tv Heritage Foundation Discussion on Global Economic Freedom CSPAN August 31, 2015 3:00am-4:11am EDT
tablets and smartphones and wi-fi all over the place, such that tv is not just a stationary , lean back experience in the living not just tv but video. >> monday night on "the communicators." >> the heritage foundation hosted a discussion on the global economy and international trade. undersecretary was among the speakers. he said that issues should be on top of the agenda for the 2016 presidential campaign. this is one hour, 10 minutes. >> good morning, everybody. welcome to the heritage foundation.
it is a delight to have all of you here this morning. areend of august and people still a vacation. school is starting in some areas. it is feeling like washington is getting and the gear of things. we're all too happy to help it along. very happy to be here for the release of a new report of the heritage foundation. the 2015 global agenda for economic freedom. a copy of it. this is a study that is produced by the davis institute for national security and foreign policy at the institute for economic freedom. both of which are distinct and the heritage foundation. i am especially happy to be here for two reasons. , a is to hold my good friend keynote speaker. he is one of the smartest people i know and economics. his also a true gentleman.
but most importantly, he is a good guitar player. he is a fan of the blues and jazz as i am as well. i keep teasing him about putting together the economic freedom group as the latest ring in rock. something is wrong with the term. the other editor is i was, the founding the latest of which will be discussed today when i was vice president of heritage. see these reports continue to watch them grow. the most important things the heritage foundation does in my opinion. to have thismely discussion today because of what is happening in china. and the u.s. stock market.
problems that are causing the melted of china's stock market not limited to china alone. many of the same economic ,ailures, the rest of the world the huge debts, corruption, bloated state owned enterprises, lack of transparency, lack of rule of law and economic freedom. as you will learn from today's discussion, many of the mistakes china and others are making are being done by this administration. we should not be surprised our economy is in trouble, too. loss in particular the ability to lead the world out of recessions and troubles which i'm sure all of our participants particularly grant, will be talking about. to get us started, grant will deliver some remarks. he wore many hats and has a wide range of experience in trade and economic policy and law. in 2001 to 2005, roughly the same time i was at the state department, and with
undersecretary of commerce for international trade. a number of historic trade deals were enacted while he was in office including the normalization of trade deals with china and the training development act of 2000. before his tenure at commerce, he was chief international trade councils of the senate finance committee, which is the top trade position in congress. today he is the principal managing director at a traded investment consultant firm. he is an adjunct professor, or director of the international technology and innovation foundation, and also a senior advisor to the center for strategic and international studies. after grant makes his remarks we will be joined by commentary from bill olson.
bill lived for a number of years in beijing and also spent some time in moscow, so he has a unique perspective on the economies of these two countries which i'm sure he will share with you. also jim roberts, research fellow for economic freedom and growth of the center for trade and economics here at the heritage foundation. i will ask grant to come up and deliver his remarks and then after that we can hear from the other two. thank you very much. grant: thank you for that kind introduction. i am at the age where when somebody goes back through your bio you start aging all over again, so i'm not sure how much i actually really appreciate introduction. [laughter] the blues part i like.
the one thing that keeps us young. my job here is first of all to applaud the release of the global agenda. i look forward every year to the index coming out because it is a benchmark against which we can measure the extent to which societies first of all, recognize the importance of economic freedom and then second of all the extent to which institutions promote it or undermine it. i will come back to this at the end, but the problem that you see reflected in the global agenda report that is coming out is where the united states is. it has been mired for some time. america has to be a beacon in terms of economic freedom. we cannot depend on hong kong to be the advocate. there is no alternative. we have to be the defenders of not only our own freedom but understand that our freedom depends on embracing and
defending elsewhere. i'm going to come back to that. but really where i want to start, and why i welcome the opportunity the foundation has given me is an opportunity to reflect on my own experience but also to reread the road to serfdom. i'm going to start with a personal reflection and that i am going to spend a little time on highest -- highest -- just as a reminder. and that i will come back why i think economic freedom ought to be central to the presidential campaign and why i think the problem we are facing in the end -- international markets reflect why this freedom ought to be central to the debate. first to the personal side, i am what i would like to say the fortunate son of my father.
