Steve Forbes, Chairman and Editor in Chief,
Forbes Media
Landon Lecture
March 9, 2015
Thank you very, very much, Kirk, for those very, very kind words. Thank you all for the warm welcome. Thank you for the great weather. More than one person with a straight face has told me this is year-round.
As Kirk indicated, I did come in 1978 with my father when he gave a Landon Lecture. It was in January. It was cold and there was a lot of snow and it was coming down. So maybe we've had global warming since then so you don't have snow anymore, but I kind of doubt that.
It is an honor to be here with a lecture named after Gov. Landon. He was an extraordinary entrepreneur — very, very successful. He established a successful business. But he was also a humane public servant. As governor he cut taxes in the Depression, kept expenditures in line. He did a lot of things to relieve the great distress of that terrible era, that economic catastrophe. Among other things, he put a moratorium on foreclosures of mortgages, realizing that for a period of time these things were beyond people's control. He knew how to do the right thing, both in making sure that taxpayers' money was not wasted, but also in making sure that during a time of real economic contraction people were not left on their own — helping people who couldn't help themselves because of adverse circumstances.
He also recognized the U.S.'s role in the world. Back in the 1930s, if you read your history, it was a great isolationist decade. America did not want to have anything to do with the world. He went against the grain, even before the U.S. was brought into World War II in December 1941. Gov. Landon was an advocate of aiding Britain, which was, for a period of time, fighting Nazi Germany alone. He urged the U.S. government to give billions of dollars to Britain to help fight that war before we came in. He also opposed in that decade the so-called "Neutrality Acts," which put severe restrictions on the U.S's ability to help countries that were under attack. He thought that if evil was running amok in the world, you had to do something about it.
So this evening what I'd like to do, in the spirit of Gov. Landon, is to make some remarks about the economy — both our economy and the global economy. The reason is very simple: We live in one of these periods of time where America is unsure of its role and it's critical because the economy not only involves our well-being and the world's well-being, but also involves the safety of the world, the security of the world. If democracy and free enterprise are not seen to be working, if the U.S. is seen as weak and unengaged, then political extremists around the world arise and get strength. Fanatics around the world arise and get strength. And people who figure they can grab things that are not theirs gain strength. We see it with ISIS in the Middle East, not to mention what's happening in Nigeria. You see it with Iran's push to get nuclear weapons to cow part of the world and develop ballistic missiles that can eventually deliver those nuclear weapons to our shores. We see it with Putin's seizing of Crimea and now trying to conquer Ukraine — and before this is over, he'll probably try to make moves against other neighboring countries. We see it with the occasional aggressive probes of the Chinese government into disputed territories in the Pacific.
We saw in a deadly way — and Gov. Landon recognized this in the 1930s where we also lost civilization. The 1970s was another terrible decade when America was seemingly in malaise and decline, not doing its part that it should in the world. Amazingly, given what happened subsequently, the Soviet Union was seen as ascendant. Central America and Africa seemed to be falling more and more under Communist influence and parts of Europe wanted to appease the Soviet Union instead of standing up to it. And we're still living with the consequences today of the mullahs taking over Iran in the late 1970s, and then the Russian — Soviet — invasion of Afghanistan in 1979. We're still living with the consequences of that act today.
Today the U.S. seems to be in malaise. Things seem to be out of control and this then leads to why is this happening. Is this something inevitable? We here these words today: "the new normal." Actually, what we're going through is the new abnormal and it's not going to last. Just as we shook out of the 1930s, came back from the 1970s, we're going to come out of this terrible period in the next few years. And this gets then to the basics of how do you get an economy to move, how do you make progress? And this comes to asking a very simple question: How do you achieve progress? That's answered with another question: What is the difference — and George Gilder the technologist and others have asked this — what is the difference between us today — human beings today — and people in the Stone Age? Same appetites, same bodies, same planet — what's the difference between us and them? It always boils down to this: We have more knowledge.
