Transcripts For CSPAN2 Tonight From Washington 20130420

>> [inaudible] >> well, ladies and gentlemen, i'm cochair of the council on foreign relations, and we are privileged, indeed to have with us the honorable, highly experienced german government offiho crrently serving a minister o finance. you have the resumé, we are running late, and to maximize time for conversation, i'll be undipmatically brief, but let me say that minister has held four positions of chandler cole who served as federal minister for special tasks, head of the council and minister of the interior. under chancellor merkel 2005 to 2009 served as ministers of the interior. he is a long standing leader of the christian democratic union serving as its chair in 1991. he's bee a 1972 serving as parment ri whip from 1981-84, and in 1990, led negotiations for the reimplication of east east germ. he is proficient in economics of law, a doctor of law, and he's written a number of books most recently "the future of modernization: what we can learn from the crisis," and, mr. minister, delighted you with are us, look forward to the remarks, and we'll then pepper you with questions. >> thank you very much. sorry for being late, tday,r thout and minds are on the people in boston. we hope it will be over soon. i have to make some remarks, and in europe, and what i wanted to say, we are the member -- [inaudible] we all know the summit in london , up to the meeting today, and we have made a lot of progress. we agree. [inaudible] too much in the european markets,. it is three main issues we are working on. i think in the open markets, we made last couple years, and that is not. in liberty, finance, and marks, we have a different opinion. aits issue as of late. we have to continue in this country. what we've done in europe, and bond markets, banking. [inaudible] financial markets and it is a very -- [inaudible] everyone at peace. [inaudible] to build by 17 sovereign benefits, you really think it would be easy to get it. it's not easy. i am quite convince the if i go to the meetings in a global level, imf don't know what else, but we have some form of some kind of new global governments. i bet we are not yet. we are in the beginning to find better, and in this dimension, maybe a very difficult way, complex way of european integration in the last 60 years. it's been a major success. it may be in some way, to go on, billing more original, global, whatever governments. [inaudible] we suffered, and all allow this, and only rces in the last three years, adi uderstand that is a success story, but we have to fight it. we have five reasons. [inaudible] resolve at this point. therefore -- [inaudible] we are working again and again, the parliament in germany when we approve. [inaudible] the member states -- there's a lot of member states, and we let the common results, still at risk. excuse. if you don't improve your competitiveness, we will get -- that's been proven. it will happen. we are -- [inaudible] speak to degrees of which it's difficult, to in conflict of risk, and then we can. make a list, differences to buy time and to think it gain access. [inaud last year, and i think, and if you look at this, we have, for every deficit, for every level of deficit, it's the -- [inaudible] we have witnessed the difference in the labor costs between different member states. [iudible increase and going down, slowly, but going down, not increasing. greece as risen up in the last quarter, this last year. they made a lot of process in reducing deficit as well. therefore, we are regaining confidence. if you look at markets, markets are very -- gained a lot of confidence, and bonds for all all the members areding italy, below. there used to be -- that's what they say. what we are doing now is the next step of ing abaning union. , we healady a great great -- you need strong european region of banks because our banking's cannot influence one member stating but several. we need the european -- the european -- been commended, implement of supervisory, things into coming weeks, has been already decide thed. we will build -- we have european, i think, relation on insurance. we have european regulation, just not yet decided, and therefore step by step in the european banking union as well to split, separate the risk of sovereign debt and the banking system as well. we have improved all the relations, financial sector in europe as well, and therefore, i think, we are -- we are generally on a good way. it remains possible, discussed it yesterday evening and this morning again and again. growth in europe is actually not as convincing, but if you suffer, we did -- unique sometime to overcome the crisis. if you promise to deliver immediately, you can only create the next bubble which we decided not to do. therefore, we need time to forecast. the permission is that we will get the turn around in 2014. as you know, every economic figures are things that we build, gets its turn around, and in regaining on their own in 2014, but i'd like to say what we said this morning. no one should expect that europe will deliver high growth rates in the coming years. if you look at the real situation, if you look the democracy, if you look the the standard of living within those systems, the quest in -- cost in europe are dabbled compared to others. .. a model it sustainable growth. in germany, for example, what i have said years ago. >> want to overcome, maybe -- -- unless we have -- said, sustainable growth, we must uniten -- may not rely on the high cost. but my modest -- much more dynamic. ern europe.situation is we are working for happen? able growth and stability. so much problems that need to be resolved and that is the main objective, and i am quite convinced that the support of european population -- member states, political problems, but sometimes not easy to get decision. have no gernm much more successful. without government, been very successful for years without a real government. but sometimes you need -- germany is expressing this, you may have known that -- not a wrong decision -- if you look at that greg, the highest growth we ever had. 70%, which is really high, i suppose, said, yes, we have to solve the problems. thank you very much. >> thank you very much. [applause] is more coordination needed between the two of us, and if so, how would you recommend we achieve that? i think we try to find solutions for europe, even though -- but we will work to discuss -- it's not most problematic. it's not some most problematic to have a common understanding in the financial sector. nevertheless, even in financial regulations, you can suffer what is normally in history, as soon as you have some progress or some more -- the last crisis is far away, so less ambitious, is to ongoing seek reforms. what i tell to my european colleagues, again and again, if we have another crisis like the crisis suffered in 2008, my concern isn't europe. i don't know about the situation in the u.s. in europe, my concern is another crisis and the damage would not only take -- affect the economy but the way of democracy and the rule of law, and, therefore, it's very important that we even oblige financial markets to understand there must be regulation. we have a philosophy all these years of the century, the lest regulations the better for financial markets. then we have no regulations, and markets destroyed themselves. therefore without regulation it does present uque speculation and we have again -- it's only possible on the -- look at the host of just raised the issue on tax bases. it's not a minor problem. if we have asked for a report and the outcome was -- companies which are -- on a global level, a tax burden which is high compared to companies not on a global level because the possibilities, the options to avoid taxation, are in this interconnected world, and at the end you need someone who pays for the budget. otherwise you will create major problems in europe. exist to discuss better market economy, is more successful combined with political freedom and democracy and rule of law, over the economy combined with the political system which is so complicated. i am convinced, more sustainable the basis of freedom, the rule of law, democracy, and might be a bit more complicated. more sustainable. perhaps we have to do this again and again. >> let me ask you quit a different question and that is, u.s. and the european union have announced they're going to negotiate a transatlantic investment and trade pact, partnership, and several have suggested that the united states and europe include canada, which has in the final stages of negotiating a free trade agreement with europe, and include mexico, which already has a free trade agreement with europe so that we don't have different rules of origin and border red tape and all the mess that comes from three separate trade agreements. what is your view? >> look, i am -- as i just tried to say, i am very in favor of think thing globaldensis because t we, especially united states, even europe as a minor partner for united states, we have a common responsibility to make a world statement, and this will not happen if we find better the nuisance to fight satisfied, of course learned people agree might increase the economies on both sides of the atlantic ocean. if we will negotiate in -- europe, huge problems, and i don't know whether you ever suffered any lob -- lob using -- we do in europe. it would be a battle. say, we have to pay much more money for technology, innovation, and then -- but of course, you never touch. nothing is very strong if you look at -- if youave financial regulation. it's really interesting. and at the end, you cannot really make a division between expertise and -- it's totally different in our complex. therefore, i am quite happen this negotiations -- but the minister of economy, very happy to see what will happen, and i think it would be better in our common interests not to exclude mexico and canada. that would be the wrong signal. because we are transatlantic free trade agreement is not -- only the first step in either direction, but we don't want to have mexico -- >> thank you. >> professor, microphone. >> i have one question for you. there may be new elections, voted against the policies, there is not yet any president or any government. may be new elections. don't know the results of them. what happens if it goes in the wrong direction, do you accommodate italy or confront italy? the second question, there's been ongoing debate in the eurozone how much you rely on bailouts as opposed to private -- either sovereign or the banks and you decide it's not the -- what are the rules of the game in which case of either heads of banks and necessary as part of rs of another economy. >> italy. italy is much more flexible than germany. therefore i have -- always find -- the german would really be, oh, hopeless. by the way, i don't share interpretation of the outside of the last election. i think it was a vote against the -- if you look at italy, you can imagine, you can't understand, all ofope a little bit. major concern, therefore it's not -- i don't think it was a decision against the policy of monte. it is successful prime minister, he was a member of the european commission, and i like him very much. but to be a political leader, it's a little bit different. when we discussed -- he said, no, i'm ready to -- i will not run for election. okay, it's fine. but that democracy. late, late decided to run. so, elect