10:40 A.M. EDT
Audio of Real Briefing
MR. DENIG:Good morning, ladies and gentlemen, and welcome to the Washington Foreign Press Center. Welcome also to journalists assembled in our New York Foreign Press Center. We are very pleased today as part of our series of briefings on the elections during the year 2004 to be able to present to you a real expert on the American economy, Steve Forbes, the President and Chief Executive Officer of Forbes and also the Editor-in-Chief of Forbes Magazine.
Mr. Forbes will brief us today on the topic of the U.S. economy in the election year and its impact on global markets. He will have a brief opening statement to make and after that he'll be very happy to take your questions.
Mr. Forbes.
MR. FORBES: Thank you very much, Paul, and thank all of you for coming out here this morning. In terms of the American economy, I should probably first give you a word of warning from what I am about to say, and that is to share with you a favorite saying of my grandfather who founded our magazine, Forbes Magazine. He was an immigrant to this country and when he founded the magazine people would ask him, obviously, what’s going to happen to the economy, the stock market and the like. And my grandfather would reply that you make more money selling the advice than following it. (Laughter.) So you are all on notice in that respect.
But concerning the American economy, this [current] expansion is for real. There is no fundamental reasons why, barring some hideous disaster in the war on terror or something like SARS flaring up again, there is no reason why this expansion shouldn't be as long-lived as the U.S. expansions of the 1980's and the 1990's. The fundamentals are there. We see it in productivity which is very high by historic standards. Even though the productivity numbers fluctuate from quarter to quarter, they are very, very high from what we were accustomed to 20 or 30 years ago. Companies have very painfully made very serious adjustments in their own operations. They have become leaner, they have become more efficient and that has obviously had some very real costs in terms of employment; but in terms of profitability, profits are now coming in above expectations rather than below expectations.
And another area is capital spending by companies. Capital spending by companies, investments by companies collapsed in the year 2000. They are now growing again. Those expenditures are growing again at rates of excess of 10 percent; probably this year it will probably reach 20 percent or more, especially in information technology.
Inventories of companies are very lean, very low. And so, as they start to get replenished, that will provide more growth for the economy.
Personal incomes have risen in real terms. And then another factor that's at work is one that is very controversial in this country, and that is the tax cut that was passed in May of 2003. The thing about a tax cut, in terms of gauging how much impact it is going to have on the economy, the best way to do that is simply look at whether the tax bill, the tax law, reduces the tax rate people pay on their next dollar of income. Economists call it the marginal tax rate, the rate you pay on your last dollar and your next dollar of income, whether it is personal income or business income.
The bill that was passed a little over a year ago reduced marginal tax rates, and whenever you reduce marginal tax rates you get more economic growth. This bill reduced the capital gains tax in our country from 20 percent to 15 percent which means there are more people trying to start businesses, more investment taking place. The dividend tax was reduced from 38 percent to 15 percent so there is more capital creation. Personal income tax rates were reduced and there were incentives put in especially for smaller businesses to make business investments, to do capital spending.
So you put that package together and it provided enormous stimulus, lasting stimulus for the economy. Giving people a rebate is only what we call a one-shot. You do it and then it's over. With cuts in tax rates, it is a lasting cut and it has a long-term impact. And so it is no coincidence that after this tax bill was passed last May that in the summer, the American economy finally really came to life.
Yes, economists tell us that there was growth in the American economy after mid-2001, but it is the kind of growth that only an economist could discover with a microscope; businesses really didn't feel it. It was more a statistical recovery than a vibrant recovery. That's why there was not much job creation even though there was economic growth.
But last summer that changed. The economic expansion really began and it is going forward. Growth rates this year will be in excess of 4 percent; next year they'll be in excess of 3 percent, could be 4 percent as well. And so, even though year-to-year growth rates will fluctuate, this should be a long-lived expansion barring, as I say, something like a dirty bomb or something going off in the U.S.; barring a September 11th-like catastrophe this expansion is for real. You put those factors together.
And let me just quickly hit on some of the things that people worry about and then we can deal with them in more detail in the Q&A, questions and answers. One is concerning the U.S. trade deficit, which almost every month seems to reach a record level. One reason for the U.S. trade deficit is because the U.S. economy until very recently has been much stronger than the economies of the rest of the world, so we are taking more imports in. Our exports have grown enormously in recent years, but our imports have grown even faster. Part of the problem is that one of our big customers still remains Western Europe, and Western Europe has been for years lagging behind the United States in terms of real economic growth rates. And, so, that's a key reason why we have had a trade deficit.
