The Role and Evolution of the Government in the Face of Global Economic Integration
Mr. Steve Forbes
President & CEO, Forbes, Inc.
Editor-in-Chief, Forbes Magazine
Well thank you very much, Doctor for that very warm and gracious introduction. It is a delight to be here today. I'm honored to be part of PBEC; and also too, to be able to speak and to not have to worry that everything I say will be held against me.
I have been asked today to make some observations about the role of government as the process of globalization continues. As all of you well know, we are on the cusp, and everywhere around the world people sense it more and more, we are on the threshold of truly, one of the most extraordinary periods in human history. This new era is symbolized by the microchip, which you might say is extending the reach of the human brain the way machines extended the reach of human muscle during the industrial era. A farmer today driving a tractor can do more physical labor in a day than a hundred Herculean plowmen could have done in a month in days of old. And so too, in this new era, the chip and all of its offshoots is in a sense, making us all brighter and smarter, giving us more control and more choices, and truly bringing the world to our fingertips. And as the old saying goes, 'we ain't seen nothing yet.'
Whoever would have thought, for example, this new era would be based on sand -- silicon - writing whole worlds on grains of sand? And yet now we have developing, chips that in effect will be based on molecules, which means that within a generation a supercomputer today will literally fit on the size of a speck of dust. So you get up from a meeting like this, you brush yourself off and you might hit twenty or thirty supercomputers and not even know it.
And what is happening now with bandwidth? You know some of you have seen ads, certainly in the United States, where companies will offer you long distance telephone service at ten cents a minute, eight cents a minute; if you get up at three a.m. in the morning on Sunday, four cents a minute. But thanks to the explosion of bandwidth, within a few years, telephone calls in terms of voice will be a fraction of a penny per minute. It'll almost be a giveaway.
Now it is true, obviously, that technology has an enormous impact on politics and government. The United States for example, a little over a quarter of a century ago in the early phases of technology it was thanks to computers that we got a device, a financial instrument, became a huge industry in this country called 'money market funds.' Today they're ubiquitous. They're everywhere. But thanks to money market funds, thanks to technology, money market funds twenty-five years ago when they were invented could guarantee investors that the net asset value would not change. When you look at money market funds in the newspapers they're all one dollar net asset value. The only difference is their yield. But because of that, individuals could get money market rates for their money.
Twenty-five years ago interest rates were set by the government in the United States -- what banks could pay on deposits. Because of technology and the rise of these money market funds, those old restrictions were blasted away.
You saw too, in the early 1980s, when France for example elected a Socialist, Francois Mitterand, and he did try to put in a real socialist program - nationalization. The markets did not react very well to that and he was force to reverse course.
You saw another example in the early 1990s when the British government tried to set an unrealistic rate for the pound and the markets said 'No' and that whole attempt was undone and the conservative government there never recovered from it and lost office resoundingly a few years later.
You see it too in China today as they try to put restrictions on the internet. And yet, one of our newspapers on the continent, talked about how he went out to the countryside in China, went to a village, and a sixteen-year-old was able to hack away the restrictions that the government thought they had put on access to the internet.
You see it too in Japan as makes what for read as very painful changes after a decade of stagnation, of beginning to open up its markets, start to put in some sensible tax changes. Those changes, small though they may be so far, would never have happened without the force of technology and globalization.
You see it too in Germany today. A social-democratic government still feeling many parts of that party, the Social Democratic Party in Germany; that they can still have the government control the economy. Where just a few months ago their chancellor, Mr. Schroeder, Herr Schroeder, proposed doing away with capital gains taxes on corporations -- never would have come from a socialist government a few years ago. But again, force of technology and globalization is making that happen.
And here in the State of Hawaii, one of the most over-taxed and overt states in our union, is now begun to make changes in reducing the tax burden and starting to make changes on regulations. Being an anti-taxer, I think they've got a ways to go, but they are making progress. They are making progress.
And you see it too in immigration. Never a popular subject in any country, but in the United States they're going to have to raise visas, what they call H-1B Visas to bring in more skilled people for our high tech industries.
