Pettis fresh off the press (April 11, 2025): “The most effective way is likely to be by imposing controls on the US capital account that limit the ability of surplus countries to balance their surpluses by acquiring US assets.” Pettis’s ideas seem to be influential among some advisers, such as Treasury secretary Scott Bessent, Stephen Miran, the chair of the Council of Economic Advisers, and Vance.
The recent Financial Times editorial by economist Michael Pettis, in which he advocates for U.S. capital controls to achieve balance in its external accounts, is emblematic of a deeper and more troubling reality: American economic policy has entered a conceptual dead end.[1] Regardless of whether the policy lever is tariffs to manage the trade balance or capital controls to influence the capital account, the U.S. is trapped in a framing that prioritizes balance sheet coherence over economic substance. In doing so, it systematically avoids confronting the real issue: namely, the relative collapse of the country’s productive economy and the long-run consequences of financialisation.
Pettis’s proposal is not without internal logic. He argues that the free flow of capital into the U.S. has enabled persistent current account deficits and that without restrictions, America cannot regain control of its trade position. This perspective reflects a widely shared anxiety about global imbalances and the apparent inability of the U.S. to generate export-led growth or reverse its dependency on imported goods. On this view, a more managed capital account would force adjustment in the domestic economy, reduce financial distortions, and contribute to a fairer and more stable global order.
But the very terms of this proposal reveal the inadequacy of the prevailing policy paradigm. What is being sought is not developmental transformation but accounting symmetry. Pettis and others are calling for tools, whether capital controls, tariffs, or currency interventions, that might restore numerical balance in national accounts. However, these tools do not and cannot address the fact that the U.S. economy has, over decades, lost the industrial, technological, and infrastructural depth that once underpinned its trade competitiveness and productive capacity.
This is not a matter of ideology or partisan failure. The problems are structural and endemic to the nature of the political economy and institutions of social settlement. The U.S. economy today is one in which capital flows disproportionately into asset markets, where financial institutions prioritize short-term returns over long-term investment, and where supply chains have been offshored in pursuit of cost minimization. Meanwhile, the capacity for large-scale productive investment in manufacturing, energy, transport, and digital infrastructure has withered. The result is an economy that is both overleveraged and underproductive.
In such a context, the pursuit of external balance through capital controls risks becoming performative; it is nothing more than a way of imposing symmetry on paper without changing the real terms of economic life. The imposition of capital controls may, in theory, lead to a reduction in the U.S. current account deficit. But this would likely be achieved through a contraction in domestic demand, rising borrowing costs, or a weakening of the U.S. dollar’s international role. All of these would leave Americans poorer in real terms. The balance may improve, but only by shrinking the base on which it rests.
This is the core contradiction at the heart of the current policy trap. The United States cannot achieve external balance without restoring productive balance. But productive balance requires a transformation in how the political economy is organized. It requires large-scale investment in infrastructure, a shift in financial incentives toward long-term capital formation, a reassertion of industrial policy, and a re-embedding of economic activity in place-based systems of value creation. It also means a commitment to investing in the literacy and numeracy standards of the population. These are not changes that capital controls, or any financial adjustment mechanism, can deliver.
To be clear, Pettis is not the architect of this policy impasse. Rather, his proposal reflects a broader exhaustion within economic policymaking. The U.S. has spent the last four decades drifting from one set of failed promises to another. The policy experiment has floated from the neoliberal dream of global competitiveness through deregulation, to the post-2008 hope of stimulus-led recovery, to the recent embrace of tariffs and “friendshoring.” None have reversed the underlying decline in real productive capability. Instead, they have reinforced a mode of governance fixated on accounting ratios, namely deficits, surpluses, debt levels, capital inflows. At the same time, the real economy treads water.
Even industrial policy, which has made a rhetorical comeback in recent years, often falls into the same trap. Initiatives such as the CHIPS and Science Act or the Inflation Reduction Act attempted to stimulate investment through targeted subsidies, but they rarely confront the structural problems of financial short-termism, supply chain fragmentation, and a degraded labor market. Without complementary reforms to reshape the institutional environment in which capital is deployed, these efforts risk becoming one-off injections rather than the basis of a systemic transformation.
What is needed is a reframing of the economic problem. The issue is not a matter of achieving external balance, but of rebuilding internal coherence. The U.S. needs to rediscover what it means to be a productive economy: one in which energy, labor, capital, and technology are coordinated to meet material needs, generate innovation, and sustain communities. This means returning to questions that dominated mid-20th-century developmental thought: How is capital formed and allocated? What institutions govern its use? What is the role of the state in steering investment? And how do we measure economic success beyond balance sheets? It also means jettisoning preoccupations with what others are doing, of harbouring grievances and foistering responsibility onto others.
To answer these questions requires moving beyond the metrics of accounting and embracing a new vision of value. Value must be seen not as something captured in trade balances or capital flows, but as something produced in the real economy through work, infrastructure, and technological capability. It means recognising that value is meaningful, ultimately, when it delivers use value rather than the perpetual merry-go-round of exchange value in fictitious capital markets. This is the only basis on which durable external balance can eventually be restored, not by restricting money capital flows per se, but by renewing the conditions under which it can be productively deployed in the pursuit of use-value creation.
Pettis’s proposal for capital controls is not wrong per se in its symptomology of imbalance, but it is emblematic of a larger diagnostic malaise. The American economy is now governed by the logic of finance and accounting rather than production and development. It is dictated by the logic of exchange value, as the dream of use value increasingly fades away for most Americans. The US needs a broader strategy of structural transformation. Without that, interventions such as tariffs, capital controls and such like are likely to be just another attempt to make the numbers look right while the country continues to drift and the living standards of the majority of people goes backwards.
This fixation on accounting balance has also contributed to the rise of a corrosive politics of grievance. By translating deep structural and productive failings into narratives of national victimhood, by blaming trade partners, currency manipulators, or foreign investors, the policy discourse confects enemies abroad when the real culprits are domestic. Financialisation, disinvestment in productive capacity, and political choices that favor asset inflation over wage growth are homegrown problems. Yet the legitimacy conferred by the accounting frame enables a political narrative in which external “imbalances” become scapegoats for internal decay. In doing so, it distracts from the hard work of economic renewal and instead fuels zero-sum populism, which only compounds the dysfunction.
Ultimately, what the United States needs is not a balance sheet correction, but a transformation of the structures through which economic value is created and distributed. Until the body politic confronts the underlying realities of a hollowed-out productive base and a financial system detached from national development goals, the politics of grievance will persist, and so will the stagnation it thrives upon.
[1] Pettis, Michael. “The U.S. Needs Capital Controls to Achieve External Balance.” Financial Times, March 2024.
