Steve Forbes: The Only Way Out Is a Return to Free Markets and Capitalism
Forbes sees a new gold standard in the next five years as current system worsens
Show transcript of Steve Forbes: The Only Way Out Is a Return to Free Markets and Capitalism
JIM: Joining me as my special guest on the program today is Steve Forbes. He’s chairman and editor-in-chief of Forbes Media. He’s also the author of the bestselling book How Capitalism Will Save Us: Why Free People and Free Markets Are The Best Answer in Today’s Economy. And Steve’s new book coming out in July of this year is Freedom Manifesto: Why Free Markets Are Moral and Big Government Isn’t.
Steve, I want to talk about something that I have read and you have written about over the years, and that is the idea of the gold standard. If we look at the currency markets today, it’s obvious this system isn’t working; something is awry here. What do you think are the chances that we could go back on another gold standard? [00:50]
STEVE: Oh I think it’s going to happen in the next five years simply because of circumstances. Imagine what this country would be like if you had 50 states each having their own currency, each having their own central bank. It would be chaotic and we would have a much lower standard of living. So the chaos that we're experiencing now I think is setting the stage for a gold-based currency again. And people ask why gold? And the answer is simple. Gold keeps its intrinsic value, a stable value, better than anything: better than silver, better than copper and better than Ben Bernanke. We did it for 180 years, we did well with it. And since we've abandoned it, we in the world have paid a price of increased volatility, misdirected capital and the kind of chaos and slow economic growth that we're experiencing now. [1:42]
JIM: You know, for listeners this may seem astonishing because when you talk about gold, whether it’s in the media or in the financial press it’s disparaged; what’s called the barbaric relic. What seems astonishing today is you believe this could be conventional wisdom in a very short period of time. What could trigger that? [2:03]
STEVE: I think either a new president, a new head of the Federal Reserve and also the circumstances of the world. People know when the dollar is weak, unstable, it is not a good thing and boils down to: what do you trust? Gold, or Washington politicians to preserve the value of what you have earned? And I think it’s no contest when you put it that way. [2:24]
JIM: Now, if we were to go back on a gold standard, this would really change Washington because it’s been very easy for Washington to overspend. They’re not spending their own money and you have a Federal Reserve that could print fiat dollars to pay for these bills. How would this change Washington? And I guess, what would change for Americans if we were to go back on a gold standard? [2:50]
STEVE: Well, you would have more prosperity; savers would get interest on their savings again and we’d have more of an opportunity society in terms of, as Lincoln put it, enabling us to improve our lot in life. So for Americans it would be a godsend because when they earned a dollar it would be worth a dollar. One reason why wages in real terms have gone nowhere for a decade is because the value of the pay that you receive has gone down. Now, we should have learned this from the 1970s. So it’s as if you were supposed to get say five loaves of bread and you end up only getting four, you feel cheated; you didn’t get what you had bargained for. And that’s true when you take the dollar off gold, these bad things happen. [3:39]
JIM: We have central banks today and they have often been equated to central planners. And people talk about socialism being dead, but is it really when you have a central bank that can manipulate the economy in ways that create artificial interest rates, artificial borrowing rates, printing money to stimulate economy growth? Isn’t that central planning in essence? [04:04]
STEVE: Yes. It’s manipulation. Let’s not even give it the glorious name “central planning.” It’s pure manipulation, supposedly for our benefit. So it’s about power. It’s about control. And when you can determine what people get in terms of the value of their money, that’s a huge amount of power and control. And they’d also enabled you to create artificial winners and losers. Why in the world did Wall Street do so well in the last decade? Why in the world did the energy companies, particularly our oil companies do well? And it wasn’t just because of their shared genius, it was printing too much money which makes it necessary to get financial instruments to protect yourself against this trashy money. It artificially increases the price of oil.
