Q: People talk about the United States as an empire. Is the U.S. an empire and if you believe it is, why is it, and if you don’t think it is, why is it not?
Steve Forbes: Well, the United States is an empire of freedom. We think of empire as- as imperialistic ventures like the Roman Empire or the Persian Empire, things like that, but the United States is an empire of the human spirit, people coming there trying to find opportunities. The essence of the American Dream is allowing each of us and all of us the opportunity to discover our talents, develop our talents to the fullest. That is what opportunity is about. And so the United States as a result not only is a large land mass, is one of the most populous countries in the world, but also is able to absorb people when we stick to our basic principles from all around the world and in a generation or two, there as American as anyone else, and no other entity has been able to do that. You look around the world; look at the breakup of the Soviet Union, the conflict in Lebanon, other parts of the world ethnic fighting, communal fighting. The United States has avoided that because we do have these basic principles and if you adhere to them, you’re part of the American empire.
Q: That’s great. There’s this great experiment in freedom and the republic has, particularly in recent years, has an extraordinary explosion in borrowing. How much of a threat is the national debt to the sovereignty of the country?
Steve Forbes: Well, the national debt in and of itself is not the problem because when you look at the assets of the nation, if you add up all the assets of the nation, it’s over a hundred and sixty trillion dollars. The problem, they’re the unfunded liabilities of Social Security, Medicare, Medicaid; tens of trillions of dollars, about eight to ten times the size of the national debt. That doesn’t show up on the politicians’ balance sheet. They don’t want you to know what a mess they’ve created. In the private sector if you had those kind of liabilities, why you’d be joining the ranks of Enron. And so that is the real problem. And we can deal with Social Security, we can deal with the problems of healthcare, but that is where the real debt is and that’s what the politicians don’t want us to talk about.
Q: Looking back at 20th century America, can you point to a couple of pivotal moments when monetary policy as administered by the United States government created, if you will, this sort of economic mess of ignoring the idea that you shouldn’t be spending more than you have?
Steve Forbes: I think the real turning point was probably the Great Depression. When you have warfare, the power of the government expands, government borrowings go up, [and] you always get hit with inflation. But up to the 1930s, ’40s in America, after a conflict, the government geared back. It happened after the Civil War. Massive powers, but the powers are stripped away. The income tax was enacted in the Civil War and was repealed a few years later. World War I racked up a lot of debt, but in the 1920s we reduced it by a third. Tax rates were brought down. It’s hard to believe, but in the early ’20s the highest rate was 77 percent wartime taxes, cut it down to 25 percent, so we were still in the tradition.
Then came the Great Depression. Nobody then knew why it happened and it was seen as a failure of free enterprise and therefore the government had to do in peacetime to help us recover from this disaster what it did in wartime. And so with the New Deal, even with Herbert Hoover, the government assumed new powers to try to correct the flaws of private enterprise, so you had the rise of the alphabet agencies. Then in the late 1930s, the New Deal sputtered to a halt. It clearly wasn’t pulling us out of the Depression. But no sooner did that thing look like it was finally going to end, the worst of it, came the Second World War, another ratcheting up of government powers. After the Second World War, we started to ratchet back a little bit, then we had the Cold War. Everything was done for national security. Even the great Interstate Highway Bill of the mid 1950s established and eventually built 40 thousand miles of freeways around the country was done in the name of national se curity. Government involvement in education; had to have more scientists, national security. So as a result of this constant warfare we’ve had to fight, hot wars, Cold War and now again, the war against Islamic fanaticism, fascism, government powers have always gone up. And I think what the real challenge for the United States now is to show that we can fight these forces that threaten our basic freedoms and preserve our freedoms from excess government at the same time. No other states, no other nation, no other empire’s been able to do it. No other republic’s been able to do it. I think that’s the challenge that we face and I think we’ve got to show ourselves and the world that a free people can defend their freedoms and not give up more sovereignty to government bureaucracies.
Q: As you said, you know, after a war, we’re going to cut spending a little bit. We’re going to reduce government involvement. That doesn’t seem to ever happen. There always seems to be a reason why the government needs to spend more. So we’ve heard about cutting taxes; we’ve never heard about cutting spending. People talk about it, but it never happens. Why is that?
