It is striking to see a generally well-respected figure like Robert Lightheizer recommend the radical policy of capital controls, not just for the US but generally. Wall Street Journal reporter and one-time Fed whisperer Greg Ip published a lengthy interview with Lightheizer last week, focusing on his views on trade and his advocacy of capital controls as a way to achieve balanced trade. This is a radical idea; iIn the post World War II era, capital controls have been deployed either in emerging economies in some degree of trouble or in China to prevent capital flight. The Ip coverage suggests that if Trump wins, capital controls will be on the policy menu. We’ll discuss below why we think this is not such a hot idea.
Lightheizer was one of the few Trump Administration officials seen as competent. He was Trump’s Trade Representative, and as the Ip piece reminded readers, very influential. He was the architect of the Trump trade tariffs against China. Despite having been widely criticized at the time as ineffective to counterproductive, they were nevertheless kept in place by Biden.
It is important to recognize that fairly open trade and capital movements are historical anomalies, and that high levels of international money flows are highly correlated with severe financial crises. And the resolution is most often a paradigm breakdown rather than successful reforms. We had that when the period of highly open trade in the runup to the Great War resulted in a breakdown during the conflict. MIT economist Peter Temin has argued that the effort in the 1920s to reconstitute the gold standard system is what precipitated the Great Depression. That in combination with the threat of communism led to many countries implementing social democratic policies which prioritized domestic wage growth. As we saw under neoliberalism, that was perceived to harm competitiveness, not of the US per se but of our pet multinationals. And here we are, having offshored lots of our manufacturing and lost not just capacity but also skills. So many policy makers effectively want to undo that. But ideas like capital controls are quick fixes that do little to address the root causes of loss of capability.
Interestingly, the damage done by hronically unbalanced trade was what led Keynes to recommend his bancor at the Bretton Woods conference. But the Keynes idea never got off the ground, presumably for the way it imposed costs on chronic trade deficit countries and even more so on chronic surplus countries.
Now to the Ip story. Lightheizer has a mainly sound analysis of the trade problem from a US perspective. From the article:
Despite the change in policy since 2016, global-trade imbalances persist, notably the U.S. deficit and China’s surplus. Lighthizer thinks the elimination of these imbalances via tariffs, and perhaps other tools such as capital controls, ought to be the overarching goal of U.S. trade policy.
“I have migrated from thinking we need superficial fair trade to realizing that that is unachievable, and what we really need is balanced trade,” Lighthizer said in an interview in Palm Beach, Fla., where he lives a few miles from Mar-a-Lago. “Not balanced every year and with every country, but over time and globally.”
He added: “Every country should be exporting in order to import. If you’re running chronic surpluses for decades, then you are by definition a protectionist. You’re engaging in industrial policy to help yourself, you’re transferring resources from your consumers to your producers, you’re trying to … acquire other countries’ assets.”
These used to be called beggar-thy-neighbor policies, he said, “and they have to stop.”…
From the early 1990s until 2016, presidents of both parties pursued freer trade in the belief that consumers would have access to cheaper goods and U.S. workers could sell to bigger markets. Trade pacts would also strengthen political and strategic ties with the U.S.
Lighthizer, who got his start serving President Ronald Reagan, never bought into either premise. “No one really believes in [free trade] outside the Anglo-American world, and no one practices it,” he wrote in “No Trade is Free: Changing Course, Taking on China, and Helping America’s Workers.” In deals struck from the 1990s on, “American policy makers effectively decided to let the rest of the world make our trade policy.”
Here Lightheizer does not acknowledge that freer trade is, as Bill Greider stressed, managed trade. There is no such thing as free trade. Exporters still need to meet standards, particularly product safety and other requirements, of the target country. Financial services, a substantial category of US services exports, is on the whole heavily regulated. The US has also insisted on and gotten an intellectual property regime very favorable to Hollywood and Silicon Valley implemented in much of the world.
And that’s before getting to the fact, as we mentioned above, that the more open trade regime (which actually started way before, such as with Mexico’s maquiladoras, which were already a significant factor for the US auto industry and some other manufacturing sectors such as air conditioners as of the early 1980s) was to promote the interests of US multinationals. Even though NAFTA touts like Robert Reich represented otherwise, the Stopler-Samuelson theorem effectively predicted that high-wage factory jobs would be the loser, as did the great economist Ross Perot:
We have got to stop sending jobs overseas. It’s pretty simple: If you’re paying $12, $13, $14 an hour for factory workers and you can move your factory South of the border, pay a dollar an hour for labor, … have no health care—that’s the most expensive single element in making a car— have no environmental controls, no pollution controls and no retirement, and you don’t care about anything but making money, there will be a giant sucking sound going south.
… when [Mexico’s] jobs come up from a dollar an hour to six dollars an hour, and ours go down to six dollars an hour, and then it’s leveled again. But in the meantime, you’ve wrecked the country with these kinds of deals.
