my sense is, the japanese are always concerned about the nature of our relationship and china and what is happening there. how you address that on the policy side you make sure you pre-breathe and pro-brief them. my sense is that there may have been some doubts, especially the serious issue -- there may have been some doubts. i think the president clarified that. in my sense, in beijing, that message got through. >> i think also, we talked the photograph -- if you look at that from the west, you think, white even have this picture. i think it points to the underlying domestic politics

think about -- that will be a reality on the chinese side these have to be prepared for. to the economy continues slow down, we should be prepared for -- and we will see united states -- demonstrations in japan. people will not be as easily economic growth -- they will mobilize around essential fundamental issues. one of those will be history. sometimes it is worth as remembering that. we can see the street demonstrations and assume that is this reservoir of energy, in fact i think there are many opportunistic protesters, people who will go into the street for whatever is available. is an issue, that they may go into the street for that, but there may be economic issues below that. >> speaking of demonstrations,

let's talk about hong kong. you recently wrote about the demonstrations in hong kong. it the prevailing view in china -- or should we expect china to take a harder line on hong kong? have the basic law that out between thatcher -- we are now living with that. in white paper came out june -- that created the hong kong -- the way in which the chief executive would be nominated were qualified. i think it was terribly problematic and how was rolled out.

the trust that has been built up for a number of years, and expectations on the part of the in hong kong, le it diminish that sense of trust. you have bad politics, bees do have good economics in hong kong. people have jobs, they go to work, there is stability in the streets. because of that, my sense of the demonstrations is that they can only go so far -- people in day jobs, unlike what you saw in the arab e east with the -- where wweather there was bad economics. will the demonstrators be back at it? they probably will. they have been raised under the traditions of u.k. i think the bigger issue really is taiwan.

all you have to do is look at the elections there were held couple weeks ago. the democratic progressive party clean house with many major municipalities. this play -- -- i was stunned by it the marketplace changed. if they said, this is the model that will work for us, they have something else coming. in e of -- the taiwan -- and we have presidential elections not far on the horizon. i suspect this issue will loom very large and be transformative in terms of politics in taiwan. this leads me to conclude -- we

things had stabilized good work with the minister of china -- i think we will be at another problematic period. i'm not sure many people anticipated or is thinking clearly about it right now. >> i would agree. that is the that approach to na's demonstrations that is counterintuitive -- the fact they are not usually considered about it. this is also part and parcel of the message that we have seen under president xi.

in the response, you see them say, this is our territory and run an administer it the way we want. white paper -- i think it's not just disappointment for hong kong, they feel their has been ntract betrayed. demonstrations will come back because the underlying issues not been addressed. they have not solved the problem. >> i think there are a lot of ways to explain how the hong kong demonstrations have been. immediate the precipitated cause, how the elections in hong kong what

happened. the reasons are also economic, a lot of people feel they can't an apartment -- young kids end up sleeping on their parents couch. that is because local developers are in cahoots with beijing. another reason, a specific, the how china will probably define and orient the the world -- defined by -- a national or global ethic? wwhat they're finding, china is very ing itself specifically as chinese. jinping is saying, congratulations, you are part of china. they are nice that we share -- not exactly sure

what they think about that. >> there has been this incredible episode of the of sony pictures -- what some are calling the work of north korea. i know you, ambassador, have especially concerned about ttechnology and rights, what is the greatest danger for u. s. china relations? is it that we might accidentally stumbling toward about these issues, or is it cyber? still have the destruction of silicoln for the and zeros -- ones

that will change as silicone becomes a different battlefield. so goes with air, land, and see, we should think of cyber well in that. i'm not sure folks know quite what to do about the internet -- it was created on trust silicon valley created on that premise. to worry about e now you do.ut sony crisis ith the -- that often has a distinct advantage. real damage is less

on the cyber attacks we've seen, because we've not had a so to l pearl harbor speak, but we have seen a lot of intellectual property ripped off. in my mind, that depletes the a creative entrepreneural society. if your best ideas will be hacked and stolen. me is that because problem -- the theft of intellectual property. there are no seeming rules of the road, and no real in doing so. it's interesting -- in the defense authorization act for now a new e is section on response to cyber threats. you have to make it hurt if they are going to take us on. this is a very big deal. i think the theft of

intellectual property -- it it steals ged d -- is the greatest threat to us. >> should we take them at their they say they're going to do something? >> you mean that they will address the problem? >> yes, to some degree. in china, on the one hand they are top-down authoritarian system. it opposite problem is that is messy, and they uncoordinated, so they do not know. a e reality is, they do have one-party state and one-party system. to some degree, someone to make if president xi

was not aware of the problem that time, we have made him aware. in that kind of a system, if it, he coud o stop and he has a, that is significant. it's a problem, but people say, we will keep out innovating them. there has been some interesting research done on. that history, cap on innovation -- i think that's where we're at now. on the military peace, we've -- cyber is particularly dangerous because of the pace of escalation. two ships come together, they can see each other.

cyber -- suddenly your power desire es down, and the to respond asymmetrically is very high. >> i get the sense that cyber is particularly prone to the problem of unintended consequences. thought that abutting on media in north be to this. our relationship with how we other countries -- it is a conversation that we are having. for several llywood years had it asked themselves, how much do we cut our movies if we want to show them in china. in its own way, cyber can

produce all sorts of confrontations that we have less experience in handling. you look at the american business community, and they used to be tolerant a few years vocal.o being quite the unintended consequence of that is that is like washington -- there is re-examination going on. >> does this appear to be the the sony orth korea -- attack? >> well -- >> the story is all over town that it is, but the white house will not say it is. >> pretty good likelihood,

maybe with some subcontracting out to some partners. >> if the north koreans are this good, then i would guess that the chinese are better. >> one of the interesting things about chinese cyber it is or is how obvious -- and how clumsy it looks sometimes. i think that's something that's a surprise to a lot of people. in regard to north korea, interesting to me you devote resources -- bother you that has canceled this? it's almost like we lost a cyber battle -- maybe not a war.