My own view is I almost wish we didn’t keep trade deficit numbers because they lead policy makers to do foolish things like protectionism, these anti-dumping suits that are relevant now in the U.S., especially against China. For 300 years, North America had a trade deficit, from the time the Pilgrims came to the early twentieth century. Fortunately, no one paid attention to the numbers and the United States grew. But with the modern age, we got more numbers and so we start to do foolish things on the basis of those numbers. But as the rest of the world starts to grow, particularly India and Western Europe, the proportionality of the trade deficit will, I think, be reduced.
The key thing from the United States' point of view is to get off the kick, as I think we finally did, of debasing the dollar. For a while, it was the policy of the U.S. Government -- it wouldn't admit it, but it was the policy to have the dollar go down in value. Part of that was justified because the dollar got overvalued in the late '90s, but we overshot the mark. Now it seems to have stabilized and that's good. And, by the way, the worst thing we could do for China is for China to revalue the RMB against the dollar, because the Chinese banking system is a disaster. You don't want a floating currency in that circumstance, but we can get to that in the Q&A.
So on the trade deficit, it looks like a huge number, but given the state of the world, it's not a number that signifies that the U.S. is about to face some disastrous situation or catastrophe.
Another thing that you read a lot and hear a lot about in our country is the budget deficit. Part of the budget deficit is no surprise. When you have an economic slowdown, receipts are affected. When you fight a war, even a war like Iraq will cost money. Proportionately, Iraq is the equivalent of about 10 days of World War II financing, but it is still very real. It costs tens of billions of dollars.
But another factor at work is that our friends on Capitol Hill have been on a spending binge. Money has been spent on everything. There is no program that suffers a fund shortage. I mean they have just been funding everything. And so spending has grown enormously, even when you take out defense, even when you take out homeland security, even when you take out what we call entitlements like health care and Social Security, discretionary spending has been going up very sharply. That will change after the election. It's starting to change already. There is beginning to be a perception that that is not a smart thing to do. That is not sustainable.
The amazing thing about the American economy is that if you have a little bit of economic growth such as we are now experiencing, government revenues will rise rapidly; you’re starting to see it happen already. And with a little bit of spending restraint, the budget deficit should start to come down.
There are two entitlements, though, that in the long term are going to impact the economy. One is Social Security and the other is Medicare/Medicaid or health care, and those need systemic changes. On the Social Security side, to make a long story short, we need to have personal accounts for workers instead of a pay-as-we-go system that we have now. And in health care, the key there is putting the patient in charge of the money again. No country does it. Many countries, as you know, have a national system. The U.S. has a hybrid, part national [system] for people above the age of 65 or people who fall below certain income levels; and then it is either you are uninsured or you have third-party insurance, your employer provides insurance. But in few cases does the patient have control of the purse strings, as we call them. As a result, we have a skewed system.
In every other part of the American economy, when there is more demand for something, it is considered good. More demand for more cars, Detroit is happy. Demand for more software, Silicon Valley is happy. More demand for health care and everyone considers it a crisis because of the crazy way we finance it. We can discuss that in the Q&A. Those are two big issues.
One other big issue I want to quickly touch on because it's a political issue -- although I think it is beginning to go down -- is jobs, what is called outsourcing, offshoring; the idea we are losing jobs to India, to China, to the Philippines. What gets overlooked is that while a number of jobs do go overseas or get destroyed entirely -- agriculture has lost, continues to lose jobs in the U.S.; they don't go overseas, they just disappear -- but the amazing thing about this economy, the American economy, is that we in-source, import more jobs than we export. I will give you an example. Samsung is putting a half-a-billion dollar plant in Texas. Novartis is moving its research from Switzerland to Massachusetts. What you might call in-sourcing gets less publicity, especially in an election year, than outsourcing.
But in terms of a global economy, while it is wrenching for the people who are impacted by outsourcing, the American economy as a whole is doing very well in the in-sourcing/outsourcing situation. We are actually bringing in more jobs. Foreigners are creating more jobs [in the U.S.] than we're losing to new facilities in China and elsewhere. But it will remain a political issue, because particularly in manufacturing and in certain areas of high-tech, what we call white collar jobs are going overseas. And Detroit has made it very clear to its suppliers, that they have to provide parts cheaper, which means a lot of them are going to be building facilities in China.
So even though the numbers are small compared to the size of the American economy, it will be a political issue. Very, very sensitive. And so you are going to hear a lot about it this year. You will hear a lot about it in our congressional elections in 2006. It is going to be with us for a while.
