Forbes magazine editor Steve Forbes failed to win the Republican presidential nomination in 1996 and 2000. And his pet big ideas -- a flat tax that would let citizens fill out their income taxes on a post card, individual health savings accounts and market-based Social Security reform -- remain unconsummated dreams of many conservative reformers.
But Forbes, 60, hasn’t lost his optimism, his edge as a sharp economic prognosticator or his capitalist’s disdain for dubious government fiscal and monetary policies -- even when Republicans are practicing them. Forbes writes editorials for each issue of Forbes magazine (circulation: 900,000) and appears often as a guest analyst on CNBC financial shows. I talked to the CEO of Forbes Inc. on Monday, March 10, by phone from New York City.
Q: The stock market seems to fall a percent and half a day. Oil prices just set a new record. The dollar is falling. Inflation is going up. The subprime troubles don’t seem to end. What has suddenly happened to our economy?
A: What’s happened is twofold. One is the weak dollar policy of the Federal Reserve and particularly the Bush administration. I’m a Republican, but I think they have made a grievous mistake here. When you debase your currency -- you print too many dollars -- strange and unpleasant things happen, such as soaring commodity prices. Since 2004 oil, copper, lumber, steel -- they’ve all gone up. The housing market, which was booming, went on steroids. The same thing with a lot of the hedge and equity funds. We’re paying the price for that today.
Then with the credit crisis last summer, what has made that protracted is, first of all, the people don’t know where the bad stuff is. It’s similar to getting a health warning that bags of lettuce are tainted. It may be only a small number, but nobody buys lettuce until they know where the bad stuff is. That’s what’s happening with the subprimes.
But we also have a modern version of a bank panic. Lenders are reluctant to lend, even to solvent customers. The system is frozen up. That’s why even solvent companies in the mortgage business are having a very, very tough time these days. So we have a panic and we have the unknown.
Q: Does all this add up to a recession?
A: Whether the theologians call it a recession or a slowdown, the economy has slowed very precipitously from the boom in the third quarter. The fourth quarter was stalled and the first quarter is stalled. I think in the second and third quarters of this year the economy is going to start to move up again. We shouldn’t forget that there’s plenty of liquidity in the economy. Overall, incomes are rising, not declining. Small- and medium-size companies are starting to buy back their stock. So there’s liquidity out there, and I think that will eventually get the economy moving.
Q: What’s the number-one thing we should be worrying about?
A: Two things. One is the free-fall of the dollar; that’s got to be stopped; that cannot go on. Two is stopping the panic by telling banks and lenders and the accounting industry and the regulatory authorities don’t take write-downs on subprimes and some of these other exotic instruments until you actually know what the losses are. In other words, if somebody defaults on a mortgage, you write the mortgage down. But you don’t try to guess how much you are going to write off because you don’t know.
Q: In layman’s terms, why is the fall of the dollar so important?
A: Why it’s important? Every time you go to the gas pump, you'll see why. Every time you go to the grocery store -- why are those prices rising like that? You see it in the impact on the housing market. Why did lenders behave so bizarrely? Well, one of the reasons is that a lot of new players came in with the easy money and lending standards went out the window. When you have that situation with excess money -- it’s the equivalent to flooding the engine of a car with too much fuel -- what you also have is that businesses are investing more outside the U.S. than inside the U.S.
A: Well, it did not do anything to shore up the value of the dollar and ask the Fed to cooperate in that. There are various time-tested methods to do that. It all boils down to when you spill something, you soak it up. The Fed could sell bonds that remove excess money from the economy. The Bush administration could work with the G-7 (European countries) to do exchange operations -- you know, buying dollars to shore that up. Our allies would be quite willing to do it. They find the fall of the dollar very disturbing, very disruptive. So you take positive steps.
Q: Is it simple enough to say that the dollar is falling in value because too many have been printed up and are in circulation?
