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Customer Review

TOP 500 REVIEWERon 22 April 2013
To read this book you need some A-Level economics, because the author does not bother to lay it out. Here's the necessary crib:

(1) Y = C + I + G + (X - M)
(2) Ydisposable = S + C
(3) Ydisposable = Y - TAX + TR

(2),(3) => S + C = Y - TAX + TR =>

(4) Y = S + C + TAX - TR

(1),(4) => C + I + G + (X - M) = S + C + TAX -TR =>

(5) (TAX - TR - G) + (S - I) = (X - M)

In plain English, equation (5) says that the budget surplus (tax collected minus transfers minus government spending) plus net savings (savings minus investment) are identically equal to the trade surplus.

It makes sense, of course. Maybe in today's world you should say that the budget deficit plus net dissaving equals the trade deficit, but you get the idea.

You can complicate it a bit more by also including net investment flows, but the above crib is good enough to plough through the book.

There's a reason the author does not have the crib in the margin of every page: he likes to exaggerate. To exaggerate best, he needs to play fast and loose with equation (5). So he states, for example, that a tariff on a necessary good (a good that is imported from abroad but we cannot do without and will not buy any less of after the tariff has been imposed) will AUTOMATICALLY lead to more net exports.

Such a tariff is clearly a tax by another name. Suppose TAX goes up in equation (5). There's more than one ways this can be balanced out:
(i) more government spending G or more transfers TR would do the trick
(ii) savings S could go down, as people who've borne the tax can save less
(iii) fewer goods might be imported to compensate for the tariff
(iv) less capital might be exported

The author axiomatically states that net exports will go up, which corresponds to (iii) and (iv) above but ignores (i) and (ii). It's one of the book's big ideas that a tariff or a currency devaluation does not rely so much on substitution effects as it does on the inevitability of accounting identities. Well, if you cannot explain it in English, if you cannot lay out how the accounting identity comes about, you should not be writing books, frankly.

Regardless, the author knows what he's talking about, and most of the time he gets it right. Especially when he discusses China (comfortably the best chapter and good enough a reason to buy the book) a lot of the alternatives to balance the equation are irrelevant, because the process is managed and choreographed by the Chinese government. And in China the budget surplus / deficit is totally dwarfed by net savings which (as a result) roughly equal net exports. But the inevitability of the conclusions he presents is, quite simply, false. I agree with him a lot more than I disagree. The point is that he is presenting OPINIONS dressed as FACTS.

So do read the book, but arm yourself with the crib. When something seems far-fetched, check.

The other thing I did not enjoy about the book is the idea that Europe will get better only if the Germans become lazy and overpaid like everybody else. If there was only Europe and nowhere else, I'd say "what the heck, that kinda works too, until somebody else decides to get his act together." In a world with 6 billion people, I'm not so sure there's terribly much value in rushing to the lowest common denominator. Besides, our world is increasingly about services, rather than manufacturing.

Overall, the book discusses many important issues and presents a very interesting analysis of what's going on in China. I'm no China expert and I could not possibly comment on whether the analysis is correct, but it's an interesting and plausible perspective. I'm better off for having read the book, but to anybody who decides to buy it I'd recommend that you crib equation (5) above and write it in the margin of every page. Then use it to challenge the author on his most outrageous claims...

Yes, it's true that BUDGET SURPLUS + NET SAVINGS = TRADE SURPLUS, but it does not come about automatically. Economic agents have to make it happen. Maybe nobody told the author his job was to tell us how.
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