I am sorry, but i cannot for the life of me understand why anyone with a brain would think that a famously dishonest man who has been bankrupt multiple times would suddenly be brilliant at running the world's largest economy. He won't be, and whatever his followers on here may think, in the end he will damage the United States both economically and in its relations with the remainder of the world. Donald Trump has only one interest, and that is the welfare of Mr D Trump.

Stiglitz fails the political test for support of the Middle Class which Trump has obtained. He claims the US Middle Class will suffer because of policies aimed at helping them, so he is not actually contesting Trump's political success - only attempting to undermine it.

Even more so, Stiglitz fails to provide a clear path the Middle Class in America can follow for political-economic support if the Trump Plan fails. He only leaves the Middle Class with one alternative - failure after failure after failure to maintain their political-economic status in determining America's future.

Thank you Karen Williams for your reference below to the Michael Pettis article.

This article seems to have some problems in the interpretation of causality.
According to the national income identities, the following equation can be derived:
Trade deficit = the difference between investment and savings + government deficit
But from the definition of the national income identities, as well as this equation and the derivation process, there is no explanation as to which part is the reason and which part is the result. In the article the reason for the US trade deficit is that investment is higher than savings. There is no logical basis for this view.
Inventories produced in the current period but not sold are considered as investments in macroeconomics. In fact, it is very likely that the increase in imports has led to poor sales of domestic products in current period. This passive investment has increased. In this mechanism, the trade deficit is precisely the reason for the excessive investment, but not the result.

From the article, I deduct the following - America will get Bigger - Bigger Trade Deficit, Bigger Budget Deficit and Bigger Price Increase (Inflation)?

I guess we might as well give in, give up. No need to worry about all the Middle Class Americans that have lost their livelihood because of globalization. No need to worry about all those Middle Class Americans that are looking their livelihood because of technology. No need to worry about American companies whose IP was stolen and continues to be stolen by the Chinese. Might as well do nothing. Thanks for the great advice, Mr. Stiglitz!

I think Michael Pettis (professor of finance at Peking University’s Guanghua School of Management) may have a deeper understanding of this issue. I think his recent post at the Carnegie Endowment for International Peace, dated July 10, titled "Tariffs and Trade Intevention," is very much worth a read.

I wonder whether Mr. Stiglitz has read his work, and if so, what he thinks of it.

Trump's tariffs will force foreign producers to LOWER their prices, generating huge terms of trade gains for us. As for the idea that we cannot end the Chinese bilateral trade deficit, it would be easy: just institute a full-on trade embargo. Their human rights violations are enough to justify that.

Joseph E. Stiglitz’s blinders are as pinched as were those of Obama and Bush. There is not a potential war between America and Communist China. There is no “if”. There is war now. Communist China has been a belligerent forever. War is in Communism’s blood.

This war is not just about Stiglitzian economics. It is about America’s, and the West’s, long-term independent survival. No thinking, liberty-loving country or person one can coexist with Communism, for it ever eats at the pie of dominance, of stifling power. Communist China is a crystalline example to students of what Communists do, a la Communist China: dedicatedly steal intellectual and military secrets, lie as standing operating procedure, close international sea lanes, build military bases around the world, seduce by Panda diplomacy and mislead with Confucian Institutes, require firms to give over their seed corn to do business, play with the rmb, counter America’s efforts to denuclearize Communist China’s best ally—North Korea, continue to threaten one of America’s most solid supporters—the Republic of China, squeeze the spirit out of Hong Kong. Communist China under Xi Jinping or any other Communist leader is a threat to the world. Since when should Communists be trusted, and history be denied?

Blinders off. Stiglitz may intone his economic themes. Unforgettable is that eggheads have a tarnished history when it comes to fighting Communists. Trump’s advisors may not fit Stiglitz’s model of good economists, but Obama’s advisors just let Communist China’s aggressive, debilitating economic juggernaut roll merrily along. Economics is just one tool that Communist China uses to further its evil goal of smothering liberty, already done to its own citizens. Economics is one of the tools that America, and the West, needs to use to confront the aggressor. Look Xi Jinping in the face and beware.

I am not an economist, but surely the US trade deficits are the result of the people in the US wanting more of everything than the people they buy from. It seems to me that they should realise that the trade deficits are something that a very rich population has to pay when it is buying its goods from countries with relatively impoverished populations.