When it became evident that the US was losing jobs and capacity, the fallback position was to pretend that “smart” policies could turn around the impact on low wage workers, with “let them eat training” combined with exhortations that they needed to move where the jobs were….as if they miraculously had the resources to pay for relocation and housing with no income during an employment search, even before getting to the question of whether they could even secure regular paid work in a strange city.
This is a long-winded way of saying that for Lighthizer to pretend the US, which during this entire time period of US de-industrialization was the world’s leading economic and military power, was a victim of nefarious mercantilists, is nonsense. We did this to ourselves for the benefit of particular industries, as in capital.
That also means that another claim of Lightheizer, that other countries are taking advantage of us via having industrial policy, is equally ridiculous. The US heavily subsidizes Big Pharma, real estate, higher education (not in a remotely economically productive manner; it’s a massive PMC job creation program), and arms makers, for instance. The fact that we don’t do so with an eye to international competitiveness is our problem, not our trade partners.
Having said that, Lightheizer is not wrong to say China (like Germany before them) is creating politically and economically destabilizing trade surpluses by suppressing consumption. The Japanese wound up there back in their heyday by virtue of having such itty-bitty apartments that they could not buy much stuff even if they wanted to. Again from the Journal:
Economists still disagree with Lighthizer on deficits, which they see as the natural outcome when a high-saving country like China trades with a high-consuming country like the U.S.
Lighthizer agrees that deficits reflect savings differentials, but not that they are natural. Rather, they result from other countries’ policies that suppress consumption and subsidize exports. An example: Germany’s early-2000s labor reforms which, along with the adoption of the euro, suppressed German wages and rewarded exporters.
An important influence is Peking University finance professor Michael Pettis, who has written extensively on how China’s suppression of consumption dictates that it run a trade surplus and other countries run deficits. As deficit countries lose incomes, they must either accept higher unemployment or increase debt to replace lost spending power.
Mainstream economists increasingly agree China’s surpluses are harmful…
What to do? [Treasury Secretary Janet] Yellen suggested China expand retirement benefits or spend more on education to bolster consumption. Beijing politely dismissed her complaints as protectionism.
A big problem here is the US does a terrible job of making its case. Sustained big trade surpluses are eventually self-defeating. They either lead the deficit country to eventually block trade, cutting off access and leaving the exporter with surplus capacity and job cuts, and/or result in the chronic exporter holding lots of financial chits in the deficit nation and being increasingly unhappy about that….when they created that outcome. Recall the 2015 Greece bailout negotiation, when the right-thinking consensus was that Germany was harming the Eurozone with its persistent trade surpluses? Germany like China saw its surpluses as the result of Teutonic virtue and chose to omit the part where its wage suppression also played a role. Germany further increasingly and vocally resented that it had shipped perfectly good goods to the likes of Greece and all it was getting back were financial claims. But that is inherent to that deal!
Not that China would listen, but its policies are inherently self limiting. And dogged pursuit of them is not likely to result in a very good end game. But with the US so openly hostile to China, even if we had a very sound argument, there’s no reason for Chinese officials to believe us. And even putting that to one side, the US has never exhibited any concern about the impact of our policies on other countries, witness our famed indifference as to the impact of our interest rate changes on other nations. So it’s not as if we have done anything to earn good will from other countries now that we are on the receiving end of their economic actions.
Now back to the capital controls remedy. The reason I am not keen is twofold. First, the most recent major examples of where they were deployed and well-studied afterwards are Malaysia and Thailand in the early 2000s, after the Asian crisis. Many critics contend that the economic success that happened after their implementation is a mere correlation and not the result of the capital controls. The biggest fact in support of that view is that nearly all of the capital flight took place (and it was substantial) before the policies were implemented.
A fairer-minded, and more analytically rigorous account comes from the Asian Development Bank. One problem I have with this and other studies I found on a quick search is that they don’t articulate well what the capital controls were intended to achieve. The Asian Development Bank said that neither one of the capital controls succeeded in controlling the value of the currency, which suggests that was a major aim. However, the study indicates each regime did achieve some positive, albeit different, outcomes.
Clearly, the US is not a smallish developing economy. Capital controls by the US (beyond pretty modest ones) would throw a monster wrench in the mobile capital regime, which revolves around the US dollar. So it’s not hard to see this as causing failures among banks that wrong-footed this development, and potentially cascading failures. And how do multinationals operate?
Lightheizer seems to be engaging in the same sort of fallacious thinking that operates among Green New Deal types. They think that the status quo can be kept largely intact as long as the right combination of incentives and restrictions are put in place. But the US can’t force balanced trade on other parties. We depend on many critical supplies from China, from pharmaceuticals to ascorbic acid. The idea that we can capital controls magic that way is spurious. Like finding a way for something dimly resembling civilization to survive the current climate change/resource limits/species loss crisis, what would be required is a long-term program of root and branch restructuring of the US economy based on explicit priorities that both parties embrace. In highly complex systems, following simple paths to desired outcomes usually backfires, as we saw with Western sanctions against Russia. Capital controls, ex as part of a vastly bigger initiative (and then as a secondary tool) are likely to suffer the same fate.