We know more. Simple as that. Even if you have physical destruction, if knowledge is not destroyed you can quickly recover from physical devastation. We saw that after World War II. Western Europe was devastated, Japan was physically devastated — two nuclear bombs dropped on it to end the war. Millions of people died, and yet because of the U.S. security umbrella, Western Europe and Japan quickly came back from that huge devastation in the matter of a few years, which experts thought was absolutely impossible. The key thing was knowledge was not destroyed. You see it today, numerous examples of knowledge at work. Take, for example, a country much in the news these days, the state of Israel. The modern state of Israel was founded in 1948. Since then, Israel's population has grown more than tenfold. Its arable land has grown threefold; it's agricultural output sixteenfold; it's industrial output more than fiftyfold. Yet, the net use of water today in Israel — thanks to knowledge and technology — the net use of water in Israel is 10 percent less than it was in 1948.
That's the power, that's the real source of wealth in the world. It's not physical things; it's the manifestation of the true source of capital, which is indeed the human mind. Earlier today I spoke to some business students and made the observation about economics that economists don't do their profession any good when they talk about heart-throbbing things like the allocation of scarce resources — not like "50 Shades of Grey." The allocation of scarce resources is pretty dull stuff. But the key thing about economics is not allocating resources — that's a part of it — but it's secondary to what true economics is about, and that is the creation of resources.
As we discussed with the kids, there are very few natural resources in the world. Take the example of oil. Oil is always referred to as a natural resource. It is anything but. In and of itself, it is simply gooey stuff. Glop. You can't eat it, you can't drink it, and you can't feed it to camels. It's just goo. What turns this glop into something we can't live without was human ingenuity turning it into energy more and more efficiently.
We see it, too, in terms of free markets. Free markets, if allowed to operate, will always, without exception, turn scarcity into abundance — figuring out how to make things cheaper, make things better. One example obviously is the automobile. One hundred and ten years ago a car cost the equivalent today of over $120,000. A toy for the rich. Along comes Henry Ford and his engineers who developed the moving assembly line to turn a toy for the rich into something every working person could afford.
A more modern example is what we used to call cellphones are now handhelds or mobile devices. We saw the first cellphone 30 years ago. It was big as a shoebox and weighed as much as a brick with a 40-minute battery life. The first one, which was made by Motorola, cost $3,995. Today, billions are used around the world, most of them given away as part of a plan with a provider. And now we're going to soon have handhelds — smart handhelds cost $25-$35 a pop. Amazing technology. For those of you who love sports and movies, flat-screen TVs. I'm old enough to remember when those things fetched $15,000 to $20,000. Now you can get them for a few hundred dollars.
This has implications, which we'll discuss in a moment, in the field of health care, where we are told that there's a lot of scarcity and we have to make hard choices in the future. No, we don't have to make hard choices. We have to make the right choices and turn scarcity into abundance and more and more affordability. But when you look around the world, it's a troubled world. The U.S. economy is doing better, but still we're like a car that had been going 30 miles per hour and now we're getting up to maybe 40, but we should be going 65 or 70 miles an hour. And if nobody's looking, maybe 80 miles an hour — better not say that to kids, but anyway. So we only look good, we only look fast because the rest of the world is doing worse. Europe is in trouble. Much of Europe is in a recession or semi-recession. Latin America is in trouble — they're stagnating in Brazil and other countries. Japan is still mired in semi-recession. You look at China and they're having difficult problems making reforms.
So what in the world is going on? Why aren't we moving ahead? So let me touch on a few big things. One is — and I hesitate to do this because you're such nice people but it has to be done — and that is start with a subject that is critically important but is not the kind of thing that excites you like a good Super Bowl or watching certain movies. And that is the subject of monetary policy. Money. Now when you say monetary policy, Federal Reserve, Ben Bernanke, Janet Yellen, Greenspan, exchange rates, blah, blah, blah, the eyes get heavy. And so let me — as a reward — give you a little reward for what I'm about to do to you discussing this subject. It is a travel tip. If you ever find yourself in an airplane — in coach, middle seat — on the runway watching your life pass away and you want a little elbow room with your seat mates, start talking with them about monetary policy. They'll cut you a wide berth. In a similar vein, we've got a lot of young people here. If you are single on a bad date and want out, start talking about monetary policy and you'll never see that person again, guaranteed.