But the key also though, is to recognize that technology and the forces that come from it do not always mean that everything will go a benign way. And one of the key tasks of government, as a matter of fact in this extraordinary new era, is to make it possible for these innovations, for these advances, to truly flourish and to flower, to truly bloom. In other words, to create an environment where these good things can come to pass. And all we have to do is look at the last century to see the importance of that kind of an environment. What is unfolding in high tech is not inevitable if you don't have that environment. What is happening in terms of about having the rest of the world have a chance to grow as never before will not happen inevitably unless you have a benign environment around the world.
All you have to do is look for example at the 1920s in the United States. That decade of the 1920s was probably one of the most innovative was probably one of the most innovative decades economically until the 1990s and the advent of the high-tech era. The 1920s saw the flourishing as never before of electricity in the production and the running of our factories which made huge productivity gains. Obviously electricity had been around for a long time, but it hadn't really reached the critical stage until the twenties. The twenties saw also mass production, especially with automobiles - where every working person could afford a car. You saw it too, with one of the results and the greatest road-building programs since the Roman Empire. The twenties saw the proliferation of labor-saving devices: vacuum cleaners, washers, toasters. A joke of the twenties had a farmer saying about a washer, that his wife wasn't wore out yet, so he wasn't going to buy one of those contraptions. You saw it too in the growth of people participating in the stock market. Charles Merrill of Merrill Lynch bringing it to ordinary Americans. And in terms of high technology -- then was radio. Talk about high stock prices -- a few of these 'dot-coms' could match what RCA did in the late 1920s. Even agriculture was beginning to be revolutionized by the advent of the tractor -- which enabled millions of acres that had been set aside to grow forage for … to grow food for the animals to pull the contraptions, the farm implements -- could now be devoted thanks to the tractor, to growing more food.
But then came the Great Depression -- a depression that led to the rise of Nazism in Germany, led to intense militarization in Japan, brought about the Second World War, nearly undid civilization. And that was a result of a great depression, of huge mistakes made by government policy. Among them, the Federal Reserve in the United States decided that the stock market bubble had to be pricked in the late twenties and started a tightening and helped bring about the very catastrophe that it had hoped to avoid. I hope Mr. Green span reads the history of the late 1920s.
Then the real felony, the real crime, was the 1930 Smoot-Hawley Tariff which destroyed global trading, led to capital controls, and a huge depression. Then we compounded that felony in the United States by passing the massive tax increase in the pit of the depression under the guise of trying to balance the budget, which simply increased unemployment from fifteen percent to twenty-five percent. So these things are not inevitable if you don't have that kind of benign environment.
By contrast, the United States and its Allies did things right after the Second World War. In order to have economic growth you need a sense of security - which NATO provided with Europe and our nuclear umbrella provided with Japan, the Marshall Plan and more particularly, the European Payments Union, helped undo some of the catastrophic policies of the 1930s and making it possible for capital and trade to flourish. GATT began the round of reducing trade barriers and the Breton-Woods monetary system, even though it collapsed in the early seventies, did away with the 'beggar thy neighbor' policies of the 1930s. And so, Europe and Asia made a recovery from the war that astounded the experts.
In more recent times we've seen the importance of good government policy. For example, in the late 1970s in the United States, hard to believe today, but our maximum capital gains tax rate was almost forty-nine percent. There was no, or very little, venture capital in the seventies in the United States. A company like Amdol had to go to Japan to get its venture capital. Others had to scrap up resources in other countries. But then in 1978 an obscure congressman (unfortunately he died prematurely), a fellow named Bill Steiger managed to get through a huge cut in the capital gains tax from a maximum of almost forty-nine percent down to twenty-eight percent. Was passed in 1978 and that's when began the rise of what we now call Silicon Valley and the high-tech era.
You saw it too just a little over a year ago in October of 1998 in the United States. In October of 1998 Washington did something sensible on the tax front. It happens occasionally. They put a moratorium on new taxes on the internet from in mid-October. And that is when the extraordinary boom in 'dot-com' stocks started. E-bay and others exploded. And while there have been a lot of corrections among particular companies, even the mighty Mr. Greenspan hasn't been able to destroy that boom yet.
So the environment is absolutely critical. And this leads to the question, "How can governments help create an environment where we get the full benefits of these extraordinary innovations ?" That they are allowed to flower. That we don't make the mistakes that we've made in the past. On terms of economic progress there are five basic principles of economic growth. And while times and circumstances change, those basic principles do not.