Steve Forbes: I think to be blunt, the reason why it’s been so difficult to cut back on government spending, to cut back on the government’s reach over the economy is because we’ve done it the wrong way. When you go after a specific government program, obviously, the beneficiaries are going to fight you tooth and nail. And beneficiaries of other programs are going to fight you because they figure, “Boy, they knock off that one, they’re gonna come after us.” You saw that 10 years ago in the mid 1990s when the Republicans took over Congress for the first time in decades, controlled both Houses of Congress. They made a real effort to ratchet back government spending. It lasted about a little over a year. They made some progress like trench warfare in World War I; they gained some ground and then lost it. They retreated. Now why? I think it’s because they were too limited in their ambitions and they made it sound like they were going take something away from people.
Well, turn the tables on the big spenders. Take, for example, one of the biggest sources of power, the tax code. Simplifying the tax code, people don’t think you’re taking something away from them, they think you’re helping them. Take, for example, Social Security. The money is there for the elderly, for those on the system or about to go on the system; the real problem is people in their 20s, 30s and 40s. So why not say, “We need to help them. We’re not going to cut their benefits; we’re going to allow them to control the money. You’re going to have the money. It’s going go into your own personal account. There will be safeguards for it, but it belongs to you, not the politicians.” People aren’t going to see that as taking something away; they’re going to think, “Yeah, we’re taking away from the politicians, not us. We own it.” Same thing on healthcare. It’s all third party. You don’t get to use it until you use it. And in the workplace, healthcare is counted as a fringe benefit, but it’s not the same thing as getting money in your pay envelope or your check. You don’t have it until you use it; whereas with something like health savings accounts properly structured, the money goes into your account. You control it so you have something. Now, if you go to say a General Motors worker, they may spend what, eight, ten, twelve, fifteen thousand dollars on your healthcare, but you don’t see it unless you go to the doc. If you had a system where you had a high deductible policy, but you got several thousand bucks a year to go into your account and what you don’t use you get to keep and have it grow tax-free, you save money, but most workers are going to think, “I’m coming out ahead.”
So that’s what you have to do. Use a little imagination; flanking movements instead of charting the machinegun. Bring in some artillery, bring in some air attack and then we can beat them. And we go after the big things like healthcare, Social Security, education, huge source of government power. Why shouldn’t parents be able to control where their kids go to school? Now, there’s a suit just filed in my home state of New Jersey, a parent saying, “The school’s failed my kid; I want to be able to take the money you spent on my kid and go to another school.” If an automobile company sells you a lemon car, they give you a refund and you go buy a car elsewhere. You don’t give the auto company more government money. So too with an education. If the school fails you, you should be able to take the money and go to a school that isn’t a lemon school. People aren’t going think that’s a cutback. The unions will, but most people think, “Yeah, right. If the school doesn’t work, I shoul d be able to put my kid in a school that’s doing a good job.”
So go after the big things; healthcare, education, Social Security, taxes. You win there, and by golly, you’ve given a real blow to the leviathan and then you can start going after these other things because you’ve established in the people there’s a right way to do it, people think they’re coming out ahead, and then you occupy the high moral ground. So don’t fight by the rules of the other side; we should rewrite the rules and then we can win.
Q: One of the things that we’re taught is in times of war, the people in general have to make sacrifice. It doesn’t seem that in recent years in this War on Terror that the American people in general have been called upon to make a sacrifice and, at the same time, government spending in non-defense areas has grown. Are we in jeopardy of essentially bankrupting America if the policies that are in place now continue?
Steve Forbes: Well, this is where I think this whole area of how do we finance this war against Islamic fanaticism, how do we stop this crazy spending? Comparing the spending to drunken sailors is an insult to sailors. They are defending the country and they spend their own money; they’re not spending other people’s money. And so the government in terms of this kind of war, it’s a different kind of war, so it’s not the total war that we had say in World War II, but one of the reasons the American people are so upset with both political parties is they see there’s no firm hand on the tiller in Washington. They read about bridges to nowhere. Here we’re asking young people to go to Iraq and Afghanistan and sometimes they don’t have the equipment they need and yet we’re spending this money on frivolous stuff because a politician thinks it’s going to help him win reelection, that is what got people upset. People are willing to do what is necessary to defend the country, but we as a free people now have to take the next step. It’s not enough to be angry at these characters; we have to say, “Who are they? Let’s challenge ’em in a primary,” as they did with state legislators in Pennsylvania who abused the public trust and beat most of them, even though the challengers had very little money, weren’t well known. We have to take on these folks and say, “Here’s what you did. You have no good explanation for it.” We as a free people are going to say, “It’s time for you to find new opportunities.”
Q: What was from your point of view in the last 25 years what Alan Greenspan did that was great and what he did will not be looked at as one day in history people will look back and say, “What was he thinking?”