But the subject is critically important, and the reason is very, very simple. Even if we get it right on taxation, on spending, on regulation, if you don't get monetary policy right — if you don't get the money right — you're going to have a troubled economy. This gets to that question of how we achieve progress. The mechanism for achieving progress is we seek knowledge. It comes from constant experimentation. We think of experimentation in the lab, but it happens in the markets every day — people coming up with new things to see what works, what doesn't work things that fail. Failure you learn from as well. Some of you may be old enough to remember in the days of Apple, before Steve Jobs came back, a product called the Newton. Failure, but they came up with technology that enabled things like the iPod. So you learn from failure, getting that knowledge.
But the way we achieve progress is we trade with each other, we exchange with each other. Say you want to bake a cake. You've got to get the ingredients. You've got to get the eggs, the milk, the flour and the like. You've got to get the electricity, you've got to get the stove, the oven. You've got to get the refrigerator. You've got to get the measuring spoons and the like — all of these things. So you do it through buying and selling, though exchange. We do it billions of times a day and don't think anything of it anymore. But all this is done through trading with one another. As individuals we can't do much of anything. Imagine if we have to do everything ourselves, we'd still be living in caves. But this interacting with one another, exchanging with one another is how we moved ahead.
So what makes this exchange possible? Money. Now in the old days we had barter. So if I sold an ad in Forbes 3,000 years ago how would I get paid? Perhaps with a herd of goats. Let's say I wanted to buy iPads for our writers — I'm being a little facetious here — if I go to the Apple store with a herd of goats and the storeowner says no, he doesn't want goats, he wants sheep. So I have to then figure out how to swap the goats for sheep, perhaps by hiring a shepherd to make sure the wolves don't eat the sheep. The shepherd wants to be paid with wine. I've got red wine, but he wants white wine — it becomes very cumbersome. So money was invented in the marketplace by people to make it easy to exchange with one another, to trade with one another.
The first coins, historians tell us, were invented by a state called Lydia near the Greek states 2,600 years ago. Athens soon came up with its own coin — what was called the Athenian owl — a silver coin. It became a great commercial and cultural center. But whether it's coins, pieces of paper, or ellipses or blips on a computer, money is a means of doing transactions. This gets to something very important. Money facilitates buying and selling, but money in and of itself — unless you have one of these ancient, rare coins — money in and of itself has no intrinsic value. None. It simply measures value the way scales measure weight, or rulers measure length, or clocks measure time. So money in and of itself is not wealth — it measures wealth. It's a claim. Think of it as a claim on products and services, such as a coat check at a restaurant. You use it to claim your coat. It's a claim. In and of itself, it's nothing and it only works based on trust. If you don't trust it, it doesn't work. If you trust it, total strangers can trade with one another because they trust that the piece of paper or that notation on a computer is worth something and can be a claim on other products and services.
So money works best when it has a fixed value, just as you have fixed weights and measures in the marketplace. You buy a gallon of gasoline, you assume it's a certain size — it doesn't fluctuate each day. You buy a pound of potato chips, hamburger, cheese, whatever it is you want to buy, you assume its 16 ounces. It doesn't fluctuate each day. Just for a moment play a little mind game. Imagine for a moment our central bank, the Federal Reserve, did to clocks what it does to the dollar. Imagine floating the clock: 60 minutes in an hour one day, 48 minutes the day after, 93 minutes the day after that. Life would be chaotic if a clock changed in terms of time each day. Imagine trying to bake that cake we talked about. It says bake the batter for 40 minutes, and then you have to figure out if that is nominal minutes, inflation-adjusted minutes, is it a Kansas minute, a Mexican minute, a Japanese minute? It would be chaotic. So when you have stable money, it just makes life easier so you don't even have to think about it.