We saw in the 70s oil went from $3 a barrel to $40 a barrel. When Reagan killed that terrible inflation, oil from the mid 1980s to the early part of the last decade averaged $21 a barrel. [5:04]
JIM: If this was to take place, and it seems like it’s been gaining a lot more recognition, you have people like Ron Paul out there talking about this very issue. In fact, every time Mr. Bernanke goes on Capitol Hill, he gets a mouthful from Congressman Ron Paul, but it’s also been picking up in the Republican camp and I also believe some Democrats are talking about reining in the Fed. [5:27]
STEVE: It has begun to get support and the critics now are trying to laugh it off or vilify it, which shows that first they ignore it, then they vilify it and then suddenly it becomes conventional wisdom. So yes, people are studying the issue, people are getting more knowledge on it and realizing just as you have 60 minutes in an hour or 16 ounces in a pound, so too the dollar should be fixed in value. [5:55]
JIM: I want to move on to an issue that you champion when you ran for the office of the presidency and that’s a flat tax. And what I find ironic today is when we talk about a flat tax, there are a lot of people here who don’t like it, but if you were to tell me that the flat tax was gaining traction in countries like Russia, or for example, in Hong Kong or what used to be very socialistic and communistic countries it’s picked up there. We seem to have gone in the opposite direction over the last decade. [6:31]
STEVE: We have. We made a little bit of progress in 2003 when at least we got the dividend tax low; cut that by 60 percent for individuals and made a good cut on capital gains. But other than that you’re right, it’s almost been 10 years since we've had good news on the tax front and we’re starting to fall behind the rest of the world. As you know, our business taxes are the highest in the developed world. We even have higher ones than Japan and France for crying out loud. [7:00]
JIM: Now, some would say when it comes to corporate taxes — we now have the highest corporate taxes in the world after Japan lowered theirs — that’s it’s really not true because corporations have tax deductions and they don’t really pay that. But what I think of, Steve, is the vast majority of jobs in this country are created by small businesses and they do pay that tax rate. [7:21]
STEVE: They do indeed. And it also begs the question: why have the code flooded with stuff so that people can avoid a harmful tax? Why not slash the tax in the first place, declutter the code and let people focus on doing real things? [7:36]
JIM: Wasn’t that the philosophy that Reagan tried to do? When he took office, tax rates were at 70 percent. He brought them down to 50 and then down to 28 percent. We had I think three tax brackets. But after that, we went right back and George Bush Sr. took them up and then Bill Clinton took the tax rates back up in two giant steps, taking tax rates from 28 to 31 all of the way to 39.6. And there’s an argument in this country that we need to go back to that. In fact, the president is making the argument we need to go back to that and add some more. [8:11]
STEVE: Well, I think the experience answers that question. It inhibits people, it puts a price on good things like productive work, risk taking, success. So again, put aside the powerful arguments for it, just look at what we had: In the seventies, rapidly rising taxes, we had a stagnant economy; lower tax rates in the eighties, America blossomed. And even Bill Clinton had, as you mentioned, a reduction in the capital gains tax after he won reelection in ‘96. [8:39]
JIM: Are we at risk of losing our industry? I live in the State of California where we raised income taxes to 10.3; now the governor wants to raise them to 13.3, except they’re no longer on a million dollars worth of income, it starts at 250 like the president’s plan. In the last three years since we've raised taxes, California tax revenues have fallen, businesses have left the state. Are we at risk of the same thing nationally unless we change? [9:13]
STEVE: That’s exactly right. If you take the word ‘Greece’ and translate it into English you get California, Illinois and some other places. And simply spending and taxing, we know where that leads. It leads to what’s happening in Europe. Some states are getting it right like my home state of New Jersey of Chris Christie; Scott Walker in Wisconsin and other governors. Even a Democrat, Andrew Cuomo of New York turned in a budget that was less than it was a year before, which had never been heard of in New York. [9:43]
JIM: It seems to me, Steve, that when the president commissioned Simpson-Bowles, they came back and they were in favor of simplifying and broadening the tax base. I’m not quite correct with my figures, but I think they had like two tax rates; I think it was like 14 or 23. But they were going in that direction towards tax simplification. Is it going to take a change in Washington, in other words, a change in the presidency to bring this about? Because there was bipartisan support for Simpson-Bowles, but the president never did anything with it. [10:18]
STEVE: Yep. Well, I think he thought it would be one of those commissions. You just do it and it has the big press conference and then it collects dust and everyone forgets it existed. What I take comfort from is that it really touched some chords; Democrats and Republicans agreed on the concept of simplifying the tax code and reducing tax rates, doing positive reforms for entitlements. It was the White House that kiboshed the thing. So I think after the election there will be an environment where some positive things can start to be done. [10:48]
JIM: In this kind of environment, let’s say you've got a president in office who could articulate like Reagan did, and said, Look, if we lowered taxes on everybody including wealthy people, what is that going to mean? It means you’re going to keep more of what you earn, wealthy people will invest, they will take risks, new enterprises will be developed. I mean look at the boom we've gone through periodically in this country. It’s probably one of the best ways of creating jobs in this country, which leads me to my next topic which is moving the economy back towards capitalism because I don’t think we have capitalism now. You know, under capitalism, if you make a bad investment you lose money. That’s how capitalism works. We seem to have gone to a system where, well, if you make money that’s good, you get to keep it, but if you lose money and you’re big enough, we’ll bail you out. That’s not capitalism. [11:44]
STEVE: There’s a word for it: Crony Capitalism. But I think it’s just pure political pork. And I think the American people are clearly very upset by it. But free markets mean that if you succeed, you do well, like a Steve Jobs. If you don’t succeed, you pay the price for it, not with taxpayer money but with your money and investors’ money. Which is how it should be: You take a risk, you make a hit, great; if you don’t, you pay the price for it. [12:12]
JIM: Now, 25 countries around the world have adopted flat-tax policies and you came up with a number, I think — correct me if I’m wrong, but I think your rate was right around 17, 18 percent. And you would also use that same rate across the board. In other words, corporations would pay a flat tax at 17 percent, individuals would pay a flat tax at 17 percent.
