Noah Smith, and a few readers, have asked for a summary post about the errors of Michael Pettis. Since Pettis is now an influential trade thinkers with many of the Trump people, I think it is worth repeating my previous points just a bit.
Here are the errors, perhaps there are more:
He talks about tariffs (FT) as if they are anti-consumption but pro production. But tariffs are anti-production on the whole, at least outside of some well-known cases of increasing returns, and even then the tariffs have to be applied properly. Pettis does not present this very important qualification about increasing returns, and he basically presents an argument that we would expect economics undergraduate majors to reject.
With this talk of trade balances and demand deficits, he repeatedly confuses the short-run with the medium-run and long run. At some point prices adjust and the demand shortfalls go away. I never see him acknowledge price adjustments as creating differences between short-run and long-run effects in this context. Of course this distinction between long-run and short-run effects is fundamental to macroeconomics. If Pettis wishes to disagree, fine, but he has to spell out his argument.
He has a bizarre notion and theory of demand, for instance claiming during America’s recent high inflation that demand was weak in the United States.
He sees the degree of wage suppression or “labor exploitation” in a country (his concept not mine) as a central determinant of export success. That does not accord with the evidence, and yes this question has been studied extensively.
All of these are basic and fundamental errors, and furthermore they matter for most of Pettis’s main conclusions, including his policy conclusions. So I will say it again — he has become a major media figure, but Michael Pettis does not understand basic international economics.
You could add to that some more complicated shortcomings, such as his analysis of tariffs is bad (see Noah’s piece), or that there is not (so far?) any coherent model that will get you to his conclusions. Admittedly those are more complex issues, what I list above are not.
A habit he has is to categorize and dismiss economists as a whole. For instance, as Noah cites, Pettis wrote, I think responding to me:
If you want to understand the effects of trade intervention, its ok to ask economic historians, but never ask economists. That’s because their answer will almost certainly reflect little more than their ideological position…It was direct and indirect tariffs that in 10 years transformed China’s EV production from being well behind that of the US and the EU to becoming the largest and most efficient in the world…Tariffs may not be an especially efficient way for industrial policy to force this rebalancing from consumption to production, but it has a long history of doing so, and it is either very ignorant or very dishonest of economists not to recognize the ways in which they work…To oppose all tariffs on principle shows just how ideologically hysterical the discussion of trade is among mainstream economists.
Obviously that is not responding on the points of substance at all. In general, you should be suspicious when you see broadside attacks on economists in a debate, even if some of the embedded criticisms might be true.
Note that Pettis’s fundamentally correct point, namely that China subsidizes investment too much, predates him and can be made without all the accompanying errors. The notion that party-run economic systems oversubsidize investment is decades old, and usually right.
Addendum: After I wrote this post, Paul Krugman came out with a new Substack, excerpt: “But I decided to talk about a new view of trade imbalances, associated especially with Michael Pettis, that has been gaining some traction lately. It’s also mostly wrong…”
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