Professor Stiglitz should look at trend lines: the US already has lost the "trade war" to China. The US problem, started by the lies of Clinton and continued through Bush and Obama Administrations, is the fantasy that with economic growth, the China Communist Party would go the way of the Soviets and just fade away. It was a fantasy developed in the context of US triumphalism in the 1990s. History, rather than short-run financial self-interest, would have told them that economic growth would only strengthen the party by providing greater material benefits to more people. And the Party has delivered.

The "trade war", however, is not the only game in town. The main issue, avoided by Stiglitz, is geopolitical. China has used it greater economic power to modernize its military and increasingly to dominate the Western Pacific with the aim of excluding the US from its Post-WWII position in that region. Trump, focusing on the "balance sheet" has not come to grips with the real problem, which is not surprising given his spectacular limitations.

BTW, professor, where are the sources of greater saving - the poor, the middle classes, the corporate sector, the government? Are you suggesting the the federal deficit be reduced by increasing taxes and/or reducing expenditures? An exogenous increase in saving will have a dampening effect on the US economy. If that is what you want - say it!

I agree Trump is not approaching trade imbalances in a productive way. However, reducing trade imbalances is very important and needs to be addressed. This article gets the economics wrong, apparently for the same reason Martin Feldstein has got it wrong in postings on this site, i.e. misuse of the accounting identities. While underlying analyses are not provided in these postings, the only obvious way reconcile conclusions of Stiglitz/Feldstein with accounting identities is to assume that total US based production is essentially fixed and cannot be affected by trade actions. This unstated and invalid assumption totally misses the point, i.e. a primary objective of these trade actions is to increase total US based production. If production in the US becomes profitable it is reasonably predictable that production will begin to increase, and production in industries that are struggling or marginally profitable due to import competition will stop declining. Some industries have slack and could increase production fairly quickley, others will take some time to build the needed production capacity.

Regarding this statement at the end of the article, “Trump has changed the world, permanently, for the worse.“. Nothing is really permanent.

I'm commenting based on the first paragraph alone. The correct term should be MERCHANDISE trade deficit. America runs a SERVICES trade deficit with all its major trading partners except India. Which figures, because America graduated into the post-industrial society decades ago.

The textbook manufacturing and merchandise trade that Trump is pigheadedly pushing died a long time ago, with the emergence of globalisation and global value chains.

Some of the merchandise he's imposing tariffs on are nothing more than American products assembled abroad (because it's cheaper to do so) and brought back to America to support the life of abundance and affluence that Americans take for granted.

All that will shrink as the tariff-pick-pocketing of Americans, not foreigners, as Trump wrongly thinks, kicks in.

Now let me see if he rest of the article makes any sense.

This article seems to have some problems in the interpretation of causality.
According to the national income identities, the following equation can be derived:
Trade deficit = the difference between investment and savings + government deficit
But from the definition of the national income identities, as well as this equation and the derivation process, there is no explanation as to which part is the reason and which part is the result. In the article the reason for the US trade deficit is that investment is higher than savings. There is no logical basis for this view.
Inventories produced in the current period but not sold are considered as investments in macroeconomics. In fact, it is very likely that the increase in imports has led to poor sales of domestic products in current period and this passive investment has increased. In this mechanism, the trade deficit is precisely the reason for the excessive investment, not the result.

Let's assume Trump's best case scenario that manufacturing does come to the U. S. It will be met with the 4th wave in manufacturing; smart, adaptable, industrial robots (made in Japan, Germany or China). A worker's pay can be no higher than the amortized cost of a robot. The higher costs of the goods will be passed on to the 95% of Americans who don't work in manufacturing.

Professor: Aren't you becoming a bit UN-American by branding him a liar? Leave it to Washington Post which has listed 2500 plus supposedly lies, misleading remarks in the past years during his reign!

https://www.zerohedge.com/news/2018-08-03/china-signals-willingness-help-assad-retake-rest-syrian-territory

"Meanwhile in the broader context of this week's broader escalating trade war with Washington, and as China has long eyed being first in line torebuild Syria in close economic partnership with Damascus, Chinese companies in the Middle East will increasingly find themselves targeted by the West, as the US is seeking to prevent further Chinese and Russian entrenchment in the Middle East."

Are you sure the real issue is even any trade war??? Are you sure the real issue ain't those gas-lines and routes to Europe that US, Russia and China corporate interests want control over, and choice of route? Or should that be the national/corporate interests of US, Russia and China are fighting over? And any consequences to any civilian populations are just collateral damage. And just unfortunate circumstances for the greater good of specific corporate interests; again with absolutely no consideration to any mass, state, human populations anywhere;damn them all. Only the top 1% are significant. Do note Apple is now the equivalent of what, like 10% of US GDP? And, how much debt is being assumed by US general population, not in that 1% quintile? How many more US "fools" are willing to don their uniforms to now fight the Chinese in Syria, for corporate hegemony that won't pay them a cent? And just what are the uniformed and non-uniformed Syrians sacrificing their lives for?

