Reforms for the New Millennium

Ladies and gentlemen, it is now my great pleasure to introduce to you our guest speaker for today. Steve Forbes is President and Chief Executive Officer of Forbes Inc. and Editor-in-Chief of Forbes Magazine. Mr. Forbes is also Chairman of two company subsidiaries--American Heritage, and Forbes Newspapers, a New Jersey-based chain of suburban weeklies.

Steve Forbes assumed his current position in February of 1990, and since that time Forbes Inc. has expanded with the addition of six new magazines, including Forbes FYI and Forbes ASAP. Forbes has also introduced a new conference division, an electronic edition of Forbes on Compuserve and the World-Wide Web, in addition to the American Heritage custom-publishing group.

Mr. Forbes writes editorials for each issue of Forbes under the heading of "Fact and Comment" and of course has been a widely respected economic prognosticator appearing on many national news programmes including "The NewsHour," the nightly "Business Report" and "Wall Street Week." He's the only writer by the way to have been a four-time winner of the highly prestigious Crystal Owl Award for making economic predictions.

In 1985, President Reagan named Mr. Forbes Chairman of the Bipartisan Board for International Broadcasting. In this position he oversaw the operation of Radio Free Europe and Radio Liberty. Mr. Forbes was re-appointed to this position by President Bush and served until April of 1993. From September 1993 until June of 1996, Mr. Forbes served as Chairman of the Board of Directors of Empower America, a grassroots political organisation.

Steve Forbes was born in Morristown, New Jersey and educated at Brooks School, Massachusetts. He received a Bachelor's Degree of History from Princeton in 1970. At Princeton, a presage of what was to come, he was the founding editor of Business Today which became the country's largest magazine published by students for students, and with a circulation of 200,000 the magazine continues to be published by Princeton undergraduates.

Mr. Forbes now serves as President of the Board of Trustees of Brooks School. He is a trustee of Princeton University, serves on the boards of the Foundation for Student Communication, the Ronald Reagan Presidential Foundation and the American Enterprise Institute and is a member of the Board of Overseers of the Memorial Sloan-Kettering Cancer Centre.

He holds honorary degrees from Lycoming College, Jackonsville University, Heidelberg College, Iona College, Kean College, The New York Institute of Technology, Lockhaven University, Westminster College, Sacred Heart University and Centenary College.

On September 22, 1995, Mr. Forbes took leave of absence from Forbes Inc. to campaign for the Republican nomination for President. He vigorously competed in all the early primary contests and was victorious in Arizona and Delaware. Steve Forbes in this campaign advocated a platform of hope, growth and opportunity. The key to his programme was a flat tax that was a tax cut, medical savings accounts, a new social security system for young people and parental control of schools and term limits.

Ladies and gentlemen, please help me extend a warm Canadian welcome to the new millennial voice for hope, growth and opportunity in the Americas--Mr. Steve Forbes.

Steve Forbes

Thank you very much Michael for that very gracious introduction. It is a great pleasure to be here today.

I'm very delighted that the Fraser Institute as well as the Empire Club put this occasion together. The Fraser Institute has done extraordinary work over the years. It has been a one-person band in Canada in terms of think tanks. In the United States we have a number of so-called think-tanks that put out new ideas, do studies, give people ammunition to be able to participate in the affairs of the day and go against the prevailing grain, but it looks like the Institute has really achieved some real success up here. It appears that the intellectual ground, you might say, is beginning to shift more to a free-market orientation and you deserve high credit for that Michael.

I understand there's going to be a question and answer session after my remarks on the topics I bring up or the topics that might be on your mind. I just have to warn you that if you ask about specific matters such as what is going to happen to interest rates or the stock market I will tell you, but I should warn you about a favourite saying of my grandfather who founded Forbes Magazine back in 1917, the same year as the Russian Revolution. Wherever my grandfather is right now he must be happy that his creation outlasted Lenin's creation, but my grandfather liked to say that you make more money selling the advice than following it. So you are all on notice.

