Courtesy of Mish.
In response to my article Pettis Proposes Savings Glut and Income Inequality are Source of Global Imbalances; Mish vs. Pettis: I Respectfully Disagree, I received an interesting reply from Michael Pettis.
Before posting his response and my reply to his response, I reiterate my gratitude to Pettis. He has taught me much of what I know about trade. I recommended his book “Great Rebalancing“, and still do. I also deeply appreciate even having this discussion and for Pettis to personally respond.
That said, Pettis failed to convince me. Here is his reply. Does he persuade you, or do my arguments make sense?
Michael Pettis Responds
Thanks for the discussion, Mish, but I don’t really think you’ve addressed the essay, which provides a logical argument, not a moral or political one. My argument has been praised as brilliant by one group of people and as evil by another, but too many people on either side have failed to understand and instead have resorted to political prejudices.
The problem is that you cannot agree with just the part you like. Either the entire argument is true or it is false. In fact all of these conditions can be true but are likely to be more or less important under different conditions. One of the great follies of contemporary debate, it seems to me, is that certain policies are considered to be intrinsically and always wealth-enhancing, or intrinsically and always wealth-destroying, depending on your political beliefs, whereas I would argue that these policies, and in fact many others (free trade, unionization, free banking, etc.) can be wealth-enhancing under certain conditions and wealth-destroying under others. Rather than close the door to debate we should try to figure out the conditions under which they are one or the other, and guide policy according to the relevant conditions.
But let me explain why I do not think you, or most others, have addressed the argument. To summarize, I start with three propositions, from which everything else follows:
1. The rich in any economy save a greater share of their income than do the poor. This is an assumption that can be proven or disproven empirically. The fact that some countries are rich and others poor may complicate things, but this only means that income inequality inside a country matters, whereas income inequality between countries might or might not matter.
2. In every closed economy savings is equal to investment. This is true by definition because the demand side of an economy consists of consumption and investment, while the supply side (how we allocate total production of goods and services) consists of consumption and savings. Because demand and supply always balance, savings is always equal to investment. I know you understand this.
3. No one has infinite debt capacity. I don’t know if this is an assumption or true by definition, but at any rate I know you agree.
Here is the argument which, if you accept the three propositions above, can only be logically true or logically false:
1. From Proposition 1, if income inequality rises, the savings rate must rise….
