FPR Conversations: Steve Forbes

Steve Forbes is a two-time presidential candidate and the chairman and editor-in-chief of Forbes Media. He recently sat down with FPR Editor-in-Chief Ben St. Clair to discuss his latest book, Reviving America, and the consequences of his free market and flat tax proposals.

You’ve talked a lot about the inherent morality of a free market in relation to your idea of “Big Government.” Can you explain how free markets exhibit morality? I guess first: What do you mean when you talk about markets as being “moral”?

Well markets are people, so they’re not some impersonal force out there. They’re people interacting with each other. To succeed in the free market, you have to provide something that somebody else wants. You have to meet the needs and wants of other people. In that sense, it is profoundly human. You may lust for money, but you don’t get it unless you provide something that somebody, unless you’re a thief.

It encourages trying to figure out what other people might want. It encourages cooperation to get things done. Breaks down barriers between people — you may not love your neighbor, but you sure want to sell to your neighbor. It allows for creativity. People from most unlikely backgrounds make big breakthroughs. There’s no aristocracy in a free market. Free markets always, when allowed to do so, turn scarcity into abundance.

We see problems, such as healthcare, which is the lack of free markets. That’s the problem.

So is the morality a sense of right and wrong?

You have to have that sense of right and wrong, and [James] Madison was right when he said that men were angels if they did not need laws or government. But we do need laws — law of property done can be a teacher. You need guideposts. You don’t sell adulterated food — basic things like that. Yes, but unfortunately the left often portrays it as massive government regulation or anarchy. Not being able to drive 100 miles per hour in a school zone — that’s perfectly sensible.

In The Freedom Manifesto, though, you set up a dichotomy between “Big Government” and “free market.” Do you think there’s a room for a middle ground? Does this dichotomy neglecting the benefits of a public-private partnership, for instance?

Well you can have a public-private partnership if you want to build a highway or a bridge or something. But in terms of big government, which portrays itself as moral but is out for itself at the end of the day. The free market, if what you’re providing doesn’t work, you cease to exist. You don’t get the capital anymore. Government. As [President] Reagan said, “There’s nothing close to immortality than a government program.” There’ll always be a constituency saying, “We gotta have it.” It can fail, which we’ve seen with ethanol — you can just go on and on and on.

Government is hostile to creativity. They know what’s there, what is seen. That’s why Medicare is always behind the eight ball in terms of medical innovations. Government then becomes, as all human institutions, left to their own devices, become self-serving. Unless you have the discipline of the marketplace. Government will just take on more and more power. At the end of the day, with healthcare it’s about rationing, with pensions — they’re always underfunded.

In terms of safety nets, you got to design them in the right way. Food stamps have been badly administered, but the idea is a sound one: You shouldn’t go without food. You do the same thing with healthcare instead of the hodgepodge system we have today.

In terms of education, you’ve see where that leads when we have a monopoly. Some people should have choice. You have to have accountability. Problem with government is, often, you don’t get real accountability.

When you’re phrasing the debate do you think it’s almost unhelpful to say that on one side there’s “big government” and on one side there’s a “free market”? And you’re neglecting the space in the middle that says, “maybe there’s a partnership between the two.”

Partnership like what?

Well the government can help absorb some of the risk of a large private enterprise, like you mentioned building highways.

Well, yes, government took over building highways, and they did the interstate highway system that you could make an argument maybe for that. But now today, where’s the infrastructure problem? It’s not in railways. In terms of freight, we have the best freight system in the world, as we deregulated the railroads in 1980. You don’t have an infrastructure problem in the delivery of packages. We have FedEx and UPS. They forced the Post Office to get itself in shape on that. We have problems where the government is in charge because they may like to build a highway, but they hate to maintain it. There’s no votes to be made cutting ribbons filling a pothole.

With governments, usually, less is more. You even see it in defense, trying to procurement in defense reformed — hasn’t been done in decades. Government stays in its own rut. Aggrandizement has become today — you have regulatory independent agencies that are the real lawmakers in the country today, not Congress — tens of thousands of laws. There’s a book out called Three Felonies a Day — so many rules, many of them vaguely worded. You’re in a position of responsibility, you’re probably committing a felony and you don’t even know it. If the government wants to get you, they can.

If markets are made up of people trying to act morally, aren’t government also made up of people trying to act morally?