Michael made mention of my presidential foray last year. Soon after I left the race the commencement season began in the United States where colleges and universities try to get their seniors out into the real world. Parents try to get them out of the nest, not always successfully and in my neck of the woods in the State of New Jersey one of the local colleges decided to give an honorary degree to Yogi Berra, the former Yankee baseball player. Any of you who know about Berra know that he comes up with these strange sayings. He gave the commencement address and gave his usual words of advice such as: "If you come to a fork in the road take it," and helpful hints like that. At the time the newspapers were full of stories about Berra and one of them recounted the time that a newspaper reporter went up to Yogi Berra and gave him the news that the good Catholic voters of Dublin, Ireland had just elected a Jewish mayor. And Yogi Berra remarked: "Gee, that's wonderful. Only in America could that happen." You might say in a sense that only in America would somebody spend his own money running for president in order to achieve his real ambition which was to host "Saturday Night Live."

I have been asked today to make some remarks about the kinds of reforms we need as we leave this century and enter a new millennium. In a sense we have a chance to go into this new millennium with the optimism and the opportunities that began this century. Obviously no one here is old enough to remember the beginning of this century so we have to rely on the history books. At the turn of the twentieth century there was considerable optimism, certainly in the Anglo-American world. This century would not only see great material advances but would also see great advances in the rule of law and the advance of democracy. Even Russia, autocratic Russia, czarist Russia, which was then the barbaric nation of the time, was beginning to lumber haltingly, especially after the Revolution of 1905, into something resembling a parliamentary democracy with a king or czar. It was a time of optimism. Even in Russia they still had something resembling the rule of law. The courts had considerable independence from the czarist regime, certainly compared to what happened after 1917. So it was a period of great optimism. People thought that things could only get better and progress was inevitable.

Then came of course the catastrophe of the First World War, seemingly senseless slaughter and a real decline in faith in western institutions and western civilisation. We had the rise of Communism, Fascism and Nazism, the Great Depression, the Second World War, followed by the 40-year Cold War. In a sense we are back to where we were in 1914 and the real question before us is: "Will we realise the glittering opportunities that are now before us as we enter the new millennium or are we going to have a replay of the catastrophic mistakes that so scarred this century?"

As you know from business, even if opportunities are there, it does not mean those opportunities will be realised. You have to make them happen. The political sphere is similar. Just because times and circumstances are favourable there's nothing dictated in the stars that says things are going to go well. People are important in running businesses. That's why we at Forbes magazine always focus on what my grandfather called the head-knocker. People make the difference and we should not lose sight of that in the years ahead.

The opportunities are absolutely extraordinary. Events are taking place that make possible this unique juncture in history.

One is the end of the Cold War. While we still live in a very dangerous world and we should not underestimate the capacity of terrorists and rogue nations to do real harm in the world, we don't face the kind of mortal threats to our very existence that we faced for much of this century with the two World Wars and the 40-year Cold War. There is an unprecedented degree of security. But the degree of security is only part of the meaning of the end of the Cold War. The Cold War also means that the centralising trend of governments has come to an end. When you face a major enemy you need to mobilise the resources of society in order to face that enemy and beat back that enemy. If you look at the United States--which as you know was created as an anti-government, pro-individual nation and had this great tradition in the nineteenth and early part of the twentieth century--the United States government has assumed a size and scope that would have been absolutely unimaginable a few decades ago. The real catalyst for the growth of government--whether it's in the United States, Canada, Western Europe, or even parts of Asia--has been the wars that we have had to fight in this century. Every time a war ended and governments began to downsize we faced another crisis.

The Cold War fundamentally affected political, social and economic life in the United States. For example, federal aid was initially justified in the name of national security, especially after Sputnik 40 years ago. Federal aid to American universities and other institutions for research and development was justified in the name of national security. Even our interstate highway programme which was begun in the 1950s under Eisenhower had as one of its justifications national security. When John Kennedy proposed his massive tax cuts in the early 1960s it wasn't to get America's economy moving again as he put it but also to show the world that we could grow faster than the Soviets. The warfare motif has really been predominant in this century and by the early 1960s in the United States a lot of people said: "Gee, if government could help win two World Wars, alleviate the distress of the Great Depression, put a man on the moon, be in the forefront of the Civil Rights Movement, why can't government solve a lot of our other problems?" Hence government has been associated with a whole array of social and economic policies in areas that would have been unimaginable a few generations ago.

