well i'm tom are going to washington d.c. and here's what's coming up tonight on the big picture it's friday and that means it's time for conversations with great minds tonight we have economist and author in flux you pull discuss the disadvantages of free trade and its twisted history then ready to rumble i guess i will debate the top stories of the week including the political uproar in wisconsin and the. bill just signed by governor scott walker and the corporate takeover we're seeing in wisconsin this really is no i do in fact dates back more than one hundred years for the controversial sprint or case i'll tell that story to you in our village.

heard tonight conversations with great minds i'm joined by ian fletcher an author who has his finger on the weak pulse of america's economy currently and is the senior economist at the coalition for a prosperity prosperous america. and welcome to the program thanks very much for having me on your show very pleased to have you i thought your book free trade doesn't work was extraordinary and i. did a book review of it for it was blushes and probably you know and i just it and i want to talk about it i want to talk about some of these issues. you have you know in addition to. whatever. academic background you actually have some experience in

the in the world of business and trade as it were well let me tell you how i came to write the book i was working a couple of years ago as a columnist in private practice consulting to mainly hedge funds private equity guys like that and i start to get tired of helping guys who had frankly too much money to make even more and about the same time i was becoming aware of developments in the academy that was making it possible to intellectually criticize free trade in a lot of ways that people would be doing on a purely practical level for some time there was no way to make this intellectually legitimate so my wife said to me if you don't write this book you're talking about you're always going to wish you did so the book is the result yeah. by the academy you mean within the within academic circles. the criticism of free trade by political figures and folks in the real world has been a flashpoint for some time now certainly since nafta but academicians economists

with a capital e. have been telling us for a long time that free trade is a known scientific truth of economics but that's changing people are finally figuring out how to translate these criticism free trade into the abstract mathematics that economists are prepared to consider real thinking and i thought it was high time somebody told the general public about where that was going well and that's that's one of the things that i found some marvelous a valuable free trade doesn't work is that anybody could read it and get it i mean it was just it wasn't a book written like you know i i slogged through wealth of nations. theory of moral sentiments was actually easier to read you know adam smith both of but both of them you know and in david ricardo's work in any case let's let's just start out with some definitions of free trade. well free trade means that there are no barriers for buying and selling goods produced in one nation in another country and in the united states that means that our markets are open to the rest of the world now the

problem is when we use the term free trade this actually covers a situation that's not quite like that it means that our markets are open to the rest of the world but the reverse is not the case which is of course why we have such a trade deficit in other words there's no such thing as free trade in the real world or is on our side there is americas markets are pretty open to the rest of the world u.s. tariffs are about one and a half percent of the volume of foreign orthe so if you want to say our trade is ninety eight point five percent free i could live with that but the real problem is going the other direction ok you you mentioned the word tariffs. again definitions what is a tariff tariff is just a tax that's collected on imported goods and services so would it be appropriate to say that for example for a long time in the united states we said you know if there's dollars where the labor made it in a pair of shoes made in connecticut and twenty cents for the labor of the same shoes made in china or forty cents for the labor in the same shoes made in mexico

when you import those shoes in the united states we're going to hit with an eighty cent tax if it's coming from china or sixty cent tax of it's coming from mexico so no matter where you make it it's going to question the same although it's not just labor obviously the tariffs are equalizing and that the whole point of a tariff based trade mechanism that alexander hamilton put in place in the states and seven hundred eighty three was to give a preference to domestic manufacturing and that is that a reasonable summary and is that accurate yes you put your finger on a very important point that's misunderstood by a lot of people despite the myth that america's economic heritage is free markets free markets free markets in point of fact for most of our history of the united states was a very deliberately tariff protected economy. the constitution itself says congress has the power to levy a tariff the founding fathers were protectionists yeah right from the very

beginning and then the first secretary of the treasury alexander hamilton in the george washington administration was the guy and his report on manufacturers and seven hundred ninety one and largely adopted by congress votes of the united three . from the time of the founding of this country until more or less around the time of reagan that or actually let me back that up a little bit. i know that for the first one hundred one hundred fifty years of our country tariffs were pretty much everything in fact one hundred my understanding is correct me if i'm wrong one hundred percent of the cost of operating our federal government up until the time of the civil war was income from tariffs some of it was interstate but most of it was generated from the civil war to world war one two thirds of the cost of running our government was tariffs from world war one to world war two a third of government got huge still a third of government revenue was tariffs today it's some tiny fraction of that when and how did that collapse in the use of tariffs both as

