Saturday, July 7, 2012

Steve Forbes: An Advocate of Free Markets?

Zero Hedge linked to this interview of Steve Forbes.  The interview was conducted by Hera Research Newsletter (HRN).  A link to the HRN page is provided at the Zero Hedge post.

For a mainstream analyst, Steve Forbes is about as good as you can get for a free-market perspective.  Many of his positions represent improvements over the current situation in the U.S. and world economy, and also represent improvements over current U.S. Government policy.  However, like virtually all mainstream critiques and analysis, he falls short on the critical issue – the one issue that separates the chaff from the wheat, so to speak.

But I will come to this later.  I would first focus on the positive aspects of this interview.  Early on, Forbes presents his advocacy for many smaller-government, freer-market positions, including a return to the gold standard:

HRN: Thank you for joining us today.  With the U.S. economy struggling to recover from recession and financial crisis, what policies would you recommend?

Steve Forbes: The only way to recover is to stabilize our money, have a gold backed dollar, simplified tax code and return to a free market.

Regarding a gold standard, he is dealt several of the usual fallacious arguments and issues against such a position.  He addresses these quite well, especially considering the overall tone of the interview.  Following are some of the questions addressed by Forbes regarding monetary policy and the gold standard:

HRN: Don’t we need a flexible money supply?

HRN: Doesn’t increasing the money supply help to stimulate the economy?

HRN: Wouldn’t the gold standard prevent financial innovation?

HRN: Doesn’t government deficit spending smooth over recessions?

HRN: Isn’t the gold standard deflationary?

Again, Forbes handles these quite well – if you are interested in his answers, I will suggest a visit to the original interview. 

However, Forbes, like all mainstream commentators, ignores the elephant in the room when it comes to today’s economy – the one position that ensures all of his other positions cannot be implemented, or if implemented, cannot be sustained.  He does not question the existence of a central bank, nor does he question the government’s control over money:

HRN: How would re-linking the U.S. dollar to gold work?

Steve Forbes: You simply peg the value of the dollar to gold.  Let’s say, for argument’s sake, you peg the dollar to gold at $1,600 per ounce.  If gold goes above $1,600, you tighten up on money creation.  If it goes below $1,600, you ease up.  You keep it around $1,600 by tightening or easing up on money creation.  The gold standard doesn’t preclude a booming economy having more money or a stagnant economy having less money.

Who would “peg” the dollar to a certain gold price?  The only way in which this can be achieved is for the government to grant a monopoly power of currency and banking to a centralized institution – an institution whose function is to manage the nation’s money supply.  Call it a central bank…or the Federal Reserve.

A central bank created by congress is a central bank that is controlled by congress – money, banking, credit and currency become political and not economic.  A granted monopoly enforced by the power of the state is not a market enhancing entity.  As money is one side of every transaction in a modern economy, it seems impossible to truly advocate for free-markets without calling into question the underlying inconsistency of a centrally planned and managed money supply.  Forbes is the mainstream champion of free-markets, yet he does not call into question the idea that money must be centrally planned and managed.

How will market forces be brought to bear to ensure that this institution with such power will act credibly?  Will congress enforce the rules?  The money center banks?  If the entity cannot be disciplined by the market, it will not be disciplined.

This is the failing of Steve Forbes, and the failing of all so-called advocates of freedom.  You will know them by their words and deeds – if they do not call for money and banking to be a function of the free market they are not advocates of freedom, regardless of the annual festivals they host.

HRN: Do competing currencies make sense?

Steve Forbes: The idea of a parallel currency is a perfectly good one.  People would come to prefer a dollar based on gold rather than a dollar based on politicians.

Why is it a dollar in either case?  Why can’t an American use Swissies, or Yen, or “Joe’s Gold Backed Buckeroos”?  Competing currencies should mean competing currencies – anyone can bring to market his own forms of money, banking, credit, and currencies.  The market will decide on the most honest and trustworthy means.  The market will develop its own standards.

HRN: What should Chairman Bernanke do instead?

Steve Forbes: Other than resign, Chairman Bernanke should realize that the gold standard works and that when you deviate from it, you create more and more uncertainty.  He should re-link the dollar to gold.  Doctors used to treat patients by bleeding them.  Bernanke just keeps bleeding the economy.

No, Bernanke should not re-link the dollar to gold.  Leaving a central bank in place is a guarantee of no freedom for the people.  The free market should determine all issues around money and credit. Why do so many so-called free-market advocates go blind when it comes to this topic?

On to other topics:

HRN: How could the U.S. transition to a flat-tax system?

Steve Forbes: Since people get hung up on their deductions, we would institute a flat tax and give people the option of filing either under the new, simple system or the old, horrific system.  If you’re a masochist and want to punish yourself, you can file under the old income tax system.  If you want the simplified one, you can go with that.  I think 99% of Americans, out of sheer convenience, would quickly switch to the new system.

Here again, I would take a flat tax over the current system.  However, the issue of individual income taxes cannot be understood as long as it is viewed from the perspective of generating “revenue” for the government.  Personal income taxes have one purpose only, and that is for control.  The reporting ensures that the government knows all aspects of one’s financial life, and with this knowledge the government has significant control over the taxpayer.  A flat tax will not change this.

HRN: How would you go about deregulating health care?

Steve Forbes: First, we should repeal the Patient Protection and Affordable Care Act—Obamacare—which is an abomination.  Patients should have more choice.  The insurance companies don’t compete freely for business.  We should allow people to shop nationwide for health insurance.  I live in New Jersey, which has a lot of senseless regulations.  Why can’t I buy a health insurance policy in Pennsylvania that costs less?  We should equalize the tax treatment of health care expenses.  If you’re a business or are self-employed, you should be able to deduct the expense.  And individuals should be free to go into the market and pay with after-tax dollars.  We should make it easier for small businesses to form a collective to buy health insurance.  There are a lot of simple things that could be done.

How about just getting government out of the health-care business?  Don’t “equalize the tax treatment” (how would this work in a simplified flat tax anyway?), don’t get rid of the “senseless regulations” (everyone has their own opinion of “senseless” - get rid of them all).  Just get the government out of the relationship between doctor and patient.

HRN: Do free markets really work?

Steve Forbes: Free markets, with sensible rules of the road, can do all the things that big government advocates say the government does but that it really can’t do.

Who will define the “sensible rules”?  Either the market will, or a central planner will.  One cannot truly advocate for free markets and also advocate for central planning.

Again, I would take the world Steve Forbes portrays over the one we have today.  There is a small portion of the path we can walk together.  However, to believe his path will lead to the outcomes he suggests is folly- leave an entity in place to define the “sensible rules of the road” leave a central bank in place to manage the price of the dollar to gold, and you will end up right where we are today.

If you advocate free markets, then advocate free markets.  If you advocate free markets while ignoring the elephant in the room, then you remain an acceptable mainstream voice.

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