They've been big beneficiaries and they own, they still own a lot of productive assets in China. So when I look at the current Trump administration and President Trump says China is quote unquote cheating on trade, I'm sure there are many things implied by that statement that you would disagree with and you probably would disagree with the statement. But the underlying claim kind of implied by what President Trump is saying is that

There are a whole series of policies that China is doing that almost guarantees that it will have a permanent or persistent trade surplus with the United States. And therefore, it will be taking jobs away from America. The mainstream economists' arguments explaining why President Trump is wrong, I understand logically makes sense. But

Basically, you know, your philosophy, along with Michael Pettis, it seems like you'd be inclined to agree with President Trump, if not the verbiage, then the the underlying claims. I mean, we may be being excessively charitable in terms of what is meant by that statement, but or what he means when he says those things. I mean, look, I think a lot of people and this was, by the way, also true of Democrats.

you know, what was being said by officials in the Biden administration. Janet Yellen went to China and made these exact points, right? So I don't think if the argument that we're making is that there are things happening in China that are counterproductive both for China and for the global economy, that is at this point, at this point, that's a consensus view, actually. So the question is, what do you do about it? And that's where I think it gets trickier. Like, I think, you know,

You could argue there are some specific sectors where you might want to have certain kinds of prohibitive tariffs, like the Biden administration did with electric vehicles. I don't know. I could see it that way. But I think the bigger point, the idea that you just bluff imports from China coming in,

I mean, that's ultimately going to be an act. You know, it's a longer term if you do it as a whole, like that's an act of self-harm. It's like going on a hunger strike because someone else is, um, making too much food. And, uh, you know, I don't see that as that's, that seems like a negative, some lose, lose way to go about, you know, addressing these issues. Um,

I think there are probably better approaches you can do. Again, if you zoom out and say, what are the actual negative consequences for Americans, for people, anyone outside China, for what's been happening in China, and then you start from there and trying to address those specific things, I think you would come to a different kind of approach than, well, let's put a lot of tariffs on them and hope they change, which doesn't seem to be working or have worked. In your conclusion to your book, like seven different things you recommend China to do,

you know, none of them are tariffs. But you write then in the next paragraph that all of these proposals are new. None of these proposals are new and that they were recommended by mainstream economists in China in October 2013. So why isn't China

doing what needs to be done. What's the word you're saying before, right? I mean, you know, and again, this is a term that officials in China have used, like the vested interests, right? If you have a system that has developed over decades that benefits certain people, small groups of people who've gotten very wealthy and powerful relative to the rest of the population, they're going to have both the means and the incentives to try to block changes. And apparently,

So much so that the changes don't happen. So there have been, I mean, it's not like nothing has happened. This has been very small, right? There's pilot programs of saying maybe we can liberalize the Hukou household registration system, which that's the system in China that basically prevents people from the countryside from getting access to city benefits. And so it was created by Mao, by the way, to basically prevent future revolutions of the kind that he led.

It's like, well, if people can't leave their town, then you can't have no mass movement across the country, can't have revolution. So that was gradually liberalized, you know, starting in the late 1970s, but only partly, right?

People could move, but they're still kind of technically illegals. And there was always an ambiguity there. And again, there's still the tax benefit imbalance where you pay the local tax benefits. And there have been some pilot programs very recently, like in one particular province, they'll say, okay, you can, if you're from the countryside in this province, you can move to these cities in this province and maybe get benefits. And Michael's made the joke.

probably has come from people locally. It's like, yeah, but you make it so that people can move to places they don't want to move to. You know, it might be different. You know, I guess it's better than nothing, but it's not really, you know, if it's not happening in places like Beijing and Shanghai and Guangzhou and stuff like that, like, you know, how, maybe a lot, but like, so it's not like there's been literally nothing happening, but very little. You know, people are talking in China about

about introducing a property tax for a very long time. It's beneficial policy. We should study this and try to do it. And then nothing happens. So that I think is, again, I think it's totally reasonable to encourage those changes. Again, they have every reason to do it for themselves, independent of what the rest of the world thinks. But I think if you're a policymaker outside China, you should start with the presumption that

As much as it would be nice for these things to happen, they're not going to happen. And so what are the things you can do to minimize the sort of negative spillovers to yourself and your own society?