a source of income for the government and as a way of protecting domestic manufacturers when and how did that begin well that's a very interesting question because when i wrote my book one of the questions i asked myself was if we started out believing in tariffs and we don't believe in them today at what point did we figure out they were bad and what was it we discovered now what i found out is there is no such point because in reality what happened is that the united states abandoned the protectionist philosophy of international trade in the wake of world war two as a political move it was a bribe to the rest of the world to not go communist we wanted to prop up the economies of foreign nations that were threatened by the soviet union at the time places like italy greece japan and also tie them to dependence upon us so that if the italian government started getting cute with the communists would say ok there go you should wear exports so it was a political move there was never any point at which we suddenly realized oh no

tariffs are a bad idea but during the eisenhower administration if i recollect it's been a number of years since i did this math and and wrote my own book that i had a chap. about the senate but my recollection is that during the eisenhower years average import tariffs in the us it's were around twenty percent or in that neighborhood and that they really didn't start dropping until after nixon or or am i missing well there's a number of shifts if you look at the at the numbers the big fundamental decision was made after world war two when we not only cut yeah when we not only cut our terrorist but we removed various other barriers and we have applied various other policies like for example the marshall plan to rebuild foreign industry so they have the ability to produce goods that they can export to us kind of a reverse of that hearse place right and it's an understandable political decision at the time but the reality is that by about one thousand nine hundred sixty europe had recovered from world war two japan was well on the way to recovering and the

soviet economic challenge to the world that had at one time seemed like a serious threat that pretty much petered out so we really should have pulled back at that point but we didn't the policy had become entrenched thanks to special interests that were profiting from the opening of our market to the rest of the world and there had also been a process of intellectual corruption in the economics profession in which people had started to actually believe in a policy which had only been adopted as a political expedient that's a really interesting point because. the nation seven hundred seventy six adam smith wrote that in free traders today cite him and yet that's not what i got out of reading this book and certainly not a theory of moral sentiments in fact if anything i think you could build a protectionist argument out of wealth of nations. who are the intellectual are we talking about like von misses and high a can of an iraq and friedman i mean is that where it started or how did it where

did this begin this this idea that free trade was a good idea in the united states this religion oh well the thing you have to understand is that even in the time when the united states was a protectionist economy as policy the academy was split on the question of the academic world yet and so what happened if it were true as you had a much older tradition such as it is called the american principles in political economy the american school of political economy which was alive and kicking in say abraham lincoln's time it was well known to educated people in this country. these cars kind of died out under the immediate pressure of the political need to indoctrinate everybody in favor of free trade and you also had various other trends in the discipline of economics which sound like they're not too important but things like the ultra math matteis zation of economics which didn't used to be

a hyper mathematical discipline it creates a bias in favor of free trade thinking the same reason it created a bias in favor of all kinds of pure free market thinking because it's much easier to build mathematical models of a free market free trade version of the world because you assume that markets are perfect then you know exactly what's going to happen it's all for the best and so things that don't seem important like an obsession with mathematicians ation created an incredibly strong pressure inside the ivory tower that push things in the free market free trade direction. it's vastly. what. what is comparative advantage ok the theory of comparative advantage is the ultimate intellectual basis in serious economics of the claim the free trade is best basically what it comes down to which in theory is invented by a man called david ricardo in eight hundred seventy eight he was a british economist it comes down to the idea alternately that nations trade for

the same reasons that people do for example you on your way to work this morning you could stop at a starbucks and buy a cup of coffee you could have made that coffee at home would take a certain amount of time a certain amount of effort certain amount of ingredients so you don't buy things and the analogy of course is for a nation you don't import things that you could make for yourself necessarily based on the fact that you couldn't do it for yourself but it's a question of the relative uses of your time so the idea of the theory of comparative advantage is if the united states imports something that means that our time our labor our resources would be better used doing something else so if we import cars from japan it's because not we couldn't make the cars first so if we're better off allocating our resources to say making airplanes instead in the theory where and the theory goes that if it's more profitable to make airplanes then we will make airplanes therefore we'll make what we're best at the japanese will make

what they are best at and everything is best for everyone in a perfect world if you leave a lot of the complications we're trying to do this theory yes it's ok as a kind of first order construct and i wish them full size at this point i'm not against trade i nodded. in favor autarky but there's a whole lot more to the story which means that you can't just take this one little theory which you could reduce to a paragraph or two and say ok that settles the question of a trillion and a half dollars in u.s. imports and exports a year. there are there is a forgotten history to free trade and when we come back to the break i'd like to get into that and the consequences to america and what this trade deficit actually means in terms in real terms so we'll get right back to that still ahead of the big picture more with our conversations in the great minds in fletcher's after this break. and what drives the world the

fear mongering used by politicians who makes decisions. being made who can you trust no one who is your interview with the global machinery to see where we had a state controls capitalism it's called. when nobody dares to ask we do our teen question more. than here broadcasting live from washington d.c. coming up today on the big picture of.