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I do not pretend to speak “higher economics” but to agree that any single shot, single answer to any complex situation is a route to exacerbating the problem. It seems to me that on the ecological as well as the economic front the root is the aim of maintaining the status quo for me is not for thee. This is clearly impossible and continuing efforts to make it so preserve the illusion for the beneficiaries for a time. The present generation may escape the worst of the fallout. Their children and grandchildren will not.
Even a modest effort to look beyond the profit projections for the next 90 days would be a baby step toward a less unpleasant future.
Your point about complexity is well-taken, however it runs deeper than that.
There are a lot of elites that just do NOT understand how we got where we are. Yves’ summary above gives the TLDR version of how the world economy has been reshaped for the past 30-40 years.
It’s almost like watching a home renovation project where the contractor doesn’t have a grasp of how deep or where the rot is, and they keep running into problems because they’re looking to apply solutions that don’t reflect the scope and scale of the problems.
Capital controls run the risk of genuinely breaking the spine of the dollar-based reserve currency system without actually getting the USA the manufacturing primacy that Lightheizer seems to be seeking.
Keep in mind, genuflecting to the MMT crowd, the dollar based reserve currency system is what gives the US such a huge amount of fiscal and monetary sovereignty. If we break that reserve system, we’re going to find ourselves hemmed in, economically, in ways we don’t anticipate. It’s probably going to look as dysfunctional as during the pandemic where certain goods were in short supply (car parts and toilet paper).
In short, we might just break one economic model without being able to successfully adopt another one.
Not sure were i picked up the claim, but i seem to recall that at least the pretense of opening up trade with China etc was with the belief that economic activity would foster democracy by way of a rising middle class.
And i do wonder if the same idea is what keeps the left leaning parties in Europe so wedded to the idea of EU even as it’s history shows anything but. That by easing commerce across the European borders on would foster more understanding and thus a pan-European identity that would quell any future wars.
But instead we are seeing a rising nationalism as the working class that can’t as easily move with the money become immiserated.
Western elite world view of the time was that the right approach was to apply what Tom Friedman laid out in ‘The Lexus and the Olive Tree’ back in 1999.
The goal was to turn China into a bigger version of Mexico. Mexico had gone neoliberal during the 1990s, lots of privatizations and de-regulation, in addition to NAFTA and the maquiladora program. Western elites were quite happy with the results and applied the same formula to Russia, and it seemed to be working during the Yeltsin years.
The problem is that western elites didn’t get Chinese collaborators in the same way. And, in any case, the government was able to reassert control over their oligarchs.
The Russian collaborators they got were all eventually crushed by Putin and the Russian nationalists.
The problem is that most people don’t like the western elite neoliberal business model, even in the west. But it’s far more hated in the so-called developing world.
Endorsement of capital controls is indeed a huge policy shift. In The Forgotten Foundations of Bretton Woods Eric Helleiner provides a good account of the struggles in FDR’s administration over international development policy.
Opposed to New York banking circles, who were adamant in Freedom for Capital to slosh around without regard for social stability and development, were New Dealers such as Harry Dexter White and Henry Morgethau, who favored something like a New Deal for Latin America, which would combine capital controls with lending from a development bank that would be independent of New York.
While I don’t want to slight the relative generosity of the New Dealers compared to grasping bankers, it is noteworthy how an initial impetus for this development bank + capital controls approach came from worries over the Nazis making inroads into Latin America by offering better loan terms. Faced with vastly more powerful competition from China and Russia, Washington is having to go back to options that have been historically suppressed.
Typo alert: End of first paragraph: “this is not such a not idea”
Some like it hot.
Fixing, thanks!
If even the banks and megacorps oppose the policy then who exactly is “in charge” of running the greatship USS US anymore? The voters!?!
I heartily endorse this:
That gets it right.
===== and another of Yves’ remarks I appreciated was:
So what would be the objective of these “capital controls”?
From Ip’s remarks about Lighthizer’s views:
Tariffs would address the trade imbalance, but what effect would capital controls – e.g. limiting the influx of capital or exodus of capital to/from China do for the trade imbalance?
The trade imbalance is due to the cost-structure disparity between China and the U.S, and because we shipped all our mfg’g gear to China, and they have more, and now more skilled manufacturing population than we do. The also have access, now, to Russia’s natural resources and markets.
China doesn’t don’t need our capital; they’ve got plenty of their own. They are investing a lot of their capital outside China – they’re doing more to balance capital availability in under-capitalized countries than we are.
China doesn’t _have_ to export to the U.S. anymore; we’re now a small portion of their total exports, and they’ve got vast new markets opening to _them_ that … due to our predatory nature … are not going to be open to us.
Tariffs and capital controls … are barns whose horses have left the premises.
What is needed, as Yves stated so clearly, is a top-to-bottom redesign of the U.S. economy. A redesign that results in an economy that produces things that the rest of the world wants, and that addresses the environmental and resource-availability monster sitting on the couch … right beside us.