Government acts in its own interest, and in the marketplace, because you have the accountability — you have a free market — if you’re not providing what people want, you don’t get the resources to continue unless you’re supplying your own.

Couldn’t you say the electoral system is that kind of accountability for many lawmakers?

In the marketplace, you have accountability every minute of the day. Elections are infrequent, so you may have a bunch of issues you don’t like — that’s why people feel frustrated.

Because policy takes time.

So is bringing a new product to market — takes time. Especially the rights we have on drugs. In terms of accountability, in terms of cooperation, in terms of meeting the needs and wants of others, in terms of turning scarcity into abundance. Take [iPhones]. The first one from Motorola was just voice and cost $3,995. Depending on your plan, Verizon or whatever, someone would give them to you for free for two years. Scarcity into abundance. Quality of life: Once upon a time, only the rich could have chauffeurs. Now everyone does. It’s called Uber. Call up, and it’s there for you anytime of day. You don’t have to worry about labor problems. You don’t like it, you get another one.

Let’s suppose we shifted policy to enable a freer market. Obviously, right away that wouldn’t immediately level the playing field because you still have — for instance, research shows that, for various reasons, where you live determines your later socioeconomic status. So just by creating a free market, obviously you wouldn’t snap your fingers and make an even playing field for low-income people to get ahead because you still have these intrenched barriers that are inhibiting people’s freedom . . .

No. The only thing that is inhibiting people’s freedom are barriers to having this economy function the way it should. In a stagnant economy, those with the least are hurt the most because they can’t have the job opportunity for mobility. When you have a properly functioning economy, people can start with very little and move up the economic ladder. The IRS had a survey in 1995 and 2005 — the vast majority of the people in the fourth and fifth quintile, not only did they go up in terms of salary but they moved up in terms of the quintiles. This is a very fluid society when you let it be fluid.

In terms of quality of life, quality of life has improved for just about everyone. Everyone has [an iPhone] now — the whole world at your fingertips. We now take it for granted as the most natural thing in the world. And in terms of this is supposedly an oppressive society, why do you have millions of people still trying to get here? If you have open boarders you’d have 100-200 million people overnight trying to get into this country.

Entrepreneurs, they’ll tell you, especially in Western Europe — in high tech, you usually have to come to the U.S. Europe, despite great culture, great tradition, great educational institutions, is a piker in terms of high tech. Israel, eight million people, does better in terms of high technology development than Europe, European Union by almost five million.

I’m thinking of people in poorer communities, who have been there for generations as research suggests that they have been. If we were to try to liberalize markets, how would a free market help them?

If you had a free market, they could go to a school that works. That’s why the unions fight charter schools. Washington, you have a handful of scholarships — I think it’s 4,000 — they got oversubscribed, way oversubscribed, people desperate to get their kids out of a failing school. In fact, the president of the United States tried to kill that program while sending his two daughters to private schools. No member of Congress sends their kids to the Washington D.C. schools, but they don’t mind consigning those with the least to those schools. So you get the charter schools where you get real choice. One thing about charters is that if they don’t do the job — out. Monopoly, uh uh.

You start to get an education, and a lot of parents — you see it with parochial schools, with charter schools — kids from pretty tough backgrounds can start to get an education. This idea where you have a monopoly, you have a short school day — charters go to 5:00 p.m. They know the longer they have you — summer vacations, not many weeks. As research shows, it takes you a while after you’ve been off a whole three months to get up to speed. You look at kids who are almost year round — who get a few weeks off in the summer — and they actually like it. It’s an oasis.

So there would be plenty of mobility.

So it starts with education?

You gotta have the opportunity, and why should your education be determined by where you live? If you don’t like the local school, why should you be able to try to get into another?

In the last few years under President Obama, federal outlays as a percent of GDP have been roughly at the same level that they were in the 1980s under President Reagan. The same can be said about the annual deficit as a percent of GDP. But you point to President Reagan as having “removed the shackles of government” and to his policy as a model of limited government. Can you explain that disparity?

On Reagan, it’s the Defense Department. In 1980s, we had a massive buildup, the biggest in peacetime, after the drought of the 1970s. And it worked — we won the Cold War. That’s why Bill Clinton could look so good in terms of fiscal policy. They had a massive drawdown relatively speaking on the Defense Department. Back in the 1950s, defense made up over half the budget. Today it’s barely 20 percent of the federal budget. So that was part of it.

