The mistakes of Michael Pettis
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…”
Sunday assorted links
1. Cato ad for policy analyst in human progress and economics. And for psychology.
2. Joe Boyd episode Spotify playlist, put together by a CWT listener.
3. Lots more black holes than we had thought? And more here.
4. DeepSeek okie-dokie: “All I know is we keep pushing forward to make open-source AGI a reality for everyone.” I believe them, the question is what counter-move the CCP will make now.
5. A much longer follow-up post on why northern England is poor (still no mention of drunks?).
Do Migrants Pay Their Way? A Net Fiscal Analysis for Germany
This study quantifies the direct average net fiscal impact (ANFI) of migration in Germany, taking into account both indirect taxes and in-kind benefits such as health and education spending. Using a status quo approach with data from the German Socio-Economic Panel (SOEP) for 2018 and microsimulation techniques to impute both indirect taxes and in-kind benefits, our results show that migrants, especially first-generation migrants, have a more favorable net fiscal impact on average compared to natives. However, we demonstrate that this result is mainly driven by the favourable age structure of migrants. When controlling for demographic differences between these groups, we show that second-generation migrants contribute very similarly to natives to the German welfare state. Nevertheless, both natives and second-generation migrants, respectively, contribute more than first-generation migrants. These differences persist even when we do not account for indirect taxes and benefits-in-kind.
That is from a recent paper by Hend Sallam and Michael Christl. One interesting point in the paper is that native Germans have a net negative fiscal impact — is that really consistent with blaming the immigrants for the major problems?
Via the excellent Samir Varma.
*On the Calculation of Volume, I and II*
Thoee two novels by Solvej Balle, a Danish author, are now available in English. Conceptually, they are close to time travel novels (I should not tell you the actual nature of the twist), but with more literary value than you might be expecting.
Every now and then a new book comes along that is conceptual, fascinating, fun to read, good on human psychology, and in literary terms very well done. The Balle books qualify there. Each is also quite short, though the second half of each volume is better than the first, so there is a return to patience (to be clear, the first halves, or maybe thirds, are fine, but the true points are revealed only with some time).
There are some implicit economic and even crypto themes in the work, though I doubt if the author is aware of them.
So I recommend these, and will not go near potential spoilers.
*In Praise of Floods*, James C. Scott does Uncle Boonmee?
That is the new James C. Scott book, from Yale University Press. It focuses on Burma [sic], and I found this to be the most typical and illustrative sentence:
Several of the commentators evaluating this book in manuscript noticed that the section of river spirits (nats) and the much larger section describing the eco zones, hydrology of the Ayeyarwady, and the mapping of major human interventions represent something of a rupture from the preceding narrative on rivers.
Also:
One central purpose of this book is not only to recognize the animated liveliness of the river and its tributaries, but also to give voice to all the flora and fauna whose lifeworld centers around the river.
One section of the book is narrated from the first-person perspective of a river dolphin.
This is an essential book for understanding Scott. And from the preface we read:
The book before you contains more disjunctions than I would have preferred.
Scott was a great man and scholar, and this book reminds you that many such people are really quite weird, in the good sense of course. You can pre-order it here.
Saturday assorted links
1. Teen fertility in sub-Saharan Africa.
2. Does Chile have the fastest fertility collapse?
3. New book sorting algorithm almost reaches perfection.
4. How did the organization of DOGE end up? An important piece. As I have been predicting, DOGE will shrink government (slow its rate of growth?) by only a modest amount, if at all.
5. Ten-minute Rebekka Grun talk on the economics of dating and marriage.
AI Improves Student Learning and Engagement
In our paper on online education, Tyler and I wrote:
One model of a future course is a super-textbook: lectures, exercises, quizzes, and grading all available on a tablet with artificial intelligence routines guiding students to lectures and exercises designed to address that student’s deficits and with human intelligence—tutors—on call on an as-needed basis, possibly for extra marginal fees.
We were wrong only in thinking that human tutors would be wanted and needed. Toda,y it is clear that AI tutors will be available 24-7 for all students. Online education was already at least as good on average as in-class education for large classes like Physics and Economics 101 and much cheaper. Combined with AI tutors who can offer individualized instruction and encouragement (!) the online-AI model looks better.
A study at Harvard compared physics students who worked with an AI tutor against a human-led, active learning classroom. Note that the AI was paired not against boring lectures but against an active learning classroom with an experienced and motivated teacher.