Human sacrifice is reaching new heights on all sides in 2018.

Sacrifice for what, and for whom?

Ridiculous thought. How can we 'lose' the trade war when they don't buy anything from us?
Everything in my house has a 'Made In China' label. I don't believe that a Chinese citizen can look at the bottom of his lamp and see a 'Made In USA" label.
Charging China a Tariff (or fee) for everything they ship over here seems like a great idea. We get the product and some cash to boot.
Sounds like it will 'repatriate' billions of U.S. dollars sent there in the past.

Aren't we all losers in a war?

Trump "trade wars" are nothing but a well targeted campaign slogan.

The US and China both have trade deficits, and their currencies are pegged (Dog does not eat dog).
Euroland has trade surplus and no currency peg.

I keep telling my German friends to save as much as possible because, like in WWII, you can not fight on so many fronts and win. Wash, rinse, repeat.

Dr. Stiglitz, a QUESTION:

I believe I understand the standard macro you posited - the capital and current accounts balancing. However, we're talking tariffs here, applying only to physical trade not total trade.

For brevity, then, a thought experiment - what if a President somehow ordered 100,000 employees performing government services (DoE etc.) to be loanded out, for free, to some lucky employers ... but ONLY to domestic companies in manufacturing?

Assume away any skills gap, these are the smartest folks around, eh. But to be precise, assume this moved $10 billion (their salaries at $100k per) from being accounted as government services over to accounting as a labor input to the production of physical goods.

What would happen to our trade deficit?

Curious, as a former student. Thanks.

Stiglitz is a titan of economics -- for a reason. Offhand scorn, without reference to his body of work and theories, amounts to just so much ignorant hot air. BUT, he is wrong, and for the reason so many of you have hinted at. Stiglitz's outlook bases is analysis of abstract, theoretical, system-wide outcomes. But, like so many brilliant academics, he does not bother to, or simply cannot, look beyond abstract theory to actual reality. He does not acknowledge optimum tariffs (the dark secret of Miltonian economics), whereby nations maximally benefit themselves while beggaring rivals. Stiglitz does not acknowledge Japanese, and now Chinese, strategic market interventions meant steal technologies, jobs and wealth while destroying (or at least handicapping) geopolitical rivals. In short, he constructs systems that do not reference political and military factors, that have a huge influence in the real world, especially in the real world of economics. Thus, Stiglitz simply has no way to correctly model non-economic considerations, and so simply ignores these factors. China engaging in a decades-long strategic campaign to steal technology and co-opt American politics and economics for the purpose of replacing the U.S. as the global hegemon? Does not exist. Free trade's exacerbation of disparate economic outcomes (i.e. the exponentially escalating wealth of the upper and upper middle class while stagnating the incomes and wealth of all others) and consequent radicalization and instability of American culture and politics? Does not exist. We should respect . . . But also realistically criticize these commentator's viewpoints. You don't have to attack a person just to disagree with them. The Prince

Ignorance is king among trumpians, and trying to educate them is a waste of energy, so I won't bother to try. The results will eventually become obvious even to the most impaired trumpians.

Wow only a nobel laureate could get so much wrong, but it all boils down to this. As of right now China needs our markets more than we need their manufacturing ability and out economy is much better positioned to absorb price increases. Good luck to xi president for life in avoiding the firing squad when the Asian dragons economy tanks.

The U.S. can increase production of natural gas. And export even more. We were not doing it at all a couple of years ago. And make its own washing machines too. Its necessary for a country to have its own manufacturing capacity, especially for essential materials used in national defense. Alliances and adversaries do not remain stagnant or we would still be enemies with Britain and allies with Russia. We are not "Allies with the EU. The EU and Euro were designed to compete with the U.S. when the Cold War ended. Trump should not buy a shallow gesture from China and end the process before goals had been accomplished. Our trade balances and deals are not just perfect the way they are Mr. Stiglitz. Yes there will be a price to pay to bring things back into proper alignment and stop the bleeding. Just like their is a cost to a trillion dollar defense budget. And hasnt the Fed been spending trillions to CREATE inflation? Your analysis is littered with very poor and incomplete analysis. All due respect.