>> i'm just stunned that the two headlines right now are and north korea. >> i'm with you. i'm in the same room that you are. >> but the -- let the studios make movies. i wish they would have carried on. the north koreans are very good at threats. you always have to take these things seriously, but there's a to their attern pronouncements. i think it's carrying on, and showing the movie, and doing americans do -- would have been the right thing to do. you cannot blame the theaters for making a business decision. it's part sort of a debate on

first amendment, and how we will defend it. >> you think they should in some response by the u. s. government? >> i think so. >> what would've been options that president obama had? >> to encourage, and say these are our values, and we will go ahead. it would have been helpful in reassuring. >> let's go to the audience. >> this idea the new silk road bbuilding an

infrastructure that would affect all the neighbors. if you go to their neighbors, and have actually done with it -- wwith some skepticism from the u. s., a ploy -- as when present xi jinping had his press conference with president obama, he invited the united states to take part in this program. it seems to me, if you're going major country a relationship, the idea of using infrastructure to develop the the world -- with the two major economic powers, the u. s., it would be a good model. i'm wondering if you can on the proposal and you think the united states should be a part?

couple different proposals. our response -- thought our response was incorrect. think we should have engaged. i think we could've been a lot more constructive and engaging. to say that, when it comes to central asia, i think the collaborative efforts between the united states and china will be very important. -- a desires of the benign external environment. you look west, and you see nothing but trouble, you need more in creating economic

opportunity. you see pakistan, india, nato troops out 2015, who is left security of afghanistan? china will have to step up and play a lead role. ultimately, the longer term fix is not more and more troops. you have to build economic capacity. i think there is a role for states to play. like an have a country who could help in such a strategy. frontier, is the new central asia. the united states needs to step up. we need to decide what our strategy will be.

>> over here. >> thanks. congratulations again, bob. you look at space as one of the recent battlefields? also, would you look at that -- chinese russian embassy deal. didn't catch -- how do you chinese russian campaign? >> just in respect to the corruption campaign, i think is in this room would have forecasted years ago --

the sweeping nature -- ship to model has a consumption. the uld say, the rules of road -- the way in which business is governed in china is now outdated. in order to get to the next has l of growth, something to happen, who will govern all that? the parties facing some difficult times because there is a trust gap. a lack of transparency, little responsiveness. i think xi jinping has said path of action e -- fundamentally fix the party. the party not done, collapses. and there's no alternative governing system.

my sense is he is going after this they methodically. the tigers take on -- yyou find that now there will be a public trial -- when was the last time that there a public trial? the last time we saw a member standing committee -- we see members -- but we have not seen people the standing committee since 1939. this is fairly unprecedented. i think there's a method to the madness. you have to have profile displays in terms of what you're trying to get done for the world to see, and for

country to see. and ultimately, you have to the r certain elements of party out. personal l be the aspect -- military included. the security aspect. and the political aspect. big names be some involved. we uspect that by the time get said 2017, we will be any corruption cycle. guess is that xi jinping the take the time up to 20th congress to deal with the reforms. the focus has been on the corruption side. years will se five

be where that focuses on economic side. >> we would like to hear question from some of the women. i want to thank for their gentlemen service that they provide to afghanistan. and to all men and women who served in afghanistan. question is -- we talked about a lot of complexity between the u. s. and china and the pacific -- i'm glad the ambassador said that there's a lot of potential between the u. s. and china. particularly, about

afghanistan, during the cold china were s. and the soviet nst union, especially when the soviet union invaded afghanistan. is another threat against the u. s. and china's national interest. don't you think that afghanistan could be a model for cooperation between the u. s. and china? like to hear the opinions of the other are lists, by think you correct here. they will have to engage more and more as far as international problem-solving -- there is no more immediate issue than south asia, and specifically afghanistan. -- the picture has to be

looked at, and what will we be the taliban -- china has to play a role in that. what will happen in pakistan, china will have to look at that. you look at the players, and the prospects for trouble in that region -- over hundreds hundreds of years, and i think there's a huge opening for the u. s. and china to work collaboratively on issues of stability and security in this region. i'm glad you pointed it out. when people ask, what can china u. s. do -- i think this is a great example. >> we have had more and more dialogue with the chinese on afghanistan.

as i guess points out, i think real opportunity there. been hing that has interesting -- a lot of things have shaped china's behavior in are now shifting. they have largely focused on commercial interest in afghanistan -- that will change. so, what role they play? one thing that is interesting, china now has more un peacekeepers than any other country. shift re starting to their mindset. after 9/11, china on let their opinion pakistan -- that is now changing. their viewpoint on iraq is fundamentally different than it was 10 years ago. they have huge oil interest the problem sis is for them.

comment u look at the leader isis, he highlighted china as the target of one of his concerns -- to it that way. the out minimizing significant possibilities on there's a n, i think moment for people working on to say, we're a, waiting for china to fill that role that they can play in iraq and syria. if you're going to be a power that xi jinping envisions, that on some cost in -- ing on these global risk like with ebola. >> next question. >> hi.

i'm an assistant professor at university of virginia. we talked a little bit about climate accord today, but we have not talked about the impact of environmental issues like air quality and good stability in china. i was wondering if you could elaborate a bit further on what impact they may have. >> i would like to say, that after eight years in beijing, i brought these issues back with me. issues that were previously of interest of foreigners like quality of air, or quality of food, became a prime interest to chinese. in fact, it started to become a about air bol to know quality -- to care enough about are health but you checking your smart phone to see what numbers are coming in. air not simply about

the ity -- it's about bargain -- whether this government is affiliate obligation to its people. you talk to people who have no interest in being overtly -- because being political in china is dangerous a d costly -- but it's not political issue, it's a health issue. you thought the premier air pollution on -- that's because, they realize there is a fundamental political imperative that they have to make. the e're getting close to end here. i want to close with a start, i would like to hear from each of you, what would you like this to take away from this discussion today? what are the things we need to think about in regards to china

and the relationship -- its relationship with united states? >> i think fundamentally it is to recognize that the landscape is changing. the relationship therefore will have to change. frankly, the whole cadence of the relationship will have to change. china has made it very clear how they view -- that doesn't mean that we have of their way, iit just means we have to acknowledge the shift. agents travel the dynamics -- very colorful -- understanding that this is a different character. xi jinping has a unique views on a lot of things, we have to figure out how we will deal that.

