Capitalist Tool II

An interview with Malcolm S. Forbes, Jr.

People usually describe Malcolm S. Forbes, Jr., as "low-key," "serious," and "bookish," in contrast to his more flamboyant father, Malcolm, Sr. In person, Steve Forbes is soft-spoken and earnest, but he shares his father's famous wit. He notes that the United States should consider siccing the International Monetary Fund on Iraq: "That would knock them down very quickly."

Forbes, 48, a graduate of Princeton University, has been in charge of Forbes Inc. since his father's death last year. But he has long been involved in the editorial process at Forbes. While Forbes readers appreciated his father's insightful restaurant reviews in his "Fact and Comment" column, policy makers turned to Steve's column, also titled "Fact and Comment," to find the cutting edge of economic analysis. Steve was one of the first to push supply-side economics, and he continues to be a strong voice for tax cuts and deregulation. He is generally credited for the magazine's publishing Warren Brookes's cover story questioning global warming. And Forbes is the only person to win the Crystal Owl award—given each year by US Steel to the most-accurate economic prognosticator—more than once. He currently owns four Crystal Owls.

REASON Editor Virginia Postrel and Assistant Editor Charles Oliver interviewed Forbes during a February visit to Los Angeles.

Reason: What directions do you see Forbes going in over the next 5 to 10 years?

Forbes: We will continue to evolve as we have done for the past 20 years—concentrating on the people who run and manage companies, people who can make decisions, people who start new enterprises, because without good management you'll not for long have a good business.

We are not only a drama critic of companies—telling who's doing well and who isn't and why, coming to conclusions. We also unearth trends such as the litigation scandal where [Ralph] Nader got very close to the trial lawyers—each scratching the other's back, wrapping themselves in virtue. We will continue to take the veil off of that sort of thing.

Reason: Now that Nader piece was extremely controversial. You were deluged with letters.

Forbes: Right. But his response wasn't as strong as we had expected it to be. He was full of anger and outrage. But he really didn't wound or demolish the premises of the piece.

Reason: But surely you didn't expect that.

Forbes: No, we didn't. But I think he was quite surprised that anyone would dare to treat him as he treats others.

Reason: Forbes has a reputation for challenging the conventional wisdom. Were the Nader piece and global warming piece examples of using that viewpoint on a political issue, or did they reflect some particular ideology?

Forbes: Our ideology, if there is one, is "Let business be done by consenting adults." We don 't have an ideology or party line, but we're always looking for things that others haven't found.

On the Nader story, for instance, we stumbled onto that because of our earlier story on the scandalous ways that trial lawyers have affected the economy and the way judges have allowed that to happen. When we were researching that story, we stumbled across the fact that there was this unpublicized, very close relationship between Nader and the trial lawyers. They worked very closely, like hand in glove. We didn't search out Ralph Nader. We came upon it doing another story. That's often where you get your best stories—you start one story and end up getting evidence that warrants another one.

Reason: Some have said Forbes is getting too much into political issues and inching away from pure business journalism.

Forbes: Quite the opposite. Nader has had a major impact on business and not always for the right reasons. One of the institutes that he has been associated with came out with a piece a few months ago alleging that five major insurance companies were on the rocks. It had to, at least in two of those cases, withdraw that statement and in a third do a semiwithdrawal.

Environmentalism and its cost obviously have impact on the economy, and to have a piece that says we should try to pay more attention to science and less to emotionalism doesn't seem to be a bad thing for anyone whether they're in business or out of business. Business today is a much broader subject, and it's subject to many more forces than it was 20 or 30 or 50 years ago.

Reason: How does a business magazine, particularly one that takes a tough stance on regulation and is critical of people like Nader, avoid becoming a sort of cheerleader for business?

Forbes: By having each one of our stories come to a conclusion, we avoid being a cheerleader for anything that shouldn't be cheered. The flaws of capitalism are people who don't know how to run businesses well. They waste capital. They wither it away. When I say drama critic, that means we praise and pan. Each issue has a number of stories that are critical. As a matter of fact, some congressional investigators say they get a lot of their ideas by reading Forbes because we seek out the shortcomings, the people who aren't doing well.

Reason: How would you describe your personal political views?

Forbes: I'm pro-growth. If that means enterprise zones, I'm supportive, and if it means increasing the earned income tax credit as a way of enabling people to get off the welfare treadmill, I would be for it. That's really the guiding compass: How do you let people develop their talents with a minimum of interference?

