Sound money makes for sustainable economic growth, FORBES argues, as he looks at the state of the economy and the 2012 presidential election. Excerpt from “Simple Ways to Get the U.S. Economy Growing Again,” August 24, 2012.

STEVE FORBES, Chairman and Editor-in-Chief, FORBES Media; Former Republican Presidential Candidate

 

In terms of the economy, yes, we are growing this year. But we’re like a car on the open highway going about 30 miles an hour instead of 70, 75 miles per hour. Never before have we had such a weak recovery from a sharp downturn, and that leads to the basic question: Why? What are the things that are standing in the way?

The first barrier is the most boring subject in the world: monetary policy. You can have an economy with basic strengths, but if you don’t supply enough money to meet the organic needs of the marketplace, you’re going to stall the thing. You print too much money, you get the economic equivalent of flooding the engine; right amount and you have the chance to move ahead.

This is what is happening in the world today. The Federal Reserve has been on a money binge since the early part of the last decade. This is something that most political authorities don’t understand, precisely because it’s so inhibiting, so boring. But it undermined the presidency of George W. Bush with the weak dollar, and it’s undermined the presidency – along with some other things – of President Obama; it undermined Nixon – he did a lot other things, but this was a contributing factor to the great inflation; and it undermined Carter. None of those individuals fully appreciated what hit them, even to this day.

Money is simply a means of doing transactions with each other. Money is fixed in value; it’s like weights and measures. When you go buy a pound of something, you assume it’s 16 ounces, not 13 ounces, 10 ounces, or 18 ounces; it doesn’t fluctuate each day. Imagine if the government did to the hour what it does to the dollar. You assume 60 minutes to the hour. Imagine if they floated the clock. You have 60 minutes to the hour one day, 80 minutes the next, 20 minutes the day after? You’d soon have to have hedges, derivatives, futures to figure out how many hours you’re working. You go hire somebody for $16, $20 an hour to do a job. Is that a California hour? Is that an Arizona hour? A Bangladeshi hour?

When you have a cheapening of the dollar, it profoundly undermines commerce in ways we don’t even realize. [John Maynard Keynes] was right when he said not one in a million realize how destructive this thing is. It misdirects capital, when suddenly you can’t trust the value of money, where does money go? It goes into hard assets. You saw that in the 1970s. You saw oil suddenly go from $3 a barrel to $40 a barrel. People wondered, is this greedy oil companies? What’s happening? Whatever. When inflation was conquered by President Reagan and then-Fed Chairman Paul Volker, what happened to the price of oil? It crashed from $40 down to $10, finally stabilized around an average of $20, $25.

You also see it around housing. You also had an artificial housing boom in the 1970s, you had it on steroids this time. The blunt truth is, in terms of the housing bubble and then bust, you never could have had a bubble of that size, even with Fannie and Freddie and everything else, if the Fed hadn’t printed the money to finance it. Could not have happened. And yet, the Fed doesn’t get the blame; everyone else gets the blame.

When the dollar is being trashed, you can’t trust prices anymore. How much of [it] is genuine supply and demand? How much of it is speculation, or anticipation of inflation, speculation, hoarding? You see it, too, in the capital markets. Do any of you really believe that in a normal market, the United States government today could sell 10-year bonds at 1-and-a-half percent interest? Or 30-year bonds at 2-and-a-half percent interest? Only the Brits did that in history, back in the 1800s, when the pound was seen as good as gold.

What happens is you can’t trust the prices of credit anymore. So that means the private sector gets starved of credit even though there’s a lot of liquidity out there. Government gets its money; that’s easy. Big business gets its money; that’s easy. But small and medium-sized businesses? Very uncertain, because you don’t know what the real price of money is. So it’s very, very disruptive.

