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THE FIRST 150 DAYS
Steve Forbes
Republican Presidential Candidate, 1996/2000; President and CEO, Forbes, Inc.
If you're living through this slump, if you're involved in high tech, the pain is very real. But this is simply part of a cycle of enormous change; the U.S. economy as a whole has slowed down not because of the collapse of the dot-coms, but because of mistakes made by policy makers. In the 1980s we had two major sectors of the economy collapse: energy and agriculture. Yet the American economy was growing at higher rates of growth than it did in the 1990s. You can have various sectors going through a wrenching change - a contraction - but it doesn't mean the economy as a whole goes through the change.
In terms of what is happening in the Valley, it is important to put it in historic perspective: It's not the first time that this sort of thing has gone on. Remember the early 1980s: the personal computer, burst upon the scene. Time magazine named the PC its person of the year. But who remembers Franklin Computers today? Look what happened to Commodore, Atari and Osborne. Even established companies like Texas Instruments stumbled in that business. By 1983-84 the IPOs had dried up, the industry was in a contraction, and people like Ken Olson, then head of Digital Equipment - considered a great entrepreneur at the time - said PCs were a fad. He said they couldn't talk to each other. Yet new technology came along - the mouse - which made graphics, desktop publishing, design and engineering possible. PCs fundamentally changed the ways we work in our offices. They could indeed talk to each other, and then some.
Digital Equipment disappeared; IBM nearly went under in the early 1990s. The same thing is going to happen in terms of high tech today. It is going to come back again, and as soon as a few new technologies and a few regulatory changes come along, what we saw in the late 1990s will look like paltry hors d'oeuvres compared to the capital investment that is going to flow in the next five to seven years.
In the late '80s it looked like Japan was going to dominate microchips, in terms of being able to manufacture them more cheaply and efficiently than the U.S. Intel was canceling plants. But again, we moved ahead of the curve because of new technology. It's not enough to make the thing cheaply; the real value added came from having advanced design.
Last year there was over $100 billion of capital money and risk capital going into high tech; this year it will probably be about $40 billion - a seemingly huge collapse. Nevertheless, that $40 billion is 20 times what was invested just a decade ago. What's going to happen in 20 years in terms of high tech? You are going to see that proverbial last mile - the home and small offices will finally be conquered; we will be using just one click.
One of the primary reasons we've experienced this unpleasantness with the American economy is because of mistakes made by the Federal Reserve, headed by Mr. Greenspan. It seems to be a gene in central bankers and a lot of economists around the world: They get very upset when people are happy and prosperous. They have this crazy theory that prosperity causes inflation; that if you want low inflation you have to create a little more unemployment, that if you want a little more employment you have to accept a little inflation. It's a bogus theory called the Phillips Curve, named after an Australian economist who posited that there is this trade-off between inflation and unemployment. History shows - experience shows - this theory is nonsense.
However, when a theory doesn't work in the real world, it's not the theory's fault, it's your fault for not cooperating. In the 1980s we had a long run of prosperity - growth rates were higher than we experienced on average in the 1990s - yet inflation rates fell by two-thirds. In the 1990s the only inflation that we had was what OPEC churned up, and what some crazy laws and regulations did in places like California. There is no real inflation out there.
But the Federal Reserve a few years ago got worried that we were too prosperous and felt they had to do something about it. So they raised interest rates, tightened up on credit, and dehydrated the economy, and did indeed slow things down. It would be as if you went to the doctor, and he said, "You're in great shape. Therefore, we have to make you sick." In medicine if you did that you'd get sued for malpractice. In economics when they do that they call you maestro and put you on the Federal Reserve.
The Fed also got upset about the stock market - they thought it was too high. Markets go up and markets go down; you don't need the federal government deciding what the cap should be for stocks. But four and a half years ago, Mr. Greenspan made a famous speech about the "irrational exuberance" of the stock market. The Dow was then at 6,400. So the Fed tightened up - it overdid it. Now it's been reducing interest rates but still has to do some more.
Given what's happened to banks today, the Fed is in danger - in a milder form - of doing what Japan did. A decade ago in Japan they had eight and nine percent interest rates; now they're virtually zero. But the economy is still mired in recession; there's not enough liquidity in the banking system. It's as if you went to a gas pump and found that gasoline was ten cents a gallon. Then you'd find out that you could only buy one gallon, once a month. You have to be careful that you have enough liquidity in the economy.