the president, i don't know. but i'm quite optimistic in the coming hours. italy is in real economy, not my major concern in europe. i will not tell what is my major concern. but italy, not. they hav hugerivate service. they have -- italy is number two in europe, far ahead of france. the economy have a huge, small or medium-sized situation especially in north italy, has about 150 years they suffer and have always survive. italy is totally european. the italian population is european. of course, -- germany leave the euro zone. we won't do it. why successful? agreed even in washington, if we -- have to find solution. if you translate the principle, it means more effort but as long as things are well, the banking make a lot of profit, and as soon as they have a problem, debate, and have decided never happen. would not happen. therefore we need liability that will be part of the european struck tyler story structural mechanism, and then of course, later on security, and then the member state, and then if needed mucate. obviously your idea of liability -- but it's society of politics. as soon as you make a principle concrete in cyprus, that was a total different situation, for example, compared to greece in greece we had a huge -- we needed haircut for greece, but was also very interesting, all of the world actually is not even disputed. without a haircut for greece, would never have been able to regain access to markets. the model on banks which had attends with high interests. and cyprus banks poured other huge amount of cyprus money. at least got a lot of interest for cyprus. but the speculation went. and then wha the european taxpayer pay for this? in the beginning when it became concrete, there were only two who were in favor of a bailout. in germany, everyone -- in concrete was imf and the german government, and then we had to wait and go a long way to try compromises and all of this nonsense. and a chance for cyprus to regain competitive -- quite optimistic. of course, travel unavoidable but it will work. >> remind you to state your name and affiliation and you're limited to one question. jacob? >> jacob, thank you, mr. minister, for a very sobering and refreshing analysis, which is in stark contrast to some of the cheerleading statements made in some other meetings. so thank you for that. yoed sta by saying that europe will go sub par, be called the long term, it's aging, and the like. and so what bothered me is so much pressure on the ecb to expend further, and we all know that this will not help competitiveness of any country, where the focus on competitiveness has to do with structural measures, and with poor and weak politics, we know at it going to be very tough, and i agree that italy is very flexible, maybe flexible in ideas but not flexible in the the, so -- >> the economy -- >> i have a quick question which is the following. the achilles heel in the past crisis was the weakness of the fiiast t banks. the solution is to strengthen the banks and the best way to strengthen the banks is by having them hold much more capital, and i think that's well-received. you have a problem with a sub-optimal growth of europe. if your increase ratio now for long-term strength of banks you reduce the ability of banks to lend and support growth. how do you square that? >> well, until now we have no problems for -- to fulfill demand all over europe. there's no grant and credit, therefore of course central banks are watching carefully. i think your big banks has already raise a lot of capital. i have to add the european banking -- europe has been a little bit overbanked. therefore, one of the advantages is that we have some reducing of the banking sector. in germany, for example, what we used to have the --off -- you may arm, it's hard to do but i will not discuss on television programs. compared to others we were comfortable. the same has to happen in cyprus. it does happen, actually, and it has to go on. and in a reasonable way in a balanced way. i agree, but we will not relay in your monetary policy. some would like to do it, some others will not, and up to now we have never -- you can't examine it. in all member states we have achieved a lot of structural -- but spain has decided it would -- has never expected any good to happen in europe. but italy did under the monte government -- totally adverse what has happened over decades. and of course i can't tell you the storyies. even france has made a lot of reports. france has made the social contract with major unions and entrepreneurs of the totally new france because, like some people in angelo saxonan markets, the so-called microeconomy in germany, has been not so bad in overcoming the crisis because -- and reduction of limitation of the confrontation between different parts of the society is better to get in with france. it is a new change of heart because the french like revolution. you ask the french what is the biggest event in history, the revolution. but for reform purposes it's difficult to get. we move but we -- the pressure by our -- this why i try to tell you how we fight. there's no way beyond fighting the causes of the member states, and always not only different, financial politics, we need -- we may be compared to the u.s., our labor market remains very regulated. of course, europe remains different than united states, but together we will -- we know you need a strong united states. you need a united states, because your indispensable. you have huge responsibilities not only for the united states, but for the whole world, and you need partners, and we do whatever we can to be a reliable partner. >> front table here. >> thank you, mr. minister for a very illuminating discussion. >> your name. >> i'm jerry from the german historical institute in washington. want to discuss a german problem and that problem is the role of the constitutional court inch recent decisions it has warned against, strongly against the transfer of sovereign german powers, particularly fiscal powers, to the european union and it is a very admired institution, most admired institution in germany. will this not be an obstacle to the transfer of fiscal powers to the european union and. >> you are right. you know the germans and believe especially in the constitution, and since political clout is not very well estimated, constitution causes -- such a high expectation and all this is always a temptation, even for judges, and of course it's not really -- a long-term constitutional cause, very -- we will rely on what is the constitution in germany, and the discussion ofmany gives the constitution a special role, but only on behalf of the constitution, and the constitutional -- the judges know in german constitution, since the very beginning of 1949, germany want to be member of united europe, that was at the very beginning of the event in '49 already, and therefore we have a clear basis in our constitution to transfer sovereignty. that's not just by constitution. they look carefully, has be respect in all decisions of constitution. the rule of parliament, because the constitution calls the same, as long as you have no fiscal policy in europe, the decision on budget has to be -- that must not be -- german parliament has to be involved in european decision, without -- been decided, german parliament, and i think this decision is right. otherwise we have to change our constitution. if needed, up to now, our constitution is fine, to this way of european politics we are are doing. therefore, now our constitution is only a challenge for politicians to understand. it's not a good -- popular opinion only judges. it's good that the -- minimum of confidence of political leadership. >> if we go back to banking as the nest most important step towards fiscal union and you look at the necessary components for the single supervisory position, and then the resolution mechanism and the deposit guarantee schemes could be part of the broader banking. it all relies on the integrity of the bank balance sheets. so my question is, right now, whether it is considered the legacy asset issue or otherwise, there's a disconnect between the interests of national supervisors to dig into and disclose fully the asset quality issues that may be within their banks, and the broader banking union which might share that burden that would otherwise be borne by the national governments if they disclose the poor quality of the balance sheets before it becomes -- how are you as the strongest balance sheet in the european 'union recognize it. the ecb is still at national level to get real banking you need the bank balance sheets to be transparent and believable and we're not there yet. >> in the sequence of advisory mechanism we have decided that a defined bank in all european members will be supervised not any longer by national supervision but by the single supervisor mechanism, and look on the balance sheet whichs to not have on behalf of the different situations and the legal basis of the european banking authority, but to think -- very complicated issue of legacy. we have -- we discussed it broadly in dublin one week ago, in our informal meeting in dublin, and i can tell you not to mention all the details now but i can tell you -- by the way, i would like to be -- don't expect that as long as the situation in european treaty is at it is, the given situation, that the banking and european banking union is the same like the federal reserve in the u.s. europe remains a very strange and very specific construction of combination between european authority, where a lot of consequences, and member states which remain partly sovereign, not hundred%. no european state is really sovereign. if you explain -- american leader would never understand it but cost totally different, and in europe we need this new form of government, and we all agree on this in principle. we fight a little bit but it works, and therefore the european banking union will rely on a -- european law as the way -- then we will have to make agreement and mechanisms and european for deposit insurance and of course national responsibility. otherwise we create the wrong incentives. if you tell a member state, don't care, by the way, germany takes -- it's the wrong incentive. be careful to take part of it. and if that is not enough, at the end it's your idea, you have -- by the way, have the discussion in germany in my head, huge discussion on the target. what happened in the last couple of years. what is the proof that imbalances competitively. have a lot of -- he was ambassador when i was member of core government. >> you helped me solve a lot of problems. >> we did. cause more. exchange of -- >> we'll have a second session after this one. >> you only get one. >> richard burton, authority associate. mr. minister i think i speak for a lot of people in this room that recognize the role of you ask the chancellor have played in exercising leadership on the whole eurozone, euro crisis issue. but is it not solely a german responsibility to my question is about two partners of germany. one, france. one has the impression from washington that the french don't necessarily have the political or the economic strength to continue to be a close partner of germany in the construction of europe. and secondly, the question of britain. they're not a member of the eurozone, but in talking about the evolution and the future of europe, the british obviously have a role to play. but are the europeans and are the germans prepared