With that, why don’t we open it up for questions and discussion?
MR. DENIG: Could I ask before we do start if you could talk just a little bit about the impact of this expanding economy on the lives and perceptions of the average voter and, therefore, also on the elections this year?
MR. FORBES: Concerning the election in terms of the economy is that when an economy begins to expand, people don't feel it; most people don’t feel it until months after the expansion is underway. President Bush's father discovered that in 1992. We had a recession in 1990, '91 and what made that recession that people really felt badly about was not the unemployment rate, which by historic standards did not go up that much, but housing values in that recession went down. So even people who had jobs felt they were poorer for it. And so by the fourth quarter, by the end of 1992, the economy was growing at a good pace but it was too late politically to save President Bush's father.
In this case today, I think with the job creation we are starting to see, especially in the last three months, people will begin to perceive that the thing is turning, I think, by late summer or early fall. In other words, they will really feel it next year, but they will feel it enough this year that it won't have the negative political impact it had in terms of 1992.
So I think -- my own belief is -- I know I'll get the question -- I think President Bush will win reelection, one, because the economy will be perceived as doing better; and two -- which gets beyond the economy -- is that so far Senator Kerry has not established a credible alternative in fighting the war on terror. People are unhappy with what's happening in Iraq, but unhappiness enough won't win you a presidential election. You have to convince people that you will do things fundamentally differently.
I'll just give you one quick example in our history. In 1952, we were mired in a war in Korea. The Korean War was stalemated, the armistice talks were going nowhere. We were losing 1,000 people a week and the American people were upset. And when General Eisenhower became the Republican nominee, he said these words. He said, “I shall go to Korea,” and given his background as the Commander-in-Chief of Allied Forces in World War II, people felt he would fundamentally change the way we were fighting that war in Korea and bring it to a close. He did when he took office. He had the credibility to say in effect, convince people that there would be a major change.
So far Senator Kerry has not done what Eisenhower did in 1952. So while there is unhappiness about Iraq, that may not translate into votes for -- necessarily votes in November for Senator Kerry.
MR. DENIG: Thank you very much.
As usual, I'll ask you to use the microphone and identify yourself and your news organization. We will start up front with Germany.
QUESTION: Michael Backfisch, Germany's Business Daily Handelsblatt. Mr. Forbes, you said that personal income is rising. What about the figures? You know, the Democrats say it's right that more than one million new jobs have been created in the last month but the pay has declined. Is that myth? Or is it partially true?
MR. FORBES: No, it's a myth in the sense that the reason the economy hasn't done worse since 2000 is the rise in personal consumer expenditures. It is not just consumers borrowing on their houses that financed consumer spending in 2001 and 2002. There was also a rise in real incomes. And if you look at the 1.4 million jobs that have been created in the last 9 months, over half of them -- in fact, two-thirds of them -- are in industries that are paying above average, about $17.64 an hour.
And so, you are having a mix of entry-level jobs and higher paying jobs. And that is what happens when an economy begins an expansion. Although the month-to-month numbers will fluctuate, that's normal, but what economists will call the trend line, is you do get a mix of low-pay jobs, mid-pay and high-pay jobs, low-skill and semi-skilled and high-skilled jobs. And you're already starting to see that unfold.
And one of the things that's happening to poor Senator Kerry is that he is now having to try to almost come up with new ways to make people feel bad because the traditional misery indexes are showing that the thing is getting better. And he came up with a new index, invented one a few months ago, which if you take it backwards would show that people were better under Jimmy Carter, with gas lines and high inflation, than they were under Ronald Reagan.
So yes, the Democrats, I think, are beginning to perceive that the economy may not be the issue that it was, that they thought it would be a year ago and the job numbers are starting to show in the recovery. You're starting to get a broad base of job creation.
QUESTION: Can I follow-up?
MR. FORBES: Sure.
QUESTION: Clarification. Do you have exact figures about the percentage of the pay hike? More than one million new jobs created and --
MR. FORBES: 1.4 million. And by the way -- and by the way, I can get that for you if you will give me your card. But -- and I'll be back -- actually, I'll have to do it indirectly. I'm flying to London tonight, but I'll get you that number.
But the thing to remember, too, about jobs in the United States -- it's very important to remember -- is there are two ways of measuring jobs, both done by the federal government. One is called the payroll survey and the other is the household survey. Payroll survey calls existing businesses and asks what you would expect it to ask: How many people did you have last month? How many people did you have last year? What do you have now? The household survey takes a survey of households and says, who is working and who isn't working?