he was a refugee from lithuania. like many immigrants before him he received a new name courtesy of ellis island. he was extraordinarily conscious because of his life experience of the freedom he enjoyed in his adopted country because he could measure it against the freedom he had lost in lithuania. when my father was born in 1922 the first year lithuania had gained its independence in roughly five centuries. he witnessed the gradual erosion of that independence forces from within lithuanian society and without. he saw was destabilization and then occupation by the soviet union. its destruction following the
nazi invasion and soviet occupation, at which point many of his friends, many of them jewish, were murdered, and following the return of soviet forces following the 90 day siege at leningrad. my father, who had gone underground to resist the soviets, tried to persuade his father and their family to leave. his father refused, arguing that things would return to normal after the war. my grandfather in a letter to his father expressed his sorrow for not having followed my father's advice, but in fairness he had grown up in czarist russia and had succeeded by becoming a widely respected hospital administrator. he could not conceive of how different life might be in a totalitarian society. in the end of my father did escape with only his sister. they made their way across europe and eventually to about
that took them to sweden. german control stop them about a mile offshore and my father had to swim a mile to shore. it was qualified freedom. they were a group of refugees that found their way to sweden at the end of the war. as is often seen both in my father's life and my own, his luck held. as he was in stockholm and applying for refugee status, essentially political asylum, even my mother who was serving as a foreign service officer in the hotel diplomat, which was at that point the american embassy in stockholm, and my mother used to tell a story that she walked down the hallway and saw this man who is about 6'3" with dark green eyes and dark hair, and says she fell in love immediately. of course my father tells the story from the opposite
perspective, and he came down and saw this beautiful woman, nearly 6 feet tall, blonde hair, blue eyes, and fell in love immediately. [laughter] in those days the foreign service was a lot less enlightened than it is today. as a woman you were fired if you're married, even to a u.s. citizen. so when they finally did mary in 1949 my mother left the foreign service and returns to minneapolis for i was born. i am the fortunate son of all those events. roughly 70 years has passed since my father met my mother at the hotel diplomat, and it was ironically at that time in london, another expatriate, haye wrote that book we now know as the road to serfdom. i had observed it before i read it.
my father and i would normally walk together and enjoy the beauty of the mississippi river. every so often, which kind of frightens you as the young boy, my father turned to me, really and in a very solemn way, to try to explain what his experiences had taught him. the single statement that summarizes his lesson is one that returned to me when i was rereading hayek. he turned to me and simply said, grant, someday someone will offer you security in exchange for your freedom. you should never take it because he lined up without either one of them. and in broad outlines, that was hayek's view. at the end of the day, what hayek warned about is just as relevant today as it was in minneapolis. freedom is individual. it cannot be dissected neatly between the political and economic realms, and for that reason hayek warned that the lack of economic freedom was a death sentence for a free society.
hayek underscored, quoting the words of hilaire belloc, that the erosion of economic freedom with the erosion of freedom itself. as hayek put it, the -- freedom to own a private property is the most essential freedom. only the means of production is divided among people acting independently that no one has power over us. we as individuals can decide what to do for ourselves. hayek understood, moreover, that the freedom of individuals to shape their own lives is closely associated with the growth of commerce. that, mind you, offers a stronger explanation of the rationale for free trade in adam smith's famous discussion of the division of labor in a pin factory, or david ricardo's
discourse on comparative advantage using portuguese wine. it is about the free part, not about the trade part. at the end of the day it is about the right of the individual to choose, free of coercion by the government or by another person in our society, that indicates the idea behind free-trade. hayek recognize that that erosion of freedom what interests the individual farmer or worker, but the basic individual that we had inherited from russo, pericles, the supreme tragedy as hayek thought was that it was largely people of goodwill, then you were admired and held up as models in democratic countries, who prepared the way -- if they did not actually create the forces that ultimately destroyed that inheritance. indeed, an apt subtitle for
hayek's work would be that the road to hell is paved with good intentions. those who advocate for a limited economic freedoms do so as an appeal for the common good. this includes those who advocate for raising the minimum wage despite the fact that it acts as a tax unemployment itself. the result of raising the federal minimum wage is a pretty good testament. the obvious example of that, but the most obvious example of that is the affordable which compels every american to buy health insurance regardless of their need for it, that acts as a compulsion to justify it be desired to make health insurance affordable for every american. it ignores the way it paves the way for the reduction of other freedoms.