One of the dynamics of capitalism is that because it's in constant change, there are always people who feel they're going to be hurt by change and are going to resist it. Sometimes some of these subsidy programs are really bribes to allow change to take place, not block it. Look at the number of farmers today compared to 60 years ago. It's gone from 25 million to less than a million serious farmers. We threw in subsidies that shouldn't have been in there, but they didn't muck up the rest of the economy too much. That doesn't mean we should say we're all for subsidies. It just means you've got to recognize sometimes that, human nature being what it is, when something is threatened, don't let the forces of the status quo block the change.

The best way to get change is by doing something like reducing or eliminating capital gains taxes so that people on their own create the dynamic for getting ahead rather than having to go through an existing entity or get permission from existing political structures.

Look at an area like the Middle East. When the war is over, what we should be concentrating on isn't trying to find a favorable faction in Iraq and Kuwait or wherever else. We should push policies that would break the economic feudalism that has dominated that region.

Reason: For example?

Forbes: In order to set up a business, it's now almost as bad as Latin America in terms of getting the permission. Tax rates are much too high. Iraq is a very centralized economy. Egypt has improved, but it still has a suffocating bureaucracy. Algeria's made a little progress, so it's 98-percent hopeless, instead of 100 percent. Even Israel is in an economic straitjacket. The government owns the banks. The tax rates are too high. They've lowered the top tax rate. But if you add up individual tax rates, the value added tax, and all the other taxes they apply, it's an oppressing burden. Just as Ludwig Erhardt opened up Germany, sweeping away the war controls and rationing, so we should try to sweep away the obstacles to the entrepreneurial energy in that region.

Even if we don't get a favorable faction, we will develop eventually a middle class that will be more interested in getting ahead than waging war on their neighbors. Even if they hate their neighbors, it won't stop them from doing business with the neighbors.

We see that in Germany today. The Prussian disease has been largely eliminated. Today, instead of jack boots they are more interested in sneakers and demonstrating against the war rather than marching off to war.

Reason: Specifically, what can America do to foster these changes?

Forbes: We should ban the International Monetary Fund. If we have any other enemies, we should send the IMF to them, and that will undermine them very quickly. Maybe that's what we should do to Iraq, just send some IMF experts. That would knock them down very quickly.

We should advocate low tax rates. We should advocate not having to go through 50 different hurdles and having to bribe 300 different bureaucrats to set up a business.

Reason: What you say makes a lot of sense, but I tend to be fairly pessimistic. Look at Israel, where the United States has a fair amount of influence. We haven't used it.

Forbes: We haven't used the influence because it has never occurred to us that the way they run their economy is particularly bad, that the advice that they get from so-called experts is wrong. It just hasn't been on anyone's agenda. But it's time to put it on the agenda. The Israelis would probably be very relieved if, instead of beating up on them over the Palestine question, we said, "Gee, you should reduce tax rates and reduce your regulatory obstacles." If we try to go in there creating that dynamic, just as we created in Europe after World War II, it does set in motion forces that are more benign than malignant.

Reason: Returning to the domestic scene, it seems that there is a great deal of opposition to growth developing. The environmental movement and the no-growth movement reflect this.

Forbes: Sure, growth is like creativity, it doesn't go along very neat, precise plans. You get clogged highways before you figure out a way to open up capacity. You get pollution before you figure out a way to fight it. With automobiles you get accidents, you get carnage. With anything new you have benefits and costs. But that doesn't mean you should say, "Gee, it's bad." It's much better to have those problems than the problems of stagnation, where nothing happens.

Right now, the California economy is starting to falter. We had a story six months ago that said California is in for a rough period because they've taken their prosperity for granted. I guarantee you that in five years that attitude is going to change. When they find out that their homes go for 40 percent less than what they paid for them, and when unemployment goes up, suddenly growth won't seem so bad anymore.

You're always going to have this friction. In the 1960s, people at college assumed the economy was always going to grow and prosperity was a given. So they concentrated on saving the world by going off and building chicken coops in Chile or demonstrating against war. There were more exalted things to do than worry about earning a living. Well, after the 1970s recession, that attitude began to change, especially when these people got out of college and actually had to do something. So you're always going to get this up and down. Most people, even though they may get annoyed by change in a certain area, don't conclude that growth is all bad. They just say, "Let's clean up around here." The resounding defeat of Big Green says that people may like a nice environment, but they're not going to write a blank check for it or allow environmentalism to be used as a cloak for dominating people's lives through bureaucratic decrees.

