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Michael Pettis

@michaelxpettis

Nov 24

https://x.com/michaelxpettis/status/1986754737551577245

1/4
Increasing the share of total wealth retained by the rich – for example by cutting their taxes – will benefit the poor, according to trickle-down theory. By shifting income from those who consume a larger share of their income to those who consume a lower share (and so save more), it increases total saving, which in turn increases investment (in a closed economy, saving is always equal to investment). Because more (productive) investment leads to faster growth, the higher saving of the rich ultimately benefit the poor by increasing jobs and wages.

But this is no more necessarily true than it is necessarily false. In fact trickle-down theory can work under certain conditions and fail under others. The point that is often skipped over by both proponents and opponents of trickle down is that while policies that transfer income to the rich do indeed increase the saving of the rich, the key is whether they also increase total saving and total investment. It turns out that this depends on underlying conditions in the economy.

In a country with very high investment needs and insufficient domestic saving to fund them all, rising income inequality can indeed benefit the poor by increasing investment – if there are mechanisms that direct the higher saving of the rich into productive investment. In that case, higher GDP growth rates can more than make up for the declining share of GDP retained by ordinary households.

https://x.com/michaelxpettis/status/1986754737551577245

2/4
This is basically what happened in China in the 1990s and 2000s. In that case the share of GDP retained by ordinary Chinese household dropped at some of the fastest rates in history, as a very large share of their income was transferred to the rich, to businesses and to the government (all of whom consume a much lower share of their income than do ordinary households), leaving ordinary Chinese households with the lowest share of GDP perhaps ever recorded.

But were ordinary Chinese worse off during this period? Clearly not. Even as their share of GDP dropped sharply, their overall income rose at a very high 6-8% every year. It was able to do this because the corresponding high investment growth led to Chinese GDP growth rates of 10-12%.

But this is no longer the case in China. In fact for the past decade Beijing has been struggling to redistribute income to ordinary households, precisely in order to reduce unwanted saving and increase much needed consumption. Weak consumption is, now, creating a drag in the economy by limiting the need for investment.
carnegieendowment.org/china-financia…

3/4
It turns out the same is probably true for the US and the EU.

In advanced economies, the constraint on investment is not a lack of saving but rather a lack of demand. Not only do businesses in the US sit on huge hoards of cash which they are more likely to use to buy stocks than to increase investment, but banks and funds are eager to lend to any business with decent investment prospects. This was confirmed by a recent ECB study in which it found that business investment in the EU is very weak, and it is mainly “a weak demand outlook”, followed closely by “low profitability”, that constrains businesses from increasing investment in domestic production.

In that case, how could a transfer of income from ordinary households to rich households boost investment? It is true that such a transfer would boost the saving of the rich, but by reducing total consumption (the rich consume a smaller share of their income than do ordinary people) it would actually reduce demand and profitability further. If it is weak demand and low profitability that constrains investment in advanced economies, why would even weaker demand and lower profitability encourage more investment?

It won't. Instead something else must happen. Either the weaker demand causes businesses to close down production facilities and fire workers (this was what FDR's Fed Chairman Marriner Eccles inveighed against in the 1930s), or, in order to prevent unemployment from rising and to replace the demand lost from higher wealth concentration, the central bank accommodates an increase in household debt or the government increases the fiscal deficit.

ecb.europa.eu/press/economic….

Read 4 tweets

Michael Pettis

@michaelxpettis

Nov 23

1/5
Caixin: "By the end of September, Chinese mills had produced 746 million tons of crude steel, down 2.9% from a year earlier. But domestic consumption slumped 5.7% to just under 649 million tons, a much steeper decline."
caixinglobal.com/2025-11-21/in-…

2/5
Caixin continues: "The imbalance sent a clear message: the core problem isn’t output. It’s overcapacity, with too few buyers at home to absorb what’s being produced. To fill the widening gap, Chinese steelmakers are aggressively pivoting to export markets."

3/5
Caixin goes on to note that the average price of Chinese steel exports dropped 19.3% in 2024, and another 9.5%. so far this year. It cites a steel producer as saying: “Domestic demand is weak, foreign markets are better, so we’re all focused on expanding abroad.”

Read 5 tweets

Michael Pettis

@michaelxpettis

Nov 19

https://twitter.com/ZhangTaisu/status/1990883427218862491

1/13
It is helpful to think about Taisu Zhang's list of the EU's perceived weaknesses in the context of global trade, and especially in the context of a global trading system that exhibits the beggar-thy-neighbor characteristics that Joan Robinson warned about.

https://twitter.com/ZhangTaisu/status/1990883427218862491

2/13
To take the first, the EU's lack of political unity means that it cannot respond unilaterally in a world in which its major trading partners (China, Japan, India and, increasingly, the US) are determined to control their external accounts and are able unilaterally to do so.

3/13
A country's ability control its external accounts affects the extent to which it can control its internal imbalances while externalizing their costs, along with the structure of its economy and its mix of manufacturing and services.
foreignaffairs.com/united-states/…

Read 13 tweets

Michael Pettis

@michaelxpettis

Nov 19

1/8
SCMP: "China should add a quantitative target for consumption growth as part of its long-term modernisation goals to help sustain growth momentum as the country’s population declines, a prominent Chinese economist said."
via @scmpnewssc.mp/qmm5m?utm_sour…

2/8
The article continues: "Currently, household consumption accounts for about 39% of China’s GDP, according to Cai Fang, an academician at CASS. Over the next decade it should rise to around 61% as China strives to become a “moderately-developed” country by 2035."

3/8
Most prominent economists in China have already called for increases of anywhere from 5 to 10 percentage points of GDP, and while Cai is right that household consumption of 61% of GDP would indeed make China a more "normal" country, I wonder if he has done the math.

Read 8 tweets

Michael Pettis

@michaelxpettis

Nov 18

1/8
NYT: "The biggest recipient of Chinese financing over the past two decades has been the United States, where Chinese banks have extended $200 billion in financial support to American companies and projects."
nytimes.com/2025/11/18/bus…

2/8
This shouldn't surprise us, even if it seems to go against what we've been reading in headlines in recent years. China is the largest net export of capital in the world, which is just the flip side of its running the biggest trade surpluses in the world.

3/8
While we often read about Chinese capital exports to the developing world, in fact these flows probably peaked in 2015-16, when problems in Venezuela taught Beijing just how risky this can be. This meant surpluses had to be recycled mostly to the advanced economies.

Read 8 tweets

Michael Pettis

@michaelxpettis

Nov 18

1/8
Good FT piece on the increasing difficulty economists have in understanding, correlating and reconciling Chinese economic statistics. This leads to concerns among many analysts that GDP may be overstated, and fairly substantially.
ft.com/content/5b9e74…

2/8
For the FT (and for many others), the biggest puzzle is over how GDP growth can stay constant at 5% even as investment (which plays a bigger role in driving Chinese GDP growth than in any other country in history) is reportedly declining.

4/8
Part of the answer may be that GDP growth has in fact declined, and rapidly, over 2025, albeit from extremely high levels. Another part of the answer may be the surging trade surplus, which is extraordinarily high for such a large economy, and clearly not sustainable.

Read 7 tweets

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