Reagan had massive tax cuts. He pushed through major deregulation, in contrast to this administration. And he also wanted a stable dollar, and it did a much better job than this administration or George W. Bush in terms of monetary policy. In my new book, Reviving America, I have a whole section on that. The tragedy of what we’ve done to the dollar has been hugely disruptive — both sides can be blamed for that, but Reagan got it right. Kennedy got it right on the need for a stable currency.

The U.S. had a sensible foreign policy — strength is nice because then you don’t get in trouble as much. The Soviet Union fell, which nobody thought was possible. The U.S. became very clearly the most dynamic economy in the world. Silicon Valley became bywords for innovation and cutting-edge technology. You compare that with this: the worst recovery from a sharp downturn in American history, almost as bad as the 1930s. You have military being run down, so China is being very aggressive in the South China Sea because they don’t take our president seriously. You have Putin doing his machinations because he doesn’t take Obama seriously. Middle East explodes, redlines don’t mean anything. So these things have consequences.

If you think of measuring government size as its output, the amount of money it spends, each year, Reagan and Obama would be similar in relation to their GDP — in the last three years, after the stimulus package.

When Obama had control of Congress, it went out of control. When the Republicans got in control, you have these continuing resolutions, which meant you were outside the entitlements and weren’t constrained by what you had the year before. And as the entitlement wave of my generation starts to really hit, you can see it, we’re going to start to move up again.

So [President Obama] made no structural changes in terms of fiscal policy. Nothing constructive on the tax side. Gone bonkers on regulation — waging war on natural gas, clean fuel, pure ideology. His lawlessness on inversion. Latest rule, just made it up in the Treasury, and eventually it’ll be challenged in the courts. One decree after another. Very different from Reagan, very different. That’s why you just don’t look at spending. Look at the amount of regulatory control. It’s growing.

Would you be in support of a larger military as a function of a larger government?

Not as a function of a larger government.

But a larger military is a larger government.

What about the rest of government? Military is 20-25 percent of the government.

Under Reagan you said it was 50 percent . . .

No, in the 1950s it was 50. Reagan was less because you had the huge growth of the ‘60s in the Great Society and other programs, so defense spending as a percent of the budget never reached the levels that it did in the ‘50s. Reagan took military spending as a percent of GDP and got it up to six and a half, almost seven percent, and then it receded when we won the Cold War. In the ‘50s, it was nine percent, but then we won the Cold War, so it started to recede. You have to defend yourself. We don’t want an isolationist policy. We saw in the ‘30s where that led to. Doesn’t mean you remake the world, but you better make sure the bad guys don’t have a free run of the world, and that means that you have to have the strength. Doesn’t mean you just throw money at it. I mentioned procurement because there’s no reason why it takes 20 years to get a new weapon system. You’d never do that in the private sector. So that needs to be reformed.

Dynamic models presented by the bipartisan Tax Policy Center continue to look at flat tax proposals and have demonstrated that they disproportionately benefit those with higher incomes and would significantly add to the federal deficit. How do you reconcile the differences between these economists and the theories that you present with your own flat tax?

It depends on your modeling and your assumptions. A lot of these assumptions assume that a tax cut means no real great increase in economic output and so it’s just a deadweight loss. Experience shows that’s nonsense. You see that most dramatically in capital gains. Every time they’ve lowered the rate, government revenues from capital gains tax immediately went up. Every time they’ve raised the rates, it takes a hit. The models ignore that.

If you do a proper modeling based on real-world experience, the flat tax proposal we have in our new book, the first three or four years, government revenues will be behind what the CBO says it is, but then the lines cross and after 10 years, it’s not even close. Larger economy means more revenue for government. In terms of the flat tax, we’ve designed it in a way and have done it for 20 years, where everyone gets a tax cut. Family of four: first $52,800 of salary is free of federal income tax. Doesn’t get any better than that.

In terms of mobility, a dynamic economy means that you have a chance to move up. We have a stagnant economy today, which is why you get things calling for raising the minimum wage. Let’s do it by law. Markets would do it if you allow it. France has a large minimum wage and their youth unemployment is about 25 percent.