And prices — when we go out and buy things, prices give us information about what something is worth. Prices give us information. Something is hot, not hot; prices give us essential information. And so what happens if you have unstable money, it's like a virus in the computer — it corrupts the information. For example, oil in the 1970s. None of you is old enough to remember the '70s — this is called pandering; I tried it in politics and it didn't work, which is why I'm here today. In the 1970s when we shoved the dollar off the rails and kept devaluing it, oil went from $3 to $40 a barrel. It was going up and up in price, so people figured that if it's going up in price, we must be running out of it. So a lot of investment was made. Gee, it keeps going up must mean there's not enough out there.
Then in the early '80s we saw the same thing in agriculture — this state lived through it — and the commodities were only going up and up. Then in the early '80s — when the terrible inflation of the '70s was killed by Ronald Regan and Paul Volker at the Federal Reserve — oil crashed from almost $40 a barrel down to $10, finally stabilizing at $20-$25. Agriculture — especially farmers who had leveraged up — went through a wrenching period. Prices weren't giving the right information. We saw it in the early part of the last decade when we started to play these games again with the dollar. Housing prices started to move up and people thought it must mean we need more houses — the price keeps going up. They even invented a new mortgage, which was why have an income? Who needs it? Collateral was going up and up. Prices were lying to us because the dollar was unstable in value.
So what happens is that when you have an unstable currency, you get less investment in the future. Because investing that leads to a higher standard of living means investing in the things that today are unseen. You want a new product, it's not here today, and you invest to create it like Steve Jobs did with the iPad, the iPhone or the iPod. Building a new factory is the same thing; new equipment, the same thing — things that today are unseen. But if you have an unstable currency, what happens is you get less investment in those things — less investment in the things unseen and more in things like hard assets. That's the reason why we're not doing so well. That's the reason why businesses are going bust at a faster rate than new businesses are being created. Very rarely that happens in American history, but it's happening now. It's the reason why median incomes are not going up — we're not getting enough of that investment.
So you've got to have stable money. How do you do it? Not to totally bore you, but the way we did it for the first 180 years of our existence is we tied it to gold. Now you say that to an economist and they absolutely retch because they've been taught the superstitions out of the Depression. How do you get that stable value of money? You fix it. Why to gold? Because more than anything else on this earth, gold keeps its intrinsic value. When you see the price fluctuate, that's not so much the value of gold as it is people's perceptions of the value of the dollar today and what it might be tomorrow. What happens if you don't fix it? The dollar goes all over the place. The dollar now is strong today. That's like that clock — when you have a watch, you don't want it to be too fast, you don't want it to be too slow, you want it to be the right time.
Gold is not perfect, but it's the best thing that we have. It doesn't mean that we go off of gold coins — that would be pretty inefficient. Like I was telling the kids today, imagine going to McDonalds and buying a $1.89 hamburger and giving a gold coin and trying to get $1,150 in change. No, it's not very efficient. But all it means is that it's like a ruler. Just as a ruler measures length, gold keeps that value fixed so it doesn't restrict the economy. If you've got a booming economy, create more money. So let's say we fixed the dollar to gold at say $1,200 an ounce — pick a number. All it means is if it goes above $1,200, you create fewer dollars. If it goes below $1,200, you create more dollars. Very simple. We did it for 180 years and it worked. Even though we had the Civil War, two world wars and the Great Depression, the growth rate in that 180 years — from the time of George Washington to the 1970s — the growth rate in the U.S. was the greatest long-term run of growth in human history. If we'd maintain that level of growth that we did for 180 years in the last 40 years, our economy today would be 50 percent larger and $8 trillion bigger. Imagine if we had an economy 50 percent bigger, incomes 50 percent higher. Life would be a lot better. Now it may not do miracles this year in basketball — there's some things that money can't do alone — but certainly it would be a much better life. And so that's what happens.