>> i'm struck by the fact that while we are talking about this, too great powers edging of confrontation -- the lived experience of what it means the chinese and more can has never been similar -- that is a remarkable fact. being in the soviet union was a very different experience. if you are young chinese prison today, you are likely watching western television shows, same g many of the websites -- we can stipulate the obvious, china has its own values and priorities, but we the fact t overlook that as we inevitably find more overt n confrontation, remember that there are people on the ground across china who have never familiar to us. i would say with no

royalties coming my way, my read evan's be to book. i have enjoyed it enormously. i watch my daughter, grace, who china on skype talking to more friends in china in english and mandarin. i say -- it is incredible how the generations meld. for my generation, tough, for my parents, impossible. inherited all has the incredible work of those s. china the u. relationship. the task ahead will be, do we reflect on our common sense of humanity, and commonality, or to refocus on the division?

do we let the tools of modern technology tears apart -- which happen very easily. we either can stare at each other with a sense of trust, hhonesty and truth, and talk about our issues, or not. the 21st century will get us to the whole -- problem. >> on behalf of tcu and csis, thank you. [applause] >> this month is the 10th primetime y of our

program, "q&a." a decade of compelling conversations, the 26th, 2 through 7pm est. >> next, discussion about the economy hosted by the heritage foundation. cnbc contributor, larry kudlow monitored this discussion.

>> good morning. welcome to the heritage foundation. we appreciate those who are heritage s on the foundation website, as well as c-span. i would ask those here in house cell phones rn your off. of course, our internet viewers are welcome to send questions or comments at any time. following, we will have it. for questions and answers. this ng our program morning is the current the heritage foundation, former senator jim demint. please join me in welcoming jim demint. >> merry christmas everyone. who's istmas to everyone

tuning in. this is a great day to get together and talk about the power of ideas. panel here uper today. our goal here heritage is to the debate -- part of that process is bringing walks of life, experiences, media, businesses, tank world -- bring ideas, aand set as an organization. larry will completely introduce our panelists, but thank you to all. of a better nk panel.

what we want to deliver to members of congress, the presidential candidates, and the country as a whole is a -- servative policy agenda that really focuses on favoritism for none. politics of division -- on people into eaking groups, carveouts, like cronyism -- versus idea that we all americans -- we all a better country -- that's the inspiring message that americans want to hear. of any americans -- i'm sure there is some -- but most americans don't want be part of a minority, they to be americans.

they do not like the government, either state or federal, that is picking favorites. it is not fair, not equitable. that's our focus here. of t you here today is a lot good economic messages, what we can do. i cannot think of a better group to talk about that. larry kudlow will facilitate this. one of my favorite people in the media. i think one of the brightest in the economic minds world. i told him several times, i saturday g on his radio show where we can sit back and dig in for 30 minutes or one hour. larry, thank you for being here and leaving this. i will leave it to you. [applause]

jim hank you, senator demint -- truly a great american. okay, i am larry kudlow of cnbc. we have a distinguished panel. essentially, we will try to talk about ideas to promote economic growth -- the application free market principles. to promote economic growth, angles to it.f i will say, for my own the dpoint, domestically greatest challenge to america in the next decade is to restore economic growth, and at a minimum, get us back to the post-world war ii trendline -- about 3 1/2% per year. we fallen way behind not trendline in the last two

cycles -- as much as $4 trillion behind. to do that, create jobs, income, social mobility -- it over number things -- including obama care, spending less. in monetary policy plays a major role. and trade plays a major role. i noticed that senator warren trade me out against the the european bill, and the pacific bill -- a perfect example of congress sending the wrong message, and what ng to understand causes growth. that is essentially what we are trying to do. an , to my left is carly,

old friend. of introduction -- i think that one of the best parts of carly's backdrop is that she started as a secretary now she is a director of hewlett-packard -- the most american thing possible. have her rtunate to here. of is also the chairman opportunity international, chair of the american conservative union -- and of unlocking potential, a group to engage women in the political process the grassroots.

next to her, the dewitt wallace fellow at the american fellows institute. a blogger and columnist. then, arthur -- i've known are there for 40 years. i believe he is one of the most important economic voices in the 20th century. [applause] finally, as you know steve an had had a economist at heritage. head of the editorial board at street journal -- pumping out exactly the kind of stuff that we need pumped out on free market economics.

i can only assume, a large part of congress has no reading field, no education -- the the united states owes it to having not read steve's work. i will be the moderator. we will let you to have speed for about five minutes or so, then we will go back and forth. we will have crosstalk. we are all friends. even where we disagree. let me begin with carly. matter of growth a i'll just tried shape is matter of the

economic growth, what would you say are the three most important ideas in your mind? if you are giving a magic wand to run the country. thank you, larry. it is a pleasure to be here at heritage. have to start -- human potential.

the largest micro-finance the world -- in we lift people, mostly women out of poverty. we have lent $6 billion that way. and that experience has nstrates that everybody the potential -- if everyone wants to take a chance on of ple regardless circumstances -- and this is the greatest country on the face of the earth because our founders knew that. said, life, liberty, and pursuit of happiness, they met the everyone should be able to use their full potential. we created a system where more things were possible for more people.

entrepreneurship was valued. i started a little 9% company, most people do -- bomb businesses not big create opportunities. we have to understand that we grow our economy, we have to focus on the most important resource that we have -- human potential. we have to understand that one that is est way to do today have to understand we are destroying more businesses than creating. yes, the stock market is doing great, but small businesses are struggling. they cannot handle the crushing

load of regulations that the government is putting on them. wasting potential -- one in poverty -- are that rest heaviest on women. income inequality is the in decades -- it is highest in places like california where liberal policies have been in place for 30 years. are in a vacation -- our rate is slowing. to focus on economic growth, we have to focus on how we ensure that every american can fulfill their potential. that means every american has given a helping hand. our system traps people in a life of dependence. you lose arried,

something. we have to unlock potential -- ggive people education, tools, training. make sure that we have jobs for everyone. we have to revitalize main street. we have to retrain america. i we must fundamentally reform and simplify government. it is literally crushing the of this economy, and other people who are trying to fulfill their potential. i would say l thing i think that senator dement spoke eloquently on what unites americans. he spoke eloquently on all and ity for

favoritism for none. what i think unites americans that we think america is losing something -- losing limitless possibility. if you look at the polls, americans no longer think they have limitless possibility. be a nation where people thought that they could whatever they want, it is losing that. what i think americans think is t we are missing leadership -- leadership that recognizes the everyone has potential and deserves a chance. we save lives when we provide jobs and training. every wound in this country is self-inflicted. start by recognizing the number one reason is that -- human potential. [applause]