Another thing that happened - and unfortunately, despite the hype, Congress didn't do very much about it - concerns taxes. One of the paradoxes of prosperity is that it kicks you into higher tax brackets. You are punished for being successful. This so-called progressive tax system is really a nice way of saying the government is going to take your taxes faster than your income grows. If your income goes up ten percent, your taxes go up fifteen or eighteen percent. Worse, when you earn more, you lose some of the deductions you thought you had. If you don't lose those deductions then you get caught by the alternative minimum tax, which really punishes you. It's going to hit 30 million Americans in the next ten years if we don't change it. You start to earn more money, you start losing these credits, deductions, exemptions, so then your real tax rates are even higher than the statutory tax rates.
As a result today, the federal government is taking a higher percentage of your personal income than at any time since WWII. This starts to drag things down. What the political culture can't seem to grasp is that taxes are not just a means of raising revenue for the government, taxes are also a price and a burden - the price you pay for working, for being innovative, for taking risks, for being successful. When you lower the price of those good things you tend to get more of them; when you raise the burden of price you tend to get less of them. So we need real tax relief. Unfortunately, with this new tax bill, they phase things in, they phase things out and they use big numbers, but at the end of the day you're not going to get as much as you thought: $1.35 trillion sounds like lot of money even in Washington, but when you look at the fine print, it isn't. The American economy produces $10 trillion of goods and services each year. So in the next ten or eleven years, assuming we don't have a catastrophe, we'll probably produce over $110, $120 trillion of goods and services. What's 1.35 out of 120? It's barely a penny on the economic dollar.
When you reduce capital gains taxes, the government gets the money immediately. You reduce income tax rates across the board, investment starts to improve and revenues go up. You'd never know from all the hype about the deficits of the 1980s that government revenue doubled under Reagan, even though he put in that massive tax cut. Even if Washington messes up its finances, which it always does, the nation will do well. In the 1980s the national debt went up $1.6 trillion. But at the same time the wealth of the nation increased by more than $17 trillion. Is there a CEO, a businessperson, who wouldn't trade one dollar of debt for ten dollars of wealth and equity?
High tech collides with regulation. We don't have a federal commission on software; for years in high tech you could do anything you wanted. Now it is one of the most regulated areas of the American economy, along with televisions, telephones, radio and cable. But those regulations were designed for an economy of ten to 50 years ago, making it very difficult to exploit technology in these areas. Let the marketplace decide how this thing is going to shake out rather than politicians in Washington, working with a regulatory apparatus that went out of date several years ago.
We are part of a global economy. But unfortunately, when our country gets in trouble, our treasury department does far more harm than good. The International Monetary Fund - in cooperation with our Treasury Department - is doing immense harm to countries around the world, and that hurts us economically, and it is going to hurt us politically. What does the IMF do when a country gets in trouble? It tells them to devalue their money. That again may work in a classroom, but what does the devaluation do when the value of your current money collapses? It means destruction of wealth; it means flight capital - who wants to keep assets in money that's gone down?
The latest victim is Turkey, which had a currency collapse a few months ago. It's a critically strategic country - a Muslim country - so you'd think we'd want to help Turkey out. Instead we give them this bum advice: Devalue your money. The only reason Turkey hasn't collapsed is because half of its economy operates on the dollar. In addition to telling countries to let their currencies go down, we tell them to raise taxes, which is the equivalent of telling a patient with pneumonia go sit in the snow without a coat.
Let me give you five basic principles of economic growth and progress: 1) Rule of law, particularly individual equality before the law. And property rights: If you're not protected as an individual, as an entrepreneur you can be crushed by the powers that be, as in Russia; 2) Sound money: Don't let your currency collapse; 3) Low taxes. People who have lower taxes generally do better than those with higher taxes, unless it's a place like Taiwan where they ignore taxes; 4) Bureaucratic non-interference in setting up and running a business. It's amazing how difficult it is in many parts of the world to set up a legal business, and they wonder why they have these big, informal economies - it's the only way people can survive; 5) Reducing trade barriers, making it easier for people to do business with one another. We are on the cusp of an extraordinary era; the technology is there. If we do things right on taxes and on monetary policy and recognize what helped make us prosperous, these basic principles can work around the world.
On the subject of electricity and energy costs, why not suspend the federal gasoline tax for a summer? Eighteen cents a gallon - they don't have to get rid of it, just suspend it during the time of year when people most use gasoline. Governor Davis is always prattling on about Washington putting on caps; why not put a cap on some of the tax taking in California, and let people have that money for the summer? You have something called the utility-user tax in this state: In cities and municipalities there is a five to eleven percent tax on electricity, so when electricity prices go up their tax take goes up. In 1997 it raised over $1.3 billion in this state, probably over two or three billion today. Let's have less spin and more action; we can undo those mistakes.
Marwan Muasher
Arianna Huffington
Ben Stein