But that centralising trend is now over. The Cold War is over and it will be a while before we face the kind of mortal perils that really really scarred this century. At the same time, we are entering a new economic era that is ready for the return of power back to individuals, away from what you might call the centre.

This new era is symbolised by the micro-chip which you might say is extending the reach of the human brain the way machines expanded the reach of human muscle during the industrial era. For example, if you learn to drive a tractor, you can do more physical labour in a day than a 100 Herculean ploughman could have done in a month. In this new era the micro-chip is making us all brighter, smarter, and more in control. We are all more genius-like. Even if we have flubbed around in school, the micro-chip is going to make us look smarter. A lot of people fear that in this new era if you are not up on high technology or are not some kind of computer nerd, you are going to be left behind. Absolutely untrue.

One of the virtues of a free enterprise system is that you succeed most when you provide a product or service that people find simple and easy to use. A good example is the calculator, one of the early fruits of the micro-chip era. Thirty years ago calculators cost well over a thousand dollars. Today the packaging costs more than the gizmo itself. If you had trouble with your sums when you were in school you didn't have to worry about it as much as you once might have. A calculator is now simple and easy to use. Anyone can learn how to use it and all of us can now do in a matter of seconds or minutes the kind of mathematical computations that would have taken math whizzes hours or days to do 40 or 50 years ago. We now think it's the most natural thing in the world.

This will be an inclusive era. Just as you don't have to be an engineer to buy and drive an automobile, you don't have to be an architect to buy a house; you don't have to know anything about aerodynamics to buy an aeroplane ticket and travel around; in this new era you don't have to know anything about MIPs or bytes or whatever to be able to participate in it. It will be, should be, an inclusive era.

With the end of the Cold War there was an era of reform. In the nineteenth century there were a series of movements, religious movements in North America, both Canada and the United States, that in effect tried to improve the way people lived. In 1820 in the United States, our alcoholic consumption rates were about five times per person what they are today and back then everyone took a swig from the jug. They called it hard cider in those days but it had nothing to do with what you buy today when you talk about cider. This was high-proof, high-octane booze and when kids went to school they certainly didn't have milk and crackers. They took a swig from the jug too, especially on the frontier. By the late 1820s much of the nation by noon-time was kind of in a haze and while we chuckle about it today it did have all the predictable social consequences. As a result, there arose a series of religious movements that said that if you want to have a self-governing nation it must be inhabited by self-governing individuals. The first public health movement in the United States didn't come from a government agency but from the temperance movement and it worked. Within a generation alcoholic consumption fell by two-thirds. The 1830s saw in our country the rise of a series of religious movements known as the second great awakening and saw the rise of the abolition movement against slavery, the Sunday school movement and a whole array of forces that really went on into the nineteenth century.

When you go around the United States today you do sense there is a kind of new reform, a new kind of awakening, a desire to improve the quality of life. You see it in a host of areas. You saw it in the tone of our welfare debate last year which wasn't about money but about the fact that the current system was destroying the very people it was supposed to help and save. You see it in the crime rates in New York City. Why have they fallen 50 per cent in four years? Part of it is much better policing but also it's really people saying: "We're not going to put up with this anymore. We are not going to be passive about it. These forces are not beyond our control." You see it in the ministries in some of our inner cities that are doing work with young people and having some remarkable unpublicised successes. You are going to see it this weekend in America when several hundred thousand men march on Washington. They are called the promise keepers who are saying in effect: "We are going to live up to our responsibilities"--very much of a change from what you saw in our country 10 or 20 years ago.

There is a series of reform movements sweeping America, trying to improve the quality of life, trying to improve the tone of the culture. There is unprecedented security in the world with one superpower, fortunately a soundly based democracy, entering a new economic era that truly does liberate people, giving them more choices and more control over their lives. This series of reform movements is trying to deal with some of the seemingly intractable social problems in the United States. The ingredients you might say are there for an extraordinary era ahead. We can finally get back on track where we were before the catastrophe of the First World War.

What are some of the reforms that we need to make to truly realise these glittering opportunities? How do we remove the barriers and obstacles that stand in the way? Let me touch on some of the things that have to be done.