One of course is the rule of law, particularly individual equality before the law and property rights. If you don't have individual equality before the law, how can an entrepreneur start a company and not be crushed by the existing forces? The importance of that you can see all over the world. Look for example at oil. The United States, the continental United States, is probably the most explored area in the world in terms of oil and natural gas. Why? Because if you discover the stuff, you're allowed to collect a royalty on it. Until recent times in many countries, if you found oil you knew the government was going to take it away from you. So those kind of rights are essential and you see them in Russia today. And you see them also too, in the violence that is engulfing Colombia, not to mention Russia. So long-term, the United States needs to re-learn the lessons from time-to-time of the rule of law, especially against the depredations of the trial bar -- which is putting through taxation through litigation, first with tobacco industry and now they are going to go after other industries.
A second basic principle, in addition to the rule of law, of course is sound money. Money must have a steady value if you want maximum economic growth and opportunity. This will sound simplistic, but too many of our policy makers don't grasp it. Money in a sense is like a ruler. You know, a foot has twelve inches. Now imagine for a carpenter building a house, if you allowed the ruler to float and its length changed each day. One day it's twelve inches. The next day it's nineteen inches. The next day it's seven inches. Makes it difficult to build a house when that thing is always changing in length. The same is true with money. If money is unstable in value, what happens in a country? You get flight capital. The cost of capital goes up. People become defensive. And so realizing the importance of sound money, one sees the utter folly and the perverse behavior (and I'll be blunt) of the International Monetary Fund in conjunction with our US Treasury Department. They have this fixation, this idea that devaluation is the way you put a country back on its feet.
In the real world when you allow a country, urge a country to devalue, often you get a currency collapse and you also get internal rip-roaring, internal rates of inflation. We saw it with the Pacific Rim. The magnitude of that crisis two and a half years ago was not unavoidable, was not inevitable, it was fomented and deepened by the mistakes of the IMF starting with Thailand. Among the latest victims is Ecuador. You saw it too with Russia. And you see it too, in terms of monetary mistakes, with Japan over the past decade, where the Bank of Japan, I believe, has been much, much too deflationary too much of the time. You see it too in the United States today, where Mr. Greenspan has put on a deflationary course. It's affected commodity prices and if he keeps it up, it's eventually going to infect our economy as well.
Is it possible for countries to have stable currencies without going through rip-roaring recessions and inflations? The answer is obviously, 'Yes.' One device is currency boards, which countries such as Argentina, more recently Bulgaria and some of the Baltic States have tried with enormous success. Another possibility, certainly in the Americas, is what is now called 'dollarization.' Panama has always used the dollar as its legal tender. Ecuador is in the process of doing that as well and Argentina has expressed an interest in doing it. Other countries have 'dollarized' informally. Over sixty percent of US currency today -- you know tens, twenties, even those dollar bills, those twenty dollar bills that look like play money although they're real, those new design -- over half the currency in the Untied States today, is now outside of our shores being used as currencies of transactions in countries around the world. So it is possible to have steady value . and it's essential. And that's why I think the IMF ought to go to the equivalent of Jurrasic Park unless it makes some very, very fundamental reforms.
A second basic principle, in addition to sound money and the rule of law of course, is taxes. Again, too often policy makers see taxes merely as a means of raising revenue. They don't see it for what it really is, and that is a price and a burden. The tax you pay on income, the tax you pay on profits, the tax you pay on capital gains, is the price you pay for working, the price you pay for being innovative, successful, willing to take risks and the proposition is very simple. If you put too high a burden on those things, you will get less of them. Lower the burden on those good things and you will get more of them. Which is why in the United States today we should have a tax cut, particularly of capital gains. We want more risk capital. We don't want this technological flowering to be halted. In the United States, experienced equivalent of a tax cut when Mr.Greenspan, when he was doing things right in the early nineties, virtually eliminated inflation in the United States. That was the equivalent of a huge cut in the capital gains tax because now you would pay a tax on real gains instead of phoney gains.