Treasury Secretary Scott Bessett has made the argument that said, look, I've looked through history. And typically in a trade war, the trade deficit country has an advantage over the trade surplus country. Because if both countries were to enter a total trade embargo on each other and U.S. exports would go down by 100 percent, so 150 billion, Chinese exports would go down by 100 percent, 450 billion. So it would hurt the Chinese economy more, basically. And that

That gives the U.S., the deficit country, an advantage. You and your author, Michael Pettis, have also looked through history. To what degree do you agree or disagree with that statement and why? So in theory, I think that's right, but with a couple of caveats. One is you're assuming sort of roughly comparable pain tolerances in the societies, which might not be true. And the other thing that's tricky is that there's a question of sort of if you lose...

if you're, you know, on the deficit country and you cut your imports, can you get equivalent replacements from other people? And historically, the answer has been in general, yes, right? Like you don't have sort of monopoly producers of key goods that are the country you want to ban imports from. That's not really true in the case of China for a variety of reasons. I mean, some of these things are just, you know, like children's books, right? Overwhelmingly are made in China.

I don't know why that happened, but that's, that's the case, right? Like now, is there any economic advantage to America banning children's books? No. Right. But like, if you were just mechanically say like, we're going to, you know, there are other things that people are paying more attention to because they sound more serious. But like, by the way, it's like, I would be upset if I can no longer buy children's books. So, um,

Like, you know, some people have like sort of various critical minerals for Earth's where like they're not rare in the world. You know, they're in the crust everywhere, but actually refining them and turn them into usable products. That capacity right now basically only exists in China for a lot of things. And so if you suddenly lost access to that, you know, people talk about things like dysprosium or whatever. Like that could be a real problem for a whole lot of consumer goods and military goods, industrial goods, you know, even think about.

Um, until you don't have it. Right. And you can say, well, the market value of this stuff is really small. Okay. Yes. Maybe we're talking about a market that seems like it's like tens of millions of dollars, but suddenly you don't have any, and like, you can't make all these other things that have a market value as much higher, like at the margin, that market value actually, you know, it looks like it's only tens of millions of dollars now, but it's actually worth a lot more if you don't have any. Um, and so that could be a constraint. Uh, but I mean, leaving that, so, um,

that's really the the big question is like is the extent to which the pain from losing access to imports that can't be replaced offset by the pain of losing income that theoretically could be replaced but probably wouldn't be uh but again this is all very you know negative some kind of way of thinking about it but that that is i mean you know when people talk about

uh the impact of smoot holly of tariffs in in 1930 during the depression i think it's worth remembering that part of the reason part of the reason it was it was so painful for the us except that it was is because the us at that time was actually a big trade surplus economy and so the retaliation was much more painful than it would have been in other circumstances you look at say the uk at that point you know in 1931 which went off gold

and devalued its currency which is effectively the same thing as putting on the tariff by the way um it was it worked out a lot better for them because they were trade deficit country so you know it's not like that what best is saying is completely wrong i'm not sure it applies necessarily with case of you know the us china situation right now um in you know because there's some important exceptions to bear in mind but i mean it it is certainly true that um

if you are providing income to other people and you have the ability to make more stuff that you're not, then making more stuff at home is going to be more beneficial for you than losing the income. So it kind of depends on how these things add up. But that's the other thing too, right? Like in the depression in the UK in 1931, there was a lot of spare capacity to make more stuff. In the US now, is that true? Well, that's kind of an open question, right? Like you could say there's spare capacity. I think it's plausible that in certain situations there might be, but like,

You can also argue not, right? With like, we're looking at sort of the inflation unemployment numbers and stuff like that, actually, you'd have to be, make some sacrifice and move people from certain sectors to others. And that might be, again, something people don't want to do, you know, to talk about like, you know, you lose child care workers, you have people working in a sock factory, right? Like, that's not, that's not necessarily going to be something that people are going to be happy with.