Let me touch first on some domestic things that have to be done. I think they will have resonance in Canada as well. You can have an enormous impact on people's lives through excessive regulation. It doesn't cost much to print the decree but it can have an enormous impact on how lives are lived and businesses are conducted. In the United States we have been trying for several years now to deregulate our telecommunications industry. Unfortunately we have thousands and thousands more words and regulations, that are really hobbling what truly should be a free-for-all. There are enormous technologies being introduced, especially with the increase in band width--enormous technologies that should make possible some extraordinary advances. For example most of you have PCs and you know you need an operating system inside the PC. (Bill Gates wants you to have a particular one.) It won't be too many years, because of what is happening in the revolution of band width, before you will be able to simply pull out of the air the operating system that you want at that particular moment. You won't have to carry it around with you. You'll simply take what you need when you want it which means that the size of your PC will be infinitely smaller if you so desire.

The quality of life is going to improve enormously with this technology. I'll just give you one example. Most of you have had dealings with young kids; raising young children. You know how it is at the end of the day when you have been around small children. You want to talk to a real adult. The problem is that at the end of the day real adults are in no condition to talk either after their long day so in the evenings there are not too many sparkling conversations in most households. Well it won't be too many years before you will have your video-conferencing PC and you will be able to really talk to somebody on the other side of the world with a 10- or 12-hour time zone difference. You won't have to worry about who's sitting next to you. You can talk to some sparkling personality who's just beginning his or her day and you won't have to worry about a jealous partner or spouse because it is 10,000 miles away. No soap operas are going to rise from this, we hope, so the quality of life is going to improve enormously.

What this amounts to is that regulation can do enormous harm in terms of these advances. We are now just grappling in the United States with deregulating electricity and other areas. Regulation can slow the pace of these changes. The old order, human nature being what it is, always tries to preserve what it knows and in the United States we have seen in telecommunications the obstacles that can come in the way of realising some of these glittering opportunities.

Regulation can take on a crazy life of its own. In the United States we have something called the Disabilities Act--a seemingly sensible piece of legislation giving people more opportunities; not denying them opportunities simply because of a physical disability. Sensible thing to do; right thing to do especially in this new era. But look how the government interprets it. Remember the Valdez bill a few years ago. Exxon's Valdez supertanker bill. After that spill Exxon put in a rule that people who were alcoholics or who had drug problems were not going to be allowed to become captains of supertankers. Seemingly sensible thing to do. I certainly hope they have that for aeroplanes. However the federal government is suing Exxon for violating the Disabilities Act. Some of you have heard of the Endangered Species Act. When you think of endangered species you think of whales, eagles, rhinoceri, or elephants--real animals. In California (true story) they wanted to build a hospital in a particular part of California but the regulators discovered what they thought was some sub-species of the common fly. One has never thought that the common fly was in any kind of danger of extinction but in California they thought they had found a new cousin of the fly and so they delayed construction of this hospital for four years. They finally had to set aside a 15-acre reserve for the flies. They counted 12 of them and this is absolutely true. There's an adjacent highway, the regulators actually proposed closing to vehicular traffic for two months of the year so that the flies would not be wind-shield challenged when they crossed the road. Absolutely true.

Another area for reform is the area of American law. I don't think it has got quite as bad up here as it is in the United States. The craziness in our law right now is resembling a lottery. Fortunately the American people are in a mood for reform. In states like Alabama and Texas which have been some of the most abusive states in terms of perverting the law, people have elected judges who have gone against what we call the trial bar in the United States.

Another area for reform which has relevance to Canada is what we call entitlements. In Western Europe especially, the whole area of entitlements is clogging the arteries of nations such as France and Germany. In the United States I think we can help show the way and if we don't other countries will.

Health care. Ask yourself a very simple question: "Why is it that health care, a growing demand for health care, is considered a crisis? Why is it that the experts moan and groan when longevity tables go up?" Instead of celebrating that we live longer they say: "Oh my goodness, my God, these people are going to live longer; they are going to want more of this, more of that; it's terrible and what a catastrophe." Yet in the normal world when demand for something goes up, whether it is software, cargo, clothes or food or whatever, we think: "Gee that's pretty good; that's good for the economy." When the headlines say: "Auto sales are up," everyone says: "Oh that's good for the economy. It's good progress." But when health care goes up, moaning and groaning goes up with it. Disaster. Each country has organised its own kind of health-care system in its own way but you don't have consumerism in health care. Don't say you can't have people having more empowerment, more choice in health care because they can't understand medicine. You don't have to be an engineer to be able to make a choice of automobile.