obama's willingness to ignore the rules, it is symptomatically the broader justification by which the ends justify the means, regardless of what that means in terms of respect to the law and the constitutional limits on executive power for the erosion of individual freedom. the fact is that the affordable care act was originally supported by researchers here at the heritage foundation simply underscores the problem. it is confronting the political exigency at any moment. it is easy to forget that liberty is the ultimate and we seek, not merely an instrumentality that can be casually sacrificed on a series of incursion that is outweighed by the common good. hayek understood this because he knew that the principal that the end justifies the need -- it means is that considered either amoral or amoral. there is literally nothing which consisted collectivists
must not be permitted to do is observe the good of the whole. so much like liberal socialism, hayek put that they are guided in their endeavors by the power they possess and by transferring that power to society or to government they are therefore extinguishing power and the exercise of power which at times disenfranchises people. but what that implies is that the tyranny of the collective good is defined by individuals who claim to record -- represents the interests of the politically disenfranchised. it is essential to understand hayek's time. as a young man in austria he witnessed hagel rejecting the interests of an individual in favor of the interests of the state. we tend to see german history through the lens of world war ii. what hayek sought to remind us of was that the evolution of
german thought pre-dated and prefigured both the embrace of socialism in germany in the late 19th century and the later emergence of nottingham. as hayek pointed out emergence of nazism. the theory of the collective good could not be realized without compulsion. the key to the practical input -- a limitation of that example was the promise of security. german society recoiled from chaos in the aftermath of the armistice that ended world war i. the promise of security became powerfully seductive. freedom from choice rather than freedom of choice. as hayek pointed out, far from increasing the chances of freedom and promise of security became the greatest threat to it, which explained why again,
my father's words continued to echo in my mind. in turning to this year's report i don't intend to discuss any insights there, which i of the panelists will do, but i want to focus on one right up front. the report says that in 2010 the united states fell from the highest category of economically free countries and has been stuck in the ranks of the mostly free, second tier economic freedom category ever since. that, to my mind, represents the key issue of the 2016 presidential campaign. at the end of the day we have to determine to ourselves if we are willing to vindicate the idea of economic freedom because it is indivisible of the idea of freedom as a whole, and whether we'll pursue that not only for ourselves and make it eight key principle of our foreign policy, and organizing policy of what we do. frankly, even in the reagan years, it was not fully integrated as a part of the agenda that we need to pursue. the reason we need to do this is
very much not only in our own interest but in the broader idea and acceptance of what it needs -- means to be an individual and to be free. thank you very much. [applause] >> thank you, grant. thank you, kim. as kim noted, our index of economic freedom over the last 21 years has shown that we lead the world in economic freedom and growth. greater economic freedom correlates with more freedom per capita in more countries around the world. worldwide increases in economic freedom this year have been driven by improvements in trade freedom, monitoring freedom, and freedom from corruption. regrettably in the past year average scores for most other economic freedoms including business freedom, copyright,
they were freedom, and financial freedom, have fallen. more troubling in 2015 where the losses of economic freedoms due to increases in the size of government, higher government spending caused this deterioration. our global agenda that is based on these index of economic freedom scores and they are calculated using four pillar areas. region of in every the world. for example, while international trade plays an increasingly significant role in the economies of the united states and other countries,
unfortunately negotiations for further trade have grounded to a halt. the global agenda notes some potential bright spot for global trade, the ongoing effort to negotiate a transpacific partnership, or a 21st century trade agreement that could be beneficial to each country willing to make policy changes that would include reducing tariff and nontariff terriers, improving protection of intellectual property, improving international investment rights, dismantling agriculture and many other government subsidies, and limiting the support of state owned enterprises. as documented in the 2015 index, protectionist measures, industry specific subsidies, are essentially protectionist enforcement actions, such as anti-dumping regulatory measures reduce efficiency and competitiveness and diminish the prosperity of all nations. all countries should resist these policies and the united states should lead this resistance.
labor freedom and business freedom scores are higher in countries with laws, regulations, and policies that give employers flexibility and opportunity. for example the biggest problem in the indian economy is uncertainty about land ownership that affect hundreds of millions of people. american leadership can be decisive at promoting property rights and anticorruption measures in other countries. the global agenda covers seven world regions, plus a special section on the arctic. i will look at the first four in some detail and then my colleague will cover the rest. in central and south america and the caribbean, economic freedom scores range from excellent in chile to abysmal in venezuela,
with major players, such as brazil, the world's sixth largest economy registering comparatively low scores because of protectionism and a heavy-handed regulatory regime. there are some positive regional trends. most of the world's fta's are either based in the region or have regional participation. members of the pacific alliance nations, meanwhile in other countries economic freedom scores have plummeted. while numbers in the pacific alliance have full access to international markets and a positive inflation outlook, the other countries have limited access to international markets. a tenuous fiscal position, and negative inflation outlook. the global agenda praises the unprecedented energy reforms undertaken in mexico that could
