Michael Pettis misleading the American zeitgeist on China

Asia Times

14-04-2025

Every so often, an American public intellectual captures the political zeitgeist and sends the nation down decades-long paths, for good or for ill.
Ralph Waldo Emerson provided the nation with spiritual rigor and moral fortitude, resulting in the Republican Party, the Civil War and the end of slavery.
Francis Fukuyama provided America with a stunning vision of national triumph, resulting in military debacles, a financial crisis, a stratified society and our current insane clown posse politics.
While no one in our current cacophony has the stature of Emerson or made an 'End of History' star turn like Fukuyama, the Trump economics team are known acolytes of heterodox economist Michael Pettis, currently teaching at Peking University.
Pettis's unconventional ideas and even more unorthodox career path have managed to short-circuit the traditional economics idea-to-policy pathway.
Ben Bernanke, Joseph Stiglitz, Larry Summers and Paul Krugman were all PhD economists teaching at Ivy League universities. They had three Nobel Prizes among them, advised dozens (if not hundreds) of PhD students and published hundreds (if not thousands) of academic papers.
Their path to the Washington policy world is, for what it's worth, highly credentialed.
Pettis was an emerging markets bond trader with two master's degrees, international affairs and an MBA (both from Columbia University). He currently teaches MBA students at Peking University's Guanghua School of Management and, for the most part, does not publish academic research.
Pettis has likened himself to a 19th-century pamphleteer, writing mass-market economics books and op-ed articles. What he also does is tweet. And oh does he tweet. He is peer-reviewed, often ruthlessly, but by the Twitter peanut gallery – not credentialed economists.
Do public intellectuals shape public opinion? Or does the public elevate obscure academics and thinkers to prominence based on the national mood and its desires? Or is it a pas da deux between thinker and audience, leading and following concurrently, both inseparable parts of the zeitgeist?
America was young, still finding its footing, when Emerson wrote his transcendentalist essays, giving the nation a spiritual mission based on individual self-reliance. This expansive philosophy of personal freedom was readily accepted by an exceptionalist nation looking for meaning as it filled its frontiers and confronted its demons.
Fukuyama did his star turn in an established America at its moment of greatest triumph. The Soviet Union had just crumbled, the Japan bubble was bursting and China was still a backwater.
A happily bewildered America latched onto kid Fukuyama – who effortlessly juggled Marx, Hegel and Tocqueville – and floated off into exceptionalist bliss.
History has not been kind to the man who dared to declare its end. Singapore's ex-foreign minister Kishore Mahbubani publicly stated that Fukuyama's book gave America collective brain damage.
Perhaps harsh, but Fukuyama does not come out looking much better in the alternative scenario – the kid who could juggle Marx, Hegel and Tocqueville with one hand was just a grifter.
In the heady days after the Soviet Union dematerialized, 'The End of History and the Last Man' just about wrote itself. America was looking for flattery and the Japanese American kid who can quote Hegel and Tocqueville wins.
Where does Pettis fit into all of this? This eccentric thinker issuing expositions by Twitter thread has amassed a substantial following.
He has unfortunately become the nexus of China economic thought in mainstream Western media, which, Han Feizi believes, has caused significant brain damage to China analysis and now threatens to cause irreparable economic damage to America as his acolytes formulate policy around his follies.
While a triumphant America looked to Fukuyama for flattery, an anxious America latches onto Pettis for affirmation. And it appears the favor was returned.
For two decades, Pettis has told the Western world that China was overinvesting and under-consuming and that growth will collapse to 2-4%. China grew two to three times as fast.
Unsurprisingly, his ideas are now more popular than ever, worming their way into the minds of Treasury Secretary Scott Bessent and Chair of the Council of Economic Advisors Stephen Miran.
In recent Twitter posts, Michael Pettis appears beside himself at the feckless design and implementation of Trump's 'Liberation Day' tariffs, writing:
It is hard to see much systemic thinking in the new round of tariffs, and because trade can only be resolved on a systemic basis, and not on a bilateral basis, this means that they are unlikely to be very helpful.
Pettis seems aghast at what Trump has done, viewing it as a perversion of his belief that the global trading system needs to be systematically rebalanced:
The new tariffs don't really address the real US problem. One obvious reason is that the tariffs are largely bilateral, and while bilateral imbalances may impress those who don't understand trade and capital flows, they are, in fact, pretty useless.
Han Feizi has written extensively about China's economy in ways which challenge Michael Pettis's heterodox views (see here, here, here, here, here, here, here, here, here and here).
Fundamentally, Pettis believes that America runs persistent trade deficits because Asia has implemented policies that incentivize production at the expense of consumption and is externalizing those imbalances onto the US, the 'consumer of last resort.'
His preferred set of policies would involve taxing capital flows, targeted tariffs and industrial subsidies that even out the playing field.
Han Feizi believes this framing is erroneous and Pettis's policies, even correctly implemented, will result in years of suboptimal growth, impoverishing the US for decades. America runs persistent trade deficits because that's what happens when asset-rich economies trade with labor-rich economies.
Yes, China has implemented industrial policy to marshal its abundant labor but, at the same time, the US has implemented policies to better harness its abundant assets (e.g. mortgage market, agency bonds, derivative market etc.), allowing them to be financialized and traded.