>> can i -- i just want to go for one second -- on carly's g remarks, you have written a lot of good stuff on the decline of america started break, wwhich i the k quantitatively is most productive -- why is that? >> first of all, thanks. me say -- i think one high school student 100 years from learn about economics, or have it downloaded into the head -- i think they will hear milton friedman -- tthe

world historical figure they came on the scene when the united states is going on decline. i've written a lot on what is going on. when i wrote about startups, i think people thought it wasn't that important of an issue. facebook, google -- startups are going fine. right, unless you at the numbers. you see a clear erosion. that may or may not be a bad thing. a lot of mom-and-pop stores had pushed out -- not good for mom-and-pop stores, but good for consumers. at the box stores, employees

people shop ter, for cheaper. the high-tech startups overall the fastest growing -- that's extremely important and worry some. that's when not only do they also e a lot of jobs, but innovation -- products, services, good middle-class jobs. a lot of jobs at both ends -- had polarization -- but not so much in the middle. also provide intensity -- when you have a startup, you can do two things, innovate, or go out of business.

no way, there is a third thing, to d.c. obbies and go a tax break to give you some sort of advantage as a start up. i'm supposed to be writing a of this -- the decline startups -- it is extremely important. do not ted states -- we wwant to become scandinavia -- a social democracy. guess what, we are social democracy. welfare state. in fact, those countries could what we do if it weren't for our innovation. looking at the dynamism in the

u. s. economy, and that the kind of the dynamism -- >> before we get to the economic question, is there one overriding wet blanket? >> there's a lot of research going on. could it be just that we are an older country? all the countries tend to be dynamic, less entrepreneurial? that could play a role. is it tax structure? wwe do a whole lot of work on to es -- we also have remember regulation. i cannot figure that one particular regulation is killing american dynamism, bbut the congress passes a regulation -- doesn't make it start a business, tto grow the business?

does it give an edge to an incoming company? >> i know i'm going out of -- thing just 70% oof small business owners describe the government as hostile to them. one single regulation, and no. but have we repealed a regulation in 40 years? no. that's a heavy burden. have talked lists about regulations. the growth in the 80s and 90s had a lot to do with tax reform. what are you thinking? what should we be doing?

>> firstly, if i can add to carly's comment -- 70% finding the government hostile. the other 30% are selling to the government. is going up.centage we have had lots of years of experience in this country. 175 other countries for which we have an enormous reservoir of data. we have 50 states that have been performing experience over the last 75 years. amounts of e experiential base. my conclusion comes out -- to have success what you need is a five-point program. a low rate, broad-based

taxes them, wwere you replaced all taxes. i will come back to that. need spending restraints, as milton friedman taught us. government spending is taxation. every dollar they spend, they take from someone else. it is a tax expenditure process. rate, broad-based flat tax. they can bring an economy to its knees quicker. when we came to office, the was 21 nterest rate 1/2%, we had double-digit inflation. there are some things that we do better than foreigners. there's some things that foreigners do better.

we and they would be foolish if we do not sell them those they make better, in exchange for those products that they make better. it's win-win. lastly, minimal regulations -- what you want to make sure you don't do is go beyond the specific purpose and create a system of regulations that has a massive collateral damage for it no one would suggest you should be able to wake up in the morning and decide which side of the road you will drive on today. you need regulations but they have to be very focused and directed. on the low rate, broad-based, flat tax, i want to mix some politics into this -- those are the five things, then the government should get the hell out of the way and let the private sector solve the problems.

you should not be picking winners or losers. that is not the government's role. when you look at low rate, broad-based, flat tax, i did the jerry brown tax when he ran for president in 1992 against bill clinton -- he replaced all federal taxes except for syntax. there were two flat rate taxes, 12.8% tax on personal unadjusted gross income and a 12.8% flat tax on business net sales or you may want to call it value added. a flat rate tax across the board on the first dollar to the last dollar. if you did that, you would match all revenues. it would be static revenue neutrality. you would have full employment with a 12 8% flat tax -- can you imagine what would happen at the u.s. if it that is what we had? you would not have to pay taxes, you can get rid of the irs.

if you mow your neighbor's lawn for $10, yes, you have to send them 12.8% of that. but it would be amazing. the closest we came was in 1980's. i told you about jerry brown. he came in second in the race and we would have taken clinton out in the primary. this is a democratic primary, not republican. we would've taken clinton out except three weeks before the new york primary, jerry brown announced he was going to have jesse jackson as his running mate. our political aspirations evaporated thereafter. jerry brown had the second-most number of delegates in the democratic primary in 1992 on the flat tax. the democrats like it. in the 1986 tax idea, we cut the highest marginal income tax rate

from 50% down to 28%. in case we missed a couple of people, we cut the corporate rate from 46% to 34%. we raised the lowest rate from 12.5% to 15%. we got rid of a lot of deductions and exemptions and exclusions so it was statically revenue neutral. we lowered the highest rate, lowered the highest corporate rate, and we replaced 14 tax brackets with two tax brackets, 15% and 28%. that's it. the vote in the u.s. senate -- this bill passed. can you imagine that vote today? that bill passed, the vote was 97-3. three democrats voted against it. we got people like alan cranston and metzenbaum and teddy kennedy

and bill bradley and dick durbin and harry reid and joe biden. why did they vote for it? they know it's right. if you go back and read their press releases, they said this was the progrowth agenda. that's what we need to do and it can be done. my motto in all of this stuff is don't just stand there, undo something. [laughter] get rid of the damage, the overhang and that should be our prime agenda is undoing stuff and letting this wonderful country that carly talks about solve its own problems. >> why can't we get that done now? >> we can and we will. we are right in the middle of 1978. we just won the election massively. it took jimmy carter to create

ronald reagan and it honestly did. in the same breath that took jimmy carter to create ronald reagan, you cannot imagine the great president who will follow barack obama. >> steve moore, let's talk more about taxes, go right ahead. there are other issues -- it looks to me, judging from the white house, that president obama will come out against the keystone xl pipeline. governor andrew cuomo of new york state i read this morning, has now come out against fracking in new york state. largely on the recommendations of robert f kennedy junior and yoko ono who have been his energy advisors. [laughter] >> ono enomics. >> people with long-held experience in the energy field. what is going to happen when obama finds a way to knock out the keystone pipeline and what can the republicans do about it?

