Robert Armstrong at the FT gives him a chance to respond to Noah and Krugman and me, here are links to the originals:
[Armstrong] Cowen argues that intervention in the short term, as you have proposed, is counterproductive because demand shortfalls will resolve themselves as price adjustments. What is your response?
Pettis: While I understand Cowen’s reliance on the “Econ 101” model, which assumes that prices always adjust to balance supply and demand, this framework isn’t relevant in the context of current global economic conditions. Prices have not adjusted in the US or many other countries over several decades. Take China as an example, where price deflation has persisted and consumption has remained exceedingly low for years. To manage the gap between production and consumption, China has had to resort to extraordinarily high levels of investment and, as the cost of this wasteful investment has recently shown up in the form of the fastest- growing debt burden in history, to the highest trade surpluses in history.
So why hasn’t the demand shortfall “gone away”, as Cowen’s model would predict? The answer lies in China’s trade and industrial policies, which enhance global manufacturing competitiveness at the expense of domestic consumption. These policies include an undervalued currency, repressed interest rates, highly directed credit, and, yes, tariffs. These policies, together with strict controls on trade and even stricter controls on the capital account, have prevented any natural adjustment from taking place. This matters, because a country’s internal imbalances created by domestic policies lead automatically to its external imbalances which, in turn, must be reflected in the external imbalances of the trade and investment partners of that country. That is how internal policies in one country will lead automatically to changes in the internal conditions in other countries. Cowen’s models may well be internally consistent, but they are based on simplified assumptions that clearly fail to describe the real-world factors that shape trade imbalances.
I’ll say a few points in response:
1. Pettis says “While I understand Cowen’s reliance on the “Econ 101” model, which assumes that prices always adjust to balance supply and demand, this framework isn’t relevant in the context of current global economic conditions. Prices have not adjusted in the US or many other countries over several decades.” The first sentence there is just the usual anti-economics slur. In fact the (numerous) models I have in mind are workhorses from PhD level international macroeconomics, not from “Econ 101.” And can he really mean “Prices have not adjusted in the US or many other countries over several decades”? Run that one through o1 pro if you have any doubts, it is about as flat out wrong as a proposition about economics can get.
2. The rest of the answer just repeats his usual about China. It does not even attempt to answer why, in the medium-term or long-term, as prices adjust, demand imbalances in the United States do not go away.
3. In another part of the interview, which I will not reproduce for reasons of copyright, Pettis responds to my criticism of his claim that America had weak [sic] demand during 2022-2023. His answer is to focus on this: “Contrary to Cowen’s claim, US business investment is not constrained by a lack of American savings.” That is not something I ever said or wrote, it is something I do not believe, and it completely fails to answer my rather obviously correct criticism of Pettis on U.S. demand.
4. I will let Noah handle the rebuttals to him, if he so chooses. I will however mark his response to Krugman and Smith, on the counterproductive nature of tariffs on intermediate goods, as just abysmally bad and off point. This is one of the most obtuse rebuttals I have read, ever.
5. If you are curious, here is Maurice Obstfeld, a Nobel-quality international economist, on Pettis and related issues.
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