Right. And that's another thing I've heard from economists endlessly is that a large reason for the decline in manufacturing employment in America is not globalization. It's just not non-globalization factors such as like we've gotten way more productive. So two questions. Number one.

If, let's say, Trump puts a 30 percent tariff rate on China and keeps it there, how effective do you think that will be in reshoring manufacturing in the U.S., building things once again in the United States? And number two, if instead of going on with his tariff policy, President Trump or whoever is president, you know, religiously went to the conclusion of your book and did every single thing that they you recommend in the book.

How successful would that be in returning manufacturing to America? Or do you agree with a lot of other economists that basically manufacturing in America is kind of done? I guess the first thing I would say is that manufacturing employment is not a very good measure of manufacturing employment.

you know, your society's ability to manufacture. Manufacturing employment in China has gone down over time too, but manufacturing output's gone up, right? That's what you'd expect is how productivity works. The thing that I think is a legitimate concern is that if you look at manufacturing output in the US, which like the Federal Reserve has been tracking this for over a hundred years, and with the exception of the Great Depression, it goes up over time, except since 2000, more or less, basically flat.

And depending upon how you think about the measurement of manufacturing growth for semiconductors, which is very sensitive to a lot of assumptions about improved computing power. And that's tricky, right? Because when talking about real output of semiconductors, you leave that aside like it's been down a lot of times.

uh since 2000 more or less so that i think is a much bigger issue to be focused on relative to the employment dynamic i mean obviously we want to have society where everyone has good jobs they can pay for their um

what they want out of their wage income. That's what we would hope if they want to. But that's, I think, very distinct from the question of the fate of the manufacturing sector in the United States. Sorry, I mean, trade wars are class wars. It's about human needs and the golden age of capitalism in the 50s and 60s was people who didn't necessarily have a college degree could have a family with two kids and their spouse didn't have to work. Sure, but I mean, there's like a lot going on.

Look, there's lots of things you look at for the 50s and 60s that are much worse than now. The houses were a lot smaller. They didn't have a lot of the amenities we have. I would not be too nostalgic for that. If people wanted the material circumstances of the 1950s, they could very easily recreate them now and affordably. They just wouldn't like it. Putting that aside, I think that if you're concerned about manufacturing, I think that is a legitimate thing to be concerned with, separate from

the employment issue. I think like, to be honest, the reasons I think why you'd want to be concerned with manufacturing are twofold. One, we're just saying we didn't talk about the book because it wasn't a point of the book, but like there's a national security element of like why it's good to have a domestic manufacturing base. I think it's been very clear basically over the past five years why that's relevant. Six years. And then the other thing is that

And again, we didn't talk about this in the book, but I think it's also relevant is that high-end manufacturing historically is where a lot of productivity growth economy-wide has come from. And so if you move all of that somewhere, then you lose that or you risk losing it, right? Like one of the big things you've seen in the U.S. recently, and it's had sort of mixed results, is you have design in the U.S., R&D in the U.S., and then production somewhere else. That's like been the model, and it's capital light, investors love it, right? But...

The problem is sooner or later innovation ends up, a lot of it ends up happening during the manufacturing process, which means that inevitably

We're not a notable. What tends to happen is that you have a lot of R&D and design move to those places, right? There's a reason why a lot of the big American tech companies have big R&D campuses in China. A part of it is obviously a lot of very educated, intelligent, hardworking people in China. It makes sense to, you know, do that. Part of it also is like it's closer to where the production is happening. And so it makes sense to do that too. And so, you know, there's benefits and synergies to be had from having things, you know, integrated. And so that's another reason I think that people

people should be mindful of the dangers of the lack of manufacturing growth in the United States. The question of, you know, your question of if China had different policies, would there be more manufacturing? Yes. I mean, some, right? I think to be fair, like the sort of sectoral interests of manufacturing are, there's like some overlap of what we're talking about and then some that's not, right? Like it's entirely possible that you could imagine a world

where national income in the U.S. is higher relative to national spending. So there's no current account deficit. But the difference is coming from things like commodity exports.