course lindsey lowe and keep. the preacher he's a limb and i think people are suggesting she's. you know she says she's a star. welcome

back to conversations with great minds i'm joined by ian fletcher senior economist at the coalition for a prosperous america and author of the book free trade doesn't work at in what is the forgotten history of trade well the forgotten history of free trade is the fact that no developed country in the entire world became a developed country by practicing it now a lot of people are aware that for example today china is nakedly thumbing its nose of free trade in theory and practice and there are growing like gangbusters i don't think most americans know that i think most americans believe the story that you know we're free trading they're free trading and somehow they're winning the war because their labor is cheaper well the reality is the chinese do not believe in free trade and among themselves they don't even claim to believe in free trade and

it is the chinese the japanese the taiwanese the south koreans and the germans i'm up to now of course you're exactly right there now the interesting part of the story is although it's relatively well know that in east asia and in central europe countries like germany have no use for free trade in this goes back centuries by the way the intellectual roots of this are very deep and you can trace how the japanese learned from the germans and the chinese later from the japanese and so forth what i find even more interesting is the united states itself was not a free trade country. for most of its history even great britain which is usually held up by economists is the great example of free trade the creator of a global empire upon the free trade principles if you scratch the surface of that history even a little bit you discover that it's not so it's the servants to her plan that in the boat i forget the year what fifteen forty or something like that turned england from literally their major export was wool and they lived in

a patch of mud houses with mud roads turn them into a modern australian economy or at least you know and east india company sixty one queen elizabeth the first chartered this was because they turned their back on tree free trade and it wasn't henry the seventh saying the same thing that alexander hamilton was saying which is don't go there don't go into free trade absolutely one of the achievements of the run a science which we always hear about with respect to philosophy and art is that they actually developed modern economics they actually were the basis of capitalism and true of the things they figured out which had been airbrushed out of most economic history you hear about these days is they figured out protectionism and they figured out industrial policy hundreds of years ago and you gave england as an example you could look at the city states of renaissance italy and i talk about this a bit in my book the point is that free trade is a policy which nations tend to embrace when they're at the top of their game and certain vested interests find it very profitable to cash in on that it's

a way of harvesting a position you've got it's not a way of developing your country nor if you already developed is it a really good way of defending your position when other people are attacking it which is of course the situation we're in today yeah chang the oxford economist who wrote kicking away the ladder and bad samaritans there kicking away the ladder phrase came from one of those nineteenth century economy i don't remember we did riklis germany that's right as for it you're right and and it was that you protect your khana me until it's so large and then you convince all these. other countries to do free trade while you still kind of pretend to do free trade but you don't and that way you end up controlling the whole game and that's what we did in this country for the first hundred fifty years and that's what china's doing right and yeah and so it's a very it's a very old game and once you see through the rhetoric it's not that hard to understand none of this requires abstract economics to understand what's going on

but you've got to see past the political rhetoric and you've got to see past the ivory tower fantasy a little bit school and out to you in most economics courses not all to be fair you know so right now we have a trade deficit. what does a trade what does that mean i mean literally what the definition of those terms and what does it mean in terms of its consequences ok what a trade deficit means is that the us is buying more from the world than we sell back to it now what that means is we're getting stuff we're not paying for by giving goods in exchange so there's only two ways we can do that we're going to have to borrow money from foreign nations to pay for it where we can sell off the existing assets that we have and we do both we both borrow huge amounts from abroad both in terms of the federal government selling its treasury securities to foreign nations in terms of various private parties pouring money from abroad and we sell off assets that can be everything from apartments in miami to shares of i.b.m.

what have you is why some one of the bank largest banks in america is largely owned by saudis that kind of thing because we bought a lot of oil from them they didn't buy a lot from us so we had it in the bank so is that you know and it is so. so and the consequence you ask about the first thing to understand is a lot of people out there who say trade deficits don't matter look the idea the trade deficits don't matter is identical with the idea this isn't real money they were playing with all these billions of dollars are being swapped around is not real money we are by definition a poor country when we have an accumulated deficit because we own less and we owe more catrin simple is that right this is how we're not talking about the federal deficit or debt we're talking the trade deficit now and last year how much was it or what it what is it currently only you know it fluctuates around the five hundred billion dollars a year mark and what percentage of that is just oil. the oil crude if it's about

a quarter overall production ok so so even if we became well independent we're still not making things in the united states anymore we're importing all this stuff . it's it has been argued arrive heard it argued that this is really hadn't attacks on america and it's also a way of essentially impoverishing america and the people who are being impoverished first are the middle class the former workers in the industries that were protected and that the people who are benefiting from this are the transnational corporations and their c.e.o.'s and and that bunch and that one of the demonstrations of that is that about half of all of our international trade is not actually an american company buying from a chinese company it's an american company buying from an offshore division of the same american company it's intricately trade is that the case and if so what are the consequences of creating a trade deficit where our own companies are. the biggest piece of it out of your