Even more basic than health care is food. Without food you don't have much of anything and yet we don't have a food crisis. If it's a crisis it's because we are growing too much of the stuff; not the other way around. In American health care we devised not a national health-care system but third-party pay. In America you can buy health insurance as an employer with pre-tax dollars. It's a tax deduction. If you buy it as an individual you have to use after-tax dollars. So most private health insurance in America is bought by the employer. What that means is that even though that money is counted as part of your income you have very little choice on how those dollars are spent. You don't think it's your money and you really have no control over it. If you are careful about health care or careless it doesn't matter. You treat it like everybody else in terms of cost with no sense of accountability. You get a top-down system which we have in Medicare and more and more in managed care in America.

The answer is a device called medical savings accounts which returns true control to the individual, true control back to the doctor-patient relationship, and it gives people more control. First it restores genuine catastrophic insurance. Right now most health insurance is pre-paying next year's expenses which means you eventually have a system that is hostile to innovation because innovation can initially be very expensive. Medical savings accounts give you catastrophic insurance at a very cheap rate because you are not encumbered with dollar for dollar coverage. It also gives you a sum of money, say $1,500 or $2,000 a year in an account like cash that you can use for routine expenses. If you can find a medicine cheaper at drug store A rather than drug store B, that's money in your pocket. We've tried a variation of it at Forbes magazine for six years with more control back to the people, making them realise it's their money that's at stake. Our cost per person is less than it was six years ago and not one of our people is in managed care.

Consumerism works. When they realise it's their money, they ask questions they would never have asked before; they demand accountability of the providers they would not have demanded before. It works. And that's what should be done to our Medicare system and eventually it should be done around the western world. That way you get off this terrible treadmill of ever-rising costs and a real decline in the services that are available. We have go to get off that deadly treadmill.

In social security Britain is already on the way to a semi-privatised system. In America, we have a system that is going to go bankrupt in the next century as people of my generation retire. Why not, while we still have time, phase in a new system in which the payroll taxes of younger people go into their own individual retirement accounts? Take it out of the political system, return it back to people and that way they'll have three to five times more of a pension in their retirement than they could possibly get from the kind of bankrupt ponzy scheme system that is prevalent in much of America. They say we can't afford such a system. Not true. If you look at the unfunded liabilities of these systems in America our national debt is $5 trillion, but the unfunded liabilities of social securities is about $10 trillion, so even though it's not counted as part of the national debt it is a national financial obligation right now and I guarantee you that phasing in a new system will be infinitely less costly than the cost of having the same bankrupt system collapse in the next century.

In those two areas, health care and pensions, we should get in the dynamic of this new era. The dynamic of the machine age was bigness--big companies, big cities, big unions, big government. The dynamic of this new era is back to the people, back to individuals. There's no reason why so-called fringe benefits shouldn't be in the hands of individuals. If you wish to move, you take them with you. Your pension is yours. Your health care is yours. You aren't beholden to any government, not beholden to any employer. It's in your hands and you'll have more than you can possibly get from the self-centred system that we have today.

Another area of fundamental reform is the area of taxation. Taxes are the biggest dead weight on business life and family life. Just remember one thing about taxes. Taxes are not just a means of raising revenue. Taxes are also a price, a burden. The tax you pay on income, profit, and capital gains is the price you pay for working, the price you pay for being productive, successful, willing to take risks, and the proposition is very simple. When you lower the burden on those good things, you get more of them, certainly when the tax collector comes around. You raise the price on those good things, you get less of them. And in the United States within the next five years there will be a drastic overhaul of our tax code. It has truly got out of control. Nobody knows what is in it anymore. A national magazine earlier this year did a survey. They took a two-income family's finances, nothing very complicated, sent them to 50 different tax preparers, and got back 50 different tax returns. Nobody knows what is in that beast anymore.