And then you'd hope that the government would redistribute those extra commodity earnings to people in a way that, you know, people were happy and like the extra, there'd be extra jobs and, you know, healthcare or childcare or whatever, like things that people need. Right. But it's not tradable. That's, that is a possible outcome. Um, and that would be consistent with what we talked about in the book. That's separate from the fate of the manufacturing sector, which I think would require, you know, more attention, uh, and,

And there's a lot of other things you can read about that. But I think it's important to sort of distinguish these. They're related, and manufacturing is obviously affected disproportionately because manufactured goods are traded in a way that services are mostly not traded. And so if you have a trade imbalance, manufacturing is going to tend to bear the brunt of it. But it doesn't mean that if you eliminate a trade imbalance in a constructive way, that manufacturing is automatically better off. I mean, it might be, but there's a lot of other things you have to think about, too.

And what are the solutions, I take it they're not tariffs, that the U.S. could do to restore these imbalances? I think the starting premise is the imbalances, because they have their origins abroad, you actually, at the aggregate level, there's not a lot you can do about it. So the question is, given that the imbalance is going to happen, if you think that's the case, right? Like, maybe it's not, but like, if you think the imbalance is going to happen anyway...

which is how do you mitigate the impact on your domestic economy? And so there are basically a couple of potential costs to be mindful of. One is if foreign demand is weak and you don't do enough to increase your own domestic demand, then you're going to have businesses failing and excess unemployment in your own country, and that's bad. So first things first is making sure you have sort of the macro stance calibrated to offset any foreign weakness.

And that's step one. That's even like before the imbalance. That's just making sense. That in a sense is like the imbalance existing, right? Because if you tank the domestic economy because you're worried about the trade imbalance, like you can do that. Maybe the trade balance goes away. It definitely goes away. You're worse off. So that's step one. And then step two is saying, okay, well, you want to make sure that this imbalance is the financial consequences of it are not going to be particularly destructive to your domestic economy. And so

You know, if there's going to be, you know, again, like sort of I think the archetypal example would be the 2000s. If you say, well, okay, foreign demand is weak for whatever reason, we're going to ease monetary policy. You know, that's a very standard textbook thing to do. We have a weak economy, set rates low. I mean, perfectly normal, right? What was the consequence of that happening, given everything else that was going on? The consequence was a massive private sector debt bubble, particularly in-house. That was huge.

not sustainable in any way. You're talking about the US in early 2000s? Yeah. So that was no good, right? That was not a viable model. So the question is, okay, if someone is going to be borrowing or issuing assets or be the counterpart to the rest of the world on net in the area of buying assets, it should be an entity that can do so basically without

having to you know worry about paying it back so it could be you know have a lot of companies sell stock right i mean there are issues there and like maybe you're getting rid of a lot of productive assets to foreigners cheaply i don't know that but like companies fail or the foreigners pay too high a price because the value like whatever right like it's not going to necessarily like national prices right it's much better than what we actually experienced where we had um the other option which i think is also very reasonable say look like

If people in the rest of the world in the aggregate are looking for things that are relatively safe for whatever reason, you know, give it to them, right? Like treasury bonds. And again, like we can talk, you know, what's happened recently, leaving that aside, like in principle, you know, the federal government can always roll to debt and its servicing costs are going to be lower than any other entity that would be issuing debt. So let them do it.

Okay. And then the last thing you say is, again, you know, what we were just talking about before with, you know, manufacturing sectors, you don't want to have the composition of your economy be unreasonably, you know, distorted for reasons that have nothing to do with, you know, what's going on internally. It's like, you don't want to have perfectly viable industries just get wiped out because of problems, you know, other people are doing things that are not good for them.

And so they said that maybe you have some kind of support for the manufacturing sector, which could take a lot of forms, maybe do that too. And maybe in fact, you could have some of the government debt issuance that you're selling to foreigners to meet their demand for assets.

you know, lead directly, you know, finance the support you provide your domestic manufacturers. I think at a high level, that is a reasonable formula to use. And I think it's also basically, you know, with caveats, I was like, basically, I think that's what the Biden administration tried to do. Cause you know, I can say with confidence, like some people there read the book and thought it was interesting. And I think that's like, you know, I don't think we're the only people saying these kinds of suggestions. I think putting it together on this framing, I think is sort of unique. And so I think that that, that explains, you know, what that,

you know, that kind of approach I think would still work. I think you can look at other countries and say like, there are certain places where it worked for them too, if they tried. And so that, I mean, that's, it's not perfect. Right. But given, if we start from the premise that the rest of the world is not going to change or particularly the large surplus countries are not going to change their behavior, then, then it seems like relatively speaking, the best option available.