create numerous mutually beneficial opportunities for the u.s. and other multinational energy corporations, but urges mexico to continue to liberalize its economy. meanwhile the benefits of the trade organization are already substantial and should be expanded to remove remaining barriers to international trade and investment. turning to the rest of the world, in europe we see that the former ussr countries are still struggling to achieve more economic freedom. in sub-saharan africa, despite some setbacks caused by political turmoil and ebola in the last year, sub-saharan africa is one of the most improved regions in the 2015 index. indeed six of the 10 countries graded in the index were
registered in sub-saharan africa. the region as a whole continues to underperform when it comes to following through on reforms that will help the emergence of a more dynamic private sector and result in more broad growth. critically, the continued existence in some countries of uneven law, exarcebated weak rule of law means residents who lack connections are still being left out and have limited prospect for a brighter future. the global agenda calls for prioritizing the fight against endemic corruption in africa, fragile production of property rights, and insufficient entrepreneurial environment. kenya is in the process of devolving its highly centralized governance and empowering local governments with direct control. this devolution process could result in desirable gains in limited government, but the
devolution effort requires not only enhancing local legislative capacity, but more critically improving budget and oversight capacity. the agenda encourages african economic integration, formal inter-african trade. a serious and bold land for a greater continent wide industry action. be put into those steps are being taken however haltingly. however complex customs unions, administrative procedures, and burdensome regulations continue to hinder these efforts. our global agenda also encourages more robust
investment flows to africa, and south saharan africa has been hindered by instability. countries such as china play by different rules in africa. there are ok investments in extraction industries may help build a port or a highway but they carry with them a potentially that are legacy of corruption and nepotism. many of the same themes emerging in the global agenda's findings that we have already talked about are present in the middle east and north africa, where countries have undergone political and economic upheavals during the arab spring. nevertheless, long overdue economic reforms continue to be neglected or postponed in that region due to political instability. as a result, the gradual rise in economic freedom that had been recorded in recent years has come to a halt. structural and institutional problems abound, and the region's unemployment rate is among the highest in the world. these problems are complex and rooted in decades of authoritarian rule in the middle
east which has kept power and resources in the hands of a few. as long as national economies are dominated by the state sector, political leaders will be reluctant to reduce power is share power if that diminishes their axis two control. difficult reforms are required. so now i would like to turn the floor over to my colleague to cover the rest of the world. thank you. [applause] >> good morning. nice to be here. my presentation will be a bit different. i recently lived in beijing for over three years and returned last year to the united states after living in putin's moscow for about three years. i will cover what is going on on the ground in these countries. i have about 10 minutes to talk
about china, india, and russia. if my remarks are quick, i apologize. we need to leave time for questions and answers. first, the big picture about asia. the view from 60,000 feet. my feeling is very strongly that after being in the global economic engine for a long time, especially east asia, economic growth has clearly peaked big-time in asia for a number of reasons. three quick reasons. one, demography. you have fertility rates well below 2, approaching 1 compared to 2.1 in the united states. much of asia, especially east asia, has this phenomenal dividend.
it is now entering, very rapidly, a demographic deficit. reason number two, which i will go into detail in about 60 seconds, the china story. china now accounts for about 45% of asia's gdp, and its growth is slowing much more than you think it is. reason number three, something no one is talking about, since 2008 much of asia, especially used asia, has sailed through this economic crisis. why? credit growth. debt. there has been an enormous -- even outside of china -- an enormous increase in credit growth which no one has really talked about. in fact if you look at total debt, household, corporate,
government that is a share of asia's gdp, it is higher now than it was before the financial crisis in 1997. much of asia, especially east asia, has manufactured growth the past 6, 7 years, built on a surge in liquidity and death. it is a huge story. let's switch to china for a few minutes. given the recent slowdown in china the question is should the global economy be concerned? the short answer is absolutely. here is why. china, as you know, is the world's second-largest economy. about $12 trillion compared to the u.s. at $18 trillion. there is no close third. it surpassed japan in 2010 and is already twice as high as the japanese economy. it is the largest trading nation for 75 countries, and is by far
the largest importer of commodities in the world, which is of course a vital exporter for many emerging markets. this is why commodity prices are at a 14 year low, and over the past seven years china has accounted for an incredible one third of global economic growth. naturally it is a concern for the global economy is china enters this so-called hard landing, which i think, that will go into detail later, is a mathematical certainty. it is not based on intuition, it is a mathematical certainty. china has to enter a financial crisis. the question is whether it occurs sooner rather than later.
we have seen the chinese stock market collapse about 50% over the past month or so. that is not a factor of concern. only the chinese experienced loss. and about 60% of chinese market capitalists. even though i don't think -- i think it will probably fall further. it is not very but it is moving there. i'm an economic fundamentalists that is currently dramatically slowing china's economy. it is an economic model for the past three decades.