Yes, China took advantage of the US's open market for growth and employment. At the same time, the US took advantage of its massive asset endowment and China's productivity also for growth and employment.
The concern that Pettis displays for China's put-upon consumers does not hold water. In the past few decades, under this system, China has increased household consumption faster than any other economy, all 194 of them.
And not by a little. China grew household consumption twice as fast as second-place South Korea. And the US has increased household consumption faster than all major developed economies. Graphic: Asia Times
Disturbing this organic trade between an asset-rich economy and a labor-rich economy is not only economically inefficient, it is highly destructive in the short to medium term. America's labor force is set up for asset sales. It does not have the skills for manufacturing.
The two most dangerous ideas promulgated by Pettis are 1) China's economy is wasteful, inefficient and on the cusp of stagnation, and 2) consumption creates value.
Both of these ideas are not only wrong, they could not be further from the truth. It is highly likely that belief in these two ideas misled the brain trust (or lack thereof) surrounding President Trump, believing that the US had the upper hand in a trade war against China.
Han Feizi has written extensively about how erroneous the China collapse/stagnation view is (see links above).
If Bessent, Howard Lutnick and Stephen Miran were not stuck in the Western media echo chamber, they would figure out that the United States was about to start a trade war with an economy 2-3 times its size – not 36% smaller as reported nominal GDP would suggest. This is the Jaws, 'We're going to need a bigger boat' moment.
But perhaps more pernicious is this economic fallacy that consumption creates value and that China's factory workers need American consumers more than American consumers need China's factory workers.
Pettis has been trafficking in this fallacy for decades – the idea that consumption, especially US consumption, is a public service of some kind. This fallacy has high purchase in America because it appeals to what Americans have become – shoppers.
It has also resulted in unfortunate economic formulations like 'supply of demand.' As in the US economy is accomplishing great feats by supplying demand to needy Asian factory workers.
As if supply and demand were not useful enough economic concepts, we now have supply of demand. Which, of course, begs the question, what about demand of supply? Or supply of supply of demand? Or demand of supply of supply? Or supply of demand of supply of supply? Capiche?
This is all nonsense. There is no such thing as supply of demand. American consumers are not supplying their demand in exchange for Nikes from Vietnam. American demand has no value to the Vietnamese. American consumers are trading American assets for Nikes from Vietnam. That's what the Vietnamese want.
The liquid dollars which can be turned into Treasuries, Freddy Mac bonds, Apple stock or Malibu mansions. The wants and desires of American shoppers, as wonderful as they may be, are worthless to the Vietnamese. They, and everyone else, want New York City apartments overlooking Central Park.
Similarly, the Pettis MO is to take something conventional– efficiency gains drive wage growth – and flip it on its head in a way that soothes American anxiety. High wages drive efficiency!
The whole thing is then wrapped with a sprinkle of virtue signaling, 'The stereotype of high-saving Asians is racist!' and fed to status-anxious Americans who then think that they've been granted some secret knowledge.
Dealing in economic hogwash to sooth American angst is just as big of a grift as Fukuyama dropping that perfect Tocqueville quote in the heady days of American triumph.
Pettis and Fukuyama have their grift. It's easy, Americans want to be fooled. It is hard to even blame them. In any other time, they may have just been obscure academics backstabbing colleagues for a low-paid professorship. But the American zeitgeist made them stars.
For those who don't know, Han Feizi is American – but destined to occupy a tiny niche in the American zeitgeist. Emerson I will never be, although I gave it a shot (see here).
We all saw what happened to Vivek Ramaswamy. He brown gaffed – an Indian American accidently told white Americans the truth – and was quickly shuffled off the stage.
Here are some numbers. There are 45 times as many highly able (top few percentiles in the US) math students in China as there are in the US.
Nine of the top 10 research universities, according to the Nature Index, are now in China, up from zero 25 years ago. Out of 64 technology verticals tracked by the Australian Strategic Policy Institute, China now leads in 57.
Two decades ago the US led in 60 out of 64 technologies. These trends are accelerating and have about 25 more years to go. Graphic: Asia Times
And let me be more frank with my fellow Americans. 60% of those who score in the 99th percentile on the math portion of the SATs are Asian Americans who make up 5% of the population. Math skills at the American 99th percentile are table stakes in Asia.
20-30% of Chinese high schoolers would likely score in the 99th percentile on the US math SAT. When Chinese American families contemplate moving to China, the biggest hurdle is the fear that their children cannot keep up with local students – these are PhD families.
All the tariffs, taxes on capital flows and industrial subsidies will amount to a hill of beans if Americans do not fix their education system and lift their game. The Ivy League should not be 25% Asian. Silicon Valley should not be 50% Asian. Even Wall Street should not be 16% Asian.
As America had been led down the disastrous 'End of History' path after its moment of triumph, we fear the zeitgeist is now leading the nation down a nonsensical 'supply of demand' economic path during its age of anxiety.
The nation certainly should not be starting an economic war with delusional strategies like, 'They need our consumers.' The first humiliations are already in with Trump caving on certain tariffs. Han Feizi fears that when the returns all come in, the final American humiliation will be psychologically unbearable.