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…

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."

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.

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."

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.

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.

1/10
Important Benn Steil article on globalization, free trade, and the cost of underwriting both. He cites Wendell Willkie in 1944 as "recognizing how perilous it would be to integrate market economies with state-directed ones."
@ProSyn @BennSteil
prosyn.org/LkdDyx7 2/10
"When global prices fail to reflect supply-and-demand dynamics," Steil cites Willkie as arguing, "they distort production and trade flows, killing off more efficient enterprises, fueling imbalances, and breeding resentment."

1/7
China's fixed-asset investment declined 1.7% year on year in the first 10 months of 2025, more than twice the expected rate of decline, and well above the 0.5% decline during the first nine months of the year.

english.news.cn/20251114/2bcf2… 2/7
Excluding a 14.7% decline in the property sector, investment rose by 1.7% during the first ten months of 2025, led by a 2.7% rise in manufacturing investment.

As I see it, the weakness in investment growth suggests that the fight against "involution" is working so far.

1/5
Good Setser piece on rising global imbalances. Thanks in part to his work, central bankers and mainstream economists are slowly beginning to acknowledge that rising global imbalances can be a problem for the global economy.

Eventually they all will.
@Brad_Setser
cfr.org/blog/chinas-ma… 2/5
Most mainstream economists know that every country's internal imbalances are always perfectly consistent with its external imbalances, just as its external imbalances are always perfectly consistent with the external imbalances of its trade partners.

1/4
Caixin: "A significant increase in the household consumption ratio hinges on Beijing’s ability to solve a chronic problem of low household spending, a challenge rooted in sluggish income growth, widening inequality and inadequate public services."

caixinglobal.com/2025-11-13/ana… 2/4
It is by now widely recognized among academics and policy advisors that China's weak consumption is a function of a low household income share of GDP, and that the solution is to implement "demand-side measures to boost employment, income and confidence."

1/5
FT: “German Chancellor Friedrich Merz has backed protectionist measures to shield the country’s ailing steel industry from cheap Chinese imports, in a striking departure from the country’s traditional commitment to free trade.”
via @ftft.com/content/a02d77… 2/5
I’d argue that what Germany traditionally displayed wasn’t a commitment to free trade so much as the standard trade-surplus country’s insistence that their trade partners don’t intervene against their abilities to run trade surpluses.

1/10
NYT: "China has offset the decline from America with breathtaking speed. Shipments to other parts of the world have surged this year, demonstrating that China’s manufacturing dominance will not be easily slowed."
nytimes.com/interactive/20… 2/10
"That’s because." the New York Times explains, "China was prepared. It has been seeking out new customers for years, and its massive manufacturing investment allows it to sell goods at low prices."

This explanation shows just how confused analysts remain about trade.

1/4
Interesting article by Yanmei Xie: "Why does involution defy repeated attempts to purge it?" she asks. "Because the foundational structure of China’s political economy breeds it."
ft.com/content/e768df… 2/4
She's absolutely right. "Involution:" is just the latest name for a decades-old problem arising from a development model built around the need to keep increasing investment in capacity, even when capacity is already excessive.
carnegieendowment.org/posts/2025/08/…

1/8
Yale's Stephen Roach says China must raise the household consumption share of its GDP by ten percentage points over the next decade. In August PKU economics professor Lu Feng, said that China should raise it by 5 to 10 percentage points over the..
bloomberg.com/news/articles/… 2/8
next 5 to 10 years, while Peng Sen, chairman of the China Society of Economic Reform, said it should raise it by more than 10 percentage points.

A 10-percentage-point increase, by the way, would still leave China with among the lowest consumption shares of any major economy.

1/7
The NYT on US (and probably EU) over-reliance on China for the chemicals involved in manufacturing drugs. They argue that it is the combination of lower unit labor costs and a greater tolerance for environmental degradation that makes the difference.
nytimes.com/2025/10/15/hea… 2/7
If this isn't too much of an oversimplification, a rational trade policy could easily address both issues. The purpose of such a policy would not be to protect specific sectors except to the extent that they have national security implications.

1/9
Bloomberg: "There’s an upside for the entire global economy from the massive, state-led investments China has made over the years: The abundant supply of cheaper Chinese vessels has helped push down freight rates and keep cargo moving around the world."
bloomberg.com/search?query=H… 2/9
This type of incremental thinking explains why our understanding of trade has been so muddled for decades. To assume that the story stops at cheaper freight rates is to ignore almost everything important about this story.

1/9
The FT's Tej Parikh makes a very important point here. China's industrial policies have involved among the greatest support and subsidies for technology in history, and we've clearly seen the benefits when it comes to advanced technology.
ft.com/content/b44458… 2/9
But in the roughly two decades of their implementation, not only have we not seen a corresponding rise in productivity, but in fact China's fall in productivity has been extremely steep, and has occurred at a much, much lower level of development than it had occurred...

1/9
China's GDP growth for the third quarter came in at an expected 4.8% year on year, with the first three quarters growing 5.2%. It seems China is very much in line to report GDP growth for 2025 at – or just under – the GDP growth target of 5%.
english.news.cn/20251020/f556e… 2/9
This shouldn't surprise. As I wrote earlier this year, we all know that China's GDP growth target is not a prediction. It is politically determined, and by the end of the year China will have achieved it by directing however much credit is needed.
carnegieendowment.org/posts/2025/05/…

1/9
Bloomberg's Chris Anstey notes that "the consumer — not the producer — has been the main focus of officials in Washington. By contrast, China’s leadership, drawing on Marxist tradition, of course focused on production."
@AnsteyEco
bloomberg.com/news/newslette… 2/9
There is nothing wrong, of course, with maximizing consumption. The whole point of economic development, after all, should be to improve total welfare. This was one of Adam Smith's main points.

1/9
China Daily says that the next Five-Year Plan might see a change in the way local governments collect taxes, shifting collection from the site of production to the site of consumption.
chinadaily.com.cn/a/202510/17/WS… 2/9
This will presumably change local-government incentives from encouraging more production to encouraging more consumption. According to China Daily, "Local governments, eager for economic growth and...

1/5
Chinese debt continues to rise quickly, with total social financing rising by 8.7% year on year in September (more than twice GDP growth) to RMB 437.08 trillion. This is equal to nearly 312% of 2025's expected GDP (versus 303% at the end of 2024).
caixinglobal.com/2025-10-16/chi… 2/5
In the first nine months of the year, TSF rose RMB 30.09 trillion. If you assume interest on the stock of debt at an average of 2.5%, this implies that it required an increase in debt in the past year equal to 17% of GDP in order to boost nominal GDP by around 4%.