Capital controls might be useful if, for instance, if designed to avoid foreign capital feeding a housing bubble.
Good point, and thanks.
I recall that China used this sort of capital control to try to prevent the exodus of capital from China … the very capital that ultimately ended up, for example, creating the real estate bubble in the Vancouver BC, Canada area.
Chinese buyers have very little to do with high real estate prices in Vancouver. The same applies to the rest of Canada as well. Sadly, there is a long tradition of anti-Chinese xenophobia here and the commenter may not be aware of this. Canada’s expensive real estate market is driven by domestic demand and a faulty tax system. The situation described from 2015 has not changed.
https://www.greaterfool.ca/2015/11/02/yellow-peril/
https://en.wikipedia.org/wiki/Chinese_Immigration_Act,_1923
HUH??? Making Shit Up is not on.
As of 2015, Chinese acquired 1/3 of Vancouver real estate: https://www.fortunebuilders.com/one-third-of-vancouvers-real-estate-market-is-owned-by-chinese-buyers/
There are MANY MANY articles that describe the impact of Chinese purchases in the Vancouver and Toronto real estate markets after that snapshot.
It is true that Chinese buying has diminished due to the real estate wobbles in China, but its elevated level is the result of many many years of Chinese buying and only limited selling during the Chinese real estate bubble unwind.
“As of 2015, Chinese aquired 1/3 of Vancouver real estate:”
Reading through the article it does not say that.
“Making Shit Up is not on.”
I agree.
The title of the article says exactly that.
The first paragraph says this:
“Chinese homebuyers accounted for nearly one-third of Vancouver’s real estate market during 2015, spending approximately $9.6 billion of the $29 billion of total real estate sales, according to a new study by the National Bank of Canada.”
The second paragraph says this:
“National Bank financial analyst Peter Routledge, who compiled the data, said that Chinese homebuyers occupied 33 percent of the total housing volume in Vancouver’s real estate market, and 14 percent of purchases in Toronto – or about $6.7 billion of the $47 billion in deals.”
What article, pray tell, were you “reading through”?
Yes, I think you’re right. This is groping around by the people that created the current mess to find a “quick fix” to get back on top again. Even Biden’s actions – pumping money into what is perceived as critical industries – is doomed because it is not the top to bottom restructuring that is required. It’s the industrial equivalent of Obama’s GFC fix (which was to give trillions to the banks that caused the problems as a literal “do over”) where hundreds of billions is given to some corporations as a “do over” to undo off shoring. OK, I’m grossly simplifying here, but some of the more obvious actions which should be immediately taken are to make stock buy backs illegal AGAIN, and raise corporate taxes to force more capital investment by corporations. Both these actions are required to stop CEOs from strip mining cash out of American corporations which also wrecks whatever function the corporation is supposed to have.
What’s amazing to me is that laws have been in place requiring the Federal government to only buy American made since 1933. It’s true exemptions went went crazy under Reagan, but who was stupid enough to allow exemptions for critical components in military systems like the F-35? The sheer greed and willingness to [family blog] your own country which is now on display almost daily in DC doesn’t bode well for any significant course corrections any time soon.
“The trade imbalance is due to the cost-structure disparity between China and the U.S, and because we shipped all our mfg’g gear to China…”
What does shipping “all our manufacturing gear to China” mean?
Also, the US has had a trade deficit from 1982 through 2023 in every year other than a small surplus in 1991. Japan and Germany were countries with which the US had significant trade deficits, from 1981 on in the case of Japan, and 2002 on in the case of Germany.
CA: Thanks for catching that.
I should have said “moved a great deal of the U.S.’ manufacturing equipment to China”.
Whole U.S. factories were boxed up and sent to China during the late 80s and most of the 90s. A lot of U. S. brands were suddenly – and I mean in the space of a year or two – made in China.
We most certainly did not move “all of our mfg’g gear to China”. That was glib-talk.
W/r/t the trade imbalance, I was making the point about the U.S. – China imbalance (that’s our biggest one by far, right?), not the trade imbalance with other U.S. trading partners.
Thank you for the response, but the problem is mine. I am poorly arguing that China bought manufacturing equipment from the US, but while selling goods manufactured in China on US equipment that had been purchased the Chinese were learning to build enhanced equipment in China and would use such equipment to sell domestically and internationally.
China was increasingly making its own equipment, and learning to make the most complex equipment entirely in China.
Recently China has come to build and mass produce equipment such as F-class heavy-duty gas turbines entirely in China, entirely from Chinese components. F-class heavy-duty gas turbine building is an immense accomplishment.
Oh, CA, there’s volumes to say about how China managed the tech transfer from U.S. to China. That has to go down in history as the greatest, fastest transfer of tech – without firing a shot – ever.
The U.S. was sooooo totally sucked in, and … while it’s fun to attribute the suckering to greed, the U.S. really didn’t have a lot of choice. If we didn’t put our factories in China, they would have just built them themselves. It just would have taken a decade or two longer. It would have gotten done.