You see it too in other areas. In the United States today, in this information age, it makes no sense that we have the kind of tax code that we have today. No human being knows what's in that tax code. Just to put it in perspective, the United States' Declaration of Independence is 300 words. The Bible is 783,000 words. The federal income tax code's attendant regulations is 7.5 million words and rising. And there's not a living person who has any idea of what a lot of this gobbledy-gook means. I take pity on anthropologists ten-thousand years from now, digging this thing up and trying to figure out 'What kind of civilization was this?' It's bizarre.
And so here we have this information age - where brains are more important than ever before -- and yet, we spend five billion hours a year filling out tax forms. Think of all the brain power that's wasted on all this wasteful activity. It's perverse and must be changed.
The thing to realize is the tax code, and certainly in the Untied States, is beyond repair. We ought to just get rid of the thing and start over. I'd replace it with something called a 'flat tax' - which works like this: You could actually fill it out on one page - on a postcard. You would have a generous deduction for each adult and each child: thirteen-thousand dollars for each adult, five thousand for each child. So a family of four - mom, dad, two kids - your first $36,000 of income is free of federal income tax. Then above that you would pay only seventeen cents on the dollar. There's no tax on capital gains, no tax on pensions and no death taxes. I believe you should be allowed to leave the world unmolested by tax collectors. So sort of a new principle of taxation: "No taxation without respiration." And on the business side, you would take your revenues, subtract your costs of business - labor and materials and the like - and then pay seventeen percent on the remainder. There would be no more depreciation schedules. In other words, if you make a capital investment, for tax purposes you treat it as an expense. Again, it makes no sense in this fast-changing era for the government to arbitrarily define the life of an asset. And if you have a tax loss you just carry it forward to presumably, hopefully you can use it in the years ahead. So that's a basic principle. Make the code simple. Make the rates low and you will get more revenue because people will be concentrating their minds on more productive activities.
A fourth basic principle is non-bureaucratic interference in setting up and running a business. It is still amazing today in many countries around the world, how difficult it is to set up a legal business, especially if you compete against a politically connected industry or business; and then they wonder why, in many of these countries, we have large, informal economies. In China for example, it is still very difficult for a entrepreneur just to start a business. China, as you know, has a crisis with its state-owned companies despite the progress made in the last twenty years. These state-owned companies, many of them are absorbing billions of dollars each year. They've really ruined the banking sector, such as it was. And so China now has a very delicate period ahead of it. In Latin America for years until recent times, it was very difficult for people to set up businesses if they weren't connected. We saw too many times around the world something that became known as 'cronie capitalism.'
You need to encourage entrepreneurship. You need to encourage individuals. Take for example two countries that have done well, at least until 1997-98, and that is South Korea and Taiwan. Taiwan has thousands, countless thousands, of small businesses because it's very easy for individuals and families to do it. South Korea it's much harder. So when the crisis hit, when that storm hit the Pacific Rim, Taiwan proved to have more strength, more depth and strength than South Korea did. And you see it too in the United States. Why are we having more of this technology boom? Well because it is relatively easy for people to jump right into it and attract the talent to do it - even for major companies. I'll just give you one statistic. A decade ago about two billion dollars a year was invested in new information company start-ups. Now it's running at a rate of over forty billion dollars a year. A twenty-fold increase in a decade.
And a final principle of course, is trade barriers - reducing barriers to trade and to business. The WTO and again, now that I'm not running I can be blunt, unfortunately the WTO, World Trade Organization, has become almost muscle bound. Put aside for a moment what happened in Seattle and I'll touch on that in a few minutes, but you saw how long it took the last round to achieve results - thirteen years. And so rather than wait another round (yes, we should push for it), I think we ought to also though, push to do more on bilateral and regional agreements. In NAFTA for example, there is no reason why Chile should not be brought in -- should have been done years and years ago -- same with a country such as Argentina. I propose that we also have a North Atlantic Free Trade Agreement with Ireland and Britain as a means of getting into the European Union and do the same thing on the Pacific side. Don't wait. Move ahead.
But in addition to those five basic principles (and I'll enunciate them again, you understand them, but too many policy makers don't): the rule of law, low taxes, sound money, non-bureaucratic interference in setting up and running a business, and reducing barriers, there are other things that government have to do; and let me just quickly touch on them.