What it is in essence is a kind of government coercion. When the government crashes the value of your money, it means it takes assets away from you, or it gives windfalls to commodities or the financial [institutions] without legislation, without any discussion; it’s done arbitrarily, which ultimately undermines social trust. And that’s why you have this breakdown out there, [with] the traditional link between effort and reward being undermined. You see it in the sovereign debt crisis in Europe. Could you have had the borrowing binges there if you’d had sound money, stable money in value? No.

So watch the price of gold. Watch those commodities. They’ll tell you more than any statement from the Fed of what markets anticipate. You’re not going to get a growing economy on a sustainable business if you can’t trust weights and measures, if you can’t trust the value of the dollar.

What’s this lead to ultimately? I’ll say something that sounds outlandish, but it’ll happen I think in five years. I say five years, because most of you will forget what I said, so if I’m wrong, we’ll just let it go into the ether. And if I’m right, I’ll remind you of it.

But ultimately what I think you’re going to see is that the dollar will be relinked to gold. Why? Because no other commodity keeps its intrinsic value better than gold. It’s the best thing we’ve got.

Taxation isn’t just about taking in revenue to meet the needs of government. It’s also a price and a burden. The tax on income is the price you pay for working. The tax on capital gains is the price you pay for taking risks that work out. Tax on profit – the price you pay for being successful. The proposition’s a very simple one, but it’s amazing how much it’s ignored: When you lower the price of good things – like productive work, risk-taking and success – you’ll get more of them. Raise the price, and you’ll get less of them.

So you have to understand that when you have money instability, [there’s a] huge misallocation of time, resources, arbitrary awards, arbitrary punishments. It becomes clear where we have gone wrong in recent years. We should be simplifying the tax code. 

The I.R.S. calculates that last year we spent 6.5 billion hours filling out tax forms. For what purpose? It’s the biggest source of corruption in Washington. Half of the lobbying revolves around the tax code, trying to get an advantage or protect yourself. It brings out the worst in us. We should junk the thing, start over again with a flat rate, generous exemptions for adults and for kids, and there should be no death taxes, and do the same thing on the business side. Make it simple so the brains can focus on the real things: Increase the wealth of the nation.

 

Question and answer session with Skip Rhodes, Member, The Commonwealth Club’s Board of Governors

RHODES: Are there more financial shoes to drop in Europe that could badly impact or even cripple the U.S. economy?

FORBES: I’m an optimist, but unfortunately the Europeans are behaving in ways that just have you shaking your head. The answer is, Yes, they’re on their way to really messing things up.

What is happening in Europe, amazingly in this day and age, is they’re making the same mistakes they made in the early 1930s. Thankfully, today, unlike in the early ’30s, we still have an international trading system of goods and services flowing around the world; in the early ’30s, we blew that up. But what you see in Europe today is for all the talk of austerity, most governments are still spending more than they spent two or three years ago. Greece this year is spending more than it did last year. Where the burden is falling is on the private sector. More taxes are falling on the private sector, on consumers and producers. As a result, they’re in a death spiral; they have to meet budget deficit projections, so they pile on more taxes, which makes the economy slower and drives the economy down so the revenues are short, and then they go through the process again.

In the early ’30s, when the Depression started after we blew up the trading system, how did Britain respond? It increased income taxes in 1930, increased them again in 1931; the U.S. and other countries did the same. In 1932, we put in a tax increase that raised the top income tax rate from 25 percent to 63 percent. We had numerous excise taxes, including a stamp tax on checks; every time you wrote a check, you had to pay a tax to the government. So – no surprise – the economy went straight down.

What do we find unfolding today? Spain just raised the top income tax rate to 52 percent. Italy wants to raise the value-added tax yet again, put new taxes on homeowners. Greece is just piling on new taxes.

They should be going in the opposite direction to make it viable for the private sector to exist. The Italians, Spanish, refuse to make internal structural changes in terms of labor laws, in terms of starting a business.

RHODES: Could you comment on recent articles in the media that the middle class has either disappeared or is at least declining, and what that means to the U.S. economy?