And if we didn’t get into the China market, everyone else would have done it for us (e.g. Germany & EU, Japan, the Asian Tigers, etc.
And the Chinese played us masterfully, they truly did. I believe they knew us better than we knew ourselves.
So now we need to consider the next moves. The U.S. has a lot of advantages and strengths that aren’t (are hardly?) being utilized, but it’s going to take some cultural re-casting to get ourselves back on solid value-to-the-world footing.
That’s the hard job: to change a society’s values, habits, incentives, and attitudes. The rest of it (training, facilities, new products, new organizations), in this day and age, is mostly pretty mechanical.
We’re not yet beginning that cultural work, tho, and the clock’s a-ticking.
https://www.globaltimes.cn/page/202401/1305779.shtml
January 21, 2024
China debuts first homegrown transmission electron microscope, breaking foreign monopoly
China unveiled its first domestically produced transmission electron microscope (TEM), the TH-F120, on Saturday, the Science and Technology Daily reported.
The groundbreaking development, led by the Bioland Lab, marks a major breakthrough in core technologies and manufacturing capabilities of the country, challenging dominance of foreign brands in the highly competitive market.
Developed by Bioland Lab in Guangzhou, South China’s Guangdong Province, the TH-F120 boasts a high-brightness electron gun, which offers enhanced stability, coherence, and brightness for capturing high-resolution images. With its self-developed electromagnetic lens, the system provides superior image contrast and resolution.
For decades, China has relied entirely on imports for its TEM needs, with foreign companies holding a near-monopoly at the global market. The introduction of the TH-F120 not only signals a reduction in this reliance, but also establishes China’s entrance into the high-end TEM market, previously dominated by major foreign players…
CA : what’s the significance of this?
I’d guess that electron microscopes would be handy for chip lithography (inspect the work?) but I’m ignorant of the other, more likely applications.
Got more info?
“I’d guess that electron microscopes would be handy for chip lithography…”
Perfect, begin with analysis of nano-materials:
https://english.news.cn/20240109/d64f3a9c37444d198d7f5131802468ad/c.html
January 9, 2025
Multiple glass materials discovered in Chang’e-5 lunar regolith samples
BEIJING — Chinese experts have discovered and conducted systematic research on diverse glass materials found in the lunar soil brought back by the Chang’e-5 mission, according to the Chinese Academy of Sciences’ Institute of Physics.
Researchers at the institute comprehensively analyzed the morphology, composition and microstructure of glass substances found in powder samples obtained from the lunar regolith using scanning and transmission electron microscopes…
Notice that from 1994 on, the Yuan has been far stronger than any of the currencies of the 13 countries with the largest GDPs:
https://fred.stlouisfed.org/graph/?g=gxkQ
January 15, 2018
Real Broad Effective Exchange Rate for China, Germany, India, Japan and United States, 1994-2024
(Indexed to 1994)
https://fred.stlouisfed.org/graph/?g=1nWQo
January 15, 2018
Real Broad Effective Exchange Rate for Brazil, China, France, Indonesia and United Kingdom, 1994-2024
(Indexed to 1994)
https://fred.stlouisfed.org/graph/?g=1nXpH
January 15, 2018
Real Broad Effective Exchange Rate for China, Italy, Korea, Mexico and Turkey, 1994-2024
(Indexed to 1994)
Notice that from 1994 on, the Yuan has been far stronger than the Euro Area currencies and Swiss Franc:
https://fred.stlouisfed.org/graph/?g=QqeV
January 15, 2018
Real Broad Effective Exchange Rate for China, Euro Area and Switzerland, 1994-2024
(Indexed to 1994)
Tom P,: You’ve nailed the real issue perfectly:
“China doesn’t don’t need our capital; they’ve got plenty of their own. They are investing a lot of their capital outside China – they’re doing more to balance capital availability in under-capitalized countries than we are.
China doesn’t _have_ to export to the U.S. anymore; we’re now a small portion of their total exports, and they’ve got vast new markets opening to _them_ that … due to our predatory nature … are not going to be open to us.”
They’re leaving the US “in the dust” by being a productive nation, and by trading wisely with other nations. At the same time, China controls what their billionaires can and can’t do. Unlike in America where the multi-billionaires rule over here with massive impunity.
.
“China doesn’t don’t need our capital; they’ve got plenty of their own. They are investing a lot of their capital outside China…”
[ Nice, and just what Robert Solow explained decades ago but what has been broadly ignored in Western economies. The Chinese understood, and devote large amounts of funds relative to GDP to investment.
Interestingly, economists such as Paul Krugman now crudely dismiss the importance of Chinese savings and investment. Data I have tells me Solow and the Chinese have been and are precisely correct. ]
I like your analysis of how the US basically created this set of conditions for itself (well, those in charge did for everyone else), Tom. If I may make a suggestion as a non-US citizen, it seems to me that considerably more investment ought to be made in your human capital — from the outside looking in it looks like American profligacy (by which I mean the flagrant abandonment of large numbers of its underclass to poverty and despair) in this regard needs to change as a condition for altering the economy in more productive ways, particularly where manufacturing capacity is concerned.