>> energy is the biggest story of the american economy. i want to back up for a minute and get to your point about -- how did we get back on that 4% growth path? we had that throughout most of the 1980's and 1990's. one of the contributions of barack obama is that he has set up an interesting experiment. government activism as a stimulus and the reagan model of unleashing the supply side of the economy in private business is an important point that we have to hammer home because this lesson has to be learned -- it

will never be learned by academics but the american people are starting to understand where it let me give you an amazing statistic. ronald reagan came in with a period of economic crisis. barack obama came into office during great economic crisis, no question. the amazing thing is you know they used diametrically opposite approaches to dealing with the crisis. as you just said, reagan cut tax rates and deregulated and got government spending under control and let the private businesses rebuild our economy. there was an $870 billion stimulus plan with this so-called multiplier effect and we had obamacare and tax increases on the rich. barack obama has party much thrown the entire keynesian playbook at the situation. if you compare the records of these two presidents, this dress -- drives people on the left

crazy, they hate this comparison but is very apt -- in the five and a half years of the start of the reagan recovery versus the first 5.5 years of the obama recovery, the economy grew at just over 4% in the first 5.5 years under reagan and it grew just about 2% under obama. that may not seem like a big difference. it is enormous because of the compounding effect of this. the growth deficit and this has to be a huge mantra of progrowth republicans as we are now facing an economic growth deficit. that deficit is now $2 trillion. what that number means is that the economy, if it had grown as fast in obama's first 5.5 years of recovery as it did under ronald reagan, we would have $2 trillion more gdp. imagine how much better off the american people would be today if we had $2 trillion more

output? if you took that amount and prorated it to every family america, that's $15,000 more income. this came through loud and clear during the midterm elections, the american people are angry. i would say they are filled with anxiety as well that they are not seeing the kind of middle-class increases not just in jobs but incomes. here is another statistic -- the average family in america, the median family, since this recovery began, not since the recession, has lost $1600 in income. that is devastating. when barack obama says how wonderful things are, americans don't believe it. on energy, if we were sitting here seven years ago and i told

you all that america will go through the biggest economic boom in the history list country and we will -- and by the end of the decade we will be energy independent and see oil prices down to below $52, you would've thought i was crazy. as recently as a few years ago, barack obama was running around the country saying america's running out of oil and gas. america is not running out of oil and gas, we are running into it in a big way. the growth dividend of this is enormous. i get so angry at some of your friends on wall street paddling the story that somehow falling oil prices are bad for the world economy, it's craziness. this is the story that pumps hundreds of billions of dollars of real stimulus into the economy. when commodity prices fall and energy is cheaper, it is good for our manufacturers.

>> wait a minute -- i argue this four days per week. i am told by some of the best portfolio managers and particularly hedge fund managers, i favor them, they missed the stock market rally and got a lot of shorts. the shorts were covered yesterday as the dow went up 300 points. that's another subject. they tell me it's bad. they say it's bad because you cannot make any money at $62 per barrel. even at the well head, we are producing fracked oil at $30 per barrel plus transportation. they cannot make any money, they are overleveraged, the jump on's will collapse on the whole banking system will collapse and this is really 2008. one guy accused me of not understanding that.

>> these are the people who want oil to go back up to $200 per barrel? >> they are convinced we are now going to have a systemic banking/energy/junk-bond global default. that's how horrible low-energy is. >> that's great news. you can be on tv more. >> they have been out there. if they drive cars, i asked them and many of the hedge funds do but not all. many of the hedge funds drive cars. i said when you go to the gas station, do you see a lot of motorists weeping at the new gas prices? come on, larry, you are being silly. how do you know that lower oil

prices are good? how do you know these hedge fund guys are not right? >> to argue that oil and gas prices -- low oil and gas prices is bad for the economy is like saying rising life expectancy is a bad thing because it helps -- it hurts people who run funeral parlors. what i'm saying -- some of them are going to struggle and go out of business but every other industry. what is going on in this country is there is a manufacturing renaissance. we have the lowest energy prices in the world. the shale oil and gas revolution is transforming this country. it is not going away. this is the tip of an iceberg. this gets to your point about human ingenuity and innovation. this whole story is all about innovation. >> all about innovators who bucked the system. >> that is such a great point.

it is not exxon, it was not mobile. these were small wildcater's -- >> who were tough as nails and said, we can figure out how to do this. by the way, they did it in texas. >> to finish the point, this is a huge story. the democrats are on the wrong side of this. here we are in the biggest oil and gas revolution in the world and the republicans have to drive this message. they have to talk about pipelines, something to talk about, which is overturning the ban on the export of american oil and gas. they have to take on the radical greens in this country that are anti-growth, anti-development, and anti-progress. if you do those things, this can drive real expansion.

>> the guy who is weeping over the decline in oil prices, who is probably close to a nervous breakdown, is vladimir putin. a lot of scholars here so correct me if i am wrong, but if vladimir putin goes down, would that not be a good thing for america? i'm very naive about these things. >> isis gets $5 million a day from petrol dollars. we can defund our enemies. >> and iran. i know the saudi's act in self interest. nigeria and other places -- i think the saudi's gave us one on this. i think they do not like putin or iran. that was part of their decision not to meddle with the market. >> i agree with you.

i think the saudi's understand that oil and oil prices are a strategic weapon. >> i want to ask you, i want to come back to regulation and tax. hydraulic fracturing and horizontal drilling are technology breakthroughs. aren't these principles going to be applied to other areas of the economy? >> of course. that is why it is so distressing that we are making innovation and entrepreneurship more difficult. it transforms every industry. i mentioned that small businesses -- small businesses innovated at several times the

rate of bigger businesses. i was proud. at hewlett-packard we were generating 11 patents a day. a rapid rate of innovation. imagine the small businesses. it is not by accident. innovation requires risk-taking. risk-taking requires flexibility, creativity. those things are more difficult in big bureaucracies. they are impossible in big government bureaucracies. they are more difficult in big companies with a lot of rules and procedures. you need the flexibility to have entrepreneurship. when we think about giving everyone a chance, providing jobs and opportunity for

everyone, economic leadership in the 21st century, we have to be the innovation leader. we have to continue to be the entrepreneurial leader. we have to lead in industries that will define the century. energy is one. biotech is another. we need to be landing things on meteorites. all of those industries -- and of course information technology. those are going to define the century. we have to lead in those. we are beginning to lead in energy, no thanks to the obama administration. we continue to lead in information technology. we need to lead in space technology, health tech as well. innovation will transform them all. we are making it more difficult. on the keystone xl pipeline, i