And forgive me if you did say it, but I don't think you did. Isn't one solution you mentioned reducing the foreign sector's demand for assets with various measures, whether there be capital controls or others? Yeah, you could do that, too. I mean.

To be honest, that's the thing where, you know, you want to be careful about how you go about it. I think, to be honest, that given what's happened with this administration over the past few months, they're probably not the best ones to be implemented, sort of thing. Like in theory, right? What the IMF calls capital flow management measures.

Yeah, they're not capital controls. Capital controls sounds extreme, but capital flow management is. They said, I think it was back in 2012. They said, you know what? It's fine now. Like we made a mistake. It turns out this is perfectly normal part of the macro potential toolkit. You know, go for it. And they said that in 2012.

And I think that's perfectly reasonable. And I think that like, if you had a competent technocratic government kind of laying out a case for how to do this kind of in a targeted way, that would also make sense for the US. And we've seen other countries do things like this, rich countries and developing countries. I don't see why you could not do something like that in the US on the various things you do. And again, like there's a very plausible argument saying we're trying to ensure domestic financial stability,

It's again, it's sort of a macro prudential kind of regulation. This is the kind of thing where we're going to be, you know, not just, you know, being random here, but kind of in a measured, predictable way, like trying to discourage excessive and volatile inflows that might distort our own domestic financial system. I think that's totally a reasonable approach as well to integrate. Again, like it's not as necessary, I think, compared to the other things. It can certainly help. It's sort of a question of like,

How much do you care about the potential for too much government debt issuance in sort of an abstract sense versus the fact that the cost of capital and the cost of imports might go up if you do the other thing? I mean, arguably, there's trade-offs regardless. I think you'd have a sort of a balanced approach.

But yeah, I think that's totally a reasonable thing to do. Again, the challenge is you don't want to have it be implemented by administration that simultaneously do lots of other things that are freaking people out.

I mean, arguably you could say that already we're imposing, we're reducing the appeal of holding us assets, but I think it's doing it in ways that are counterproductive. Like you're harming Americans more by doing it that way. If you, you know, creating extreme policy uncertainty and questions about, you know, the rule of law and the university system and so forth, then if you were doing so, like, okay, we're going to have like certain kinds of tax increases, you know, taxes on foreign investment income or, uh,

you know, limits on inflows and outflows of the kind you see in lots of places, whether it's Korea or Chile or Australia or what have you. And one solution you mentioned is basically for the U.S. government to issue liabilities, a.k.a. run a deficit or a large deficit. The U.S. has been doing that, right? And one thing I've

think Michael Pettis said when I've interviewed in the past is that the large current account deficit that the US has basically forces the US to run a fiscal deficit and not have a recession. Yeah, I think that's right. I mean, except for brief periods of time when you can get the private sector to do it instead. But I say brief because they can't do it very long without blowing up. In the late 1990s, you had this huge corporate debt bubble.

massive wave of bankruptcies and like no bond issues for a while and then that led to a persistent shift in corporate investment behavior which is very destructive so like that was not a good model and then you have the 2000s where then households did it so the only entity in the u.s that could sustainably be on the other side if you have a persistent current account this i think is the government over time right you can have periods of time the private sector does it but i don't think it works out very well we've seen that before uh and it's bad but and it's

And it's not because the US private sector is uniquely bad. I think it's just the function of it's very difficult for any entity to do that over time in the volumes necessary to accommodate foreign asset demand.

So what broad conclusions, Matt, can we leave our audience with here today? Because this has been a pretty complicated conversation. A lot of implied equations between savings and investment and consumption and savings and the like. It's all additions and subtractions, so at least there's that. Yes. But what broad conclusions can we draw here? Sure. Well, first of all, globally,

you know, the economy and financial system is a self-contained unit. And so it's very important to remember that everything has to add up at the global level. And so if something happens in one place, it's not going to stay in one place. There will be transmission effects to the rest of the world, and you have to be mindful of that.