An informed and thoughtful analysis of macroeconomics, with insights into just how the US and China may fare, based on careful analysis, data, history, monetary policy etc, and what is the response by the Trumpkin economic team: gibberish.

If we the US loses this foolish foray into global economic chicken, we can look back and say it was we who did it to ourselves...

"At Risk of Losing"....what in the world does the author think has been happening for years and years?

Past Presidents have tried to use a butter knife to win a gun fight, and the US has been wounded time and again. It's time that we get serious, and that is exactly what President Trump has done. If China doesn't like tariffs, do what Trump proposed for the EU. Cancel all tariffs on both side....ZERO tariffs. That's fair. But China doesn't want to play fair. Thank goodness for a President that is taking this serious.

Good morning I fully agree.

Trade redistributes. Your disposition to Trump's trade wars depends on your interest. Stieglitz speaks for the liberal globalist trader and consumer interest that pretty much owned the mulitlateral WTO system - an elite dream coming to an end. Trump seeks benefit for a bunch of locals - his constituents - and he generates wins for them (rising US manufacturing jobs) to the detriment of the old beneficiaries who voted mostly democrat. The value lost in the process is mostly his opponents. Given the robust US economy Trump can sustain dips much better than his trade partners/enemies. Of course they initially push back, but soon look ahead and conclude that Trump has more firepower hence rationally seek viable deals on Trump's terms. Furthermore, consumers and traders know no political gratitude for serving them, they switch at a whim, but local manufacturers with assets and people connected to the land do remember who served them making these groups much better investments for political payoff.

This isn't "Trump's trade war;" in fact, China has been openly waging this war for over a decade. For years, the Chinese Gov't required foreign firms to set up a joint venture w/ a local firm (thereby allowing the local firm access to the foreign firm's IP); only in the last year or so has this changed. But that illusory freedom ended with changes this year that allow the Communist Party input into foreign firms' decision-making and operations. That's only if your company is operating in a non-restricted industry; if you're in a high-tech or "sensitive" industry, you can't even get in the door. But if you did, you'd face state-owned enterprises (SOEs) and official state policies like Made in China 2025, which seeks "self-sufficiency” through technology substitution as part of becoming a “manufacturing superpower." A foreign firm in China faces a 1 to 4 disadvantage: local competitors, banks, courts, and gov't. A foreign firm presumably expects local competitors, but not their band of accomplices. Every major bank and almost all of the 2nd tier banks are state-owned (nat'l or prov/municip), so the gov't plays favorites over who gets loans and who doesn't. Every lawyer (defense or prosecution) and every judge in every Chinese court is a member of the Party, so 2 guesses as to who'll win if a foreign company and a local company go to court. That's assuming the foreign firm ever gets to court, because the police and gov't tend to enforce the law if it suits them or they simply turn a blind eye if it doesn't. And all of that is predicated on your competitor not overtly stealing your IP or customer data; besides, if they do, it's not like you could sue them or seek redress from the gov't. Since the US is so lopsidedly losing this trade war already, the least it can do is realize it's in a fight.

So you touch on how US tariffs reduce demand for Chinese goods and weaken the RMB, and say this will eventually hit equilibrium and offset tariff effects. True... in a lab. This isn't a perfect market. Last time the RMB fell a fraction as much in 2015, the CCP blew 1/4 of it's FX reserves ($1 trillion) propping up the value to stem $100+ bil/m capital flight. If the trade war heats up, won't that begin happening again? The CCP has made it more difficult to transfer assets offshore, but that only goes so far if things get bad. Also, hasn't the IMF said that if the PRC FX reserves fall below, last I read around $2.7 trillion, they risk being delisted as a reserve currency?

How does all of this factor into their trade war position? It doesn't seem anywhere near as simple as just letting their currency fall to boost exports, given their track record.

As a buyer, I suspect America can find new sellers elsewhere around the world. As a seller, however, I also think Chine may have a great deal of difficulty in finding new buyers who lack either the cash or credit of their American customers.

Regardless of which side you are on, any trade war with China may prove long term and painful to both parties, just not equal in pain...if that makes sense?