have are absolutely right and the big consequence here is that corporate america its interests are no longer aligned with the interests of the united states economy as a whole it used to be if you turn the clock back a couple of decades the only way that corporations in america could make money is you take goods made by americans for the most part and you sell them to america what's good for general motors is good for america well kind of i mean not absolutely but when you break that connection you have companies which can present themselves on capitol hill as american companies and get what they want but in point of fact from an economic point of view they're just free agents who don't really give a fig about the united states as opposed to any other place so if we go down in flames correct i had somebody call my radio program today and say you know i don't get it would be these these politicians who are getting all these tax breaks these

corporations these corporations are moving the jobs overseas. is aren't they shooting themselves in the foot. by destroying their own consumer base by wiping out the middle class by you know dropping wages. and and you know my answer was i think that they've become like a giant harvesting machine that just moves around the world and when they're done with us they go somewhere else is that. reasonable assessment and how how could that play out if so. i think you're right to a large extent i think the big problem is that by the time the tomato hits the fan in this country that's beyond the time horizon of corporate management i mean corporate management has notoriously short time horizons they care about quarterly profits if ten fifteen years now the united states has exhausted its ability to borrow more money and sell off more assets half the c.e.o.'s would be retired by that point they don't care. that's it sounds pretty pretty damn unpatriotic i

mean it's it's hot what do we do. a quick question permanent now and permanent normal trade relations p.n.t.r. we have that with china right now. my understanding is when nixon first went to china he went there on behalf of pepsi to try to begin the process of p.n.t.r. which was basically you drop your tourist will drop our tariffs or at least with the growth of these products do i have that right can you describe it what's the history of it when it started well i mentioned the anti-communist aspects of the whole free trade thing earlier in the show where nixon went to china on behalf of pepsi china was a communist country that produced almost nothing the people in developed world wanted to buy and the big game internationally was still supposedly stopping the u.s.s.r. from taking over the world so it was a totally different context but we've stayed with that policy despite the fact the cold war is over we're in

a totally different environment the new rival for americans is not communism it's state capitalism and very few people seem to understand how serious a threat that is state capitalism as in chinese state capitalism south korean state capitals. german state capitalism it's states state protected and we used to be state protected capitalism in countries like honduras you know literally banana republics where we grew the bananas were essentially the victims of america doing this. oh nothing i have to say is to exonerate the united states or companies based here of many wrongdoing they may have done but i think the reality is that the united states is relatively unique in the world in terms of practicing a fairly free wheeling form of capitalism where wherever selling a product at the lowest price gets the business most of the world there capitalist and sense that they're not the socialist but things are much more under government control corporations do what the government lets them do and part of the quid pro

quo for that is that their governments protect the among these protections of course being terrorists and non-tariff barriers and the bad news is this can be a very potent competitive system when you have big business and big government pulling in harness together particularly against them. and against small business in the united states so in the minute or two we have left here in fletcher what do we do about this. i said in my book the united states should go back to being a terrorist protected economy i don't flinch at the term protectionist it was what this country did for one hundred fifty years i suggest in the book a flat thirty percent tariff on all imported goods and services obviously you make the tariff let's take it with you or you know. you make it a flat tariff to take the political mischief out of the picture so you don't have companies running to washington lobbying to get a higher terror from whatever it is they make that's my downpayment on a solution obviously things get very complicated from there it's interesting

because you know i've been saying this for a long time as the liberal on the left pat buchanan has been saying this as the conservative on the right and when ross perot ran for president he got nineteen percent of the vote basically on that message. do you think most americans in their gut know this and it's just like the politicians are so in debt to these large corporations that they have no choice but to act out this free trade dance you know the polls seem to indicate about sixty percent of the public are with us on the you and i on the trade issue and yet we hear just yesterday that orrin hatch is telling the president that not only does he want a new free trade agreement with korea but that has to be packaged with colombia and panama as well and it's no secret who is pulling the strings there it's multinational corporate interests behind the republican party which now have leverage over president obama so he thinks he has to go along with that yeah we've

got both parties to a large extent in fletcher thanks so much for being with us tonight thanks for talking with you and let me again recommend to all of our viewers the ins book free trade doesn't work still ahead of the big picture it's time to rumble five hell yes and i will debate the top stories including scott walker's attack on public employees and his backstabbing union busting cigarette. what drives the world the fear mongering used by politicians who makes decisions to create through get through it if you've made who can you trust no one who is in view with the global machinery see where we had a state controlled capitalism is called sasha's when nobody dares to ask we do our t. question more. time or been here broadcasting live from washington d.c. .