to make the concessions necessary to keep britain in the e.u.? >> look, europe. it's europe. -as a member of a german government i am condemned to cooperate closely with france. [laughter] >> you can't -- no. i have to tell. european history. the core of european integration. you can't get -- once i had a discussion with a good friend, actually in finland, he told me, should divide the euro zone? how to divide. it's quite interesting but answer one question. in which part is france? he thought and then he said, you are right, we can't. if you look at every member of europe, it's clear. key for europeanen france a integration. it was in the beginning, and it remains. therefore, when my french colleague came to berlin the day after he was appointed, we told, oh, what a silly decision of french voters. never vote for a bipartisan. the difficult at the we have to work together. we are condemned to work together. the french and the german. i just have mentioned that france -- you have to understand germany, and maybe the most difficulty. you have to understand france, and in france it's difficult to make social reforms. it's really difficult. it's easy to give advice. you have to do blah, blah, blah. you can make a lot of jokes but it's france. france is a wonderful country, but by the way, it make -- look, if you look at foreign policies, you can see europe is as it is and germany, and ask what we never can do because we have the history of france. italy, for superran integration at well but without france it will never. so, of course i would prefer to have the stronger position of france, but by the way, i am optimistic that they will say -- the are doing a lot of making reforms, as they implemented some -- make a lot of decisions. they would not have -- cut expenditures, deficit by cutting expenses, and relation is two-thirds cutting and one-third -- maybe you can send from one from the negotiation team to palace to help, and overcome the different position. uk would have been better from the very beginning if uk would have combine itself as part of the european continent, but they didn't. but of course, mentioned continental europe. not uk. if you look at -- we have situation -- at if you look at e situation properly, and has to be careful. i think it's -- my -- the more we succeed in our common european -- the sooner uk can join. the more difficulty there will be a little bit there. suffer a major discussion in society, you can follow it again and again because it's -- even history has changed. france and uk have to learn in a much more difficult way to change history of world war ii. the germans had nothing to learn. it's totally different. there were re -- pay respect to france and uk, and nevertheless we -- if you look at poland, for example, the role of the new member states in europe, real success story. don't underestimate. of course you can see in member states from other times. from czech republic but you look what have been achieved in separating czechoslovakia in a peaceful way. no one would have expected there would be -- they did it, and now very close friends. close friends. and even the former yugoslav, after all this technical war, we are on the way to european success story, and it remains very complex, complicated. >> minister, we could keep you here all afternoon. we're enthralled. all i can say is we're going to invite you back and hope you will come, thank you so much. join me in thanking the minister. [applause] >> the "associated press" is reporting that a boston official says the suspect in the marathon bombing has been found in a boat. and the boston police department pleaded about 15 minutes ago that a suspect is in custody. earlier there were reports of the sound of gunfire in the watertown neighborhood just outside of boston where authorities have been searching for dzhokar tsarnaev. 19-year-old college student. >> next, japan's economy with the country's deputy prime minister and finance minister. the new japanese prime minister has instituted a package of economic policies, aimed at ending two decades of stagnation and deflation. this is just over an hour. [applause] >> i want you to know they have been sitting quietly like this the whole time. i would like to tell you a very, very hearty welcome to a very good friend. he has been with us here at csis many times in many roles, and he comes now as the finance minister at a time of remarkable significance in japan. everyone has heard about the so-called obi economics but there's no success to obi-economics without action. it's going to require this man, who is going to put in place the structure to bring around the transformation. this is a very big year, and it's important for japan, obviously, very important for the united states, and we all need to learn to listen carefully. we were talking just as we were coming down about this metaphor that the prime minister used about -- i don't know if you saw this more than, the finance minister talked about bazookas. that -- having represented japan at the olympics as a marksman but he didn't use bazookas then but he's using bazookas now. would you please welcome our guest. [applause] >> thank you. thank you, -- hemre-thank you, dr. green, and thank you all for coming to join me here. i am back, too. when you say that each japanese prime minister spends only a year in office, you are talking about me. in japan politics is like revolving door. you are talking about the the senator and me. thank you very much. but you can see something not so bad here. you are now looking at an administration that has two former prime ministers, and three former party presidents. you must envious because you can do anything like that in your present system. bill clinton, vice president of obama, very difficult imagining. now i will start off by touching possible -- upon our alliance. my view is, something is wrong when you say that the u.s. is always on the giving end, and japan always on the receiving end. about tradition of security and our alliance. the japanese must stand tall as an equal and responsible ally to the u.s. the japanese must work hard as a guardian of international common goods, peace, prosperity, and democracy. in fact, that was my grandfather's grandfather's aspirations. when serious at the time u.s.-japan security treaty on september 8, 1951, in san francisco, he wrote that one day japan could work with the u.s. as an equal partner, to sustain the liberal international order. 62 years later, that aspiration still holds. it's my belief that japan has a normal responsibility to enhance peace, happiness, and democracy in the world. that's why, ladies and gentlemen, japan must begin its economic power, that's why we are working hard to turn around our economy, pushing what you call obi-economics. make no mistake we're pushing obinomics not only for the sake of economics, we are doing that precisely to make japan your reliable ally and the partner in peace, prosperity and democracy. that's a surprise to the tpp. in march, we said that we would be joined the tpp negotiations. last week, tokyo and washington reached an agreement about some of the issues we needed to solve in advance. now i am very much glad that we are on the right track to enter the negotiations. yes, the tpp is about the economic integration. but it is also much more than that. remember, japan is still the second biggest economy in the world, if bound together under a tpp, the american and the japanese can make the world a much better place. the u.s. and japan bound together in the tpp can be a major stabilizer across the pacific. think about our combined size, it is really mega. japan must be stronger. now i will spend the next couple minutes to tell you about the economics. the logic is plain, simple, and straightforward. first, the bank of japan eases money. second, the government comes in with fiscal policies, stimulating real demand. and third, the government introduces a growth package, including tpp, massive dee -- deregulation, and other plans putting the growth on the sustainable orbit. that is it. that is what you call economics and its three arrows. by the way. he was an athlete in his days. to call it a combination of arrows, fits him most nicely. if will not actually play it. i was a skeet shooter, and in japan for the 1976 olympic in montreal. so, i call them bazookas. anyhow, the yen has become cheaperrer as a result but only at a byproduct. to say that cheap yen is around gold would grossly miss the point. the big d, deficient, is too much difficult and too much persistence to get little. we have to use every possible mean. at the end of the day, a shrinking japan could only do harm to the world. only a growing japan could do good for the people in japan, for the people in america, and for the people in the world. that is what we are aiming to bring about. if you are still in doubt about what i say it is probably because you have never gone through deflation. economic deflation. let me tell you a bit about what it is like. it all started when the bubble collapsed in the early 1990s. stock price index at the end of 1989, was about 800 -- 389 -- sorry -- about 39,000 yen. it fell down towards low of 7,000 yen. the major cities hit big in 1991. it became lower by 87%. 13 yen. as a result, many banks had negative equity. many companies also had the negative equities. banks were interested only in reducing their balance sheet. companies were interested only in paying back their debt. rather than investing in new ideas or products for future growth. they choose to minimize the cost-cutting reform. unions wanted no layoffs, so they chose to accept the paycut. gradually, money gained value. then goods, growth slowed because no one, except for the government, was willing to invest. vicious cycle took root, deflation begins very persistent. i must tell you, deflation is like slow motion death by losing temperature. it is early stage. it does not feel so painful. you wish may not grow, but cpi, consumption price, is also flat. so, your purchasing power does not decline that much. it is already too late when you have finally become aware that you are a hostage and that you cannot escape the vicious cycle. because it is a slow process, deflation can ring no alarm bell like inflation, that's why deflation is much more harmful. so, what to be done? why abenomics. before december general election we thought the most important thing would be to get in a deflation mindset of japanese at the outset of abenomics. we saw that the landscape should be redrawn so that people can get willing to take risks. it was at that time that the idea of three arrows, or three bazookas. we made it our campaign platform and push it hard during the campaign, and the result was we won the landslide victory. at long last, voters gave us mandate. strong enough to do bold things that were long-time coming. we are done. nothing then, other than just voicing our policy package, and our willing to do it. interestingly, the markets started to reform. tokyo stock started to rise. it is -- it speaks volumes about how important it is to change people's perception, outlook, and mindset, it is true that japan is only a country that has gone through deflation. none other nation has a deflation after second world war ended. that is about a postwar history. if you see prewar examples, japan is among the fewer countries that have succeeded in containing deflation. john king published his general theory in 