it was built upon 3 big pillars. of course exports, investment, and of course don't overlook the property market. i believe all three of those pillars are well past their expiration date. if you look at china's current account surplus, a broad measure of the circuit trade surplus, as recently as 2009 it was 10% of the gdp. guess what? last year, 2014, it shrank to 2.1% of gdp surplus. contrary to conventional wisdom, exports to china and not been a significant source of economic growth since 2008. that engine is gone. china is not going to export its way out of recession this time given the state of the global economy and the fact that china already has a 13% share of global exports compared to 2.5% as recently as 2000.
i have talked to a lot of property developers in asia on the ground, the housing market of course is much more important than the stock market. in asia. it is the recipient of household savings and it is supported by many developers in china. there is a housing glut of unsold units of 70 million unsold homes. 70 million. to give you some scale at the height of the u.s. financial housing crisis, the backlog of unsold homes was 1.5 million. now if that figure is correct, 70 million, then you should see housing prices fall, they have to fall. in fact they had been falling. housing prices in all the major cities, tier 1, tier two, and
even some of the tier three cities, housing prices have been falling for two years. the housing sector is a major source of savings for the chinese household and now the prices are falling. then of course we have to mastic investment, which until the last -- we have domestic investment which have been running to a mind-boggling 7% of gdp. they're operating at a 70% capacity. i highly doubt from what i hear on the ground and what is released, growth has slowed to
5%. if you think about it, you are investing about 50% of your economy. and that 50% is generating 5% growth. 5% gdp growth. what we are seeing is a precipitous decline on return of investment. it is reflected in the stock market. 80% of the stock market capitalization. that is a major benchmark. 80%. state owned enterprises. i have got to keep moving here. the anticorruption campaign, the scope and intensity is far greater than anyone expected. xi jinping, i believe this is
the strongest leader china has had since mao. a quarter of a million officials have been held in detention or formally charged with corruption. a quarter of a million. this is more about clearing the old guard. this is much bigger than that. so far, well over 100 have committed suicide. let's move on to india. let us see if the picture is any brighter there. we'll talk about modi. the first year there was a lot of doubt of the intention of the administration.
evaluating modi's first year, if i had to, i would give him a gentleman's c. to be fair, in india right now, most economic indicators over the past 18 months, even before he took office, had been improving. inflation is falling. the fiscal deficit is shrinking, a lot of it is because he scrapped the planning commission which was a relic of socialism and central planning. that was good. he gets some credit there. the bottom line is -- there have been no really what we call big bank reforms which india so sorely needs.
india is getting incredible growth. india has to create 12 million jobs a year and other current conditions they are not going to do it. not 12 million. so far the only economic policy they required -- guts to undertake with the world of the law that makes it very hard to acquire land. this is critical. as his need to acquire land and the government needs to require land to build infrastructure. that law has been held up in parliament. the goods and service tax which was meant to really simple by it, it it was a no-brainer. it should easily pass. it did not. that tells you a lot. the bottom line, i think america
is looking at modi. there was this perception that he would be a thatcher or reagan. they wanted smaller government. that is what they work for their entire lives. smaller governments. i don't think smaller government was ever his intention. he did not want smaller government. he wants more efficient government. that is a very big difference. i will finish with a very quick comment on mother russia. i don't know if you have been there since the 1990's. i lived in moscow for about 24 months but it has changed radically since the 1990's. go back if you have a chance, just don't tell them you are american. you are canadian or english. they can't tell from the accent.
most can't speak english. even during the chaotic 1990's the russian parliament had power. they almost impeached yeltsin in the late 1990's. today they are rubberstamping for vladimir putin. they have no power. if they challenged putin he would simply dissolve them and put them in prison. the media in the 1990's is relatively free. i tell you this. radio, tv, it is completely controlled by the kremlin. all important decisions in the country go through the kremlin. the state is essentially run by the internal security apparatus, make no doubt about it. you cannot exaggerate the economic problems in russia. you have seen recently some good news on population. the population has actually stabilized over the past three or four years. why? one reason why is of course per capita incomes rose because of
high oil prices over the past decade. another reason is birthrates in russia -- or at that time the soviet union -- were high in the 1980's. that generation is having babies. what happened to the birth rate in the 1990's? it crashed and burned. so a decade from now what you are going to see is the resumption of a very rapid decline in russia's birthrate and population. i have to be honest with you, the russian economy, which i studied intimately for two years, is not very complicated. it is a petrostate. it takes $110 a barrel to balance the budget. unfortunately for the kremlin, we have oil now hovering around $40 a barrel. we are not even close.