Normally, the two surveys give you roughly the same picture, but when you have enormous changes taking place in the economy, they can diverge for a while. In recent years, we've had enormous creation of people working as independent contractors, what we call Chapter S Corporations, which are usually five or six people; or what we call LLCs, Limited Liability Corporations. And these, because they are small, they don't immediately show up on the government's radar screen. And so the household survey showed that there was very little job loss, net job loss in the last three years. The payroll survey, which goes with existing businesses, showed at its peak a 3 million job loss. So both showed that there wasn't a lot of job creation, but one painted a much bleaker picture than the other. And I think now they are beginning to start to go in a parallel direction again, but for a while they diverged.
And when you deal with statistics, you get crazy, crazy things. For example, the realtors, people who sell real estate in America, the realtors will tell you -- there are over a million realtors in America, people who have licenses to sell real estate. The federal government thinks there are only 300,000. Why? Because, if you're an independent contractor, they don't count you as employed because you don't pay certain kinds of unemployment taxes. So, when you get in the bowels of these things, you find out it's not the kind of precise, crisp number we'd like to think it is and so you've got to look at more than one, one measure.
MR. DENIG: Let's go up front here to Japan.
QUESTION: You just talked a little bit about the reevaluation of Renminbi, the Chinese currency. And it seems to be you are against the reevaluation of the currency. But also, there are many people here in the business circle who are asking for the reevaluation. You cited kind of the situation of the financial situation in China. Could you elaborate on that? What is your assessment of Chinese economy at this moment? Is it overheated now, or what's going on?
MR. FORBES: First of all, let me comment on the dollar-RMB situation. For a developing country, for any country, my feeling is currency stability is better than a lot of currency fluctuation. Currency should be a measure of value, like a watch has 60 minutes in an hour. We don't float the watch, so you have 60 minutes an hour in one day, 48 minutes the next, 72 minutes the next. It makes life more difficult. You then have to do derivatives, you have to do insurance and things like that, so stability -- the Chinese were right for years to tie, just as Hong Kong has done for a number of years, tie it to the dollar. And so someday Chinese may revalue the Renminbi slightly to mollify us. But in terms of a major change, I don't think they'll do it and they shouldn't do it. The reason they shouldn't do it is because their banking system is not a real banking system.
Depending on which expert you talk to, anywhere from 20 to 50 percent of the loans would be classified in a normal banking system as bad loans. They're used to subsidize state-owned enterprises. China, as you know, is making an enormous transition from a command economy to a more open economy. But during that transition, especially when you have hundreds of millions of people in rural areas wanting to get in to the coastal cities and being barred from doing so, who want to get in on this new prosperity, and those transitions can be very, very tricky and difficult.
My fear is if China actually floated Renminbi, you could a situation, a Chinese version of what Indonesia went through in 1997 and 1998. So for now, I don't want the Chinese to float their currency. I think it's an invitation to a lot of trouble, not only economically, but politically.
In terms of the Chinese economy itself, as you know, the government is trying to slow it down. The reason the government is trying to slow it down is that China has imported our inflation. For a little over a year the Fed has been inadvertently inflating. You saw it in commodity prices, which shot up; you saw it in steel prices, which shot up; you saw it in shipping rates, the Baltic Shipping Index. And inflation doesn't go through the economy at the same time; it hits one area, it hits another area.
But China being relatively undeveloped, because their currency is tied to the dollar, when we slightly inflate, they feel it right away. They feel it almost faster than we do. So when we inadvertently inflated -- and, by the way, the Fed is already starting to tighten up even though they haven't formally raised interest rates, it's starting to tighten up a little bit -- the Chinese feel it very quickly. So the Chinese felt our inflation almost faster than we did and so they had to find ways, bank reserves and the like, to try to slow the thing down.
But even though they are slowing it down, I think they'll avoid what is called a hard landing. They will slow it down, but I don't think they are going to go into what you might call a growth recession. So I think next year, as we start to get our inflation slightly under control -- and by the way, this inflation is like a cold compared to the pneumonia we had of the 1970s; this is a very different scale -- but even so, it does have distortions around the world and distortions here, you see them at the gas pump. But with China, I think they will be on a growth path this year and next year.
But make no mistake, in this kind of transition, there are a lot of projects undertaken in China that have no economic value. You read yesterday about a lot of their construction projects, including one with the architect who designed that terminal that collapsed in France; this is an arts center. So there is a lot of money being spent that normally wouldn't be spent in an open and in a true free economy.