think president obama and the left continued obstructionism is example of their hypocrisy. if you are truly worried about greenhouse gas emissions, what we are doing today that is transporting by rail, that is worse for the environment than the keystone xl pipeline. never mind, they say. this is the triumph of our ideology over economic growth. the triumph of liberal saying we are prepared to sacrifice your livelihood at the altar of our ideology. let's not forget, these poor communities in kentucky and west virginia where drug abuse is at 40%. the community has been destroyed because liberal ideologues have

said we do not like how you make a living. innovation can make -- is making coal mining safer and cleaner. no matter how many livelihoods we destroy, the chinese are going to continue to burn coal. >> harold hamm told me that if they went in there and bought of land, they made dirt farmers a lot of money in fracking. they also gave a lot of jobs to field hands and roustabouts and people who operate these fields. my question to you is, if

fracking creates $80,000 year jobs, pretty good money. prior to that, they were unemployed. there are more millionaires, which is greeting more income inequality. the rising tide lifts all boats. but i am a dinosaur. that was john f. kennedy talk. we are all happier because we are all working. but scholars and left-wing think tanks are telling me that inequality is growing, that is bad. tom wants to tax everyone 80%. what is the answer? >> i think there is two kinds of inequality. there is a kind we should be concerned about and a kind we

should be less concerned about. if someone is a billionaire and became a billionaire because they thought of a great idea. a new product or service, that is fantastic. we want those billionaire entrepreneurs. the u.s., we have more of those than any other big economy in the world. at the other end of the spectrum, france. they do not get a lot of billionaire entrepreneurs. switzerland has a lot, so does hong kong. we want policies that can create more billionaire entrepreneurs, not because i care so much that they have a billion dollars, but

all the other spillover effects. if that inequality is because you work in an industry that is protected by government in some way so it can get very big. or somehow you are able to negotiate a great pay package that has no link to your actual performance. that kind of inequality, i am more worried about. we talk about innovation, i know it is a theme. others talk about crony capitalism. if the reason for inequality is there is a lot more cronyism in the economy. banks are actually bigger than they were before the financial crisis. if something happens to one of these big banks, despite what is on the books, we will bail these banks out again. that is the history of banking.

government always blinks when a big bank is about to go under. that is the kind of inequality and cronyism i am worried about. >> 12.8% flat tax, i'm going to stay with inequality but i'm going to move it back to the framework of reforms. 12.8% flat tax for everybody would be a substantial cut for the rich. that is the argument. there are people on the left who oppose that. there are even conservatives. what is your feeling about that? the argument of redistributing income. how does that tie into the flat tax? >> let me say that we have tons of data.

the irs is competent in finding out where everyone who has any money exists. the first publication in the in great britain was the doomsday books. the collection of taxes in great britain for kings so we could find out where everyone had what. we have records on income tax returns starting with the income tax in 1913. when he went from a zero tax to a 7% tax on the rich, revenues went up from those people who were rich. i will concede that. just joking. we have records by 1919, the highest marginal income tax rate had risen to 77%. the race in 1920 was between -- we cut the rate from 77% to 25%.

the share of income taxes paid by the top 1% went to the roof during the 1920's. we had a beautiful economy. in the great depression, we went from a 25% tax rate to a 92% tax rate. revenues from the top 1% declined during this period. then, you have the period of kennedy cutting the highest tax rate from 91% to 70%. he put in the in the investment tax credit. he was a supply siding crazy guy. we had the four stooges,

johnson, nixon, ford, and carter. largest semblance of bipartisan -- they raise taxes. we had a depression slowdown terrible 16 years. we came to the period, the skies opened and ronald reagan was elected. we cut tax rates on everything. if you look at revenues from the top 1%, they went from 1.5 percent of the gdp to 3.7% of gdp. the top 1% paid that with massive reductions. the boom of all booms occurred. that is what i want to see.

let me say, it is not republican or democrat. it is not left-wing or right-wing. it is economics. this stuff is independent of your ideology. economics is about incentives. if you tax people who work and you pay people who do not work, do i need to say the next sentence? you will get a lot of people not working. if you tax rich people and give the money to poor people, you will get a lot of poor people and no rich people. if you have two locations and raise taxes in one and lower them in another, producers and manufacturers will move from one to another. raising tax rates on the rich cost everyone. lowering tax rates on the rich provide more revenues.

we need a flat tax to bring the system into providing the most revenues we need in the least damaging fashion to the economy. hopefully we can spend those moneys in the best way possible to create growth and prosperity rather than paying people not to work and produce. >> you have a different view, jim. you want the republicans to avoid tax cuts on the top and rich and you want to focus on the middle class directly. other conservative reformers do. how do you respond? why is your program more efficient? >> we have gone from a 70% top tax rate.

even now after the obama tax hike, it is at 40%. i am all for dropping the top tax rate. when you look at where taxes were then, where they are now, and the fact that 45% of americans do not pay personal income taxes and the fact that we are not at 70% anymore and the growth gains that we get by dropping -- some republicans want to put it backward was in the 1920's. the factors you have to take into account our, most americans are not going to get a tax cut. most americans are not going to get a tax cut. this is going to be a revenue loser. i would not care so much if we

were at gdp at 25% as opposed to 75%. you're going to lose revenue. you are not going to give a good chunk of the american people a tax cut. if i was going to come out of the box with a growth plan. the number one thing i come out with would be cutting taxes for wealthy americans who have been doing well. a poll i dug up what you guys were talking. it came out over the summer. they asked folks if they prefer economic growth or increasing income equality. people prefer candidates who want economic growth versus less income inequality which i think is a great statistic. 62% to 33% prefer candidates focus on economic growth to provide more opportunities. versus a candidate who wants

economic justice. very encouraging. they asked the same people, you want economic growth, opportunity, what policy do you think will get you opportunity? the number one policy, produce regulation on business. as we have been talking about. next, increase the minimum wage. that is 58%. guarantee all workers a living wage, 57%. cut taxes of high-end job creators. i am more interested in the policy and the politics and the messaging. i think given the fact that middle income taxpayers have not had a raise in years. i think the corporate tax code is in worse shape than the personal income tax code.

