Speaking Against The Ideas of Dead Economists
April 18, 1995

Speaking Against The Ideas of Dead Economists

Thoughtful verging on pensive, Malcolm S. Forbes, Jr. doesn't compete with his late father in the showmanship department. What he shares is a willingness to publish an opinionated business magazine in an era of relentless editorial balance and political correctness.

When asked, Mr. Forbes speaks as forcefully as the magazine that bears his name. In a recent interview at Southern Methodist Universities' Cox School of Business, I asked Mr. Forbes what   opportunities and dangers we faced.

"Probably the greatest danger to our economy and others around the world is continued adherence to bad economic ideas." he said.

Such as?

"The first is the idea that prosperity causes inflation. That's an idea held dear by central bankers around the world. It's why Mr. Greenspan at the Federal Reserve raised interest rates. But it's also the reason that prosperity is regularly strangled in the cradle.

"In the 1980's we had inflation decline from 13 percent a year to 3 percent a year... and we had our longest peacetime expansion. Other countries have had similar experience. There is no evidence to support the idea that prosperity causes inflation.

"The problem... what's lost sight of... is the function of prices (in a market economy). If demand goes up, they think, prices must go up. But that's not always so. The problem with the central bankers is that they think too much like manufacturers: that there is a limited capacity and once you produce at capacity prices will go up. Innovation makes things occur differently.

"Look at it from another direction. If computer chips double in power every 18 months and prices go down, that's not called deflation. That's productivity.

"If prices go up because demand exceeds supply that isn't always inflation: that's the function of market pricing. What the central bankers should be looking at is the real inflation--- what happens when your money gets trashed.

"What we've got now is very peculiar. Even though we've had the slowest recovery in the post war period, interest rates have been raised and the central bankers are patting themselves on the head for controlling inflation."

"Another bad idea is that debasing your money is good for your economy. The basic idea is that you will improve your balance of trade by making imports more expensive and exports less expensive. Instead, what usually happens is inflation, higher interest rates, distressed markets, and capital flight.

"We see it playing out most tragically in Mexico. Mexico got its advice from its own economists, our Treasury, the IMF, etc. and it will have bad results. It will have bad results for Texas, as well.

"The third bad idea is the importance of the trade balance. It isn't important in itself. This country had a trade deficit for over 100 years. Japan and Korea have had long periods of trade deficit.

"The same people who worry about the trade balance also concentrate on merchandise, not service or capital flows. The idea basically ignores the global nature of our economy. It also ignores the whole issue of value added in trade."

I asked for an example.

"Suppose you have a book printed in Taiwan for $3. But it sells in the U.S. for, say, $18 to $23. That means there is $15 to $20 of value added IN the United States. It's value added in advertising, distribution, and when the book is sold in retail stores. If you sell a book for $20, why worry about the $3 of value that goes outside the country?"

I asked if he would elaborate on impact of high interest rates.

"It's already slowing the economy. You can see it in spot reports on retail sales. This is happening in a time that with some of the technology coming on we should be growing at 6 percent, not 2 or 3 percent.

"One example is telecommunications. If I buy interactive services, is that inflationary? Is better medicine inflationary? There is too much of a focus on the idea of capacity and not enough on the dynamism in our economy... The fact that Bill Gates is worth $10 billion doesn't mean people have been impoverished by that amount. Everyone gained."

Unleash creation and the economic pie gets bigger, that's his basic message. Watch this fellow: he is one of the driving forces behind the flat tax.

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