FORBES: Well, it’s highly abnormal for the middle class either to not be expanding in this country, in terms of numbers, as people work their way up, especially as an immigrant – you come with nothing and within a generation you’re really starting to get into it and your kids even more, or moving up to upper middle class.

When you start trashing money, who is hurt most? Wage earners. Get the money right, so you can trust it again, stable value, and a few of these other things going, and that will reverse itself quite quickly. People want to trade with each other. People are accustomed to being masters or mistresses of their own fate.

RHODES: How would you address the student debt crisis?

FORBES: Why in the world is [the cost of] education going up far faster than even health care? Last 12 years, health-care prices have gone up about 220 percent; tuition is up 400 percent. Why is this happening? One of the reasons it’s happening is government help for tuitions, whether it’s Pell Grants or guaranteed loans. That means when the money is in the parents’ hands before they shovel it over to the university, the university spends the money. To be blunt, look at most of these institutions. Look at their real administrative costs; they try to hide this; it goes up faster than classroom instruction. If you want your kids to be rude, have them ask, How many hours does a professor now spend in a classroom [compared to] 20 years ago, 30 years ago?

Until recently, institutions all tried to raise prices. But that’s going to change profoundly. High tech means you have access to teachers and professors all around the world. You don’t need to have them physically there. The other thing that’s going to happen is [we’ll] ask ourselves, Why does it take 4 years or 6 years or 10 years to get an undergraduate degree? Well, we take three months off in the summer. What if we took five weeks off and do this in three years? Advanced degree, four, four-and-a-half instead of six or eight. Parents are now asking in a way they would never have dared do before, What are we getting for the resources we are spending? It doesn’t mean you become just a trade school; it means really focusing on courses that really develop the mind and not so many gut courses that so many of us coasted by on.

RHODES: We’ve had the dot-com bubble, the housing bubble, and now the Obama debt bubble. Should we be as concerned about the debt bubble as the pundits are touting?

FORBES: The answer about bubbles, especially artificially created bubbles, is that yes, they do a lot of harm.

You have to make the distinction. It’s one thing when something new comes along and people jump into it because they all see an opportunity. Remember the early ’80s, when PCs first came along, everyone knew this was big so everyone jumped into it. Companies like Atari and Commodore and others. And you had the inevitable shakeout. And you saw it in automobiles – you had over 300 major manufacturers in this country. So when something new comes along and everybody jumps into it, that’s not a bubble, that’s capital that jumps in, sees an opportunity, it shakes out, and the marketplace determines who does it best.

In terms of bubbles like we saw in the late 1990s, part of it was natural, but it was artificially inflated by the Fed. Why? Because inadvertantly the Fed tightened up in the late 1990s. The U.S. had cut its capital gains tax under Bill Clinton, and did some other pro-growth things, so suddenly we became a magnet; people wanted dollars again. So you had a dollar shortage, so investment in traditional areas like manufcaturing, steelmaking and agriculture suffered a deflation, and [in] hot areas like high tech you got a real bubble effect, not just the normal one, but tens of billions flowing in that normally wouldn’t have flown in if you’d had a stable currency.

The housing bubble came about because the Fed was going in the opposite direction, printing too much money, so you got the bubble there, just as you got it in oil.

As for the debt bubble, when you artificially lower the price of credit and artificially decrease the supply of government bonds as the Fed is doing, it becomes very easy for the government to finance its debts. The insanity is that the government’s taken on huge amounts of debt, at shorter maturity rates. They should be going long, because when rates go up, the cost of financing that debt is going to mushroom. So yes, it is a bubble to worry about.

RHODES: How close will this election be?

FORBES: We don’t know. One reason why Romney’s negatives are high is that in the swing states he’s been trashed [in negative ads]. But that comes from people not knowing the man. I think as people learn more about Romney and Paul Ryan, I think they will end up winning on Election Day.