the difference is that they have -- or they did have -- massive exchange-rate reserves, but you can burn through those really quickly. russia is in recession. the economy has been contracting for at least three quarters. russia has been floating on a blissful sea of hydrocarbons for over a decade, and enacting those structural reforms when they had time. i'm going to finish here. i know my presentation is bleak. there's a reason they call it the dismal science. when i present with my boss, he's not here today. he's on vacation. when i present with him he always wants to present with me late in the afternoon so he can go out and get a drink. [laughter] i will finish with a quote from one of my favorite movies, most
of you have seen the 1987 movie "wall street." remember the scene when the character played by charlie sheen gets arrested by the feds for insider trading? he gets arrested inside the office in front of everybody. and his boss is played by al holbrook. al tells him in this quote. man looks into the abyss and sees nothing looking back at him. only then does he find his own character, which prevents him from falling into the abyss. i am an economist. i happen to like crises. i will tell you why i like crises. you don't get structural reforms unless there is a deep economic
crisis. think of china late 1970's, india 1991. think of asia 1997, and after that those countries and regions and active large structural reforms which led to much stronger growth. as for russia, the man looking into the abyss is vladimir putin and russia is not going to change until he is gone. thank you. [applause] >> ok. the bar will be open after the session is over. either that or coffee will be offered. we have a few questions here for questions for the panel. we have a gentleman here with a microphone. it would be best if you could wait for the microphone. if you could just raise your hand, identify yourself briefly, and in the interest of time if you could please ask a question and if possible keep it short and to the point. would anyone like to start?
>> voices america. dr. wilson said we should not worry too much about china's dock market crash. i'm just wondering do the other experts hold similar views on that? >> yeah, i think you do have to worry about it. it is probably for something that my colleague would agree, the truth is it represents a discontinuity based on a lack of information and transparency in the way the chinese government operates. because there is not enough information on the marketplace expectations are never in line with reality. and then you get this sort of sharp contraction. it's not unlike what underpins the financial crisis in the united states. the unwillingness -- or rather xi jinping's willingness to concentrate on consolidating power makes sense in a chinese political context.
what he does is forestall the economic reforms that are needed to move china from an economy based on confucian principles to one that is based on the rule of law. by deferring those economic reforms, it is setting the stage for this current crisis. it is the reforms that are essential to try to tackle the underlining issues in the chinese economy. i can understand why politically he is doing what he is doing, and i agree that this is about settling old scores and clearing out the old guard, but the reality is that by deferring the economic reforms and setting the stage -- he is setting the state for a real economic failing. >> even though i have lived there, i have never owned a chinese stock, and there is a good reason why, there is simply no transparency. what i did once was i did a very simple graph. i looked at u.s. listed country -- companies on the s&p 500 and i listed two variables on the graph. very simple graph. i listed reported tax flow and
reported net profits for u.s. companies, and the correlation was 90%, as you would expect. a very high correlation between tax flow and their profits. it's not 100% because you have extraordinary write-offs, things like that. i did the same thing for chinese listed companies to see if there is any correlation, and what i got was a cloud. there is no correlation between cash flow and net profits. how can that be? what happens is when chinese companies have high cash flow they don't want to pay high taxes, they want to avoid taxes. so they report net profits. if they have a loss or lower earnings, a lot of chinese companies will list higher profits or fewer losses. why is that? because the worst fear of any chinese company is to be audited
until there are some changes in transparency, accounting standards, if the chinese company is rated aaa in shanghai there are listed in new york as close to junk. how can that be? not just a couple of companies but a lot. a lot has to change first. >> next? >> thank you. terry miller from the heritage foundation. dr. wilson said that he likes crisis because that was how you can get structural reform. i would like to link that back to the point about freedom and the fact that we have seen crisis used with germany before world war ii and as recently as 2008 here in the united states for governments to enact
structural reforms that do not promote freedom and in fact do not contribute to stronger economic growth in the future. my question would be, how can we help ensure that when we have a crisis like we had in 2008 or the current crisis that is in fact one, how can we ensure or help promote the idea that governments will promote positive reforms that actually increase economic freedom and guard against reforms that would have just the opposite in fact? -- impact? >> i think this is why we have to make this a central issue in the 2016 campaign. if you look at donald trump, it -- he represents an economic ihisy that reflects
life. it is paid to play. that is his view of economics. and it is fundamentally undemocratic. it requires someone to stand up against donald trump and point that out. just to point out what the underlying philosophy is. i think it really is time for candidates to stand up and not simply decry the impact of trump on conservatism, or on politics, but to point out what is wrong with his underlying philosophy, because in the process, what you are articulating is why freedom matters. nativism, isolationism, all sorts of isms you can attach to donald trump. we need a candidate with the courage to lead. what we had with reagan and thatcher, when you think about