Perhaps capital controls could serve as part of a suite of reforms which would force an increase in more productive domestic investment, though I have no illusions about the ferocity with which any such will be resisted by the FIRE sector and its army of lobbyists.
eg:
Liked this passage:
That’s what I believe also. Now the question is “where does the impetus, the effort, the resources come from to make that investment in human capital?”
Right now, we’re all standing around with our hands in our pockets – not just the U.S. citizens, but maybe a good bit of the “West” – waiting for someone else to supply the motive power for that investment.
Not happening top-down. No.
If it happens, it’ll be from individual-out, bottom-up.
But that scares, alienates, worries the bottom-uppers. They don’t know how to do it, they don’t truly believe in themselves, there isn’t a lot of peer-support, etc. It’s cultural.
The bottom needs to learn to do reconstruction on the culture they’re immersed within. How to create the conditions, for themselves, that they need to evolve within.
That, no doubt, will be the subject of many a subsequent conversation, and I hope you’ll be part of that.
Cheers!
People who think China’s saving rate is a result of government policy and that the gov. could boost consumption to American levels must believe that Chinese people are just Americans who speak funny instead of being a foreign culture. Saving for a rainy day is ingrained into the Chinese psyche and no amount of government policy is going to make the average Chinese person live paycheck to paycheck.
What is the purpose of boosting consumption to American levels when those levels are completely irrational?
In fact, that it what China and other emerging economy leaders said that is what their people deserve: first world lifestyles. This is apropos climate change, that just because we polluted and wrecked the world to get where we are does not mean that they should be denied our levels of comfort to protect the planet.
Plus as the comment from Yellen demonstrated, that “consumption” would include advanced economy social safety nets.
One could equally argue that the low savings rate in US is also the product of government policy–which I think is more true than not. How much of US capital comes from domestic sources, especially from the savings by the “masses” anyways? We don’t think (American) people’s savings have value, while their spending (esp from debts) makes profits.
Thanks for the thought-provoking post.
To Yves: Temin is a good example, but certainly not alone in his view that the reintroduction of the gold standard led to the depression. Barry Eichengreen and Nick Crafts, among others, also hold/held this view.
Other than that, capital controls in the US strikes me as profoundly stupid idea. After all, the Bretton Woods capital controls 1945-1974 ultimately gave us the eurodollar market and I am sure markets would find a lot more creative workarounds today with unintended consequences for the US.
Via Helleiner whom I referred to above, Bretton Woods did not implement a capital control regime that would allow counties to, for example, lower interest rates to encourage borrowing and investment without having to worry about capital flight to higher interest rate countries. The bankers won big. Can all that be revisited? I dunno.
A somewhat related thread from Philip Pilkington on recent sell off of Treasuries by China as they shift more reserves to gold:
https://twitter.com/philippilk/status/1792111533662601531
“1/ Here is a thread on why recent record sales by the Chinese of US Treasuries might be one of the first signs of a major fiscal crisis in the US. There is a lot of confusion about how this would work so let’s go through it step by step
*Sigh*
I addressed that yesterday in comments. Pilkington has allowed his multipolarity boosterism to get in the way of being the good economist he once was.
First and foremost, the US will not have a fiscal crisis. We do not need to issue bonds to deficit spend. Look at the $21 trillion the Pentagon spent over the decades that no one can account for. A significant amount of that is a black budget beyond the official black budget. We never worried about where the money for the next bombing run in Iraq was coming from.
Admittedly , we could voluntarily default as Russia did in the later 1990s. Or net spend to the degree that we have a persistent high rate of inflation.
Most investors who bought high coupon bonds in the later 1970s/early 1980s inflation held them to maturity. That is likely to be true for those who bought them recently, whether from China or other sellers.
Second, as Brad Setser is the expert on actual Treasury bond buying and selling. He has repeatedly pointed out China buys and sells a lot out of London and those are recorded as UK, not China, transactions. Pilkington does not acknowledge that his data might not be accurate.
In the same vein, Gabriel Zucman at Berkeley did meticulous analysis of bank assets and liabilities all over the world and concluded about 8% of bank assets are missing, which means in tax secrecy destinations. That same analysis says capital flows into the US are overstated and so our actual current account deficit is markedly lower when corrected. No one has disputed Zucman’s analysis.
Third, the last thing China wants is for the renminbi to appreciate. That would hurt its export position, most of all versus the US. It has remained low versus the dollar despite China selling dollars via selling Treasuries.
If China and Russia don’t invest their trade surplus in US treasuries, that would limit the US ability to deficit spend without triggering inflation.
I agree with Lighthizer, but it seems an unlikely way for the empire to evolve. He could just as well be saying that the tribute is making Rome weak. True, but unlikely to sway the opinion of the oligarchs.