Not only did the AI tutor seem to help students learn more material, the students also self-reported significantly more engagement and motivation to learn when working with AI.
“It was shocking, and super exciting,” Miller said, considering that PS2 is already “very, very well taught.”
“They’ve been doing this for a long time, and there have been many iterations of this specific research-based pedagogy. It’s a very tight operation,” Miller added.
Gender gaps in education and declining marriage rates
Over the past half-century, the share of men enrolled in college has steadily declined relative to women. Today, 1.6 million more women than men attend four-year colleges in the U.S. This trend has not lowered marriage rates for college women, a substantial share of whom have historically married economically stable men without college degrees. Both historical evidence and cross-area comparisons suggest that worsening male outcomes primarily undermine the marriage prospects of non-college women. The gap in marriage rates between college-and non-college women is more than 50% smaller in areas where men have the lowest rates of joblessness and incarceration.
That is from a new paper by Clara Chambers, Benny Goldman, and Joseph Winkelmann. Via the excellent Kevin Lewis.
Why northern England is poor
In at least six Conversations with Tyler, Tyler Cowen asks his interviewee why they think North England is poor. I don’t think he gets good enough answers, which is why I guess he keeps asking.
So here is a better explanation of why North England is poor with a bonus explanation of why so many Britons think much less of Margaret Thatcher’s Premiership than he and his guests do. It is a heavily simplified and selective story, but I think it tells the key parts of how North England fell from being the birthplace of the industrial revolution and among the richest places in the world two centuries ago to being an economy substantially lagging everywhere else in Northern Europe today.
The North’s economic decline is made even clearer when it is compared to two near neighbours and far more prosperous counterfactuals. Scotland and Ireland, who have achieved greater independence within and from the United Kingdom, and whose success is awkwardly ignored and denied by the people responsible for the North’s decline, are today far stronger economies than North England.
I will publish my expansion of these points in detail as soon as I can, but for now I offer this summary,
1. The Norman conquest.
Since at least 1066, England has been ruled from the South East for the benefit of those who rule it and the places where they live and work.
2. Ban on Northern universities.
In the 1600’s, and for two centuries after, England and then Britain’s overwhelmingly and disproportionately Southern Parliament in Westminster rejected North English requests to establish universities in the North. The outsized influence of members representing Oxford and Cambridge and graduates of their universities played a big role in this. The Parliamentarian victory in the English civil war was working on the problem but the Monarchy was restored before Northern universities were established.
3. The industrial revolution.
The lack of universities in North England meant that the industrial revolution was heavily powered by Scottish science and largely occurred at a distance, both geographically and culturally, from London and Westminster. It was this distance that allowed North England to prosper through industry, despite constant effort by British national institutions in South East England to constrain their success. And it was the competition of ideas across that distance that led to great Northern social ideas such as Manchester Liberalism, an end to the Corn Laws and more free trade, professional sports, and a fairer democracy eventually triumphing nationally.
4. Universities were allowed too late.
North English universities, although quickly successful once they existed, were permitted too late (1880 for Manchester). They could not quickly enough achieve a critical mass of high-skill and elite institutions in North England that would help the economy to retain a technological advantage or transition to higher productivity service activities when Britain’s industrial advantage started to decline.
5. Grouping, nationalisation, and privatisation destroyed the North’s institutions.
North England’s strongest local institutions were born of the industrial revolution and included the railways and the municipal corporations. Alongside wealthy local industrialists municipal corporations built and municipalised gas, electricity, and water networks, healthcare, education, and social housing systems and much more. These service and assets were taken out of local control and run overwhelmingly from Westminster as they were grouped, nationalised, and privatised by UK governments of both left and right from the 1920s onward.
6. Thatcher and the end of competition of power.
The process of transferring assets and power from local government to central government or to the private sector (regulated by central government) was substantially completed under Thatcher. Major changes included the abolition of metropolitan county councils in the North’s great cities, the removal of most remaining local taxation powers, the removal from local control of the Mechanics’ Institutes and Polytechnics (the North’s locally-created alternative to the Universities they were denied during the early industrial revolution), the privatisation and deregulation of local bus services, and the introduction of right-to-buy forcing local governments to sell their largest asset base and source of income at well below market rates and give a portion of the proceeds to the central government.
