Interview: Malcolm "Steve" Forbes, Jr.
Malcolm "Steve" Forbes, Jr. is the president and CEO of Forbes Incorporated and president and editor-in-chief of Forbes Magazine. Forbes is the only writer to have won the highly prestigious Crystal Owl Award four times, given by USX Corporation to the financial journalist whose economic forecasts for the coming year proved most accurate. During his 1996 and 2000 bids for the Republican presidential nomination, Forbes's domestic platform included a flat tax, medical savings accounts, a privatized Social Security system, and school choice. He is a longtime champion of the idea that people know better what to do with their money than government does. We talked with Steve Forbes recently about how people actually spend their money and whether they exercise thrift.
In Character: Do you think you are a thrifty person? How would you define that?
Steve Forbes: Well, never thrifty enough. The whole concept of thrift is the idea of self-discipline, the idea of putting off instant gratification to plant seeds for the future. It all gets to the whole basis of a republic, which is the idea that if you are going to have a self-governing people you must have self-governing individuals. This is an idea that goes back to the eighteenth century, with Ben Franklin. And thrift is part of self-governance, in that you must see beyond the instant moment.
Thrift also, even though it may sound the antithesis, is a part and parcel of risk. If you spend a penny now - let's call it a dollar now - you can get a piece of candy, or gum, or whatever knickknack costs a dollar. That thing you know you have in hand, whereas if you save the money, or invest the money, you are taking a risk that the savings institution will still be there, that the politicians won't debase the currency, that the stock you buy will eventually appreciate.
So a sort of trust in the system?
It's a way of building trust. If you don't clutch your gold coins, you may be prey to uncertain events. But in a free society, thrift means that you are not clutching, you are putting assets to work. That's the whole basis of the moral foundations of democratic capitalism, which is that in a free society, commerce, without people knowing it, guides people to meet the needs and wants of other people. So even if you think of yourself as greedy, even if you have an unpleasant personality, you don't succeed unless you provide a service or product that meets the needs or wants of other people. It's about knowing your customer.
Can you give any examples of how you feel you practice thrift in your life?
Well, at an early age I started to follow the stock market, so instead of asking for toys for birthdays or Christmas, I would ask for shares of stock, and I would reinvest the dividends, if there were any. When I collected enough money I tried to buy another share. I had a deal with my father that if I put up the principal he would pay the commissions.
That sounds like a good deal. How old were you when you started this?
I guess around eleven or twelve.
What gave you an understanding of the importance of thrift at such a young age?
Well, perhaps it's partially my Scottish genes. My grandfather came to this country with very little money at the turn of the last century. He was one of ten children. He only had a grade school education. And he came from a part of Scotland, the Aberdeen area, where moths came out of the purse. You know, where they would bite the coins, that sort of thing. But, even though he was thrifty, my grandfather knew you sometimes must take risks, that thrift doesn't just mean standing still.
For example, though he hated to spend money, he one day bought himself a fancy suit, and then rented a room at the Waldorf Astoria. His friends thought he had taken leave of his senses. But as a young reporter, he knew that the moguls of the day, the CEOs, the shakers and makers of the day, congregated in the evening at the Waldorf. So he figured if he went there as if he were part of the scene, instead of as a reporter, he could get to know these people on a different basis, and get information that he wouldn't get across a desk in a formal interview.
What publication did he write for?
He eventually worked for William Randolph Hearst and his papers, particularly the Journal, which became the Journal American.
You are from the baby boomer generation. How would you compare the ideas about thrift of your generation with those of your children?
Well, I think, you can find examples all over the parking lot of either kids who were indulged by their parents because they can't spend enough time with them, and kids who, even if they come from an affluent family, learn to work and save to get a car or some other desirable object. Parents try to make the connection between effort and reward, which is critical.
Is that the same as thrift?
We don't call it thrift anymore, but saving, putting some money aside, figuring out how to pay for college, summer job, investing - it's the same concept.