As we say in Maine, you can’t get there from here.
Sadly, GW Bush II let the cat out of the bag 20+ years ago… “we don’t do nation-building.”
Us surfs live in those nations and the elite… well they live where they want and if they build anything it’s empires. The individual “states” in the USA are nothing more than vassal states to this western elite empire.
All the renewed America first talk is BS. It’s vote getting talk because lots of America does need nation building which means a real plan. AND that type of plan is probably contra the desires of the elite so it’s not really on the table.
Don’t get me wrong I am all for rebuilding America, but I totally agree with the recent comment by Yves or Lambert or someone… ‘Industrial policy is not compatible with neo-liberalism’.
The capital controls will not be imposed to discourage capital moving *to* the USA. They will be imposed to stop capital leaving the USA.
The “West” is circling the wagons, closing the borders, retreating into itself to run a high pressure economy in its diminishing economic space. The peripheral vassals (Hi, Europe!) are being fed into the furnace first to keep things going but eventually the USA will run out of foreign furniture to burn and will start to burn its own. Well before this point, the smart money will leave and re-join the free world. How long before the likes of Berkshire Hathaway redomicile to Singapore? Perhaps they are already moving their surpluses into investments in non-aligned countries….
There is a great deal of ruin in a nation, so this will not happen overnight. It will happen over decades, like Britain’s retreat from reserve currency and then from East of Suez and then from Africa and then from manufacturing (Concorde was the last hurrah), until only the City remained. Will the last financier please turn out the lights?
Anyway, the capital controls will be to keep capital in, not out. Seizing Russian assets is the first step down the road to Western autarchy….
Well done, Revenant. I agree that, if the U.S. was run in its own national interests, that keeping the capital within the U.S. would be the likely move.
But…do you think the U.S. is run in the national interest? It seems to me it’s run in the oligarch’s interests, and their interests would be to move that capital to where it’ll do them the most good.
If it is not run in the national interest, those in whose interests it is run would thrive in the short term at the expense of the majority, but in the long run everyone is losing and at that moment there will be no capital to move. But in the long run we are all dead!
I am kinda confused about capital control especially if it pertains to the US Dollar because there’s a LOT of it outside the US vis a vis the Eurodollar system. Isn’t it true that by virtue of the later, banks overseas can create US Dollars?
Agree. Billionaires will be able to get their money out, invest in growing economies, evade taxes as usual, etc.
Everyone else will be bag holders for the dying empire and its increasingly alienating tech monopolies.
free trade can never work. its all voluntary, and every nation will look out for themselves, unless the country is run by traitors.
there is no fix, because its all voluntary. this mess is a direct results of bill clintons policies. he tried to make free trade work by turning over sovereign decisions over to corporate control, and the u.s.’s military might.
we see today how well that’s worked.
there will be massive inflation no matter what we do. we do not face what the new dealers faced then, because we still had the skilled labor and factories.
today its all gone, into the bonfire of what a corrupt idiot created.
as far as the article of stein and hudson the other day. the interviewer said the tariffs will cause immense inflation and stymie going green.
i am sure she is ignoring the inflation that we have today, and its building, and the lack of the ability of the average person to even afford cheap solar from china. besidse no infrastructure to recharge electric cars.
to fix the infrastructure, would require we even have to buy more from offshore.
there is really no way out of this, we either reverse everything the corrupt idiot bill clinton did, or sink further into third world status.
one way is to eventually rebuild slowly and painfully. the other way is to end up like the war lord era in china.
The US has previously threatened that the US would charge China with currency manipulation. And then always backed off. But let’s play pretend. Let’s pretend the US actually did charge China with currency manipulation. What policy measures are invoked as a consequence of that? Is there some prescription like the capital controls that Lighthizer is recommending?
Whatever the prescription, let’s assumed it work. The ideal being that China demand for US currency would fluctuate based on their demand for US goods and services. If China chooses not to grow their internal demand for US goods and services, then so be it. But then the consequence is that the US dollar gets weaker and correspondingly the Yuan gets stronger. And trade would reduce as Chinese goods get more expensive. US imports from China in dollar terms would shrink to what the Chinese currently import in dollar terms from the US. More or less. And it would be balanced.
But the US doesn’t want that end game. At least not the US multi-nationals that live at the top of the global supply chain. They need the imports to the US to stay at par and if anything keep on increasing.
So they need some alternative: have China increase its imports – that’s the ticket. And it is, if China wanted to play nice. E.g. 17th century England encouraged their local population to drink more iberian wine so that they could sustain their exports to Spain and Portugal in fine woolen products. They didn’t want their exports to go down to the level of what they were currently importing from Spain and Portugal.
That said, England could have kept the game going if they simply manipulated their currency. They could have bought Spanish reals on the market and used that to buy assets in Spain. It would suppress the value of the pound compared to the real and Spain could keep buying fine woolen products from England at par. And the business as usual would continue.