With all this talk about trade deficits with China, why no similar discussion with our much longer and also very large trade deficit with Japan?

public opinion or support never was a problem for the few who run our world with their greed.

most people obey!
they rarely ask who created the law.
they just obey bcs they were brought up to do exactly that and only that...

especially in the Asian paradise of capitalism.
in all of them countries who are in reality corporations with slaves.
their citizens have to function and survive in an environment of corruption ,greed and throat-cutting competition of free markets.
And one more thing.
Where is the rest of the world in this equation?
Analysts constantly make predictions without taking into consideration the whole system.
Europe,is it going to side with USA or China?
Russia is it going to attack Europe or what?
Africa is it going to be left to grow,and helped to clean up the colonial mess and the corruption it created ?or is USA ,Germany,France,Canada etc going to continue to exploit and rob them of every chance they have to get higher standard of living for their African citizens

And then,dont forget China has convinced(!!) their population that handing over total control of your life to a party(a gang of corrupt so called leaders that are in fact an oppressive regime ,a military dictatorship with democratic clothes)is perfectly fine ,you need not to worry since you are a good citizen!!

Take notice of the word.Convinced.
There ,people accept as normal the government to oppress them ,to silence them to arrange their future and present,to follow everyone everywhere all the time etc...
They dont resist,they just take part happily to the tests ...
Capitalist stupidity installed in China,who s next?

Refugees fleeing by the millions climate change and poverty,but who s going to buy the oil if the nations have barely enough to go by?(as a result of the 100 year sucking of their blood by the imperialist vampires of our world ,USA,Holland,Germany,Belgium,France,UK,and a few other selected greedy racists)

Who will resettle millions and maintain standards of living for all above poverty level??
I ll tell you who.We will.

We are in the "Grab whatever you can" era,those who were already in power,rich and greedy are squeezing the last blood out of humanity and earth.
Only hope is that eventually we reach the limit and those still alive decide to change attitude,eat alive the greedy rich and start society fresh, with experience that will help to avoid the same mistakes again,namely capitalism and imperialism.(greed and ignorance).

No such thing as a trade war. We know protectionism harms productivity and innovation. America is at the upper stage of the value chain and China is at lower level, along with other countries. All of them cooperate to add value along the value chain to deliver the best products at the lowest costs to end consumers. The solution is the free up the value chain from artificial obstructions. Open the trade borders. Let firms and workers compete. Let the US output in quality and quantity rise.

And a bunch of his buddies, especially in the top demographic decile. He is really just continuing the same game plan from Reagan, that has been supported by left and right as propagandized by the top decile of the US population to confuse the masses. And of course, practically every top economist does not have any guts to really reference real statistics in a simple format to counter- attack the propaganda. No, they all support the "confuse the message" campaigns to the masses to keep the same game going, so these top economists have a hope of a prayer chance to get into that top decile themselves. Game on!

Professor,
Assuming you are correct on the US at risk of losing the trade war... Why then is China so worried, despite having the upper hand? Isn't China supposed to be happy to be on path to supplant the world's largest economy? As long as China worries, Trump is winning the trade war.

JS says,".. If he had a whit of understanding of economics and a long-term vision, he would have done what he could to increase national savings. That would have reduced the multilateral trade deficit..."

How? Can somebody educate me how any administration teach how to adopt methods to increase natioal savings.

In which currency are most commodities (including Gold and Oil) denominated? The US$. In which currency are most trades being conducted? The US$. Which is the number one Reserve Currency?The US$. In which currency the largest export market for China is denominated? The US$. Etc. China has got no chance. Mind due, Trump is a gambler, casinos owner and manager, and despite the threats and counter threats over trade, the Chinese establishment cannot be unhappy with the so-called trade war, it reins in their "bourgeoning" society. So all in all, there can be only one winner. A bit like when the EU raided the cash of the Russians in Cyprus, Putin's Russia expressed dissatisfaction, but did nothing about it!

"If a country enters a war, trade or otherwise, it should be sure that good generals – with clearly defined objectives, a viable strategy, and popular support – are in charge. It is here that the differences between China and the US appear so great. No country could have a more unqualified economic team than Trump’s, and a majority of Americans are not behind the trade war."

And no country could have a more qualified economic team than China: “People say you don’t like China. No, I love them,” he said. “But their leaders are much smarter than our leaders. And we can’t sustain ourselves with that. It’s like, take the New England Patriots and Tom Brady and have them play your high school football team.” President Donald Trump.

https://www.boston.com/sports/new-england-patriots/2015/07/06/donald-trump-says-tom-brady-and-the-patriots-are-just-like-china

Trump's latest comments indicate he widened his focus to "isolate"China in order to pressure it to stop forced technology transfer and intellectual property theft. The truce with the EU and the US/EU statement last week clearly speaks to their shared concerns about these unfair practices. Even if Trump can do nothing to change the "Made in China 2025" policy, might tariffs, and other US actions succeed in slowing China down, perhaps even long enough for the US to get it's act together?