One of the key roles of government is to deal with the side effects of change and progress. All of us are not the kind of people who welcome change and disruption in our lives. It goes against human nature. And so one of the key things that government has to do is to deal with the side effects of enormous change. And make sure, to use the cliché, that the baby is not thrown out with the bath water. Take for example the rise of the automobile. One of the greatest inventions in the history of humankind - gave people mobility, great wealth creator, but it did have its side effects: pollution, carnage on the highways, the need for more police, toll and need for new insurance, courts, changing the morays - progress never comes without price.
And you see it too, you saw it too with those demonstrations in Seattle. Now a lot has to be done. It doesn't mean that we can turn our backs on change. What it means is, we have to make a… create an environment where people, who if they become destructive we face up to them, but we must do more to get the information out that this is relatively benign process. And that if change is done right you can actually benefit from it.
We see it too in Europe and their almost irrational fears of what they call a 'GM' - genetically modified foods. And this is not new - fear of change. When electricity began to really flourish in the last century you got novels like Frankenstein. You saw that old Thurber cartoon where some people actually feared that with sockets electricity would come floating out and might hurt them. You saw it in the battle for flouride water four years ago. And so government does have a role in trying to make an environment where these changes can take place and people don't fear that it's out of control.
You see it too in the internet: privacy versus law enforcement. Rules that had to be made and laws that had to be made on patents and trademarks, offensive materials. And also too, coping with new ways, changing the way old ways were done. With the internet. You see it with radio. You see it with television and telephony.
Another thing that government has to grapple with of course, is bad ideas; and let me give you two quick examples. The Federal Reserve, Mr. Greenspan, headed by Mr. Greenspan, is in the process of raising interest rates. Slowly, but you know the old phrase about a thousand cuts. He's determined to slow this economy down. He doesn't understand these high-tech valuations, but nobody does; but he's almost taken it personally. And so, for awhile he justified the tightening on the need to fight inflation. Talk about general's fighting the last war. Inflation is not a threat in the United States today. Prosperity does not cause inflation. That's a bogus idea. But also, he's now got a new one, that somehow we have to fear productivity. Now to a simple mind like mine, productivity is how you get advances in the standard of living. But recently Mr. Greenspan posited that productivity was something to be feared because if you had greater productivity, people would say, "Gee, stocks will go up because company is going to earn more money." And if stocks go up that mean people have more to spend and that's inflationary. I'm not kidding. You can look it up on the internet. He said this stuff. So productivity is to be feared. It's almost as if you went to a doctor and the doctor said, "You're very healthy. We have to make you sick a little bit." In medicine you get sued for malpractice. In economics they put you on the Federal Reserve of the IMF. It is bizarre.
And you see it in other areas. You see it in some of the misinformation on the environment. One of the things that happens when you achieve a certain level of growth, is that people want a higher quality of life. And that's why today in the United States, the air is purer, the water is purer than it was twenty or thirty years ago. In the US for example, on the East Coast, even though eighty years ago, we have more trees today on the East Coast of the United States; one of the most densely parts of the Untied Stated, we have more trees today than we did eighty years ago, even though the population has almost tripled; thanks to technology -- getting more from each acre of land. You look at those old Civil War pictures in the United States. What do you see? Clear cutting. Today you don't have to do that anymore on that kind of scale. And so if we do things right on the environment, take the practical approach. Yes, preserve sensitive areas, but trust science. Make sure we know what we're doing before we do it. And we can get more, better quality of life without massive intrusions in our lives.
And finally, I know, I read in the paper today... Admiral Blair spoke to you yesterday. And I did not hear his speech; I did not read a text of his speech. I can only go on what I read in the paper, which I can tell you from experience is sometimes a dicey thing, but but he came into some criticism, at least the way I understood it, for something that I thought was very… was right on target. And that is the need for security to have an environment where people can do entrepreneurship, and people have a chance to flourish and grow. I mentioned NATO doing that for Europe after World War II. Our security arrangement with Japan doing the same thing. And the same thing is happening today in the Post-Cold War world. It is no mistake; it is no coincidence, that this flourishing of high-technology really took off with the fall of the Berlin Wall. And so, security is important. That doesn't mean you have mass military, but the US does have a unique role. If we don't try to help create an environment for values of democracy and freedom and equality before the law can sink real roots, then we won't realize the full benefits of this high-tech era.