This is in effect what the Chinese have been doing since the early 80s. They learned from Japan. There was a period of time when it was egregiously being manipulated, when the central bank of China was printing yuan to buy US dollars from their exporters to peg the yuan. Now they have enough internal demand for the US dollar that the PBoC doesn’t need to engage in that anymore. Still that internal demand is only partly from importers and mostly from banks and SOEs buying assets in the US.
And the US multi-nationals at the top of the value chain are happy with this status quo. If only China would not encroach on the top of the value chain and actually steal biz away from those mutli-nationals directly. That’s the prescriptions they want to see – to keep China in its box lower in the value chain. The Biden tariffs on EV vehicles fits the bill exactly.
Otherwise, the US multi-nationals are all for the US trying to get China to increase consumption. “Good luck with that, let us know how that turns out” I can hear them saying.
But anything else, they’re going to fight tooth and nail. The last thing they want is to see is the value of the yuan truly fluctuate with respect to the US dollar. It screws up the whole business model for outsourcing the global supply chain. If they can’t control that (or China can’t control that) then might as well control what you can and reshore. At least they can still control the price of labor in the US.
Neoliberalism and globalization were ways to legitimate the offshoring of jobs to low-wage countries. Companies and investors made tons of money by capturing the cost savings. They also put the cost of slower economic growth, rising inequality, an a growing national debt onto the average American. Undoing them is going to be like taking dye out of water after mixing it in. The one thing we could count on is greater inflation and higher interest rates.
Unless capital controls are integrated in place with a larger industrial policy, they will fail.
Capital controls of the sort proposed are not a silver bullet and could invite retaliation. When done well, they can certainly help an industrial policy, but expecting them to work miracles on their own is not going to work.
The ruling elite have been destroyed by their own greed. They outsourced to China to begin with to break the backs of the New Deal and to make themselves richer. Needless to say, one thing they did not expect was that the Chinese CPC would outsmart them and use their greed to accelerate the development of China.
The US would struggle to shake off its reliance on China. In many fields of global manufacturing, there are simply no alternatives that can produce – sometimes at any price.
Towards the last paragraph, there is some discussion of this, but it will get worse with time. China is moving up into high tech goods. At some point, we will see China be the technology leader in most fields – it will mean that Chinese goods aren’t just the price leader, but also the most advanced goods of many industries in the world.
Building a domestic manufacturing sector (or perhaps given the way NAFTA and introducing China into the WTO occurred), I should say rebuilding a manufacturing sector, is an incredibly difficult task. It would take decades to do so. This is not easy – that’s why it takes decades for much less wealthy nations to develop into industrial economies.
There seems to be an attempt at “friendshoring”, but in practice, many of the nations are neutral (such as Mexico0 or simply serve as assembly points for made in China component.s
The US economy is simply too neoliberalized. It’s oriented towards finance. In many cases, the skilled trades no longer exist in the quantities needed. There are shortages of engineers and other specialized production staff. Within the ruling class, there isn’t the technical skill on how to build an economy based on manufacturing and to do an industrial policy properly. They have been simply too finance oriented. We can see this with how they US has approached EVs in the face of Chinese competition and the CHIPS Act.
Other issues remain. For example, Silicon Valley as of late has been engaging in a lot of stock buybacks. There’s no doubt that any US manufacturing would do the same. Another might be if Chinese goods are restricted, then the US corporations will engage in greedflation and rent seeking rather than in capital investment and R&D.
Any serious industrialization policy would have to involve ending neoliberalism. The Western rich are too “short term” greedy to do that. I can’t see this whole industrial policy plan happening barring an economic disaster worse than 2008, a major strategic defeat or a collapse on the scale of the breakup of the USSR.
Capital controls, tariffs? These so-called “experts” are blinded by their own egos…No mass industrial capabilities can ever return to the US without systemic change in health care, legal and the educational systems…and because of the immense costs and difficulties imposed by the backward US systems, no venture capital will invest in manufacturing…Universal health care, massive changes in the tort system (try to close half the law schools – but that cant happen), free or subsidized techincal education required…
Yes, I’ll believe they want to rebuild the domestic economy when they stop trying to load the entire social welfare state onto the employer balance sheet.
That needs addressing whether the employers are of US or international origin. (And, personally, I don’t care where they originate).
I’m not sure if surplus counties ever amend their ways though. Keep in mind Germany continues to run large trade surpluses to this day and its politicians are once again going about flogging austerity as a necessary cure-all.
I wonder if Lightheizer means other countries beside the obvious target, China.
The country I live in, the Netherlands, has been running large trade surpluses since the early 1980s, while sending large pension savings abroad, and so has Germany. That would classify them as “protectionist” in Lightheizer’s view.
I never understood why the Dutch are so fond of running trade surpluses and keeping pension savings outside of the country. Why not just keep the money here where it is, arguably, safer?
They do not understand that lending money to your customers so that they buy your products is self-defeating in the long run, and that a foreign country might devalue, nationalize, default, …
I would love to see the reaction of the Dutch if a new US administration suddenly starts pushing capital controls.