Steve Forbes Speaks Out

11/08/2002 12:00 am EST


Steve Forbes

Chairman and Editor-in-Chief, Forbes Media

No matter what one’s political leanings, Steve Forbes is a fascinating speaker. Few individuals are as well versed in understanding today’s economic picture and few are as forthright in addressing our country's future needs. At a town hall meeting at The New York Money Show, the president and CEO of Forbes and editor-in-chief of Forbes magazine, shared his insights on domestic and international politics and economics, with serious thought-provoking implications for all investors.

“Taxes are a critical issue. I think early next year – in the State of the Union address – there’s a very real chance that the President will give a ‘muscular’ address on the economy. Not just on the war on terrorism, but on the economy itself. I think there is a fair chance that they will propose major tax cuts, including making the weak tax cut of last year permanent and effective now – and some other cuts as well. So I think on the tax front there is hope. Longer-term, as you know I campaigned on a simple 17% flat tax after generous exemptions. A family of four, for example, would pay no Federal income tax on their first $36,000 of income and 17% above that, with no capital gains taxes and no death taxes. Indeed, I have advocated for the end of the death tax, using the slogan, 'No taxation without respiration!'

"I think there is a very real possibility that within the next year or two we are going to get the flat tax back on the table again. The reason for my irrational exuberance on the subject is that a year and a half ago, Russia – of all nations – put in a flat tax. They had a tax code that made ours look simple and efficient. It was a total mess. Then a year and a half ago, they simplified it with a flat 13% rate and revenues have been going up. Collections have been much more efficient. Simplicity works. I never thought the day would come, when Vladamir Putin – a former communist and KGB agent – would get to my ‘right’ on the tax issue. Strange things happen.

“For now, President Bush is rightfully focusing on the war on terror. But beginning early next year, we should see some bold proposals on taxes and other economic issues. Don’t expect a lot of great economic news in the 4th quarter of this year or the 1st quarter of next year. Some major companies are going to go down again. Others have warned about the energy utility area. Some companies that shouldn’t go down may get swept under. Economic growth isn’t likely to be very robust. But after the 1st quarter, when Iraq is out of the way, there will be recovery. The animal spirits will gradually return. People ask how to restore confidence in the markets. The answer is that when the market goes up, confidence goes up. Confidence follows the market; it doesn’t lead it.

“What would I say to those who are afraid that the tax cuts could lead to ballooning deficits? My response is that the cause of deficits is not encouraging people to invest or work. It is a slack or weak economy or a spendthrift Congress. They focus on deficits to prevent tax cuts. It is an excuse to pick your pockets. We should not confuse Washington’s convoluted, Enron-like finances with the nation’s finances. Could you imagine the private sector treating pension liabilities in the same way that the government treats Social Security? In the 1980s, taxes were cut substantially, across the board by 25%. And guess what? Even though deficits went up in Washington, the nation’s finances blossomed. The nation grew. The national wealth grew. The reason we got deficits in the 1980s was not because of tax cuts, but because we continued to spend. Government revenues doubled in the 1980s, but spending more than doubled. The national debt went up $1.7 trillion. But the wealth of the nation went up $17 trillion. Wouldn’t you exchange $1 in debt for $10 of equity? Washington’s finances will always be a mess. But that shouldn’t hold back the rest of the nation.

“What will it take to revive spending on technology? Many large companies find themselves over-leveraged. In other words, they owe too much and companies are under a lot of stress. Once the market turns, we start to get wealth-creation again. I want to emphasize, we are not going back to a year 2000-type market. But we are getting back to more reasonable markets – which a year ago would have looked awful, but now would look fairly nice. A rise to 1000 on the S&P would now look good. And if we get a reduction in capital gains, you will see people start to take on risk again. The key to getting technology moving again is that as more and more people realize it is worth taking a risk to take on new technology (by understanding that it will be a huge competitive advantage vis-à-vis their competitors).

"New technologies will emerge from companies we haven’t yet heard of, and then when you get a killer app or a great new product, that will stimulate people. Right now, chief financial officers are effectively CEOs because cash is king. Consider, if you don’t want to buy a new car, you can probably figure out how to make your old car last another year. But you can only postpone those things for so long. Suddenly, you find it’s either do or die for making new investments. Yes, companies can hold off on investing for a few more months, but then just for sheer maintenance or to meet foreign competition, they will need to make new investments.”

As for his stock market outlook, Steve Forbes offers the following from  “Stringent corporate cost-cutting, driven by deflation, is what's making the earnings picture pleasantly surprising. Operating profits of the S&P 500 have grown by double digits since late 2001, which is why the equity markets will surge 50% when the Iraq crisis is over, if not before. It will end when Saddam Hussein and his tyrannical regime are brought down. Iraq is the big uncertainty weighing on equities, and that uncertainty will be past us by February, at the latest. Then the market will rally convincingly. All the other downers, such as pressure on prices, indictments for alleged misdeeds of the past, write-offs, ferocious assaults by class-action lawyers, corporate governance scandals, uncertain monetary policy, and rising state taxes are already factored into today's crummy prices.”

Special Notice:  You can meet Steve Forbes and a variety of financial advisors during The 5th Forbes Cruise for Investors, June 14 - 26, 2003. The Alaskan cruise is on the Crystal Harmony, a truly beautiful ship with exceptional food and service. Meanwhile, Alaska is an experience of a lifetime. If you are considering a cruise next year, this is a terrific opportunity to have a great vacation while furthering your investment knowledge. For more information, call 800/530-0770.

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