So they are going to be continuously, as they try to reform this thing, dealing with these structural problems and structural imbalances. And something could go wrong, but short term, I think they'll avoid a hard landing. They will continue to grow. And I think they'll avoid the Indonesia-type of implosion, but I don't think they're going to float the Renminbi.
MR. DENIG: Okay. Let's go to the gentleman in the middle back there, please.
QUESTION: Daniel Scheschkewitz, Deutsche Welle, Germany's external broadcaster. You have mentioned the recent inflation in gas prices. Now, I have read somewhere that never has an American president been reelected while gas prices were on the rise. The oil output in Iraq has come to a virtual standstill in the past few days and that is not going to reduce oil prices in the foreseeable future, probably. Is there a danger for President Bush?
MR. FORBES: There is always a danger when the price of something as sensitive as gasoline goes up. And I think that as the Federal Reserve starts to tighten up -- which, as I say, I think they've started to do informally anyway -- the rise in gasoline prices will end. They have already ended. Iraq may kick it up a little bit, but by the time the election comes around I think prices will be lower than they are today. They will still be high by what they were a year ago, but when you have even a mild inflation, you get a lot of speculation. You look at futures activities and oil futures, way high, way up.
So about roughly, take $40-$42 in a barrel of oil today, probably roughly $8 to $10 is inflation and speculation. Now even if you squeeze that out, $32-barrel oil or $30-barrel oil would still be high from what we had a couple of years ago, but it's less than what it is today. And so I think the pain will be less, come November, than what people feel now.
Also, even though you would never know it from SUVs, the United States is much more energy efficient. In other words, the amount of energy that it takes to get a given amount of economic output is less, about 30 to 40 percent less than it was 20 years ago. We are using more, but in terms of the unit per output, we are relatively less dependent on energy than we were 20 or 30 years ago.
But it still hurts. But the key is, the bottom line is, how do people feel about the economy as a whole. So even if they are unhappy at the gas pump, if they feel the economy is on an upward trend, then they'll ride with it. If they feel that everything is out of control, which they felt a couple of months ago, then everything will get them upset: outsourcing, even if they are not affected by it; gasoline prices, even if they can afford it. It’s perceptions that things aren't getting better.
So what economists call the trend line is critical. If it looks like it's getting better, you'll be fine, even if it's not as good as it was in terms of gasoline prices what you had a year and a half ago.
MR. DENIG: Okay, let's go to Germany again on the left here.
QUESTION: Thank you. Eric Stackl of the Daily Der Standard, Vienna, Austria. Sir, you have mentioned that investments are increasing lately, but what do you think the reason that it's much smaller than originally expected when the tax cuts were introduced?
MR. FORBES: On the -- in terms of investment, on the small business side, the evidence is that it is very real. And in terms of information technology, it is growing again. As you know, it virtually stopped after people spent a lot of money for 2000, the fear of the year 2000.
But in terms of capital spending, it is growing at a 15 percent growth rate, which is very real, and I think that is one thing that will grow steadily. People have been so hesitant, people have been so concerned about reducing expenses, conserving cash, that it's only been recently that you've started to see capital spending really loosen up again.
But it is starting and even if you are getting more efficiencies, even if you are spending less on IT, you are suddenly realizing that what was good technology in 1999 is not going to serve you very well in 2004. And so you are going to have to spend anyway. In short, we are in a period, especially as this expansion gets some longevity, where the CEO will be able to, and division heads will start to overrule the CFO. The Chief Financial Officer has been king in the last three years, but their reign is now going to be -- starting to be diluted again. They are going to have to start spending money again.
MR. DENIG: Okay. Let's go to the lady back there, please.
QUESTION: Linda Staude, German Public Radio. There is a whole lot of speculation about rising interest rates, that the Fed might raise interest rates in the summer. Do you expect that and what would the impact be?
MR. FORBES: The Fed will raise interest rates and already the long-term bond market has already felt the impact of that. They may feel some more. As you know, if you take the 10-year Treasury bond, it reached a low this year, I think, of 3.67 percent. Now it's 4.70, 4.80. It may touch 5 percent. So the markets already anticipate that the Fed is going to do it.
One reason the Fed has taken so long to do it is, I think Mr. Greenspan is worried that a lot of hedge funds and banks have speculated in what they call the carry trade; i.e., can borrow at 1 percent and effectively lend it at 3, 4, 5 percent and get a huge spread and think you can cover yourself with hedges to make sure the market doesn't turn on you.