Some have said that those who advocate for liberalized market policies like flat taxes often have the most to gain from them. And even in 2000 when you ran for president, you exempted yourself from your own flat tax proposal in response to those types of criticisms. Was this, in a way, an admittance that their concerns were valid? Would you make this same concession today?

No. It’s this idea of a static approach — who’s helped, who’s hurt. First of all, when Kennedy has his across the board income tax cuts in the 1960s, which Johnson enacted — 23 percent across the board. You could say, “Well the top did better.” The whole economy did better. What you want is capital creation. What you want job creation. The current code today really hurts those with lower incomes by denying them the opportunity to increase those incomes. And the flat tax gives them a tax cut. Every bracket gets a cut.

But the wealthiest get the biggest cut.

Because they have the most to begin with. You assume the wealthy stay the same — they don’t. People who are rich today ain’t always rich tomorrow. Just look at our rich list. The turnover there is amazing. That’s the people at the very top. You look over a person’s lifetime — huge changes in how people do. When you start out in life, you don’t have many skills, especially if you come to this country with no skills at all. In a regular economy, you learn more, so you move up. Then you can retire. You’re not working anymore, so your income goes down other than what you collect from pensions and Social Security, so you’re going to go down in the quintiles. But that’s after you’ve had a very nice life.

Look at Europe. Europe has done all these critics of the flat tax have said they should do: have high [value added taxes], have high income tax rates, have minimum wages. What’s France’s average growth rate in the last 25 years? Under one percent. Horrible. Is that what we want here? No. How is it that the U.S. — until the financial crisis, caused by government — largest developed economy in the world had consistently higher growth rates than the other developed countries in the world: Japan, Germany, France, Italy, even Britain. We always outpace them. Wasn’t because we’re smaller and playing catch-up. Because we have more dynamism here. We’ve lost it; we can regain it, and then we’ll have much healthier politics. Bad economies mean bad politics.

You point to states like Hong Kong and Russia when you talk about your flat tax proposal. Most people would not consider these places to be really “free” societies, so I’m wondering . . .

If you take Hong Kong, even after the hand-back to the mainland in 1997 — the Hong Kong today, if you look at the Heritage Foundation and others who do freedom indexes, Hong Kong still is barely holding its own from the encroachment that is being pushed back by the mainland. But before the turn-over, and even 15 years after the turn-over, Hong Kong was fairly free. And Russia, as we make plain in the book, Putin — and it started before Putin took over — they did one thing right: They through out their convoluted tax code and put in a flat tax, simple 13 percent. And overnight revenues soared, and this is before the commodities boom. One because you had more growth and two collections are easier when you have simplicity. So within four years, revenues had doubled. They haven’t done anything right since then, but they did get that one right.

[Editor’s note: While Mr. Forbes referenced to the Heritage Foundation’s study, which focuses exclusively on economic freedom, the interviewer was referring broader measures of a “free society” like political freedoms, freedom of press, and freedom of expression — the combination of which challenge the notion of Hong Kong as being “free.”]

So can you talk about the relationship between these kind of free market policies and free political policies — whether or not they always coincide?

Ultimately, they go hand in hand.

But not in Russia?

Well, in Russia they’ve gone backwards. They’ve been attacking property rights. They’ve been seizing assets of people. So when you don’t protect property rights, when you don’t have the rule of law, when you crush your opposition, look at Russia today — once the oil boom, which was a false boom, once that went bust, they had nothing there. Russia is a very talented country, a lot of entrepreneurs, so they’ll limp along. But if they had any kind of a sensible economic approach and a political system that didn’t crush anyone who didn’t sing the praises of the great one, Russia would do very well. They’ve got a lot of talent, but they have to come over here to do it.

So it’s not enough for them to have their flat tax?

It’s not a be all end all. You need sound money, you need flat tax, you need the rule of law — the rule of law is essential because how does an entrepreneur challenge an incumbent, not be quashed? Why are the Chinese trying to get their money over here, desperately? They’re sending their kids over here. They don’t trust their own society. They know it’s too capricious. You’re in today. You can be out tomorrow. So for all the dumb things we’ve done here, we’re still the haven of the world — that and London, Canada where they have the rule of law. People want that. They don’t want a capricious government.

Thank you very much for talking with me. It was a pleasure.

Thank you.