A: Too many dollars out there. Especially when the Fed prints a dollar bill these days, with all the borrowing and exotic instruments, it can multiply pretty quickly -- just like rabbits. So you stop breeding the rabbits.
Q: There have been Republicans screwing up the economy. What are the chances that either President Obama or President Clinton will fix things right?
A: The Democrats will probably make the situation worse, because they believe in tax increases. They want to raise taxes, not cut them, which would make us less competitive, which would hurt job creation and innovation. So they would compound the problem.
Q: Of the two Democrats, which would you prefer to see president?
Q: I think that’s known as a Hobson’s choice?
A: Yeah. That’s like picking poisons. I’d rather have the antidote -- so I’m working for McCain.
Q: With John McCain, do you have any sense that he knows what the problem is?
A: I think that he’s got the instinct that great countries do not have weak money, just as John Kennedy did. And you know who else did, in addition to Ronald Reagan, was Bill Clinton. He was obviously not an economist, but he looked at the Carter administration and asked, "Why did that fail?" Obviously, one of the big reasons it failed was the wild inflation, the weak dollar. So the Clinton administration didn’t go for a weak dollar -- for political reasons.
Q: Do you see the flat tax -- which is quite popular in Europe these days -- having any chance of becoming a reality here?
A: I think the answer is yes. The reason is because of what you see in Eastern and Central Europe. A number of countries have implemented the flat tax there. Twenty countries around the world have done it in recent years. And as these countries do it, their neighbors are forced to react. A good example is several years ago, Slovakia -- little Slovakia -- enacted a flat tax of 19 percent, including a corporate tax of 19. And neighboring Austria suddenly felt the need to cut their corporate tax from 34 percent to 25 percent, just to try to stay in a competitive arena. So more countries start to do it -- I think one of the major European countries will do it -- and when that happens, then we’ll do it.
A: A part of the reason was he didn’t get much traction, so therefore people were only vaguely aware of it. They knew he didn’t like the IRS and wanted to replace it, but they didn’t really focus on the details. If he had won some primaries outside of the South, then I think there would have been a more intense discussion of the thing.
Q: You are a flat tax guy and not a fair tax guy, and you continue to be so?
A: That’s right. I think it’s just easier and faster to move to a flat tax. One of the things you have to do with a fair tax, and its proponents are upfront about it, is repeal the 16th Amendment to the Constitution, which allows the income tax. If you don’t do that, we know at some point we’re going to get both.
Q: The flat taxes in Europe are on top of all their other taxes, right? They still have their VAT taxes and other taxes, right?
A: They do. What they have done is simplify their income tax and it’s worked very well. Russia, of all places, for example, put one in about eight years ago at 13 percent. They had been in the 30 or 40 percent range before that. Lo and behold, the economy responded. Revenues doubled in real terms in a few years. Even before the oil boom, the Russian economy was starting to move again.
Q: Looking back on the Clinton administration, the '90s don’t look so bad right now, do they -- economically?
A: Economically, and I think one of the reasons it worked was that after the tax increases of ’93, which slowed the economy, the Republicans got control of Congress in 1994 and for a while they actually practiced the principle of spending restraint. They did pass a number of good tax cuts -- the capital gains tax was cut; the capital gains tax on housing was almost eliminated for primary residences; taxes were suspended indefinitely for the Internet. So they did some positive things and, lo and behold, the economy responded.
Q: How optimistic are you that McCain or any politician will have the courage it takes to fix the economy right and keep it fixed?
A: I think John McCain has demonstrated he can take the heat. As you know, he has been a relentless foe of earmarks and wasteful spending, even if it made him unpopular with his colleagues. So I think he’s got the backbone to do it. The key is for him to have a positive plan of action. If he has that, he will get it done one way or the other.
Q: Which would you rather be in the McCain administration, vice president or treasury secretary?
A: I think it is unlikely I will be either. I am now very comfortable in my role as agitator, and I will agitate the others to do the right thing (laughs).