And you can't just look at one country and say what's happening in that country is only the responsibility of that country, that there are other forces externally that can have an impact. They're quite large. That's a big thing to think about. I think another thing to think about is that there are positive-sum solutions, that prosperity globally is not this contest of one side wins, one side loses, and that the

The problem with thinking about things that way is it will lead, you know, precisely if you think about things as a negative sum game or zero sum, it will be in fact a negative sum game, but it doesn't have to, right? Like there's large parts of the world still where people are living below their means. And there's lots of material poverty in large parts of the world. And so we should be thinking about, you know,

This can change. It doesn't have to be that way. We can all be better off as a result. There might be changes in terms of what individual people are doing or how, you know, the mix of industries and countries or what have you, but like we could all be better off or at least the vast majority. And then, you know, related to that, think about the context stuff like, I don't think

The trade war that we are seeing or the trade column we're seeing current policy is going to be good for Americans or the world. I think Americans are liable to be the biggest losers from this, but there are alternative approaches that have been tried to a degree and were, I think, broadly successful. I think if we could go back to that, that would be a better option.

Matt, thanks so much for coming on Monetary Matters. People can find you on Twitter at M underscore C underscore Klein. And your sub stack is the the overshoot. We'll link to that in the description. Tell people what you write about at the overshoot. And is there anything you cover there that we haven't talked about so far? Oh, man, I'll cover a lot of things there. It's basically, you know, global macro analysis, you know, economics, finance, public policy is what we say. So yeah,

We, it's just me. But I'm truly trying to help investors and policymakers, academics understand what's going on. Recently, I've been very heavy on trade and relationship in trade and balance and macro for obvious reasons. But, you know, cover lots of other things, you know, inflation dynamics, you know, U.S. unemployment. What's, you know, generally sort of focus on, you know, major economies, U.S., Japan, China, Europe, but also looking at other places as well.

And just a question I wanted to ask, what's the relationship between immigration and undocumented immigration and the unemployment rate and the jobs data? Because 2021, 2022, 2023, we saw very strong levels of the job market, very high non-farm payroll growth. I, at the time, definitely was not connecting that to immigration. And, you know, I wasn't really aware of the large, you know,

data of the large immigration in the US, like just how much of the quote unquote strong labor market that we've seen over the past four years has been due to immigration? That's a great question. I'm not sure it's been that much insofar as when we think of the strong job market, we think about ratios, right? And so if a lot of people were coming into the country and then were not able to find work,

then presumably that wouldn't be showing up as a strong job market, right? Somehow, one way or another. I mean, one wrinkle here it's important to know is that we have two surveys, right? There are surveys of employers based on how many people you're paying, and there are surveys of households and saying, like, do you have a job? And there was a big gap, and that gap was reconciled mostly by saying, oh, like, there are more households working than we thought. The employer surveys were closer to the truth, which is consistent with the idea that they were undercounting immigration. But...

Um, the household surveys that had been under counting immigration were also showing labor market barriers strong in terms of like the proportion of people who were working, uh, you know, within sort of prime age groups. Right. So if you were, if before any revisions, um, to the estimates of people who are in the country working, you still saw the unemployment rate is very low. Employment rate was very high, things like that. And like, I don't think it really was moving the needle one way or another. Maybe you could argue for like aggregate GDP. It was having an impact. Um,

But it's hard to tell. I don't have a very strong confidence in that view. I mean, it's not nothing. But again, like the per capita numbers, which, again, have been revised at this point, like they still show that growth is pretty strong. And so like the extent to which U.S. growth has exceeded pre-pandemic forecasts, that's still true. So I don't think it's been huge either way, to be honest.

All right. Well, we'll leave it there. Thanks again, Matt. Reminder, people should subscribe to the Monetary Matters YouTube channel and leave a rating and review on Apple Podcasts, Spotify or wherever else you get your podcasts. It really helps the show. Thanks again. Until next time. Thank you, Jack. Thank you. Just close this door.