And let me just close on this subject of money before I quickly hit on taxes and health care. It's a quote from John Maynard Keynes. You know, when we're talking about economics what you think is numbers — GDP and all that stuff. When you have unstable money, since it's based on trust if you can't trust it anymore — we discuss in a book that I wrote called Money — when people cease to trust money, they cease to trust each other. So here's what John Maynard Keynes — who got some things right — here's what he said 90 years ago. He said, "Lenin was certainly right" — Lenin was the one who created Communism in the Soviet Union — Keynes said, "Lenin was certainly right. There's no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction and does it in a manner which not one man in a million is able to diagnose." Now he was talking about a hyperinflation. But if you have this volatility over time, even if it isn't rapid, it still erodes what you might call social trust.
We see it playing out today. Research has shown, by the way, around the world that countries that routinely debase the money have higher rates of crime than countries that don't. It's social trust. You see it today in more social divisions: the 1 percent versus the 99 percent, the 40 percent versus everybody else, the young versus old, public sector versus private sector. It mocks values. You try to save money today, you kind of look like a fool given the rates of interest. We seem to have a disconnect between honest effort and reward — it rewards speculation. So this is critical — boring, but absolutely critical. I think we're starting to move in the right direction. The former head of the Federal Reserve, Paul Volker, said since we went off gold we've had more crises. Now he didn't endorse a gold standard, but he started the process. The first thing you have to do is recognize you have a problem and that what we're doing is not working. It's not working here, it's not working around the world. That's the first step. Then we can start asking the question: What do we do now?
Now another area where I think we're going to see much more rapid progress is taxes. I know this may be a sensitive subject in this state, but I'm not running for anything so I'll let it out. America is overtaxed. The thing to recognize about taxation is that it's not just a way of raising revenue, it's also a price and a burden. The tax you pay on income is the price you pay for working. The tax on profits is the price you pay for being successful, and the tax on capital gains is the price you pay for taking risks that worked out. The idea is a very simple one: When you lower the price of good things like productive work, risk-taking and success, you get more of them. Raise the price, you get less of them.
Now you look at our tax code today, the federal income tax code. It is a total deadweight on the U.S. economy. To put it in perspective: Abraham Lincoln's Gettysburg Address defined the character of the American nation in all of 272 words. The Declaration of Independence was a little over 1,300 words. The Constitution and all the amendments were a little over 7,200 words. The Bible, which took centuries to put together: 773,000 words. Now the federal income tax code — not just the code itself, which is 4 million words — with all its attendant rules and regulations is about another 5 million — about 8 million to 9 million words. Nobody knows what's in it. The IRS doesn't know. Half the time or a third of the time you call their hotline — they used to answer them — they give you the wrong answer and hold you responsible for it. Several years ago Money magazine did a survey with a hypothetical family's finances, giving the numbers to 46 different tax preparers people considered tops in the field. You know what they got back? Forty-six different returns, 46 different estimates of what the family owed — thousands of dollars of differences from people who make their living at the thing.
There's only one thing to do — and I think we're going to have it happen in two years because several candidates are going to advocate it next year — is to take this beast, kill it, drive a stake through its heart, bury it and hope it never rises again. Just start all over again with the federal income tax code. I'd replace it with a simple flat tax. I'm about to unveil in a few days a new version of it. Generous exemptions for adults and for kids at a single rate. A family of four would pay no federal income tax on its first $52,000 of wages. No tax on savings, no death taxes — you should be allowed to leave the world unmolested by the IRS. As our founders would say, no taxation without respiration. And do the same thing on the business side. Cut the rate from 35 percent to 17 percent, no more. If you make an expenditure, write it off in the year in which you lay out the cash. If you have a loss, carry it forward against future profits. You do that, stable dollar, and a tax code where we're no longer spending 6 billion hours a year filling out tax forms, you could literally do your taxes on a sheet of paper. Thirty countries have done a variation of it — this is not a theory. Imagine doing a sheet of paper or a few keystrokes and it's done. Imagine the brainpower released to do productive things. I'm getting older. We all are. I like the idea of more medical research, conquering diseases. That's a good thing. Better than filling out tax forms or trying to interpret an indecipherable tax code. So that's going to come, I think.