1976. prior to that there were someone in japan who did changing policy in the early 1930s. his name is takahashi, who six-time finance minister and one-time prime minister in the early 20th -- earl 1920 -- early 1930s. sorry. takahaskhi save japan by doing exactly what we're doing now. is build monetary easing and fiscal spending stop the de deflationary spiral. he also did it big and fast, or shock and awe. so much so, president roosevelt would say later, that takahashi had given him inspiration. it encouraged me to think that among our predecessor, there was someone who made it. we wish to follow his footsteps. now back the real genesis of our abenomics. started when mr. -- -- then head of the boj, bank of japan, and i issued a joint statement for the first time in japan monetary history, generally this year, so for joint statement with boj. in that joint statement the boj essentially introduced the inflation of 2000. he call it price stability target. on our part, the government pledged to run the kind of microeconomics, and fiscal policithat are responsive. it is also written that the government should encourage the competition and has japan's potential and establish sustainable fiscal structure. what we did thereafter, what we will do from now on, is all based on this joint statement. anyhow, the first bazooka is bold monetary policies. i will not say more about it. you may just want to open your newspaper or magazine. they are now telling a lot about so-called economics. the new governor of the bank of japan really did it big and fast, shock and awe. we are all glad. he showed guts. second overall, he is good communicator, and, third, he is well-connected with and respected by the member of the central banking community. now let me go on to tell you more about the second bazooka. that is a fiscal policy i'm looking after. please note, at this point, that we are not making a big government. making conservative does not apply to the japanese situation. conservativism is about small government, and tax reductions. the situation in japan is more complex. when the private sector cannot spend and only save on the deflation, the government must be the spender of the last resort. thinking that way, we put forth our lodge-scale supplementary budget for the fiscal year 2012. public works are also important. not only important, vital. unless we spend more and do it now on the bridges, roads, and tunnels that are all more than 50 years old, at any given time, they may fall apart. i know in the state you have exactly the same in 1980s. i also like you to remember what people said about golden gate bridge, hoover dam and so on. when constructed in 1930s, many people called them simply lavish and extravagant. however, more than 70 years after its creation, hoover dam continues to draw more than a million visitors a year. without that dam, las vegas would have been -- how -- a very different place, i say. without golden gate bridge, the tourists, the tourist economy in san francisco, would have been much smaller, i'm sure. so, we are iesti into our future generation when we do public works. that is my definition for public works. i also believe that our tax policy should play big arrows. in japan, interestingly, land prices are still extremely low, and yet the companies don't invest. they are capturing the depreciation cost again as a result of deflation. so my ministry introduced a new arrangement. another new arrangement if you buy a new machine and equipment, for your domestic business expansion, you can get tax deduction or special depreciation. if you invest more in research and development, you can also get your tax reduced. furthermore, if you hire more or pay more to your employees, you can get a tax benefit. please also note that we do what we do in order to begin economic demand, not to increase our export. japanese economy exports only 11 to 13% of the gdp. the number is bigger than that involved u.s. or brazil maybe. but smaller than all the rest, 192 nation all over the world, we are number three nation. lower than japan is u.s. and belgium, i think. the german and maybe 40% of the gdp are to export, while 25%. there's another power we can use the environment. that is the power of persuasion. here we are lucky as both of us ex-prime ministers, he and i have met a whole bunch0s ceos and they should remember their patriotism and hire more, or pay more to their employees. it is -- for the first time in many years an increasing number of companies are willing to pay more. however, getting rid of denation -- deflation mindset alone cannot hamper long-lasting recovery. we most leave people with expectation to sustainable economic growth. and for the purpose we must have two downside risk. one, inflation without growth. two, interest rate hike without growth. let me understand one by one. let's assume that you now have rising cpi, but you have no pay rise. the economy is that is a bad inflation. people should suffer then. it is right here that the third bazooka should come into play. the third bazooka, if you recall, is a package of growth enhancement policies. i know it's hard to come by. i am not saying we can do very easily. still, it takes us only to look into miller -- into mirror to see who you are and then realize you can do more. i know i sound like i'm an optimist. i even believe that to lead your nation, you had better be an optimist rather than cynic or pessimist. one thing inommon between snzo abe and i, is both of us are true believers in japan and resources. call us an optimistic duo. for example, what japan can offer. high speed train. the bullet train run average delay sign 306 second. -- sign of 30 second. not a minute. since its launch in 1964, the closed absolutely no human injury, not to mention no accident. they actually are following you, magnetic levitation technology which could connect new york and want in 40 minutes. not 40 seconds. 40 minutes. ... >> i hope you know this is dis-u know. [laughter] not english, french. animation, pop music, and song, some of you may recall there as a foreign minister, i introduced to be given to a known japanese man created. furthermore, some of the small companies in japan are amazing. my favorite one in tokyo. both total monopolies in the market of injex need -- injection needles. why it only company that produces injection needles as sharp as a mosquito. in other words, you don't feel any pain. how many employees are there? only six including the president and his wife. [laughter] amazing. few other countries have such a known, yet world class companies. only in japan you have family businesses whose dated back to seven years ago, so the real challenge for government is this, to let go. we should simply let the companies shine themselves. that must be at the course of the sad baa zoo gay. for further details, bail with me a couple months more. we have expert groups. they give their proposal about innovation and others. i'm looking forward to the proposals, likely to be bold, something that could dramatically change, that would, and in some, to prevent bad inknicks from taking shape, policies are most important. what about the bad interest rate hike, the second downside risk. it is evident that if you pursue only boll easing without putting our fiscal house in order, we'll lose your confidence and trust. after japan, gross government debt exceeds gdp. unless we pursue fiscal prudence, very much hard. there may be a sussen -- sudden rise in interest rate. no one will benefit from that, needless to say; however, you shouldn't be overly anxious. the truth is there are only a handful of countries that can fan their entire government debt in their own currencies. most of the countries must issue bond currencies rather than their own. japan can finance its debt by issuing bonds in its own currency. other such countries includes britain, switzerland, and, of course, the u.s. united states of america. only four countries in the whole world, i think. for them, what is most important is, fist of all, to lay out the credible road map for reducing the debt, and second of all, to stick to the map and win confidence from the market. i'm proud of the government agreement both opposition parties achieved last year. the agreement has become a bill. the bill enables the government to raise the -- to raise the rate of the conception tax from 5% to 8, and then 8 to 10%. the -- should take place in a year from now, and the second in october, the 2015. now, now -- sorry, no, no one wants to see tax rates becoming higher. tax hike is the most unpopular thing to do for the politicians. i think it is the maturity of democracy that made it possible for the parliament to pass that bill, and i am proud of it. also remembers here is a fact that massive easing was made possible on one condition. the government must pursue the fiscal prudence. that's what we promised in the joint statement i mentioned earlier. when the next two years the boj buys a huge amount of government bond in a scale unthinkable so far. the market must become more nervous whether to see whether or not the government is committed to improving its fiscal situation. so far, the fiscal prudence is not a task for the future. it is a clear and present one that we ought to start tackling now, rather than later. i'm determined to facilitate the critical environment and raise contention, based on the provision on the tax reform agent. we must also list japan's own entitlement reform to put the gross of the government expenditure in check. previously, at the g20 minutes, together, with other member nations restricted. we aim up having the budget receive dit, by 2015, and achieve balance, some by 20 # 20. we are going to publish medium term fiscal plan in the middle of this year the second interest rate hike is avoidable. take a deep root in order for economy to seek the sustainable growth. finally, conclusion, let me say only a few words about what kind of country japan ought to be. japan must be a place where the world meets effort. japan must be a place where risk takers can be given opportunities, not just once, but many times. both, exprime minister present there's a chance for second coming in jay pap. [laughter] japan must be a place where animals have, invite the -- japan must replace for innovation. japan is now on cutting the edge of new medical technologies. nobel prize winner said japan is a country that is the closest to bringing the stem cell technology to the bedside. that is about it. ladies and gentlemen, once again, we are doing all that, not only for the sake of the japanese, but also to make our alliance stronger. at the end of the day, the u.s. is the biggest democratic economy and japan still second. together, we can do a lot and the sky is the limit. thank you very much for your parks. thank you very much. [applause] >> we'll take some questions, and 25 years ago, i went to work in japan, and the bossed asked a young rising star to ensure i didn't get in trouble. [laughter] he failed. [laughter] but i was correctly informed with a long term growth strategy. it would add considerable sustained growth. what are the third principles you think about? >> even though -- even though supplemental -- [speaking japanese. ] >> translator: regarding the third bazooka, perhaps this question might be better addressed to someone else than myself. i hope you can wait for another few months and here directly from the people who are responsible for it, for