the degree to which we had evolved in the direction of social democracy in both the u.k. and the united states, their willingness to lead was all the more remarkable. it was a crisis in the 1970's in the 1990's and it really did require that. internationally it is the same thing. we have this tendency to think that america has declined. i made a bet when we entered the financial crisis with myself, thinking 10 years on the road we will be a larger share of the global economy for all the wrong reasons. we still live with the benefits of that freedom. well everything else is declining. what happens when you have a crisis -- good for economists, but from the point of view of the rest of us, the human reaction is fight or flight. the reality is it is a protective crouch. that is what the politician
seizes. in the face of that, all the more reason you need the courage of a reagan to stand up and fight for freedom. that is what i think we are waiting for. that is why i think it is central to the campaign. you can see where hillary is going. she is deferring to folks that are interested in that greater good, that collective enterprise. you kind of have to come out of the republican side. harsh as it sounded as it was meant to be. >> this is always a great report. there is one problem it is that it is easy to miss the trees for the forest. there are a few trees that really should be looked at
carefully because they sort of stick out. freedom is good, but there are limits to freedom. i think the myth of free trade is one of those, because if we look at the american economy, agriculture not much value added. tehe second is scrap. we have got from one of the nation's largest debtor nation. our latest top-of-the-line fighter, 70% of the electronics are made in southeast asia. do you see any problems with that tree? is it hunky-dory? >> let me start with a basic tale that will explain the economic side as well as the free trade side. today we are negotiating the transpacific partnership. one of the leading proponents of that is ford motor company. they are doing that because
there is a 25% tarrif on pickup trucks. if you look at entrepreneurs in this country we have a sort of lazy notion that that takes place in silicon valley, austin, texas, maybe minneapolis. you tend to forget that most time entrepreneurism is starting a business that is something like landscaping. the first and largest capital purchase is a pickup truck. think about what this means in terms of trying to develop new jobs. we are imposing a 25% tax before anyone has even made a dollar. the first thing i notice -- why is that hispanic worker trying to go to work in east los angeles paying a 25% tax? why is that choice limited for that individual? at the same time you have to be
conscious of what is really going on in the world. for example, even as a free trader when i see a chinese company, state owned, interstate in micron, i am very concerned about that. it is not the conventional concern that it is somehow eroding our defense. so little of the defense industrial debate depends on microchips that micron actually produces. i worry about the baseline technology, whether we can still participate in that market, but more powerfully i went about y about the fact that the state of the chinese company becomes part of our political process. reflects why we should be concerned about that, so when you say there is limits on free trade, i say we should pursue the idea of freedom of choice for the benefit of eliminating those sorts of taxes that actually injure our ability to grow the economy. we should be very conscious of the areas where you are inviting in forces which will limit freedom down the road. my response would be, really bullish on free trade, bullish
on trying to vindicate our rules and ideas of economic freedom in the global marketplace, and deep concerns about whether and when other places that violate the rules start to really undermine our ability to deliver on that yes, sir. >> john with cti-tv, taiwan. will the volatility of the chinese stock market have any negative impact on president extinct xi jinping's position when he comes here for a state visit next month? will it make him more acceptable or easier to make deals or concessions to the u.s.? another issue with taiwan, we all know that the taiwanese economy is so dependent on the
mainland. where will the volatility of the chinese market and stock market and slower than expected growth, and potential financial crisis, have any impact on taiwan? are there any things that tie juan can do to prevent that? thank you. >> let me say this. you look at the -- brazil is in recession, russia is entering a deep recession. you have had massive -- as recently as four years ago, china was growing at almost 10%. probably half that now. and grinding down slowly. so, when xi jinping comes to washington in september, he won't be strutting in. the u.s. economy now is growing at a rate around 3%. we have created 200,000 jobs a month over the last 12 years. so you have seen the u.s. economy -- the u.s. economy is
always written off. written off in '81, '82:19:90s, the jobless recovery, and it's -- it's resuscitated once again. the fundamentals are pretty strong. asian corporates were lauding up the past years. u.s. corporate balance sheets are in cringes condition, low debt and capability to spend money on hiring over the next two or three years. the question is in taiwan -- i was in taiwan nine months ago. we are concerned. we used to be by far the largest trading partner for tie one. during most of -- taiwan, during most of the postwar period, and this his completely reversed, a lot of it because of the proximity. china is so big now, and 40% is tie one's experts -- taiwan reside experts go to china, many cases they're assembled and
exported again. so have to be careful with the figures and the value added, but you have the case where 70% of taiwan's outward-begunked foreign direct investment goes to china, and then if they end up approving the cross-straits service agreement, that could go both ways for tie one. after living in china, the service sector is extremely poor. there's no culture in terms of -- in the service industry and providing quality services. spent an afternoon in a restaurant and realize that quickly. so, there's a possibility tie one could do well -- taiwan could do bell was it hat a more sews fix tis indicated service sector, and given the differences in size, the chinese economy now is 20 times larger