Steve Forbes: Well, Alan Greenspan was a good crisis manager when things went wrong in Asia, when things went wrong in Russia. When we had a stock market crash in 1987, he was right in there making sure that panic didn’t spread, containing it. But his greatest failure was he was like a pilot who didn’t fly with instruments; he flew by the seat of his pants. He had good instincts, but if you’re flying by the seat of the pants and you get some adverse weather, sometimes you’re going to hit a tree or a mountainside. And so as a result, he left no legacy to a successor on how you properly conduct monetary policy, i.e. how does he know on a day-to-day basis whether he’s doing his job right or wrong? There is no fuel gauge. Imagine driving a car without a speedometer and without a fuel gauge. You’re going to always be wondering. So he didn’t provide the speedometer, he didn’t provide the fuel gauge. What’s the best speedometer, fuel gauge for monetary policy? Look at the price of gold. If it’s zooming up, that means you’re printing too much money. If it’s crashing down in price for a period of time, it means you’re printing too little money. Gold reflects the markets. Let markets tell the Federal Reserve whether it’s doing its job right or wrong instead of always guessing what is the right interest rate and getting sidetracked and detoured on things they shouldn’t be concerned about. Keep the dollar stable in value. Tie it to the price of gold or to a range, a little bit of flexibility. You’ve got to give these people something to do each day, but have that kind of gauge and then guess what? You don’t make huge mistakes like we have today with oil zooming up and other crises out there. That kind of instability hurts. We want stability, not instability. We don’t want inflation or deflation, we want ‘flation.
Q: Should we be back on the gold standard?
Steve Forbes: Should we be back on the gold standard in terms of having a pile of gold? No. All you need to do is look at the price of gold and base your monetary policy based on the price of gold. In short, I’ll pick a number, 400 dollars an ounce. If it goes above 400 dollars an ounce, you’re printing too much money, mop it up like you spill something in the kitchen, you mop it up. If it goes well below 400 for a period of time, you know, you’re not creating enough credit for the needs of the economy, so you print a little more. You let the markets, the economy tell you what to do. You don’t try to second guess what’s needed like setting interest rates and hoping you targeted it right. Markets will tell you.
Q: As a holder of some dollars, is the value of the dollar starting to depreciate at a rate that is of concern to you?
Steve Forbes: The dollar should never depreciate or appreciate. It should be stable in value. It should be fixed in value. Say a foot has twelve inches; you don’t change that each day, appreciate it or depreciate it. It’s a fixed measure. Same thing with an hour; sixty minutes in an hour, it’s fixed. You don’t change the number of minutes in an hour each day. The dollar should have a fixed, basic value. Gold, for all its imperfections, is like a Polaris. It’s the best thing we have out there. Experience shows that. Keep the dollar stable in value and then you can focus your energies on more productive things like innovating, starting a business, building a house or buying a house, being responsible, moving ahead in life.
If you don’t have a currency that is fixed and has a fixed measure of value, then the temptation always is to, as they said in times of old, clip the coins, reduce the content. Politicians love to spend and they hate the idea that there’s any discipline out there. So without discipline, guess what happens? You get inflation, you get chaos, you undermine it. Lenin said the best way to undermine a society is to debauch the currency because not one in a million people understand what is happening. Inflation is great for those who want terrorism, for those who want totalitarianism, for those who want chaos. That kind of chaos is the enemy of freedom. Stability is the friend of freedom; chaos is the enemy.
Q: Given that, how dangerous is our profligate spending to creating the inflation that could create chaos?
Steve Forbes: Well, the spending is not just a monetary issue, spending is a moral issue. You’re taking money from people and wasting it. People are forced to give money to the government, presumably in return for services. As we said in our Declaration of Independence, to secure certain rights, period, not all the other stuff they’ve gotten into. And then Liberals will say, “Well, you mean you want to take away Social Security?” No, we want a system where people own the assets so they truly have something of true value there. They’re not burdening other generations. They’ve earned it, they’ve built it, the assets are there. They can have a far better, richer retirement than they can when the politicians control it. This is the way you fight these things, by emphasizing we come out ahead. We do better when it’s in the hands of we, the people and not politicians who have no sense of restraint or discipline.
Q: That’s great. Thank you. What do you think is the greatest threat to the stability of the United States at this point?
Steve Forbes: The real threat is bad ideas. A lot of bad ideas came out of the Great Depression, that government could be a stabilizer of the economy, that government could do better than free markets. We’re recovering from the devastation of the Great Depression, but bad ideas are always out there, that high taxes are good, that low taxes mean deficits. No, low taxes mean a more vibrant economy. The problem with deficits comes from spending, not from a lack of revenue. So fighting these bad ideas, fighting bad conventional wisdom, those are the things that ultimately can undermine a society.