i would like to see anyone who wants to bring up the idea come out of the box with a set of policies to address the everyday concerns of middle-class voters. it includes a take-home pay, whether they can send their kids to college without saddling them with enormous debt. i think -- having your lead idea be cutting the top personal tax rate, i'm not sure that would be number one on my list. >> i want everyone to react. you also propose a $2500 increase in the child tax credit. is that the middle class tax cut that you think will work? i want to put the politics aside for second. in economic terms -- >> i think it is indisputable

that if you let people -- this is a tax credit which we applied against income and payroll taxes. >> is it refundable? >> it is not refundable. you have to make some money. it is indisputable that if you allow people to keep more money, they will have more money. if you let people keep more money, they will have more money. i think that is a good thing. they can spend on childcare or getting their kid tutoring if one of them has trouble in math or for a college education. it is part of a broader portfolio of a pro-middle-class agenda when combined with the sorts of deregulation i think business tax reform. i think that is powerful. it is appealing for politics to middle-class america who is saying republicans have nothing

to offer them. mitt romney did not care, showed no empathy for them. i think, as a propulsion presidential nominee, -- as a potential presidential nominee -- hoping that they will work more and invest more, i think that is a political loser. it is not a top priority on economic grounds. >> we were going to be the tar out of bill clinton by having -- by lowering rates on the highest and raising on the lowest. people under stand it is fair. when you get into -- you do not have a standard. that is a good standard. it gets rid of all of the

bureaucracy. >> why didn't people flock to the robbie tax cut plan? -- the romney tax cut plan? >> romney wanted to do tax cuts for able other than wealthy people. separate positions. it wanted to increase the productivity of the tax code. i did vote for romney but that is not because i thought he was any good. i've quoted for him because i thought obama was worse. -- i voted for him because i thought obama was worse. bill clinton was one of the best presidents we have ever had. i voted for him twice. >> do you think cutting the current tax rate from where it is currently to calvin coolidge levels -- >> i would cut it to ronald reagan levels. i want to have a flat tax -- >> you think were on the wrong side? >> clearly we are.

warren buffett pays 61 -- six 100th of a percent of his income in taxes. he does not pay taxes. you go to the top 500 people, they all get their income in unrealized capital gains. what you do is get rid of all of that stuff and have a low rate so it does not matter. we all make choices aced upon what we think is right. -- based upon what we think is right. if you spend 40% of your money in taxes, you'll spend 40% of your time trying to avoid a. -- trying to avoid them. get it down so people lose interest in their taxes. let them try to make money and grow this economy. >> do you think telling a voter, i'm going to cut the top tax rate and by the way, i'm not cutting taxes for you in a some people on the right would do for

that 45% who are not paying taxes, you have to contribute. that is a wonderful strategy. >> i think there -- we can argue about the rates. at least half the problem with our tax code is, it's complexity allows people to game the system the tax code is used by big companies. the tax code is used to further certain people's interest. we have to reform the tax code. not just in terms of its rates, but in terms of its complexity. i also think we get it wrong when we say that as a requirement for tax reform, my view of tax reform is fundamental, simple dictation of the tax code -- simplification of the tax code.

i think we missed something when we say, whatever we put forward should be revenue neutral. let me say, this government takes in too much money. the only way to begin fundamental reform of government , fundamental supplication of government, -- simple dictation of government instead of out-of-control growth, regardless of who is in charge, is to start sending less money to washington. how many people -- i started my

career in washington dc working for at&t after i went off and got an mba and i sold to the federal government. anyone who is done business with the government knows in the last six weeks of every this go year, every government agency spends every dime they are entitled to, whether they need to or not. they do so because they want to make sure that the appropriations process is focused on the rate of increase for the following year. not what you actually need -- not whether you actually need to spend it. let's start with the principal that we must fundamentally simple if i. -- simplify. let's have a debate over whether it needs to be revenue neutral at all or whether we should start a process of having government spend less. >> we are done polling on the

subject. i think you're onto something. when we do these polls. when you ask people about tax reform, the word that comes shining through his fairness. -- is fairness. we have to decide for people what fairness means. >> sorry to interrupt you. what most people know in their bones is, if it is so complicated that i cannot understand it, it is not fair. most people know that. if i can understand it, i can figure out whether it is fair or not. >> they also think somebody else is getting something. >> and they are right. >> these rich people are getting off with not paying a lot.

i have come to the conclusion that if you are going to do a big change in the tax system, you have to do the big bang. you have to blow up the system, start over. what is interesting about the last presidential election, the thing people remember. the one thing people remember about that field, 999. people want something that is understandable. they think everyone is going to pay their hair share. -- pay their fair share. >> we got an e-mail come in about the fair tax. the income tax credit which i

favor, along with the child tax credit, our two of the highest fraud tax parts of the irs system. this surprised me. the child tax credit has definitional problems. people are not sure the definition of children when it comes to things like adoption or abandonment for example. we will get into the breakup of families. steve, i know in your past you have flirted with the fair tax -- the sales tax. i think you have overcome that but i want to get specificity because we got an e-mail. dave camp is introduced -- he thinks it is a band-aid for tax reform.

this person wants us to push the fair tax reform which would be a 130 page bill that has been buried under the table. the irs needs to be abolished and the fair tax, which is this. i always thought the fair tax was the flipside of the near tax or flat tax. if we abolish the irs, i do not think so. so many competitions. you're going to have give ups and carveouts. are you still on the fair tax thing? >> i like the idea of a national consumption tax. i think it would mean every time you go you do not have to fill out a 1040 form.

you just pay your tax at the cash register. whether that is achievable right now, will he not. i like the idea of a flat tax system. at some point, that might be the stepping stone of moving to a consumption tax. arthur and i have done research on the states. we have an experiment here. on the sales, consumption. states like new york and new jersey. my home state of illinois. they have high income tax rates. we find conclusively that states that tax consumption and do not have high taxes -- when we talk

about the top one or two or 3% -- 1%, or 2%, or 3%, they are the employers in this country. the people who create the jobs. that is an important thing. my old boss used to say to say liberals love employers but they hate jobs. -- they love jobs but they hate employers. you cannot have one without the other. i do the problem you have identified as a pretax income problem, not a post income tax problem. the middle class' problem is that there salaries are not rising. >> the tax plans i've heard -- it does not cut their taxes, when you are telling them is that by instituting a tax plan -- which will require blurring up -- blowing up the current system. i'm going to put in a new plan. i'm going to put in new plan that will, we hope, increase economic growth so that down the