than that of taiwan. as recently as 2000 it was 10 times larger. and so there's a worry among small, medium size enterprises in taiwan of being consumed and swallowed if the service agreement is passed, and we're concerned about that. >> i take a little different approach. i think that xi jinping will come strutting into town because he read his opposition accurately. the president has invested a lot in china being onboard in terms of the climate change agreement at the end of the year. the idea that president obama will try to undermine the relationship, given what he views as his legacy in these other areas, same thing with the iran deal and other things -- is exactly what xi jinping will exploit. and the reality is, let's not kid ourselves. often times the most revealing things we say are the criticisms we offer about other people, and i always used to love when the
chinese would describe the united states in the bad old days of the cold war as a paper tiger. a moment of self-reflection. china and xi jinping in particular is very good at projecting an idea of power and calm, despite the turmoil in the markets. the reality is much more unsettling. this is a country that is ruled for the benefit of people in the conclave of to the forbidden city. nor to the so site and under those circumstance wes should be concerned about the fundamentals politically and economic bily but -- economically but a that don't play out in terms of a meeting with president obama. >> i'll take the liberty of asking the last question. going back to the question that terry was asking about how do you direct a crisis in the right direction? we have been in a series of crises now for a number of years and got know thinking about the one about ronald reagan and maggie thatcher and was turned
in the right direction, and 2008 went in the other direction. what was going on in the country that allowed the politics to go off in different directions? i don't know the answer to that. maybe you do have it. but did remind me of another thing. that clearly in the case with reagan and thatcher, there was widespread perception that the direction the country was going was not working and they thought they understood what the cause was. wasn't a lot of confusion. high inflation from then 1970s, which leads me to the federal reserve. by artificially keeping the interest rates low, by putting all this money into the system, every time the stock market hiccups, they think about continuance. same thing with china. this is -- the artificial perception that things are better than they. hiding structural problems and politically this is benefiting the party or the movement who
wants the easy answers on security, collectivism and all the things you mentioned. so the other things we talk about here, there's not 2,000 people in this room. we talk about hard things. we have -- i think we speak the truth. but the truth is not always what people want to hear. so my question to you is, talk about the federal reserve, talk about this issue, and is it possible to unwinds that problem without having the kind of pain that actually could put the crisis in a direction -- in which direction i don't know but the point i right now a lot of the americans north seeing the reality of what is going on because of this. >> ow raise such an interesting -- you raise such an interesting quicker as always, ken. it is the central problem. if you think about the debt crisis we have had, there's just an excess of debt that has been floating freely in the system
for very long time. decades. driven starting with the inflation during the vietnam era. and what we have done is abet that with the existing policies. so, we are simply -- the federal reserve is simply augmenting the possibility of global financial crisis down the road. how are you trying -- and combat that when the orthodoxy within the economics profession still has faith in macroeconomic theories despite its failings, is a real problem. i have to save i admire -- worked -- janet yellen is something who is steady, pragmatic and was when she was profit the san francisco fed, but having said that the orthodoxy she is confronting is one that is built in with saying, let's keep the money flowing. certainly the politics of the moment, in terms of who is in charge downtown, is, let's keep the money flowing as a practical
matter. until somebody brings that up short i doubt you'll see much resistance to that. so it's like hey yack. he was pointing out things that temperature fundamentally true but he was disregarded in the 1940s and 1950s. he was shunned because he was speaking the truth but known point you're absolutely right. think about it as economists in a practical way. when he measure inflation we look at hard goods, and so we delewd ourselves -- greenpan said as much -- with delude ourselves into thinking inflation is low you. see inflation in housing and other -- so ironically, all the dat that you're looking in that persuades most people that things are steady also she goes, let's stay where we are, ignores the very feature of the system that is creating the next crisis. and that's where we're stuck. china, frankly, i think, because it had the opportunity to take
advantage of that period with this rapid growth, havein svelte, foreign reserves, is now stuck with the problem that was answer in the united states, once in asia, in russia, but it's this money that -- this debt that is sloshing around in the international system, and it is until we sort of bring it up short, but that has to start with a little bit like i said -- there has to be some courage on the people -- part of people to stand up and say, this is not what it purports to be. >> any others? >> not a very satisfying answer, i have to admit. >> all right. well, i help everyone will join me in thinking the participants in the speakers. it was an excellent sings. i learned a lot. i hope you did as well. stay tuned for next year's index of economic freedom comes out in january of 2016. thank to all of you. [applause]