Now, there are many in academia that would argue the government will lose all this revenue. You've seen the rhetoric any time the government runs a budget deficit they blame it on the tax cuts and we know that tax revenues actually went up. [12:50]
STEVE: That’s right. And it all gets down to they have this what’s called a ‘static analysis’ mentality. What that means is they assume if you raise taxes, everyone will, like sheep, go along with them; and that if you reduce taxes, all it means is the government loses money. They have no conception of incentive; no conception that you’re going to try to work harder if your rate is 15 percent rather than 85 percent. That just goes over their heads. So of course they battle every tax cut. But experience shows that when we do them right, reducing tax rates, by golly, we all benefit including the government. They get more revenue. [13:29]
JIM: And speaking of revenue and innovation and creating jobs, let’s talk about capital gains and dividends because I think a lot of individuals when you hear that, well — let’s take an example the Buffet rule. Okay. Mr. Buffet gets a lot of his income in the form of capital gains and dividends which are taxed at a more favorable rate today at 15 percent. And some people think that’s terrible. And really what you’re talking about with the Buffet rule is doubling the tax on capital. Why would that be a bad thing? [14:02]
STEVE: Well, what it would do is in addition to smashing small businesses, it would destroy capital and it would also have people not realize gains because why realize gains if you’re going to lose them all or lose a big chunk to the tax collector. Capital gains is risk taking. There is no guarantee that you’re going to have this success. And government politicos, they always focus on people who have gains, like Gov. Romney, and ignore all the losses that you have of risks that you took of businesses that did not succeed. It’s no sure thing. [14:34]
JIM: You've written about we need to return to capitalism. In fact, your new book coming out Freedom Manifesto: Why Free Markets Are Moral and Big Government Isn’t, what are you going to tell your readers in that book that we can talk about today?
STEVE: Basically, that all the things big government types blame on free markets — that they’re unstable, that they’re greedy, that they’re short-sighted, that they oppress the poor — that’s a good description of big government. When big government goes beyond defending the realm, defense and internal order and the like — basic things that we all know government has to do — when it goes beyond that, it is government that is short-sighted. It’s focus is just the next election. It’s government that puts its interests ahead of the people it ostensibly serves. It is government that wastes money and keeps people back. In the name of the poor, government has done more to block their ability to move up, while free markets have done the opposite.
Free markets bring about cooperation, you know, you have to deal with your suppliers. You also have to succeed. And this gets to the nub of the thing. To succeed in a free market you need to provide something that somebody else wants. It’s all about meeting the needs and wants of other people. So even if you have a lust for money, you’re not going to get it unless you provide something that somebody else wants. [15:56]
JIM: I think a good example of that is what we've seen in the success of Apple. I mean if you take a look at the products, this was a company that was given up for dead back in the nineties. Its entrepreneur returned, came back with the iMac, came out with the iPhone, the iPad, the iPod — but, here’s an entrepreneur that came out with products that people wanted. [16:20]
STEVE: And he made a famous statement on that. When asked if he does marketing surveys, he said, no, because people don’t know what they want until we show them. [16:30]
JIM: Now, in this book, Freedom’s Forge: How American Business Produced Victory In World War II it is a story that’s not often told. You hear about the leadership of FDR, you hear about American war heroes. You never hear about American entrepreneurial heroes who made the production of weapons and materiel that basically supplied our allies. Let’s talk about that for a moment because it’s a remarkable story that you don’t hear too much about. [16:59]
STEVE: Well, people assume that what we did in World War II was just because we were the largest industrial country in the world. But in World War I our mobilization of industry was a disaster; our soldiers in France had to get their supplies from the French and the British. In World War II we did it differently. One thing Franklin Roosevelt did right was to recognize only free enterprise could really turn out the vast amounts of war materiel we would need. And the people who ran the effort, people like William Knudsen who had been president of General Motors, Henry Kaiser a great construction engineer, they recognized that you don’t tell people what to do, you put out incentives, you try to mobilize people’s ingenuity. And as a result the US became the cornucopia. We provided 70 percent of all the war materiel for the Allies. That is, we did more than twice what Britain and the Soviet Union — Russia — did together. Ford Motor Company alone turned out more than the entire economy under Mussolini. [18:06]
JIM: As we take a look at the topics that we have covered today, Steve, we talked about a return to a gold standard, we talked about about a flat tax, is it going to take a period of time — I can remember I got into this business in the late seventies and I remember it was called the Misery Index. The unemployment rate was over 10 percent, inflation was running over 14 percent, we had double digit interest rates, high unemployment. It was a terrible time and we had been dealing with this with successive administrations whether it was Johnson, whether it was Nixon, whether it was Ford and Carter.