Another thing that looks like a crisis today, but I think is setting the stage for something profoundly positive, is this era of health care. Ask yourselves why do we have a health care crisis? The usual answer is that people like me are getting older, we want more health care services, more medicines. So the thing becomes more expensive, it spins out of control, people can't get it and we've got a problem. But step back for a moment and ask yourselves why it is that demand for medical care is considered a disaster, whereas demand for everything else is considered positive? Great opportunity for entrepreneurs. You want more apps? There are writers glad to help you out. You want more food? People in this state are glad to help you out. You want more aircraft? There's some manufacturers glad to help you out.
So what's with health care? Why is demand seen as disaster and everywhere else in the economy it's seen as a great opportunity? It's because we don't have real free markets in health care. This grew up over the past 70 years. Nobody designed it; it just evolved crazy like a monster movie. We have pieces of it, which is why we still have the best health care in the world. We're still turning out more devices and new drugs than the rest of the world, but it's a crazy system. You go to a clinic or hospital and you ask in advance what it costs, you get a very strange look. It means one of two things: either you're uninsured or you're a lunatic. Why would you want to know the price? What's it to you? It's all third party. There's a disconnect between provider and consumer. Now can you imagine going out to dinner tonight, ordering a fine meal and saying, "I don't care what it costs? Let Aetna or Blue Shield or Medicaid sort the thing out." It becomes chaotic.
But you know, a new system is beginning to rise. Not what we had before, not the Affordable Care Act, but a whole new system where for the first time in our lifetimes patients will truly be in charge. Now it's messy, it's going to be convoluted, so my advice is don't get sick for the next three years until this thing sorts itself out. But you can see little signs of it. For example, flu shots in terms of health care delivery. Once upon a time if you wanted a flu shot, you made an appointment at that clinic or hospital or the doctor, went there, got the shot. Today, you can go anywhere. You go to the drugstore, go to the airport, go to the gas station and say, "Filler up, give me a flu shot, and do the windshield while you're at it." It's available everywhere. You see it in walk-in clinics more and more — CVS, Walgreens, and others.
Nurse practitioners — research shows that 80 percent of our maladies can be treated by nurses and technicians. Other things we need the full-fledged physician, but you go in there and if you have a serious problem, then they send you to the hospital.
You see it in other areas. For example, lasik surgery for the eyes so you might not have to wear these things. It costs less today than it did 10 years ago. Why? Because there's not the disconnect between providers and the consumers. Our publisher Rich Karlgaard got the thing done 11 years ago and it cost him $5,000. He told me a few months ago that he could get it done today at half the price and probably a better result. Why? Because there's not that disconnect, so providers have every incentive to make it more affordable and better for you. And in terms of health care, we're going to have a new system evolving where finally we're going to get that miracle of turning scarcity into abundance.
Now again, human nature being what it is, we'll soon just take it for granted. And look at these handhelds today. I'm old enough to remember when you placed a call overseas back in the '50s, it was a big deal. It took minutes to do it. Today, you place a call to Outer Mongolia and if it takes more than five seconds you say, "This device is a piece of crap; it's taking six seconds to reach Outer Mongolia. What is this?" So, we'll take it for granted. But the bottom-line is that if we just don't lose it in the rest of the world, then we will find ways around it. We've been through rougher periods before. We're setting the stage in a very messy way for an extraordinary new era ahead.
Thank you very much.