building the ideas right now and you will be able to get the most accurate answer from them, but as far as i know, allow me to also try to answer the question. [speaking apaes [speaking japanese] [speaking japanese] >> translator: well, at this moment, a number of people coming up with wonderful ideas in large numbers and mainly has to do with deregulation or regulatory reform, particularly, let me focus on the medical care area for the moment. for example, in japan, there is, already, a production going on for producing care robots because we have the technology for people to think something in their mind set, then it drives the mobile's arms in whatever direction you'd like to see them move. already, that type of technology has been developed in japan, and the idea is to apply this to be used for the robots, but, unfortunately, at this moment, we have a ministry, and who knows nothing about robot development assistance, and it would be got, and what they are trying to do is just apply directly the pharmaceutical oriented development system to the development of the nursing care robots, so many times over clinical trial and experiments that is been performed so that by the time approval is given, the said robot will become outdated. this is the way not to go. we'll have legislation to overcome this type of issue, for example. [speaking japanese] [speaking japanese] [speaking japanese] >> translator: robot is just one mere example, and another example found in the worker supply system. i think in the world countries, apart from japan, having the private companies to run those systems, but in japan, the whole purview belongs to the mic, mission international communications, that's their exclusive area where they view influence on, but japan is a country which is nope for being successful in recovering 99.99% of the charges so almost most of them is of revenue, water opposed, and those systems are run by either the state or the municipalities so we hope that we can privatize the areas themselves. it's just like schooling a facility. a public sector can construct the schools, but the private sector runs the facility. >> thank you, matthew? >> we have microphones and matthew will have an example by identifying himself. [laughter] >> i'm math thee goodman here, and thank you, mr. minister, for the compelling remarks. i have a question about the first arrow, but i want to comment on the answer to mike's question because i think it s yre specific in your answer to the question on the growth strategy, and i appreciate that. you like moga, and if i may cite the most famous american monga, peanuts, charlie brown faces lieuy who is holding a football, encouraging him to kick the football, and he wants to kick the football, but doubts that she will hold it and thinks he'll take it away because she does, and he ends up flat on his back, and so i think a lot of us in washington are like charlie brown, we want to believe, but there have be experiences in the past where the growth strategy has not been specific or carried through. i think everyone is looking forward very much to the growth strategy and to the specific elements that are credible and carry through on. that's the comment. the question is about the first arrow. can you give us more flavor of the discussion today and the j20 about monetary stimlouse, not just japan, but advanced economies, and the impact of that op global markets and whether there was significant concern about that issue and any agreement to address monetary stimulus. [speaking japanese] [speaking japanese] [speaking japanese] >> translator: in fact, g20 meetings were held with the finance ministers, and the previous the second or second one of which has been hell -- held just now in washington, and i was asked in the question, of course, i will want to know about thempthe easing policy for the banks in japan because right now the interest is on the solo. it's to point to 5%, not 5%, but .5%. people are worried that it might indeuce a situation whereby massive flow might indeed end up in the emerging economy. [speaking japanese] ] speaking japanese] [speaking japanese] >> translator: so when we talking about the city basic hours, the primary aim of reach is to lift the japanese economy out from the deflation in the recession. that is precisely the priority, number one for us, so if the yen depreciates, this is only a mere byproduct of what we are attempting to make. these are the story lines that we have been saying to people who want to know more about this, and i think more or less understanding have been gained. [speaking japanese] >> translator: during the communique, and perhaps i can gain understanding on this. can i read them out? >> we have agreed while progress save been made, fed acton equiredded to make growth strong. sustainable and balanced. some countries have taken steps to stimulate activity since we last met, last met in moscow, last met. in particular, japan's region policy actions are intended to stop deflation and support domestic demand. [speaking japanese] >> translator: i think the portion that i just read out to you corresponds to the answer which is in due to answer your question which might have con taped some steps about our majors. >> arthur? >> thank you. i'm arthur alexander, teach japan economy at georgetown, and you're making the subject interesting again. one of the interesting problems you face, and i do not envy you, you said fiscal consolidation, consumption tax goes up next year and the following year and will take a big hit on consumption on income that will have a negative impact on the economy, and i wonder how you're balancing the two issues of fiscal consolidation and demand? >> [speaking japanese] >> translator: the most important point because whenever we may try to increase the taxes, it does not necessarily result in increasing tax revenue. we have known the actually examples, we said happened in the past in many numbers. [speaking japanese] [speaking japanese] >> translator: back when the consumption tax went from 3% to 5%, we initially thought by doing this we would receive the increasing in the tax revenue by 5 trillion yen; however, it owrn -- turn out to be the tax increase dampened consumption by individuals, and as a result of that, the economy got worse. it used to be back in 1997 that total tax revenue raised property tax, income tax, and in the following year, it was reduced down to 37 trillion yen. we hope that we can add on another 5 trillion yen to the tax revenue, but it didn't. instead, we leave 4 trillion. [speaking japanese] [speaking japanese] [speaking japanese] >> translator: and last year when the moving party, dpj, mbp, and they were able to have an agreement to sign the agreement and there was a number of provisions included in that document, and to put it simply, what recommend was that we have to see a pickup in the economy, otherwise, in no way the consumption tax, and whether to do it or not would be eid to october, if we have engaged in the economy then, we can have the tax, but if it doesn't work out that well, then the timing of the asset tax referred to date so we have been serious in considering the implications about the tax, so if you ask me to say definitely taxation at this stage or not, we cannot say definitely. we have to allow time economies would be get back, and then judgment would be a good call, definitely. >> we have time for a very short question. wait for the microphone. >> thank you for speaking today. you mentioned hetanspacific partnership as a means to economic growth for japan. i was wondering about the sectors, specifically rice, soy, wheat, beef, and domestic political pressures influences negotiations? [speaking japanese] >> translator: idea a that all d perhaps, and, for example, in the case of the united states, the sugar cane, 100%, then the producers in the southern parts of the united states would go down completely due to mexico. [speaking japanese] [laughter] >> translator: likewise, people like farmers, then it will take for sure, so there's going to be no more cowboys left in the united states. if that situation is totally, utterly inconceivable. [speaking japanese] >> translator: i know any countries havecepstive issues for themselves. for example, the united states has been twisting japan to do something, and already japanese -- [inaudible] united states maintain the 2 # 1st, and this is a condition that they asked to keep. [speaking japanese] [speaking japanese] [speaking japanese] [speaking japanese] [speaking japanese] [laughter] [speaking japanese] [speaking japanese] [speak japanese] >> translator: likewise, the offer by japan, of course, from now on we have to decide which item in the article. it is all up to the negotiations for details from now on, so we might decide eventually that some items are for subsidy, and, in fact, there's a positive side to it, and there's the price of 3 # 00 or 350 yen a piece in shanghai or countries in the arab area.fo hesitated and soldt 300 yen, for example, but it's the trace that's different then at a high price, so just -- [inaudible] they enjoy the benefit of it, and as well, and a much more better place, and in the title, the rice was known for, most undelicious kinds of rice, and plenty before that, and rice has been -- for the excellence in their products, and why? because we were -- you can hardly -- much of the result, patty rice, patty field, into rice. there's motivation, and 25 times larger than elsewhere. in this way, even rice is much more high, and right now, because of the economy change and so forth, rice production area is really shifting towards much more, so i think the area shifts to much more in the fruits area like strawberries, for examp, isaw that i see i'm not an expert, but i look at the welfare around japan, and i can tell it's changing. >> thank you for a comprehensive concrete and candid presentation. we'd appreciate if you give the minister and his delegation a chance to get to the airport and get out of their necks. there's copies of the speech available out front and on the website, but, first, let's conclude, please join me in expressing our appreciation. [applause] >> she was very bright and political and that's why they got together in the first place. she spoke several languages. she was extremely well educated so she had all of these things going for her, but she had suffered a series of tremendous emotional blows. three of the four children died, one in the white house, one shortly after her husband's assassination sitting next to her in the theater. i mean, the kinds of grief this woman was going through is amazing. >> folk demonized her, thought she feels crazy. well, we found out she was not crazy, but she was the voice of a significant person, and i hope someday we get a better view of the range of things that influenced her life, not just the tragedy. >> more on mary todd lincoln in the conversation with his tore yaps and you live monday night at 8 eastern on c-span, c-span3, c-span radio, and c-span.org. >> economiest'ian fletcher, economist of free trade do you want work and conservative case against free trade talking about u.s. trade policies and the trade deficit at the commonwealth club in california in january. this is just over an hour. >> good evening, and welcome to the commonwealth club of california. i'm chair of the club's international relations forum. we welcome our viewers on c-span, and we inprovide our audience to visit us online at