We have the challenge of rogue states as you well know. North Korea and Iraq. Terrorism. A hundred years ago anarchists would shoot political leaders, including the President of the United States. Today their descendants have weapons of mass destruction at their disposal and certain states will cooperate with them. We have other crises. We have the crisis now of Taiwan and China - making sure that that doesn't degenerate into war. And again, let me be utterly undiplomatic since I've had my free stay here, and that is concerning Taiwan, Taiwan is now a vibrant, obviously, a democracy, and there is no way it can be forced the way Macao and Hong Kong could into a formal reunification. That will take time, deepening those ties between the Mainland and Taiwan, since Taiwan is now a democracy. And I believe that those Taiwanese who believe that this won't really reach its full fruition until China itself becomes a democracy, I believe those observations are on target. So we don't have to… and I'm delighted the President-elect Chin is not going out of his way to rub salt in those potentially devastating wounds; is toning down the rhetoric; tone down that rhetoric. The United States should make it clear that force is not going to be permitted to solve this crisis. I think the thing will eventually sort itself out. this is not the time for the proverbial 'bulls in the china shop.'
There are other crisis as well. The Mideast is a real demoralized society today in terms of the peace process and so we have some very real dangers there. Internally, Russia has problems. Externally, we have a very real crisis brewing with India and Pakistan over Kashmir. Indonesia's got internal problems. China too, has some very real domestic problems - the rise of cults -- which is traditionally a sign that the government is losing legitimacy in the eyes of its people. So there is no lack of potential crisis around the world. And that's why it's essential that the United States not turn its back on the world, but recognize we have a unique role, both in Europe and in Asia; and try and have an environment where peace has a chance.
And at here at home, let me just close, I can't resist it, by saying some things that ought to be done in the spirit of this new era. I mentioned the tax code. Another one, which other countries are beginning to do in terms of our national pension system -- in our case, Social Security. There is no reason why we can't phase in a new system for working Americans as other countries have begun to do - where that money goes into your own personal retirement accounts instead of the government. Turn a problem into an opportunity. The same is true in education. Parents should have control of education. Parents should be able to choose schools. In this information age, no parent should be forced to send that child to an inferior school - a school that doesn't work. And bluntly put, too many of America's schools are not working today. And healthcare too. We have this top down approach from both employers and from government. There are various reforms to put patients in charge again. At a time when you can go to the internet and learn more about what ails you than ever before, it's preposterous that you have to go to a gatekeeper and somebody shuffle you along and you are not in charge of your health care.
In closing, let me make - since I'll get it in the Q&A, I might as well do it up front - somebody will ask about the American presidential election. As you know, Taiwan recently had an election and the formal Nationalist candidate finished a distant third. I can say I feel that individual's pain.
And, in terms of our own election, I do think at the end of the day...
Before I make this prediction, I'll remind you of a favorite saying of my grandfather who was an immigrant to America. Penniless, but he achieved success - started Forbes' Magazine. My grandfather liked to say, "You make more money selling the advice than following it."
And so, I think in terms of our own presidential election, that Mr. Bush at the end of the day, will pull it out. I think that issues such as education, taxes, the decline of our military will help him. I think too Mr. Greenspan tightening up is going to take a little bit of the bloom off the economy and Mr. Gore. Another factor I think is, there is genuine Clinton fatigue. Even those who agreed with his policies didn't like the other things that happened which led to the rise of first Mr. Bradley, who didn't take advantage of it -- didn't know how too; and then Senator McCain. And then finally, Al Gore.
Everyone knows, whether you agree or disagree with his policies, he's a very bright individual and he does his homework and he's a tough fighter. But I think that Mr. Gore is going to suffer from what you might call the 'Tom Dewey Syndrome.' And that is, even though if you have brains; even if the people know you know more than everyone else in the room put together; even though everyone knows you know how to fight, in politics people have to feel comfortable with you. I think Mr. Bush, assuming he achieves gravitas (and I think he will), he'll come across as a more likable person than Mr. Gore. And so I think at the end of the day he'll pull it off.
However, I'll remind you a year ago I thought I was going to pull it off.
So with that, thank you very much.