With this long preamble to raising rates, I think he was trying to tell people, "Unwind your positions because the environment is going to change." And so get out of it so we don't have a long term capital situation such as we had in the late '90s where a major hedge fund threatened to drag down banks because it was so over-speculated, so over-leveraged.
So I think he's -- normally, I would have expected the Fed to have raised interest rates already. Do it early in an election year, get it out of the way so it doesn’t become a political issue closer to November. I think he has hesitated in part to tell the hedge funds and others, "Unwind your position. This nice gravy train we have provided you is over or will be over."
So rates will go up. Already, I think the Fed, either advertently or inadvertently, has tightened. You can see it in the gold price, for example. It's gone from 430 down to 385, 390. You see it in other areas; it's beginning to ease a little bit, the inflation.
So I wouldn't be surprised if this month he raises rates 50 basis points, and after the election may do another 50 or 25. But don' be surprised with the mild inflation we have that there will be, what you might call baby-step increases in short rates for the next year, year and a half.
But again, by historic standards, 2 percent or 2.25 percent short rates is low. It's not as low as 1, but certainly lower than we've been accustomed to for many, many years. And so I think the spreads between short rates and long rates will narrow. Long rates are already moving up in anticipation that the short rates will move up. The market is already adjusting.
MR. DENIG: Let's go back to Handelsblatt up front here.
QUESTION: Michael Backfisch. You mentioned the tremendous effect of tax cuts for the upswing of the U.S. economy. Apart from electrifying the general business climate in this country, can you tell us what are the tangible effects of these tax cuts in terms of output, in terms of consumer spending, in terms of new jobs? Because critics already say there are tangible effects in terms of the huge deficit. So what is the positive side of that?
And secondly, regarding the outsourcing debate being a hot potato in the elections to come, do you have a balance of the relation between in-sourcing, creating new jobs in this country, and outsourcing jobs?
MR. FORBES: In terms of the impact of the tax cuts, you already see it on household balance sheets. A medium household balance sheet -- that is, the value of your equities, the value of your houses, all your assets minus your liabilities -- is now exceeding the year 2000. A lot of it is housing, but equity prices have rising over $2 trillion since last May, and so if you look at the balance sheet, that's already improved and that's one reason why I think consumer spending has continued is that people feel better about their balance sheets.
By the way, the rise in interest rates will put, I think, only a slight dampener on that. The key thing is, make sure that long-term mortgage rates don't have a huge spike. A lot of people now have what we call ARMS, Adjustable Rate Mortgages. But they don't, most of those don't kick in for three years, five years depending on what kind of deal you cut. So, a small spike in interest rates I don't think is going to derail, totally derail the consumer.
But in terms of business activity, you see it in the balance sheet, you see it in investment, you see it in the creation of small businesses. And so that is why the economy -- that's why in the third quarter, it grew -- it couldn't last -- 8 percent. And that's why it's now growing at a good steady 4 plus percent.
By the way, don't be surprised if you get another bump to, say, 5 percent as people start to replenish inventories. Up to now, if you didn't replenish your inventory quickly, you were rewarded with lower prices. That's now changing. You don't get that reward anymore. So -- and a slight: a plumber buying a few more supplies, that starts to ripple through the economy and it will give what you might call a one-time boost next year. It will go down again, but we will have growth next year.
MR. DENIG: The second question was about balance of in-sourcing and outsourcing.
MR. FORBES: Balance of in-sourcing, outsourcing. Part of the problem is it's hard, since it hasn't been until this year, was -- it didn't become a major political issue until the past 12 months, so the statistical base is still very crude. There was a survey that came out, report in the paper yesterday that there is very little outsourcing. The Chamber of Commerce came out with a report three or four months ago that tried to measure this thing and found that in the service area, we are indeed in-sourcing more than outsourcing.
But there is a lot of statistical gathering, but so far as people delve into this, they are finding that the emotions outpace the actual outsource, the outsourcing. Even if you take the Forrester Researchers, Forrester Research, which said we're going to have 3.5 million jobs outsourced between now and, I think, 2013 or 2015. That's about 300,000 a year. We have an economy creating 2 million jobs plus a year and 1.5 million, 2.5 million jobs plus a year. It's not happy to lose 300,000 but you're creating far many more than you're losing.
QUESTION: The relation between imported jobs and outsourced jobs, do you have an overall figure?