commonwealth club.org. it is our pleasure to introduce the author, coalition of prosperous america, a nationwide grassroots organization with over two and a half million members, dedicated to fixing america's trade policies and compromising representatives of business, agriculture, and labor. previously at the business council, a washington think tank founded in 1933 #, and before that, an economist in private practice serving mainly hedge funds in private equity funds. educated as at the university of chicago, lives in san fransisco. he regularly writes blog posts about trade in popular online publications. the blogs can be read at the huffington post and world net daily. his most recent book, "free trade doesn't work" was published in 2011 and is available for purchase here tonight. mr. fletcher will autograph copies. let's give a warm welcome to ian fletcher. [applause] >> hi, i'd like to begin by pointing out to everybody that america's eis$500 billion a year. start with that fact to make it crystal clear that if we got a trade problem in the country, that is to say trade relations with the rest of the world or not in good order, it's a big problem, not a little problem. it's not an obscure little thing. we've all been sitting through weeks, if not months of discussion of the so-called fiscal cliff, and look how much money is involved there, this is a comparable amount of money. people have been worried that the fiscal cliff would result in huge amounts of aggregate demand as economists calling taken out of the economy. well, thanks to the trade deficit, we're looking at a comparable amount of money taken out every year regardless of what happens, and it's been going on for years and years and years. now, some people can't understand what the trade deficit is, some will, but the trade deficit is the difference between what america exports and what we import so what it really means to say that we're $500 billion out of balance for the rest of the world is that we're consuming more than we produce to the tune of $500 billion a year. the reason that's true is the only place you can get goods to consume is you either make them yourself or import them from someplace else. this is another way in which the united states is living beyond its means. now, those remarks were to try to get you interested. people don't usually pay money to hear me speak. i assume you are all at least somewhat interested. if you look at free trade, once you understand there's an issue here with the trade situation, if any of you got a wallet on you, pull out a ten dollar bill. the guy on the ten dollar bill etary of the treasury, ca the intellectual architect of american capitalism, one of the founding father, and an envowed protectionist as was abraham lincoln, as was virtually every president prior to world war ii. what this tells us is if we have a trade program and we have this idea that free trade, you hear that free trade is just taken were granted as the thing that's right, best policy, ect., ect., well, given that for most of american history, americans did not believe in free trade, did not practice free trade, and during that era, i remind you that they were the most successful economy in the world. we have provocation that maybe economic theory or what passes for it on the editorial page is not correct because how could that be that the united states could have repudiated free trade for so long, been an a protectionist company, and teddy roosevelt viewed free trade as a form of moral degeneration for reasons to talk about later. no, he did. he says thank helps i'm not a free trader, that seems to coincide with a fatty degeneration of immoral fiber m i think he met it's a la -- laissez faire, and the idea of laissez faire, deregulate everything. that's an idea that no developed country takes seriously domestically. the united states has not taken that idea seriously in our domestic economic policy for well over a hundred years. there's rhetoric from right wing people that we believe in laissez faire, and look at nixon or what george w. bush did in office and tried to do, nobody believes in it, and, yet, suddenly, when you look at the international economic policy, you take this strange theory that died in the robber barren era of the 1890s, domestically, and suddenly, it's treated like gospel truth, so another thing to wake you up on the controversy, and i harp on this because free trade is the perceived opinion spooned out by all the media, most of our political systems, and so it takes a little bit of stage setting here to hopefully get you guys to take the idea seriously, that maybe as i put in the book, that free trade doesn't work. here's an interesting thing, a translation into chinese. we have stuff translated, we have some friends here who told me it's okay, but if you look at all the oteccs in the world, ch, japan, germany, greater gemny, us tray ye, so on, so forth, they don't believe in free trade. these are the successful economies in the world, where we borrow money from. they have money right now to spare, and we don't. the reality is that the other major economies openly repudiate free trade, for example, the government of beijing is brazen about promoting imports and limits imports from dozens of countries and have major policies that do this, and other countries with democratic systems and less author -- author tearian forms of government, they do it in a similar way. no question japantot trade and germany and others manage their trade. they control what their imports are. they control what their exports are, and they are doing well, and we're the oning borrowing money right now, and they are the ones lending it to us. the other countries going our way knowing free trade is a known truth of economics are countries in similar problems we're in. for example, the u.k. is in the same boat we are. hopefully all the facts should make you realize that this consensus we have in this country, that free trade is just a known good thing, maybe there's a problem here. there was an article in harpers by jeff maverick which questions, wait a minute, is there a problem here? is in some depth, i did work as an economist in private practice looking for a book that could tell me if free trade is best, has anybody actually look at this in a very long time in there was no such book so i decided to write the book myself. what i discovered is that for start, con consensus is a hologm projected by special interest groups, specifically u.s. based multinational corporations referred to as american corporations. they are really not, and there's circumstances they are clear about the fact. they don't care about the american national interest or u.s. opposed to the other countries where they produce goods and sell them. it's in their interest to promote the poicyso-called tad it's free on america's part, very, very few restrictions on imports into the united states. locally speaking, this construct free trade is not free trade. it's free trade on the part of the u.s., which is why i'm talking about it, and it's managed trade on the part of the other major economies, but it's our belief in so-called free trade that allows them to manage their trade against us, and when you add up all their policies for their interest, that's where the interest comes from. now, u.s. based multinationals find it very convenient to have access to the american market, to be able to produce anywhere they want in the world, and to sell here without restrictions or speedometers imposed on them in return. they promote a construct free trade with the ability to push itow of lobbying and dominance of institutions like the u.s. chamber of commerce, very strong over the republican party and less strong, but still real over the democrats, and they also have the indirect influence of the intellectual establishment in the country which is a structure composed of journalists, think tanks, universities, and various other people who think and write and have an interlocking influence on public opinion. all of these institutions are in various ways under control or influence of the large corporate interest. i have no interest in promoting a marxist conspiracy theory, but it's true american media is dominated by fewer than half a dozen large conglomerates. it is documented, not denied. if you look at the major universities, who runs these universities? who is on the board of trustees? who funds them, okay? this is not a conspiracy theory, but a basic reality that the money and the power are set up so that when you have interest groups with so-called free trade in the interest, they have the ability to push the academic establishment and the public policy establishment and journalists in print and television to tell the world, the public, the voters that this is the right policy whether or not it is. what i mention in the book is if you look at a poll done ten years ago of economists, you see that 93 #% of american economists are in favor of free trade with reservations. only 70% prepared to endorse a ww.reservation. what this raises in my head as it should in yours is the question what is a reservation? what you discover when you scratch the surface of economics is that the consensus of free trade is known to be a good thing all the time, that is not really what economists think. they think it's dangerous to tell the public anything else because you're just going to get some idiot popular form of protectionism shoved down the country's throat with no logic to it, and that would be a bad thing. you're better off just telling people free trade is best. it's like if you talk to economics, they give you the free market answer, and economists know perfectly well that there are a lot of limits and caveats to the con cements of free markets, which is why we don't live in an 1890s robber barren type economy anymore, and no country does, but they also know that it is danger to allow people to h aytotise ynd take a certain rhetoric in public talking to those they view as the uninitiated, but if you scratch the surface, you discover that's there 30% gap which, okay, some reservations. what's that mean? 30%, of course, take the other side, but what you discover is that if you talk to economists that specialize in trade as a field because economists like other disciplines is broken down into fields. you discover that people are actually trade economists are less dogmatic on the subject than those who are specialists in some other field or just generalists who are only telling you what they remember about trade economics in grad school. they are less dogmatic about free trade, and i puzzled over this for awhile, but the reason for this, i concluded, is if you teach purely economics, you can be true to the fact in economic life there's winners and losers. we know this in our personal life, if our career, in our shopping expeditions, there's winners and losers, more advantageous and less advantageous outcomes for you, me, and the other guy. if you are purely economics, shrug your shoulders. if you teach in a business school, well, then, you tell people how to be the winner, so business school economists are much more realistic about the fact if you teach people how to conduct, you have to be real realistic about the fact that international trade barriers are there. if you tell the students you want to import into the united states, there are few restrictions, which is true, but if you want to export to china or some eli bu still coknifing