It seems like we've gone through a little bit of this malaise in let’s say the last decade. We’ve drifted further and further away from free market principles and more intervention by government, which has not turned out well. Is it going to take a rough period as we've been through which makes people more willing to say, Wait a minute, this stuff isn't working? Maybe we need to go back and try something that does. So that’s my first question.
Number two, is it going to take somebody to articulate these facts and communicate it to the American public because they certainly aren’t getting that from mainline news media sources. [19:24]
STEVE: That’s right. But I think through the web, through Ron Paul’s campaign, whatever you thought of some other parts of his platform, he got it right in the need for sound money again. And so I think the environment is ripe. I know when I talk about it, people respond well to it. So even though things are rough now, yes, we are doing better than we did last year, we're still going about 35 miles an hour when we should be going twice that. I think reforms are going to be made and I think instead of one person like Ronald Reagan, I think it’s going to be a multitude of people getting the message out there. You’re starting to see it in primaries. Richard Mourdock beat the 36-year incumbent in Indiana because voters want people in Washington who understand the principles of free enterprise and are willing to support them. [20:12]
JIM: And you’re talking about more and more individuals, which it seems like there is going to have to be some kind of common consensus, a coalition that maybe both sides can agree on. And are you seeing that in Washington, are you seeing that Democrats are saying, hey, maybe raising taxes up to 48 or 50 percent may not be a good idea? Simplifying the tax code, getting rid of these tax deductions and loopholes, in other words, do you see a consensus forming between both parties? [20:42]
STEVE: I think you’ll see a portion of the Democratic party go along with it, just as you saw support with Simpson Bowles and Paul Ryan has gotten support. I mean Senator Ron Wyden, Democrat, liberal from Oregon supports Paul Ryan’s proposal on positively reforming Medicare, Medicaid and Social Security — the entitlements. So yes. You see it on the state level: Chris Christie in New Jersey got big things through; he is a Republican, but he got it through a Democratic legislature. People know things have to be done. We don’t want to go the way of Greece or what’s happening in other parts of Europe. [21:20]
JIM: Well, I hope you’re right because I think that, you know, the one thing that you probably know the quote better than I do, Steve, from Winston Churchill, it goes something like this: Americans will try all the wrong things before they’ll finally get it done well. It seems like we've tried a lot of wrong things over the last couple of years. Maybe it’s a time to return to what works. [21:44]
STEVE: I think we're going to have one of those periods, just as we did 30 years ago.
JIM: Well, we’ll end on that optimistic note. We've been speaking with Steve Forbes. And Steve, do you want to tell us a little bit about your new book coming out? And Amazon says it’s going to be available July.
STEVE: Yes. It is about free markets bring out the best in us. Yes, we do need sensible rules of the road, but it’s about meeting the needs and wants of other people. It expands our sense of humanity, promotes philanthropy and I think people will find it a positive thing. It enhances trust. It brings out the best. And we all know human nature has its upsides and downsides, and this is a system free markets that enable people to do things that not only benefit themselves but also benefit others. And most of us, like fish in water, don’t even know we're in the water, how the system works. [22:35]
JIM: The name of the book is called Freedom Manifesto: Why Free Markets Are Moral and Big Government Isn't and Steve’s other book called How Capitalism Will Save Us: Why Free People and Free Markets Are the Best Answer in Today’s Economy.
And we've been speaking with Steve Forbes, he’s chairman and editor-in-chief of Forbes Media.
Steve, thanks for joining us on the Financial Sense Newshour. [22:56]
STEVE: Terrific, Jim. Thank you.
Jim is pleased to welcome Steve Forbes, Chairman and Editor-in-Chief of Forbes Media. Steve and Jim discuss a number of important topics, from a new gold standard, to tax reform, to Ben Bernanke and the Federal Reserve. Steve believes the only way out of the mess we are in is a return to free markets and true capitalism. The combination of a low-tax system and a gold-backed currency worked well for much of our history, and Mr. Forbes believes we must return to those basic policies.
Steve Forbes is chairman, CEO, and editor in chief at Forbes Media and an internationally respected authority in the worlds of economics, finance, and corporate leadership. He campaigned twice for the Republican nomination for the presidency. His previous books include Flat Tax Revolution, A New Birth of Freedom, and the New York Times bestseller Power Ambition Glory.