MR. FORBES: Again, there is no firm figure and services, it looks like from the data we gather, that indeed we are importing -- far more importing than exporting. And in terms of manufacturing, you have to be very careful there. In manufacturing, America has been losing jobs for decades and the other countries have been losing manufacturing jobs for years. As a matter of fact, the new job creation in manufacturing, it looks like, has been more because of foreign investment than domestic investment. So on the services side, the Chamber of Commerce has found a surplus and you can get the report, I think, on line. In manufacturing, it's a negative, but it's been negative for years.
And what is happening in manufacturing is, in a way, replaying what happened in agriculture. As you know, 80, 90 years ago in America, 25 plus percent of the economy revolved around agriculture; today, certainly in the farm sector, it's less than 1 percent, because of efficiencies and breakthroughs in technology, especially the rise of the tractor in the '20s and '30s. But those jobs didn't go overseas; they just ceased to exist. And that is what's happening in manufacturing. But the service area, the Chambers found that it seems to be a net surplus.
MR. DENIG: Okay. Let's go back to Austria on the left there.
QUESTION: The indebtedness of American households that already was considered -- was quite high four years ago has been growing considerably. It's now something like $9 trillion. Isn't this of any concern to you?
MR. FORBES: When you look at debt, you also have to look at assets. You've got to look at the balance sheet. And too often when we look at, say, the federal debt or consumer debt, we are what you might call balance sheet-challenged. You look at one area and not the other area.
If you look at what people pay as a percent of their income to finance their debts, it's not out of line. When you look at their assets, it's not out of line. It's like saying somebody took on a $25,000 mortgage. You could obviously say, "What’s the house worth?" The house is worth 50,000. You say, "Okay, you can easily carry that debt." But if you just looked at the 25,000, you would say, "Oh, my God, how are they going to do this?" You've got to look at assets and liabilities.
So it's not out of line. Certain people always get overextended in good times and in bad times; but, overall, whether it’s a percentage of their income that's going to finance these debts or their balance sheet, it is not out of line.
Now if we had a situation like we had in the '70s, where interest rates went up at a pop 3 or 400 basis points, then you would have a very different situation. You would have real deflation as people scrambled to stop spending and to start paying down debt, selling to pay down debt. But barring a huge spike in interest rates, it looks like today it's pretty good.
And one of the things that has helped housing in this country -- other countries have had housing booms -- but one thing that helped housing in the United States was in the late 1990's a change in the tax law which effectively eliminated or sharply reduced capital gains taxes on the sale of a house for most home owners. Your first 500,000 would be free of tax. And for a lot of people that meant you could buy a house and then go out and buy a smaller house and not pay capital gains tax.
So this sort of semi-repeal of capital gains on housing you can see the value of housing started to go up. The lower tax burden, the lower tax rate, started to be internalized in the value of housing. So all of these factors play in. But today, we are okay; but you get a shock, all bets are off.
MR. DENIG: Any other questions. Okay, let's go to the lady in the middle there, please.
QUESTION: Yeeli Hua Zhen with the China Economic Report. And a very, very simple question. Are you considering being the Vice Presidential candidate?
MR. FORBES: Maybe with my wife. (Laughter.)
But, no. No one is going to ask, and as for a Presidential candidate, not this time, nor in '08. I find it much easier to get elected president of Forbes Magazine than I do of the United States. So I will be what they call a political agitator. I will push candidates, push causes like tax simplification, but for now, I am going to leave the running to others.
MR. DENIG: Let's go back to Japan up front here, please.
QUESTION: Sorry. I forgot to identify myself. I am Hiro Aida with Japan's Kyoto News. And my question is about this government -- about the deficient and spending spree or spending, you know, binge, you call it. How do you think about the Bush, President Bush's economic policy at this moment? Is it a right, you know, way of handling U.S. economy as a Republican President?
MR. FORBES: The overall economy policies of President Bush, I think, have been very, very positive, particularly on the tax side. As I say, the key is -- and this is what made Reagan's presidency successful -- the key is reducing marginal tax rates. You do that and that covers a multitude of other sins. You get that part right, a lot of other things can go wrong.
I think they have learned their lesson, to be blunt on trade. When the steel tariffs went in, everyone learned what economists could have told you before, that while you may help a steel company you hurt those that have to buy from the steel company. And so that wasn't a smart thing to do.
I believe they shouldn't have signed the agricultural bill they did three years ago even though I'm a Republican. But they've learned that. They have negotiated a good Free Trade -- they're trying to get Doha back on track again. They negotiated a good Free Trade Agreement with Australia. They've got a good Free Trade Agreement with Central America, both of which I hope Congress will pass this year. A very, very important signal to give out to the world.