country, you have to know what the rules are. the rules are not what it says on paper that they are. we have a beautiful construct called the wto. we have free trade, all these countries, all have free trade. most of the rest of the world understands that's not a sham, but it's a gentle mep's agreement to conduct managed trade in a relatively polite way. most of the world and those of you who are lawyers may understand this does not take the letter of the law in domestic or treatly laws as seriously of the united states. we observe commitments and the rest of the world doesn't. if the united states tried to practice the kind of managed trade other countries practiced under current law, you could go to a federal judge, and you can ste the government and make them n most of the rest of the world. the wto doesn't have nuclear weapons or make a country like china open markets to the united states if the chinese don't want to, and it's -- that's -- most of the rest of the world understands that. anyway, back to the original point, if you teach economics to business school students, you have to tell people there's winners and losers in the game, and what i discovered from talking to people have businesses that operate internationally is that it is all completely obvious. for example, one of the major steal makers in the u.s., i know their ceo says there's some countries we can't sell to. other countries, you can operate in, but you have to put the plant there. it's understood that's the reality of the game. now, when i fo thought, okay, why doesn't the theory line up. i was app inclined person saying, okay, this is true in practice, but false in theory, whatever. it's, like, no, you got the wrong theory so if you have experience of how things work but doesn't line up, well, just don't give up on your theory, but get the right theory. there's a number of things when i looked into that. the first thing is that rests on a lot of assumptions. when they have free trade economics, is on its own terms, if you grant the assumptions of the economic theories, it's true you got to dig out what the premises are. for example, most of the theory that you look at, they don't deal with trade deficits. they just assume that in a free market we have this wonderful e quill lib bree yum to be reached and you'll have balanced trade. sometimes it's not an explicit assumption, but it's there, and it's very different if you don't. why is it different when you don't have balance trade, that is to say you run a trade deficit? we're not trading with santa claus, when we import more than we export, okay, we just don't get given that stuff out of the goodness of the hearts of a nation. we have to give them something in exchange, and what we give in exchange is we go into dead to them or sell off existing assets, it's like if you wanted to sell off more income as an individual. you have to rack up credit card debt or sell unwanted junk on ebay. as a result, when the united states runs a trade deficit, we have a declining net worth. we own less. we are poor. that's,ing, that's not economics. that's not mentioning issues of when we buy goods produced abroad opposed to produced here that destroys jobs because jobs are created overseas where the goods are produced opposed to created here. it's no accident that our economy's having a hard time recovering. part of that is due to the overhang of debt and deleveraging, but part of that is due to the fact that you have 500 billion dollars a year of demand that is just going overseas. there are other issues with the economic theory behind free trade. those who studied economics in school or are familiar with the issue heard of something called the theory of comparative advantage, okay? it's a theory invented in 1817, a brattish stockbroker and became an economist after the wealth of nations on vacation, and this theory has been around since then, and on its own terms, the theory is valid. i spent a chapter in the book explaning what the problems with the theory are, they go on forever, and another issue with comparative advantage is the problem that trade moves the posts, okay? what i mean is the theory of advantage, even if you take ita, but even if you buy 1 hux%, it's a theory about what is the best swap to make for this stuff versus that stuff right here right now. it completely ignores, does not have anything to say about how trade will affect the industrial and quick structure of a country. if we buy automobiles from japan or aircraft participants from china, we just don't get goods today for less money than what we would have paid to produce themself our ourselves, but that affects economic base meaning their industries grow and strengthen in the future. it means ours won't. this is a significant cumulative effect. if you look at the hoer renne does deficits since 1990 and add up the cumulative loss of economic growth due to the deficits, you're looking at something that has been calculated to be about 13 #% of the u.s. economy, the size of the canadian economy that's not there that would have been there if we had balanced trade. when you look at you'll economic problems, all budget and cuts made to programs that we don't want cut or the fact the united states will not buy fighter planes, well, that traces back to trade because we have less tax revenue because we have less economy and less income because of less economy. it's a relentless consume mative effect, a problem that's ignored by simply looking at the theory of comparative advantage. >> one other thing, i am primarily concerned with the economic implications of the free trade issue. there are a lot of noneconomic implications. for example, the united states today unable to put a single military aircraft into the air without using components made by potential adversaries, and i gave a talk at national defense university in washington three years ago, and they said, yeah, we kind of know that, but the defense contractors control congress, and nobody cares. okay, i'm not a defense guy. i'm talking to military officers. you guys worry about it. now, if you don't mind the idea of the u.s. being dependent for its defense on a hostile deck at a timer ship, go ahead. t somebody else about it, but that's part of free trade. other nations manage this stuff. the u.s. historically prior to the end of the cold war had controls on this stuff because we understood that you need descril base, not just for economic reasons, but also for security. now, interestingly enough, this ties back into american history because i mentioned al exapedder hamilton before. one of the reasons that he became a protectionist, and he was the lone economist among the founding fathers, the guy who turned this country in that direction. he talked to general washington and said, look, if we just have free trade in the new country pee put together, they knew what free trade was, it was a policy option, controversial, they didn't talk about it in the same vocabulary, but they knee they had choices. hamilton says we will end up as an economic dependency in europe. at the time, united states was almost entirely agricultural society with minimal manufacturing, and the great industrial powers in europe, particularly, the u.k. who we just fought a war of independence against. hamilton said we can't be dependent on these people so we need to have a protectionist policy. the interesting thing is that it's not just an issue of national defense. if you look into the history, and, by the way, it goes back to the renaissance, and protections first emerged under rational discussion in the italian renaissance between a myth out there that economics began with adam smith. it's really not true, but what you discover, if you look back 500f the history, you discover every economically developed nation got that way practicing some protectionism, not just the united states, but also the other developed colonial countries like canada, australia, even south africa, strangely enoughing and then you turn back europe, first industrialized country, the u.k. turned aggressively to free trade in the mid-19th century, but prior to that, they were the most protectionist country in europe. there's a phrase that you may have heard if you cross the paths with economic history. there's a myth out there promoted by free traders that mother tiles was about kings who wanted to horde barrels of gold in the palace. i have to observe having gold is the only way to expand thonepp s are based on gold. the gold is money supply. we talk about expanding money supply with the fed. they wanted a lot of gold. mother tilism was a systematic philosophy back 500 years of how to manipulate the free market to develop the country because laissez faire will not do it, never has. i don't know of any country that's gone from being a third world country to a first world country over laissez faire. remember all countries with third world countries at one time. the u.s., at the time of the american revolution was considerably more primitive than bangladesh is today so every country, you have a counterexample to the mist that free trade is best. that provokes the question, why did we change our minds? why did we go from the protectionist policy of teddy res vet in 1900 to the free in ? the answer was it was not an economic decision. i realized the switch, want to trace it down to figure exactly who changed their mind and when and why and how they persuaded everybody else. you know what i discovered? it never happened because it was not an economic decision at all, but a political decision to win the cold war. the era of the marshall plan and us figuring out what to do with europe so they don't go fascist or communism again is that, okay, build up the economies among other things. shoot a lot of bad guys. you know, nazis on trail, and the other we have to do is build up the economy. when people are poor, unemployment, ect., ect., they do this politically crazy stuff, so, two things, one, throw the can bulp emio the woldo exports toad we'll encourage the export of american technology on the cheap, and alsgoing to tie them to dependents on us. now, what that means is if you ok at strhat looked in the 1950s klihey might be communism like italy, we're in a position to say to the italians and trade unions, if you get cute with the reds, we ct off oeexports, and there's 30% up employment in six months. that's the game. it's to make the people rich, but also make them dependent on e amica market so we cut them off if they make trouble. that's what harry truman and the guys were about. that's what they were doing, and the u.s. was so incredibly economically strong in this erad economic output peaked at 51% of the world output in 1945. the idea of worrying about anybody else competing with us or losing out to anyone else is ridiculous. we are worried about the rest of the world going communism or phackist -- fascis so that's whyth decision was taken, and that was the game map for the cold war regimely. if you act nice, you have the good markets, otherwise, we put an embargo on you. it's not the only thingbut it's a part of the cold war gae pl in on until 1989 that the assumption of opening markets to the rest of the world. e th olicy,oued, ovennt toe pold ha to aaioizing i tell people all sorts of things tha econocs says that really doesn't. you make a decision like that, and like a lot of o a onomicisionscan make a oice for one reason, and itn d intellectually aentrenched i the interest