What have you asked your children to do that you think will help them learn these values? Have you told them to get summer jobs or have you offered them the same stock deal that your father did?
Well none of them have quite the interest that I did, except for one, in the stock market. But they would all do work in the summer. They all were on allowances. And, from a very early age we did with our kids what my parents did with me and my siblings, that is, we went to business functions. When I was growing up we were expected to know who was there and why and to help out. So we learned early on that business just doesn't happen like a tree growing. That it takes nurturing things and constant work.
Indeed, the stories we got as youngsters about the travails of Forbes Magazine during the Great Depression where it nearly went under, instilled in us the idea that nothing is permanent. So when our kids - we have five daughters - were growing up, they would come to various functions and they were expected to help out, you know, giving tours and that sort of thing. They needed to understand that business is similar to a bakery. Just because you baked that great loaf of bread last week, it's not going to help you when you open up the doors tomorrow. You've got to do it every day.
I think some people will probably be skeptical that we are interviewing someone with your resources for our thrift issue. Why do you think that it's important to teach kids, especially in a wealthy family like yours, the value of thrift?
Primarily because wealth is not physical things. Wealth is not physical; it's metaphysical. For example, after World War II, Europe was physically devastated, but the knowledge was still there; so when we helped create an environment where people had a sense of safety and stability again - boom! They recovered far faster than any expert thought possible.
Look at our high-tech era. Even with its booms and busts, the technology is real. But who, fifty years ago, could have conceived that you could literally bring the whole world to your fingertips? The true capital of a person is metaphysical. It's habits, it's faith, it's customs. You can get capital. But if you don't have certain habits, if you don't have certain insights, it can disappear pretty quickly. And if it disappears, then it's hard to get it back again.
This is true on a personal level as well as a sort of larger social level?
Yes. And it doesn't always mean you are going to make a smart investment, but if you get a setback you are more likely to come back if you have certain habits and certain outlooks.
How did those habits and outlooks help your own family's business during difficult times?
My grandfather founded Forbes in the year 1917. He was the only Hearst employee who was allowed to set up something on their own that Hearst didn't own a piece of. The magazine was a great success in the '20s, and around 1928, Hearst offered my grandfather the equivalent today of tens of millions of dollars to buy the publication, but my grandfather, being an independent sort, turned him down, proudly. Three or four years later the magazine was bankrupt in all but name.
During the Depression, he kept it alive through various measures. Because he had some freelance income, he didn't cash his magazine paychecks. He paid the tax and then put the check in the safe. He also instituted what became known inside the company as "Scotch Week" - every fourth week you didn't get paid. People were happy to have a job at all in those years. Eventually, through thrift, through belt tightening, the magazine turned around and probably one of my grandfather's prouder moments in life was being able to cash each and every one of those paychecks.
You mentioned the Scottish tradition here. Did religious views at all influence your ideas about thrift, or your family's ideas about thrift?
Certainly it did with my grandfather. He was a very genuine Presbyterian and then my grandmother, his wife, she was a very devout Catholic; so you have a very interesting home front on the budget. And they made a deal when they got married, since you weren't supposed to marry outside of your faith in those days, that they would alternate religions with each child. One would be Catholic, one would be Presbyterian. My grandfather said it probably damned them both. But that was a compromise they made. My father and his siblings - there are five of them - all grew up with an attitude of trying to see the bigger moral issues and not getting caught up in doctrine. But in the broader sense of seeing the connection between work, commerce, faith, purpose in life, that did come through - the idea that you have broader obligations than just the bottom line. My grandfather said in the first issue of the magazine, "The purpose of business is to produce happiness, not to pile up millions."
Today when people say someone is thrifty, they are often thinking of miserly behavior. But you seem to believe it has other associations.
My grandfather liked to quote from the Bible about being "your brother's keeper," that you can't just be in and of yourself, and that was instilled in his children and certainly was instilled in us. I think that one of the things that people find hard to grasp today is that commerce and charity are not polar opposites. That you do not do commerce and make up for it by giving it to charity. As if you fleece people and squeeze widows and orphans and then give money to the library. They are really two sides of the same coin - meeting the needs and wants of other people.