line, you will get a better job and have more income. the economics of that, i think a better code will do that. a consumption tax. will create more economic growth. i think that is true. as a political matter, i think it would be difficult to do that. there is a spectrum of issues. we have talked about taxes. while republicans are talking about tax plans -- i do a lot of blogging. every commentor on my blog has a tax plan. every conservative in america has a tax plan. democrats are talking -- >> is all we know. [laughter] >> democrats have been working on health care plans, college plans, regulate the internet -- regulating the internet. i think it is sucking the intellectual oxygen from the

right. we are not focusing on these other things because we are very focused on taxes. is this tax reform is probably more -- business tax reform is probably more pressing. >> i want to stand up for that point. the work coming out of ai shows the beneficiaries of business tax cuts is the middle class, the workers. things should be sold as an income booster for the middle class. it is also go to enhance incentives for businesses. as long as you stick the pass-throughs in their, you have yourself a hell of a middle-class tax cut. they want to put task cuts in their. -- tax cuts in there.

>> what you actually end up with in the piece of legislation is how you go in. i do not think we should negotiate with ourselves beforehand and compromise the plan. you go in what you think is the right plan. of course you are willing to compromise to get a good plan. you should never let the best be the enemy of the good. i think the fair tax is a great plan. i would vote for it every day of the week and twice on sunday. what i do not want us to do is pre-negotiate with ourselves and put in all the things and then get in there and find we have nothing. >> you have to hit a certain level of plausibility. i think coming up with a tax plan -- you can question the tax policy center. for any republican to come out

with a tax plan -- any of these private models is going to say this thing is going to lose $400 billion a year. i think with most voters, that is not going to pass -- >> with jerry brown, we had a huge revenue increase which was plastered all over the world. that's why jerry brown did very well in the democratic -- >> i want to note, i live in new york and connecticut. on the way to work, i passed through new jersey. each of those states has a high income tax. each of those states has a high sales tax. each of those states has a high corporate tax. each of those states is declining and shrinking. that is the problem i had with 999. and i heard 999, i heard connecticut, new york, and new jersey. -- when i heard 999, i heard connecticut, new york, and new

jersey. i do not want to commit the scene that my friend jimmy p is worried about. i think there are other issues to focus on. how far we going on this? noon? we will give it a little more. i want to raise a point to carly. the issue that i fret about a lot is the issue of marriage versus family breakups. i worry that we are creating a permanent underclass. i worry that the bottom quintile has lost its social mobility. on these points, i am reading what the left liberals have to say because they are looking at the same data. some great work -- is it brad wilcox from ai? this guy is doing great work. mary families make -- married families make a lot more income and wealth than unmarried as point number one.

point number two, the issue of family breakup seems to be the key to poverty, inequality, and to the closed door. the upward path of america. they should throw education in their too. part of it is culture, part of it is economics. it has to be addressed. anyone running for president has to address this. >> let me say, on this debate of tax reform, or any of our

debates about policies, i think, sometimes, conservatives start with the policy and try and related to someone's life -- try and relate it to someone's life. i think we need to start with people's lives. and talk about our principles and policies in relation to their lives. politics matters because it impacts people's lives in real ways. policies matter because the impact people's lives. sometimes, we get very abstract and we talk about big models and numbers. what people are thinking about is the micro economic reality of their life. they need to understand, how is what you're proposing going to

make my life better? which leads me to your point. i think the data is becoming unmistakable. data matters to me. results matter. it does not always matter to politicians by the way. the data is crystal clear, already said, about the impact of certain policies on economic growth. we see in the united states, we have evidence that supports the data. 30 out of 50 states run basically under republican policies and economic growth is better. we're starting to see if rent show the between a state like -- we are starting to see differential between a state

like texas -- we come to the question of poverty. i think the data is clear. getting a high school education is a determinant to someone's future earning power. if someone does not have an opportunity to get a decent high school education because they have no choices to get a good education or they have no chance to have a real teacher in front of the classroom that cares about them, they are going to be stuck in a life where they cannot fulfill their potential. the data is clear. i think conservatives on that point need to be crystal clear.

liberals and demirel -- democrats are on the wrong side of this issue. look at what happened when tilde blah zero said in his -- bill de blasio said that he wants to limit the choices of schools in new york city. who is it who walked across the brooklyn bridge in protest of those policies? it was low income families who thought, you're going to take away the only chance my child has. we know education matters. we know marriage matters, we know that you have a stable family unit, everyone in the family does better. we know that too many women live in a situation of violence and abuse. it is hard to tell a woman, who has perhaps the skate domestic violence, the answer is for you

to get married. the point is, we have to be focused on what are the things that make someone's life better? we know what they are. and education. -- an education. stable family environment. we look at entitlement programs. those programs -- and those programs make it more difficult to give a job. when our programs make it difficult to get married because of all the things you are going to give up and the liberals defend those programs, they are the ones destroying people's lives and livelihood. they are the ones people destroying -- they are the ones destroying people's lives and livelihood. belief in everyone's potential to live a life of dignity and purpose and meaning. it is why i am conservative. i know our policies work better to lift people up. we cannot talk about it in abstract. >> remarriage is ok too? >> absolutely.

>> remarriage is where you marry the same person a second time. [laughter] >> you can come back. >> we have done a lot of work on this issue at heritage. i am sure all of us experienced this. the country club republicans to not want to talk about social issues. one of the things that came through is, these issues are economic issues. larry, you said marriage is one of the great economic stimulus plans out there. the job is the ultimate stimulus plan. but we have to do as conservatives is come about these issues in the way that carly talked about. this is somewhat about morality,

but that is not the point. this is about behavior virtues that lead to a good life. it is not complicated. it is the old formula. if you want to get out of poverty, do not have kids out of wedlock, you get married, do not do drugs, graduate from high school. if you do those things, you have a small chance of being in poverty. we have to talk about social issues in economic terms because these are what lead to success in life. >> it would be a good idea. the data is there and is compelling. i think you are going to need leadership and have political people talk about our culture. it is not inconsequential. the other things you mentioned, de blasio.

he does not want choice in schools. he does not think we need a police force in new york city. he routinely throws them under the bus and refuses to defend them. i think all these issues are related and they are social issues. i do not see what -- the democratic party has been socially very conservative. the democrats used to have white, working, males and females but males particularly, manufacturers. they've all left the democratic party because there is no discussion of values which i