Absent any of the protections against it that exist in the US constitution, Thatcher moved the British state past the French state into being the most centralised in the developed world. “You can just do things” is an emerging meme in the pro-growth community, but since Thatcher that has been largely untrue in North Engalnd. Most of the time, someone from central government will block you, if you succeed they will try and stop you, and if you continue succeeding they will subsidise your competitors.
7. Ultra-centralisation of the state.
Since Thatcher there has been no effective local counterbalance within England to the UK government’s power held in Westminster, no right for cities or regions within England to raise taxes to fund investment in growth, and no limit on the power of the UK central government to constrain growth in the North. The UK central government, backed by Britain’s national institutions, has intensified its preference for South East England. Britain’s government and institutions have moved Britain’s science and innovation from the rest of the country to the South East, focused on London, Oxford and Cambridge.
The central government, holding the monopoly power on such investment, has invested heavily in transport infrastructure in, around, and to London and almost nowhere else in England. The development of a competitive agglomeration to London in North England has been deliberately constrained almost continually. These patterns have deepened even while central governments claim to be focusing on regional investment. In the last fifteen years, while the UK government has claimed to be moving power out of Westminster it has centralised its civil service, centralised its investments in R&D and transport infrastructure, and moved an extra million employees from local government control to central government control.
8. A new generation of policy thinkers.
A new generation of British national policy thinkers, policy advisors, politicians, and custodians of Britain’s national institutions now live almost none of their lives outside of South East England. They rarely have a memory of, or interest in, an England that is not ruled overwhelmingly from the centre.
While arguing for growth today these people and their organisations repeat the mistakes that Thatcher cemented in British political economy thinking that a well-managed central monopoly on power is better than a competitive dispersal of power. They celebrate new scientific institutions in London such as ARIA that repeat — against strong evidence that it will not deliver greater returns in doing so — the centralisation in the South East of England of our national research capacity.
We are repeating today previous disasters for the North’s economy such as the relocation of Britain’s synchrotron to Oxford, the relocation of AstraZeneca to Cambridge and London, and the centralisation of biomedical research in South East England with the construction of The Crick Institute. Our institutions celebrate the creation of new organisations such as The Open Data Institute, Nesta, GDS, Tech City, and the AI Safety Institute that employ large numbers of well-paid people in the capital. At best these organisations allocate their money with preference to South East England and represent local interests as national objectives. At worst they actively oppose and shut down success elsewhere in the country.
This all happens largely without malice, though prejudice against people from “the regions”, while greatly reduced, remains rife within British high society. It is the result of England having forgotten, and — embarrassed by the comparative success of Ireland and Scotland having rejected this centralisation — not having taken the opportunity to remind themselves of the power of competition and markets in government.
There you go. Agree? No mention of behavioral factors? How would social indicators compare to the much poorer Kerala or Sri Lanka? And is Scotland, especially without subsidies, such an economic success?
Friday assorted links
2. Sonoma State is eliminating economics (among other fields). They did add ethnic studies a few years ago.
3. Rohit tries to measure what AGI would look like.
4. Why is homeowner’s insurance getting so expensive?, a very good post by Brian Potter.
6. UFO okie-dokie. From the new director of the CIA.
Why did Paul Krugman leave the New York Times?
…in an interview, he said the circumstances of his job changed so sharply in 2024 that he decided he had to quit. He had been writing two columns and a newsletter every week, until September, when, Krugman said, Healy told him the newsletter was being killed.
“That was my Network moment,” Krugman said. “‘I’m mad as hell and I’m not gonna take it anymore’”—a quote from the Howard Beale character in Paddy Chayefsky’s 1976 film.
…there was a condition: if he wanted to keep the newsletter, the frequency of his column would have to be cut in half, to once a week.
Krugman rejected that offer…
The offer to reinstate the newsletter did nothing to placate Krugman, who had another serious complaint. “I’ve always been very, very lightly edited on the column,” he said. “And that stopped being the case. The editing became extremely intrusive. It was very much toning down of my voice, toning down of the feel, and a lot of pressure for what I considered false equivalence.” And, increasingly, attempts “to dictate the subject.”
“I approached Mondays and Thursdays with dread,” Krugman continued, “and often spent the afternoon in a rage. Patrick often—not always—rewrote crucial passages; I would then do a rewrite of his rewrite to restore the original sense, and felt that I was putting more work—certainly more emotional energy—into repairing the damage from his editing than I put into writing the original draft. It’s true that nothing was published without my approval; but the back-and-forth, to my eye, both made my life hell and left the columns flat and colorless.”