And just as thrift is a form of self-discipline, of looking into the future, of putting off your immediate wants to create a better future, so too, charity involves realizing you are part of a community, that unlike a miser you can't live just for yourself. Just the whole concept of getting married and raising children is putting faith in the future. The return on investment for children is delayed, but....
So the mechanisms today are different. We don't glorify thrift in and of itself, but everyone realizes that if you have children, you better start thinking about saving for college. You realize you are in it not just for yourself.
What do you think of our current high rate of consumer debt?
You just can't look at the size of the debt. You have to look at the monthly payments in terms of the percentage of income, and from that perspective, consumer debt is not out of line right now.
Yes, because interest rates are so low. Even though you have individuals who are always falling into personal bankruptcy, the pattern as a whole has been that when people see trouble ahead, they begin to tighten up. They don't go out as much. They don't take an extra day of vacation. They don't buy the extra shirt. And so they have a sense of when to rein it in.
There have been a lot of stories recently about people getting mortgages that they can't handle, particularly in the locations where there is a housing bubble. Are you concerned that too many people are buying out of their price range and facing foreclosure?
In the one sense when you buy a house you always feel "Oh my God, am I taking on too much?" And with a house, you have to see it really as a long-term asset. It is going to have ups and downs. I haven't seen any surveys, but I bet you most buyers feel remorse when they take on a house. You know, "Oh my God, can I pull this off? What if one of us gets laid off?"
One can argue whether we have a bubble in housing. In certain parts of the country that may be true. But the idea of taking a mortgage to buy a house is something that is very thrifty. You are, in effect, indenturing a portion of your future income to build a house. Whereas in olden times, you would have to save for twenty years and then you would live in the house for twenty years. Alexander Hamilton understood that properly used debt and other financial instruments allow you to bring the future into the present and therefore have a richer future. The thing of a mortgage, it's, in effect, taking future income and putting it to work now, which creates an asset that otherwise wouldn't be there.
You have been a crusader for changing the tax code. Is there a relationship between thrift and taxes?
The tax code was almost designed to discourage thrift. It came out of the Great Depression, from the idea that people weren't spending enough, that they were being too thrifty, which in a Keynesian sense meant the economy was stagnant. So the question became how do you get people to spend.
[John Maynard] Keynes was guilty of what they called the Cargo Cult. In the Pacific in World War II, we built airstrips on various islands, and the local populations would see these guys up in a tower, waving, what seemed like magic wands - of course, they were air traffic controllers, bringing in the aircraft. But after the war, the locals would build towers and wave the wands figuring that's how you get the bird out of the sky.
So, yes, spending makes an economy move. But it doesn't mean you just give people a piece of paper and voila, you've created wealth. Paper represents wealth. Paper represents future assets, and if you don't have the creation of capital, if you don't have institutions that protect property rights, that allow you to turn a house from just a place to live into a source of capital, you are going to have a stagnant economy.
So, the tax code has gradually been changed to be less hostile to capital creation. Rates have come down. The capital gains levy has come down from almost 50 percent in the late '70s to 15 percent today. And there is no coincidence as that started to come down, you had Silicon Valley and other phenomena of innovation appearing. Just last year, the cutting of the dividend tax from 38 percent to 15 percent also helped capital creation.
These are all things that encourage thrift because they encourage people to save?
Encourage people to save and invest. Thrift means not just opening up a passbook account. It means putting the money to work in a mutual fund, a 401(k). There are numerous avenues now.
And, for companies, the lowering of the dividend tax means that companies have less of an excuse to retain earnings unless they can show you, the shareholder, that they can put the money to work better than you can. Previously, with the double taxation of dividends, you took a huge hit when you took a dollar profit and paid it out to shareholders. That dynamic is changing.
