Chapter 1 of [amazon_link id=”0691158681″ target=”_blank” ]The Great Rebalancing: Trade, Conflict and the Perilous Road Ahead for the World Economy[/amazon_link] by Michael Pettis is available to read for free online at the Princeton University Press website.
It isn’t often that I bill anything as a must-read, but this really is, for anybody who wants to understand what has been happening in the world economy in the past decades, the causes and consequences of global imbalances. As another recent comment on my previous post on this book puts it, this book is a game changer. Click through and read the sample chapter!
[amazon_image id=”0691158681″ link=”true” target=”_blank” size=”medium” ]The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy[/amazon_image]
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Thank you for this!
I bought this book, partly because you recommended it, but I must say that untill now (I read the first two chapters and the chapter about the eurozone) I am not convinced that it’s a game changer.
First of all; he doesn’t provide detailed data for the phenomena he writes about and there are no graphs in the book, so often you have to take him on his word. Compare this for example with Martin Wolf’s Fixing global finance, which has the same subject matter and is far superior in this regard. Every argument Wolf provides is underpinned by detailed data and graphs (which also makes it easier for the reader to form his own opinion about the issue).
Second, there are some places where his reasoning is not very clear. Take for example the second chapter where uses the example of Fredonia to explain the effect of tariffs and other taxes and the savings rate and the trade balance. Pettis writes that when total domestic consumption declines and if total production stays the same, the savings rate will rise. While this is certainly correct, that total production has to stay the same is not a necessary condition (maybe he also doesn’t think so but he doesn’t make it clear). Total production can decline and the savings rate can rise at the same time. This can be shown with the simple equation GDP= C + I + X – M. Assume that C=7, I=3, X=2 and M= 3, so GDP or Y is 9=7+3+2-3. In this case savings (Y-C) are 2, but investment is 3, and the trade deficit is 1. Now the government wants to decrease the trade deficit and increase savings, and imposes tariffs or a consumption tax. Suppose that this (through the mechanism Mr. Pettis describes) does not only decrease imports but also the consumption of goods that are produced domestically. Suppose for example that C decreases with 2 units: one for imports (M) and one for domestically produced goods (and X and I don´t change). In that case Y will be 8= 5+3+2-2. Notice that however total production Y has declined with one unit, the savings rate rises from 2 to 3, as 8-5=3 and the trade deficit = 0. But it can also be that I misunderstand his argument. In the first chapter Pettis explains that he wanted to keep the book accessible and that’s why he refrains from using mathematics. But in this case some simple equations would be useful so readers can more easily following his reasoning.
The chapter about the eurozone is interesting but doesn’t add anything to analyses that have been made before by, among others, Paul Krugman and Martin Wolf. So for me, it is not really a game changer, yet. But I will finish the book and I hope that by that time I’ve had to change my mind.
Well, I do hope so. While Martin Wolf and others such as Stephen King have indeed written very well about the global imbalances question, what I particularly liked about this book was the link between international imbalances and domestic policies that are never connected with the international consequences. Pettis makes that point clearly enough for policy makers to understand it. I’d guess the absence of charts etc and the over-simplified examples stem from a wish for the widest possible readership. Tables and charts and equations do just turn off a lot of people…
Anyway, let us know what you think when you finish.
Thank you.