groups, and you are stuck with it, so question is, okay, what do you do about it? thankfully,heeeway here. the firstti i t united stateseeds to do focus therade deficit. shortnswer is you want to zero out the trade deficit, and how you get tough on the rest of the world is not that difficult to do if you makethe decision to do it. there's a lot of discretion, nobody has power over us, can stop us from doing whatey are doing, and we have a lot of options. you cn manage trade by managing trade or t countervailing capital flows that take place when trade it paid for. as i pointed out, when you ave trade deficityou sell off assets to go into debt with foreign nations. if there's capital contls, that can't happen forcing trade back into balance. the advantage of that is there is less legal infrastructure to remake because we have fewer legal commitments on tt, butu c. if you look atwhae rest of the world does with itself, with other countries, people understand what the game is. there would be squealing, hollering, but fundamentally, the rest of the world would have relieveddedh that, if that is because they know that the current u.s. situation is unsustainable. youcan't run up your credit ca debt forever or sell off existing assets forever unless you have an infinite supply of assets. at some point, the current situation is goio unwind. whether it unn the cris, that's just going to be all over the headlines one day, or whether it's going to unwind gradually, i don't know. anyone who claims to know, i'd like to know oven what grounds they predict. the world is not going to give us stuff we don't pay for forever. what would that look like? well, the obviously thing is a crash in the international value of the u.s. dollar. it's because the u.s. dollar is so high that we import so much stuff. only, with a strong dollar, it imports are cheaper and more expensive. if your dollar is over valued, you have a trade imbalance. now, some of you may have heard of the issue of chinese currency manipulation. occasionally that's in the press. it's one of the things of the organization i work for, coalition for prosperous america, has been working on for some time, and strange about chinese currency manipulation is the trash ri department refuses to designate china as a currency manipulator, an official action when the law requires them to do or not do despite the fact that the treasury's own economists repeatedly concluded china is manipulating its currency. there's not really any serious controversy over whether they do or whether they don't. there are some websites magazines out there that try to make a controversy out of it. the chinese do not deny it is way i was told by a guy i know at the taiwan embassy who says this is a silly controversy. the chinese do not deny it. it's not a dispute. how do you manipulate your currency? well,aue of currency is important. if you manipulate value of the currency, you can ma manipulatel trade, millions of dollars every year. it's determined, like everything else in the market, by supply and demand for the corp -- currency so when you buy things from americans you demand dollars because that's what americans accept. when you buy things from chinese, you demand what they accept. you manipulate currency if you create barriers to imports so that the chinese buy fewer stuff from america than they otherwise would. you can manipulate the currency, one of the things you do is all these dollars have to come back to the united states. we send them. you have to do something with money. you can't just sit on it. we'd like that money to come back to us by buying goods and services, but it doesn't the the chinese government buys and has been buying treasury bills, bonds, and so on and so forth and other stuff. they accumulated foreign currency reserves, not reserves, but cash, reserves of liquid instruments. they have now something like $2,000 per person in china. that's a lot of money for a third world country. there's no question that they are manipulating their currency. one of the first things that the obama administration could, should, and won't do is have a treasury department, an executive agency designate china currency manipulator so the cues can start taking countermeasures against it. there was a bill to crack down on bill manipulation passed in the house and senate in separate sessions so was it was not law. that was one of the immediate things people ask, what could one do, but the larger issue is the u.s. similarly has to get wise to the fact that free trade is a theoretical construct built on sand, and it's consequences, which are observable, are bad and they are inexitble. if anyone has questions, i'll take them now. >> i got a question. >> one moment, please. we'll bring the. i should say, author and senior economist, [inaudible] >> sorry, i think now -- yes, sorry, and we'd like to remind our viewing audience this is a program at the commonwealth club of california, why free trade doesn't work. so your questions are recorded anded in the telecast, use the microphone that i'll now -- >> thank you, a spirited talk. i have a question from a noneconomic perspective, and and the presidents should have the power to make treaties provided two-thirds of the senate concur. now, all the free trade treaties, other than the u.s.-canadian one in 1988, have passed by simple majorities. okay. now, i don't remember a constitutional amendment, you know, allowing the president and government to do this. how were they able to get these things through? legally? >> well, you touched on a larger topic as you talk about which is that free trade is a problem, and then free trade agreements are a problem in their own right. the big issue with free trade agreements is not just that they mandate free trade for the u.s. and not really for the rest of the world. the big issue is that they have other provisions in them. most of the tax has nothing to do trade, but about protecting the rights of foreign investors. this is a problem both in the u.s. and other countries because what it means is you have treaty commitments that say basically you've agreed to certain policies and you've given up your democratic right to make, say, environmental policy worker safety policy consumer safety, and a lot of other things, environment are the big ones because if you make some change that empyres somebody else's profitability, well, that's lumped into the same category as a bunch of marxist bandits riding down from the mountains stealing everybody's stuff. in principle, protect foreign investors from exappropriation. what it's become is it's become a way of cementing in place policies that may not be the best policies, also profoundly democratic. with respect to the specific legal question, you'll have to ask a lawyer. i do know that treaty law is the law of the united states under the institution, and that is problematic because when the constitution was written, it was not expected that treaties would have a lot to do with the policy issues of a country, so right now, you have the ability to use treaty laws t under the inability to pass certain provisions that would make it through the house and senate, but if you sign a treaty that says we must do x, then you have a commitment. >> okay. well, the -- these are called free trade agreements, okay, but they're treaties, are they not? >> sure. >> yeah. okay, well, thank you. >> you're very welcome. >> hello, mr. fletcher. you mentioned early in the talk that other countries have a de facto reinstructions on trade or management of trade. let me narrow it down a bit. can you discuss how, let's say northern european countries manage their trade that we in states don't. >> let me begin with a slightly entertaining example pointed out to me. in south korea, if you buy a foreign car, everybody knows what happens is you get a tax audit by the equivalent of the irs. korea, in terms of the china is somewhere in the middle. okay. i'll give you an example, northern euro, the' thing to i understand, i use the term "greater germany" meaning germany and a host of countries that follow german quick policy. here's an example. if germany, one of the things they have that we don't is their corporate structure is more dependent on debt opposed to equity, that is bank finances opposed to stock market finance. what this means is you have giant so-called universal banks there that own large proportions of the major corporations. if you have bmw, for example, deciding, no, we're not going to buy cash raters from the german manufacturer that's supplying us for 30 years, but buy them from a company in texas or england or south korea, wherever, they are going to get a call from the banker saying, look, you idiot, you cut them off, they go broke and can't bay what they owe us, if you want trade credit again, you don't do that. obviously, when you have a system set up that way, nobody has to make that phone call. it's just understood that there are people you're supposed to do business with and people you're not supposed to do business with, and it's still a capitalist country. it's not a command economy. there are limits how inexe tent people get and still expect to be in the club which is why there's interim pressure, everybody's got to be good so we do business inside the club and remain profitable and so forth, but that's just one of the more polite examples of what sometimes called crony capitalism, a terrible term, but i use it because people understand it. sometimes crony capitalisms in malaysia and indonesia is rich, greedy, incompetent people scratching each other's back. in the civilized polite countries, the masters germany and japan and the countries that follow after them like korea ataiwan, there's different arrangements, but the pattern is you have a clubby, corporate establishment, and the government understands the game. the government wants to favor domestic producers, understand that they got to be competent to do that pushing people hard, but there is app assumption of insiders and outsiders, and that assumption is just so in the system that nobody really has to talk about it very much, but if you go talk to people in the right time in the right place, nobody denies this because they say, look, it works very well for us. it's good for the country. why -- what are we ashamed of? please. >> so forgive my economic naivety, but you mentioned at the beginning of the talk that one of the issues with economics or economists speaking is they say something as rhetoric, like, free trade is good because they don't want someone sub stanuating bad trade restrictions; right? so you can imagine in the same way you've said that the dogma of free trade has floated off the political underpinnings in which it was founded in the cold war that the old boys club, we don't do business with them could free float away from that. .. it would make things even worse. i absolutely agree with you that the solution is being applied by a lot of foreign countries which is very different and probably not appropriate for us but if you look at the rest of the world, they have their own diverse solutions themselves and there is a common pattern towards balancing of trade and running trade surpluses particularly against the biggest on the block uncle sam but the ways in which they do this are very different. if you just apply a flat tax on u.s. imports that's one way to push our trade back into balance that doesn't

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