What about shifting the tax base into a sales tax? Would that encourage greater thrift?
Well, the concept of a sales tax as an alternative to an income tax is fine. But making it happen in this imperfect world, I think would have formidable political challenges. Some of the proposals range from 20 to 30 percent and people blanch at the thought of paying that much. But lowering income tax rates and simplifying the tax code, I think those are doable and eminently desirable.
A number of decades ago, politicians, Republicans particularly, used to argue that it was wrong for the Federal government to have such a big debt because it sent the wrong message to individuals and families about how much debt they should be carrying. Is that a reasonable argument?
Well, like most things it depends on what the money is used for. Wars are expensive. We will run up debts to fight wars, just as we did in the Cold War and the world wars. And taking on debt to pay for college, you can make a case that that's investing for the future. Taking on debt to buy a house is usually a wise thing to do.
If somebody, say, took $100,000 mortgage to buy a house and you told that person they would have a deficit this year of $100,000 they would look at you as if you were nuts. "No, I pay my monthly payment, what do you mean?" On paper you are way in debt. You've got to look at assets and liabilities. What are you getting for the money? For items like automobiles or vacations, the debt is of a short-term nature, or should be. The asset is wasted away.
Speaking of paying for college, there's been a big debate in Congress recently about the federal financing of college loans. Is it okay for a public program to get young people into so much debt?
Well, the idea of working to raise cash or borrowing cash to improve what you might call intellectual capital, would be a sound one. You're investing in the hope of getting future returns. The challenge with the government's involvement is that too often universities and colleges just take the money and raise the price, figuring it will be covered. So you don't have the normal marketplace forces that force the institutions to provide a better product for the money. And it's a tough one because if you oppose or put caps on federal loans, then you are against education. And then there is pressure to give more grants, because kids graduate and they often feel as if they have a mini-mortgage. One of the most aggravating things for young persons is making that payment each month. So, what the answer is I'm not sure yet, but I think part of it is the federal government should ask financial-aid recipients to ask colleges questions such as: how many hours does a typical tenured professor teach undergraduates today versus twenty years ago?
The colleges will love that.
We need more information banks so that people can start to compare. And obviously some top universities could probably charge double and people would be lining up at the door. But the popularity of state institutions has been growing because even though the tuition has gone up, they still charge far less than what you pay at a private institution. Just to tell you that consumers may be willing to forego a prestige name if they think they are getting a good education for fewer dollars.
Not Princeton though, right?
It's a great institution, but people can get perfectly good educations elsewhere.
In this political season, there is always a lot of talk about how much money is spent on political campaigns. Is there any reason to think about thrift in the political game? How much money is it worth to become president?
Well, politics in a sense is like warfare. It is very expensive. In this big country you need money to get your message out. It is not cheap. Mailings are not cheap. Hiring personnel is not cheap. So it is going to take resources. Period. And we still spend less in a political season than Procter and Gamble spends on advertising Tide and other consumer products, or Detroit spends on advertising cars, or potato chips. So getting the message out there, yes it is going to cost money.
And it's worth it?
Well, if you believe in a democracy you have to believe in getting the message out.
One of the themes that you have mentioned throughout this conversation, in business as well as in personal finance and politics, is simplicity. Do you see simplicity as something that enables greater thrift?
Well, people like to see a connection between what they spend and what they receive or what they think they are financing. So, they like the connection. And where you don't have the connection, as in public education or as in healthcare, where there is almost always a third party, you get crazy systems with ways of delivering services that have you scratching your head and wondering what in the world is going on.
The bottom line on thrift is that it is a piece of the puzzle, part of the whole moral basis of a free society, which is allowing each of us the opportunity to discover our unique talents and pursue them peacefully and lawfully in a way that not only gives purpose to each of our own lives, but also ends up helping others. Commerce is meeting the needs and wants of others. And that's why this most commercial of nations also happens to be the most philanthropic. It's not because we have more. It's because commerce and philanthropy are two sides of the same coin.