Reason: Are there any particular people whom you admire in public life?

Forbes: There are some who do certain things that are good. Jack Kemp, for example, is trying to find new ways of breaking the paralysis in the inner cities. The idea that you have an East European–style economy operating there is a good place to start.

I admire Ludwig Erhardt for what he did in economics. He was a lousy chancellor, but he got the economic part of it right and understood it. You can see that in Germany today. I like [Margaret] Thatcher in certain areas. She strayed a little bit in recent years. That's why she got herself in such trouble. I respect Reagan for doing what he did, despite all the compromises. They don't look quite as bad today. So it's all case by case. I'll even give kudos to someone I disagree with on most issues. If we see eye to eye on one, I'll give him credit for it.

Reason: You say Thatcher strayed. In what way?

Forbes: She strayed in her monetary policy. Her tax changes in '87 brought a flood of new money into Britain. They tried to keep the exchange rate at an unrealistic level and instead set off an inflation that raised interest rates from 8 percent to 14 percent. That, more than anything else, killed her politically, because all the mortgages there are floated, and you don't get the tax deduction, so homeowners feel the pain very quickly. And that's her constituency, homeowners. She left them hanging, so she didn't have the core that could have saved her when the cabinet knifed her. Fighting inflation is what she came into power on, and that's what ended up doing her in.

Reason: Are you optimistic or pessimistic about the U.S. economy over the next few years?

Forbes: There is strength in this economy that people have overlooked. Who knows when the war will end, but when it does, we'll start to see a revival in economic activity. In the last 15 years, various sectors have gone through wrenching changes, but never simultaneously. In the booming '80s, agriculture and energy went through a depression. That's Midwest agriculture. California agriculture is a different area. Banking is going through one today, as is real estate. But even if these areas continue to go through changes, that doesn't mean the other parts of the economy shouldn't start to pick up and show signs of life. The nice thing about an open economy is that you're not dependent on a handful of people doing something right.

And if we make a few changes on the tax code, we'll really see some activity. But we're still a long ways from doing something about the debt and the Federal Reserve. I can just hope that the damage that they do is minimal.

I guess if you want to reduce it to simple form, it's the raw energy quotient in this country that is still very strong, and increased immigration could make that energy grow even stronger. It can ameliorate the shortcomings of the political elites, business elites, and everyone else who "knows what they're doing."

Reason: So you support fairly open immigration policies?

Forbes: This country has the capacity to absorb more immigrants than we are absorbing now. There are several benefits with immigrants. One is they don't let you get set in your ways. That kind of constant prodding is very important as many societies do get set in their ways and take their advantages for granted. When you get new people coming in, you can't do that as much as you would otherwise. It keeps the rest of us on our toes. This country can absorb people so much better than any other country. We're not a Lebanon. We're not a Soviet Union. When people get to America, they're glad to be here, most of them. Allowing people to come in who are neither members of existing families nor political refugees but who want to come and do something is all for the good.

Reason: You're not worried about any sort of threat to the culture?

Forbes: There are always threats to culture when you bring new people in. That's why it's important to have a society that's fairly confident of itself. A hundred years ago people said we could absorb the Germans, the Irish, and the English, but how in the world could we absorb these southern Europeans who have no democratic tradition at all. Well, for a while, it was touch and go. That's why you had rough political machines in some cities. It wasn't very democratic, but that was part of the adjustment process. Now political scientists say, "Gee, these machines did help the transition." Even though they stole everyone's money, they performed a service—probably better than some of the social services today—because they wanted to get votes.

New York City, for example, will never be as smooth or gracious a city as others because you always have a new crowd coming in that wants to muscle its way in. So New York has a harder edge than the rest of the world.

Reason: Are you optimistic about New York?

Forbes: Short term, no. The state of New York and the city of New York have very severe financial problems, but again, the raw energy level is high. So we will survive. Over the next 10 years, local government budgets will be under such pressure they will be forced to try things that they never would have tried before. Just as inflation enabled us to deregulate transportation, so will budget crises force governments to try things—whether it's privately owned highways or whatever—that they never would have fathomed before, just because they can't afford the old way of doing things anymore.

Reason: Thank you.