Q: What’s the worst conventional wisdom in Washington today?
Steve Forbes: What’s the worst conventional wisdom in Washington today? Oh, where does one begin? It’s the idea that these folks are there to help you.
Q: How big a mess are we facing with the major entitlement programs, Social Security and Medicaid; as they say, the rat moving to the snake as it gets closer to retirement each year?
Steve Forbes: Well, the problem with entitlements is that someday you have to pay for them. And if you haven’t built the assets to pay for them, then you got a big problem. And I think that’s why properly putting out there proper Social Security reform where it doesn’t look like you’re taking something away from grandma, who thought she was promised something, but actually helping younger people with their own personal retirement accounts, that’s a positive. You change the entitlement to something where people feel they’ve earned it. Part of the problem with Social Security is people who are on it felt, “Well, we put money in the system, but the politicians mishandled it.” So people were cheated. They were deceived. Now we’re going to finally tell the truth to younger people. “The money that you put in is actually yours. It’s not been stolen by politicians.” So truth is the way you fight these things.
Q: Mr. Forbes, in Flat Tax Revolution , you spoke about how taxes breed corruption. Can you elaborate on that? What do you mean when you say taxes breed corruption?
Steve Forbes: Well, the Federal Income Tax Code is the biggest source of corruption in Washington because of its complexity; politicians know it’s a source of power. If you sit on a tax-writing committee, you’re always going to be guaranteed political contributions for your election cycle, and as a result, half the lobbying revolves around it, trying to put changes in, amendments in. Each Bill has literally hundreds of amendments; nobody knows what they really mean. They’re for special interest, special things to change in the code which is why the code now has nine million words. Politicians love it because it’s a source of power. You have to go to them to fix the thing or to get help or to get relief or to hit your competitors. So they love it, but the American people pay a price for it.
Q: Thank you. We’re not getting into the numbers of them, but the idea of a flat tax that you’re talking about, is that something that would help us pay off this nine trillion dollars that’s sitting there so that we wouldn’t be spending all that money on debt service and we could actually rebuild the infrastructure? Is the flat tax a good tool towards that?
Steve Forbes: The flat tax wins on all fronts. It’s a great blow against political corruption, great blow against the current system of a tax code that brings out the worst in us, always thinking, “Do I get a deduction here, do I get a deduction there?” Instead, we do things for the right reasons instead of the wrong reasons. And finally, and very importantly, it means more economic growth. It means higher asset values. Ask yourself, why did housing prices go up starting in 1998? It’s because there was a change in the tax code that in effect, I won’t bore you with numbers, that removed the capital gains tax on your first- on your primary residence if you sold it. Suddenly, for most people, it did not have a capital gains tax. When you remove a tax on something, the value of it goes up; very, very basic. So by lowering tax rates, by making it simple so that people can actually understand what’s happening to them, we have a better civil life, we have a better political life, and we have a s tronger economy, higher assets, more businesses being created, better jobs being created. Boy, if we can’t- with that kind of a situation, if we can’t deal with the mess that’s been created in the past, then I don’t know what will.
Q: As a proponent of the American people getting the truth, if you could pick one truth about money, monetary policy, debt, gold, what would be the most important message that the audience would get from this film?
Steve Forbes: The key thing for the American people to realize is that don’t get caught up in all the numbers. Just remember, it’s your money. When politicians spend, they get it from you. And if they say they’re going to give you a free lunch, just remember, they’re using your credit card, your money. You’re eventually going to be getting the bill.
Q: And once the American people have that knowledge and it has become second nature to them, if you will, what would be the right action for them to take?
Steve Forbes: The American people as a start should say, “Who are my representatives? Who is my state representative, state senator, congressperson, U.S. senator, governor? What are they doing, why are they doing it and start badgering them. Challenge them in primaries even if they’re not doing the job right. Go online, write a letter to the editor, be active. It only takes a few minutes each month. By golly, that’s how you get results.
Editor’s Note: The above was taken from the companion book to the critically-acclaimed documentary I.O.U.S.A. Included in the book you’ll find interviews from some of the most revered voices in the nation, including Warren Buffett; former Treasury Secretaries Paul O’Neill and Robert Rubin; Pete Peterson, CEO of The Blackstone Group; Congressman Ron Paul (R-Texas); and bestselling Empire of Debt author Bill Bonner. Defiantly non-partisan, the empowering solutions outlined in these pages are a must-read for any American who wants to help change “business-as-usual” in Washington as a new administration heads towards the Oval Office.
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