I know nothing about this, but that is from Charles Kaiser at Columbia Journalism Review. Here is Krugman’s latest column.
Who Loses from Immigration Restrictions?
A good summary from the excellent Jeffrey Miron on the effects of the Indian Chinese Exclusion Act (repeated here, no indent):
A long-standing concern about immigration is that it might reduce job opportunities for native workers:
In 1882, the US government passed the Chinese Exclusion Act, which banned laborers born in China from entering the United States and prevented individuals born in China already residing in the United States from obtaining citizenship or reentering the country. … Proponents argued that Chinese workers—who constituted 12 percent of the male working-age population and 21 percent of all immigrants in the Western United States—reduced economic opportunities for white workers.
Yet in 1882, similarly to now,
… many business owners opposed the Act. They worried that highly productive Chinese labor could not be easily replaced and that a sweeping ban would lead to significant economic losses.
So what were the Act’s effects? According to recent research,
… the Act reduced the Chinese labor supply by 64 percent. A reduction occurred for both skilled and unskilled workers. …
This is presumably what the Act’s supporters intended. In addition, however,
the Act reduced the white male labor supply by 28 percent and lowered this group’s lifetime earnings. …
Further, and relevant to current debates,
the Act reduced total manufacturing output by 62 percent and the number of manufacturing establishments by 54–69 percent.
What is the explanation? Reduced immigration means higher labor costs. This implies reduced output, and thus reduced demand for native labor, even if businesses partially substitute native for immigrant labor. Reduced immigration can therefore be “lose-lose,” hurting native workers and businesses, in addition to harming immigrants.
The slide toward growing protectionism?
That is the topic of my latest Bloomberg column, here is one part of the argument:
Start with the distinction between trade in goods and trade in services. When a US manufacturer sells tractors overseas, that’s goods. When a US software firm creates an AI medical diagnostic tool and sells access via the internet to foreigners, that’s services.
It is much easier to keep trade “free” for the first category than for the second. The tractor crosses a border at a specific place and time. It may face additional regulation once inside the foreign country, but the transaction is relatively clean.
An online medical service, by contrast, could “cross the border” — that is, be used by someone outside the US — hundreds or thousands of times per day. It may also face licensing requirements, foreign liability law, extensive testing and, if the country has multiple jurisdictions, layers of regulation. In the European Union, the website itself would be subject to extensive regulation through laws regarding data, privacy and AI. Even within the EU, a supposed free-trade area, there are restrictions on trade in legal, medical and notary services, to name a few examples.
The wisdom or foolishness of these regulations is not the point. They exist, and most are not going away anytime soon. In fact, they will become only more important as the provision of services expands as a share of the global economy.
In the US, much of this growth occurs in education, health care and, especially, technology. Nvidia, for instance, depending on fluctuations in share prices that day, is often worth more than the entire German and Italian stock markets combined. Efforts to “harmonize” (i.e., increase) corporate taxation thus are more harmful to US interests than would have been the case a decade ago.
Any world trading order that broadly stays put is thus weighted against the exporting interests of the US. That is essential background for understanding the debate over trade prompted by President Donald Trump’s various proposals.
Recommended.
Those new service sector jobs
Oscar-winning film composer Hans Zimmer — who will perform live in Riyadh on Jan. 24 — is working on a new interpretation of Saudi Arabia’s national anthem, according Turki Alalshikh, chairman of the General Entertainment Authority.
Alalshikh revealed on X recently that he had also spoken with Zimmer about ideas for a new Riyadh Season concert and an original composition called “Arabia,” inspired by the Kingdom.
“Today I met someone who is considered one of the greatest musicians of our time … the legend Hans Zimmer,” Alalshikh wrote.
The post continued that the German composer — known for his work on films including “The Lion King,” “Interstellar,” “Gladiator” and “Dune” — was also offered the chance to create the soundtrack for the upcoming Saudi Arabia film, “The Battle of Yarmouk.”
Here is the full story, via Rasheed Griffith.
Congratulations to Christopher Rufo and Richard Hanania
As most of you already know, the Trump administration through Executive Orders has taken major steps against affirmative action and also DEI. We will see how the details play out, but each of these developments seems highly significant and not just “expressive.”
Those two individuals played a decisive role in what happened, in both cases taking considerable flak along the way. And so they deserve this hat tip. Here Richard and Bryan Caplan discuss what happened. Coleman Hughes too.