Just to give you an example. The Holy Bible which took a few years to put together runs a total of 773,000 words. America's federal income tax code is seven and a half million words and rising. If you want compliance, if you want long-term growth and prosperity, give people a simple code, an honest one, and you'll find that compliance goes up and you get more growth with it. It means a loss for the political centre but everyone else gains from it. In the United States I think we will get the flat tax which has generous exemptions for children and for adults. A family of four in America for example would pay no federal income tax on their first $36,000 of income and then a flat 17-percent rate on earnings above $36,000 and the system would end up generating more revenues than the monstrosity we have today. It works and its virtue is apparent--the more you make, the more you pay. It is that simple. You are not going to get around it. All income is taxed, taxed once, taxed at the source.

On the foreign policy side let me just give out one reform. And that is the advice that we give. It's prevalent not just in our treasury department but also at the International Monetary Fund and with too many finance ministries in the western world. It's the equivalent of the way medicine was practised 200 years ago. As you know 200 years ago, when you got sick, doctors used to bleed you. That of course got rid of the pain and suffering because it usually got rid of the patient. What economic doctors do today is the equivalent of what happened 200 years ago. When a country gets into trouble what does it do? It recommends a devaluation which fuels domestic inflation. To balance the budget, political elites normally raise taxes which crushes your rising middle class. It is a kind of austerity, mindless austerity, that ends up doing immense harm in the name of making the patient well.

We have for example a currency crisis in South East Asia. I am amazed it took this long to happen but it is very clear what needs to be done there. They do need sensible exchange rates but they also need more transparency in how their economies operate. Japan is making that painful transition to more openness in this new era. It has taken them six years of near recession to do it. But openness is the key and let me just give you four basic principles that the IMF and others should follow when these countries get into trouble. We should follow it too. If we are going to give advice at least give good advice.

One is sound money. If you want to avoid inflation people have to have faith in the currency.

The second is low taxes. Look at Hong Kong. We are all familiar with Hong Kong. Fifty years ago, $200 per-capita income. They've gone from $200 per-capita income to just about the highest in the world. They had a variation of a flat tax and for 40 years the growth rate of their revenues has been consistently the highest in the world. You want to create an environment in which you can collect more and that means lowering the tax burden, not raising it; making it simple and transparent.

The third is property rights and the rule of law, whether it is intellectual property or physical property. Why is it for example Mexico with so much oil has so little exploration? If you discover oil in Mexico in your back yard, you don't look forward to a nice royalty. You know you are going to lose your property. It's that simple. Some incentive to find the stuff!

And finally, no bureaucratic interference. It's amazing that in many countries in the world today it is very difficult to set up a legal business. And then they wonder why they have all these informal economies. Well if you make it hard for people to go legit don't be surprised if you don't get as much legitimate business as you should. Make it simple and it will emerge and you'll suddenly find your GDP growing not just because the economy is expanding. A lot of business that was off the books begins to go on the books again when people realise they are not going to be destroyed or punished for being successful or trying to work within the system.

So those are basic reforms for the new millennium. Part of the burden is on the United States to rise to the occasion and not go isolationist the way we did in the twenties and thirties. We should remember; you should encourage us too.

You should fulfil your responsibilities too. What has happened to your defences is really pathetic in the way you have let them run down. While we don't face the Soviet Union we do face a dangerous road.

Just remember after World War I, for a brief time, democracy was the prevalent form of government in much of Europe. After World War I some 25, 30 countries adopted various forms of democracy but by the mid-1930s, with a couple of exceptions, they'd collapsed in every one of those countries. Whether it was Hungary, Romania, Bulgaria, Poland, Lithuania, Latvia, Estonia, Portugal, Brazil, Yugoslavia, Greece, Turkey and most ominously Japan and Germany, democracy was a form of government in those countries and everywhere it collapsed. If we don't help create an environment where democracy can sink real roots, don't be surprised if bad forces arise.

Domestically I have mentioned a lot of ways to get into the spirit of this new era, symbolised by the micro chip. They all have the common thread or theme of trusting in the real basis of democracy which is the belief that we are responsible enough to handle our own affairs whether working alone or working together. The real basis of democracy is the belief that seemingly ordinary people can achieve over time extraordinary deeds if they are allowed and encouraged to take responsibility for themselves, for their families and for their communities.

Can we realise these glittering opportunities? I'm an optimist. I think you are too. I believe when historians look back on this era they'll conclude that the democratic nations will have risen to the occasion. We will have done things more right than wrong and we will have a rich heritage to pass on to future generations. Thank you very much.