So on trade, I think even with some of the backsliding such as happened in steel, the Bush Administration has been much better on trade than the Democratic Party would have been. President Clinton -- I was an opponent of President Clinton, but he got it right on trade in the early '90s on NAFTA. He did get that right. His party has abandoned that position and so the Republicans are the only ones pushing now for reducing trade barriers.
And President Bush also got the negotiating authority to negotiate trade agreements. As you know, in Congress, if you don't get this authority they can attach amendments to a trade bill which would kill it. Now if the trade bill is put before Congress you either vote it up or vote it down. So you do negotiating once at the negotiating table and then you put it for an up and down vote as you're doing on Australia, as you're doing in some other area.
But if you didn't have that negotiating authority, which President Clinton was unable to get renewed, Doha would have been utterly hopeless. So overall, I think they've gotten it far more right than wrong, and on the Democratic side, I don't see very much hope at all, either understanding tax rates, understanding trying to reduce trade barriers. And so, overall very positive grades.
MR. DENIG: Okay. Back to Handelsblatt.
QUESTION: One more. You were actually relatively optimistic regarding Western Europe. You said once growth is picking up over there, as well as it does right now in India and in boom regions like China, U.S. trade deficit might be reduced. What's your evaluation of Western Europe? Because many people are very critical of that, you know, in saying that structural reforms are very necessary and that they are lagging behind in that respect.
MR. FORBES: That is true. Europe has lagged far behind the U.S. in terms of private job creation, in terms of technological innovation. What's amazing is that Germany and France have not been more of a factor in high tech, such as India and other countries, have been, and they do need major structural changes. Ireland and Britain did their structural changes in the '70s and '80s; Spain, at least up until this new government, did it in the 1990s.
The reason I'm optimistic longer term on Western Europe is not what's happening today, but I think it's going to happen in the near future. First of all, Germany and France are recognizing they cannot continue on the current track. Schroeder and Chirac have proposed itsy bitsy reforms and suffered politically for it. Some day the political -- the politicos in Germany and France are going to realize you can't do itsy bitsy reforms. You've got to do major reforms, so you get the benefit, so you just don't take an electoral hit. You also get some benefits, as well. At least there is the realization the status quo is not going to work.
What I think is going to help push them, funny enough, is the accession of the 10 new members of the European Union. True, most of them are small, like the Baltic States, except for Poland, but they all have a very different agenda than what you've seen in Germany and France. Their model is Ireland.
They saw a small country, stagnant economy, and in a couple of generations changed itself, morphed itself after joining the EU into the most dynamic economy in Western Europe -- huge amount of foreign investment in Ireland -- and these countries want to do the same thing. And I think as they become part of the EU, they will change the -- what you might call the attitude, the way of doing things, because their agenda is different.
So they don't have the power in terms of the economic size or population, but in terms of attitude, it is very different from what you often found in Western Europe. And so, you put that together -- Ireland, Britain, Spain -- the new government has made it clear it's not going to go backtrack completely on the reforms. Some day, Italy will reform. And I think Western Europe will start to make the structural changes because there is no objective reason why Germany is in the state it's in today, which is even in many cases worse than France. That shouldn't be -- that's not the natural state of things. So, I'm confident that eventually those structural reforms will be made and you'll see growth in Western Europe.
To give you one quicky example: Slovakia, little Slovakia just joined the EU. And the recent elections in the European Parliament, which nobody takes seriously, but it's a way of registering protest against the incumbent government, the incumbent government, Slovakia, did not get the backlash. They actually did fairly well in these European elections.
Slovakia knows that it was the poor cousin in the old Czechoslovak Union, so they're scrapping around the way the Irish did. They're stealing manufacturing facilities from France. They're getting auto manufacturers to put in facilities. They put in my dear thing of the flat tax single rate system, 19 percent, did it last fall. And they're determined to grow because they know they're way behind.
And I think you see it in the Baltic States. Latvia and Estonia put in a flat tax years ago. They avoided a lot of the fallout from the -- Russia's problems in the 1990's. So I see stirrings starting in Central and Eastern Europe of change that I think will eventually change Western Europe. It has to. They just cannot go on the way they are. The short-term, yeah, not much happening; longer term, I think a lot's going to happen.
MR. DENIG: We have to wrap up the formal part of the briefing now. And I want to thank Mr. Forbes very much for being with us here today, and to thank you, ladies and gentlemen.
