CEO Network Chat Transcript With Steve Forbes

www.forbes.com 01.21.03, 11:50 AM ET

The following is the transcript from a Jan. 17, 2003, online chat with the Forbes president and editor in chief, Steve Forbes, who discussed the economic outlook for the coming year.

STEVE FORBES: Welcome to the Forbes.com CEO Network Chat. We're ready to begin answering your questions.

CEDARCREEK: Do you have an interest-rate forecast to go along with the rest of your economic forecast? If so, what do you expect rates to do in 2003?

STEVE FORBES: Government rates will rise in the latter part of the year. The ten-year treasury should inch up to about 4.5%. Many corporate bonds will see smaller rises because they were hurt and hit by the scandals and uncertainties of last year.

STEVEN: Do you believe with all of the governance and compliance failures of the past year or two that corporate boards and CEOs have given effective compliance management the attention they need to?

STEVE FORBES: Fortunately, most companies and most boards did not engage in the shenanigans of Enron, Tyco, et al. Every director today is far more conscious of his/her responsibilities. Institutional investors are also more on the ball.

CAPITALBUSINESS: What is the capital spending outlook for 2003? How about the laboratory equipment market in 2003?

STEVE FORBES: Capital spending will improve. Companies are starting to replace equipment bought in the late 1990s. With the Bush tax cut, small businesses will have strong incentives to boost outlays.

BAMA90: Given the history of economics before, during and after wars, what do you think our economy will do if and when we embark on the next war?

STEVE FORBES: The war with Iraq should be short even though the fighting will be intense and we will be the target of attempted terrorist acts. The cost of the war on terror is easily affordable in terms of money. The real cost is the fear of terrorist attacks and the American lives that will be in jeopardy in our armed forces. Assuming the Iraq crisis is resolved and the North Korean crisis is defused, under those circumstances the stock market will go up this year in good fashion. The S&P 500 would increase at least 25%.

IEDEN: How long before the Fed starts tightening the rates?

STEVE FORBES: Not until the economy shows vigorous signs of life, which will be by the third quarter at the latest.

BRANDGUY: What are the relative advantages/disadvantages of eliminating double taxation of dividends at the corporate vs. personal level?

STEVE FORBES: It would be more efficient to make dividends tax deductible on the corporate level, just as interest payments are today. But politically, that just won't fly. The White House has put together a smart package--companies that pay federal income taxes will have their dividends tax-free for investors while those that avoid federal income taxes will see their dividends not receive favorable tax treatment for investors. Please refer to our Feb. 3 issue, which has an article on this topic as well as a table of companies whose dividends will be treated favorably. For those who have not yet received their issue, see the Forbes.com version at www.forbes.com/div.

TIKKI: Why are 99% of Americans such disgusting cheapskates?

STEVE FORBES: Thankfully, the American consumer has been a spender, which is why the recession was so mild.

PF: What would be the effects of a long-term public works/infrastructure (e.g., roads and bridges) improvement program?

STEVE FORBES: The federal government already spends billions of dollars every year on highways, mass transit and other transportation projects. The best boost for the economy would be a Texas-size tax cut of the kind that President Bush has proposed. With a more vibrant economy, which the tax cut would help create, government would have more resources for more infrastructure spending.

PF: What can we do to make Congress, the White House and the bureaucrats more accountable to us? They seem to be running the country like the CEOs who forgot that the shareholders own the companies.

STEVE FORBES: Get involved with the political process. Let your representatives know what you think. Take the time to contribute to candidates you like and to help their campaigns. Support think tanks and advocacy organizations that share your point of view. When stockholders get restless, CEOs get nervous. The same is true of pols. If they don't hear from you, they figure you're happy with them.

ROBERTSK: How strong is the U.S. economy right now, and how much of a recovery do you expect to see as 2003 unfolds?

STEVE FORBES: Uncertainty about Iraq and North Korea is hurting us. The Iraq crisis should be resolved by early March. The economy will be stronger in the second half of the year than in the first half.

PHILGOLD: Would a war in Iraq derail the recovery?

STEVE FORBES: No.

TLINKCEO: Is President Bush's proposed stimulus package likely to have an immediate impact on the economy or does it reflect a longer-term strategy to promote growth?

STEVE FORBES: The package will positively impact the economy--assuming it's passed--both now and in the future. Consumers will get to keep more of their income. A family of four making $40,000 per year would receive an extra $1,000 under the Bush tax plan. The program also has powerful incentives for creating more capital and investing that capital.

VPALMAGIL: Do you think the stimulus package will pass as proposed or is Congress likely to change it substantially? In particular, what are the chances that Congress will heed Bush's call to eliminate the tax on dividends?

STEVE FORBES: If the President pushes the package the way he did Republican candidates last fall, the essence of his proposal will pass.

ANGELOFABARA: You have called for more sweeping changes in the tax code. Are you disappointed with Bush's new program or do you think it represents the best reforms that can be obtained at present?

STEVE FORBES: I am hopeful that the president will propose a major tax simplification program in his second term (assuming, as I do, that he will win reelection). Even with his current tax cuts, some progress is being made in the fight to eliminate the death tax and the fight to eliminate double taxation of dividends.

CNONE1823: What do you expect from the Federal Reserve in the next few months? Are we still in danger of falling into a deflationary spiral if the Fed responds to a recovery by tightening interest rates?

STEVE FORBES: To judge by commodity prices, especially the price of gold, it appears that at the moment the deflationary spiral is over. The key will be for the Fed to pump in more liquidity into the economy after the Iraq war. Such a move would prevent a resumption of deflation.

STEPHENWEINBERG: What do you expect FCC Chairman Michael Powell to do about the misbegotten Telecommunications Act of 1996? Will he give the Baby Bells what they want?

STEVE FORBES: Chairman Powell has just made a proposal that would phase out some of the stupidities that his predecessor gave us under the guise of the 1996 Act. Competition will effectively come from cable, satellite, wireless and perhaps your electrical lines!

STEPHENWEINBERG: What are the prospects for any sort of rebound in telecom valuations this year?

STEVEFORBES: Prospects are very decent. You've already seen Nortel make an upward break through the $2 barrier!

DLAURELESO: Does Bush's new economics team have what it takes to restore investors' confidence?

STEVE FORBES: Yes. One key is getting John Snow confirmed as Treasury secretary by the U.S. Senate. That, alas, will take time, because the Democrats are going to play games with this nomination.

BDA0893: At $350 or so per ounce, gold is higher than it's been for years. Is this a temporary response to the current uncertainty or the beginning of a long bull run for the yellow metal?

STEVE FORBES: No question that the yellow metal has been boosted because of the prospect of war with Iraq and the possibility of a showdown with North Korea. Assuming those crises are solved and defused, gold prices would retreat unless the Federal Reserve prints more money. I hope the Fed will do just that. Gold should ideally stay around the $350 level.

SAMUEL: The U.S. government intervened on the steel tariffs issue. Don't such steps go against the very basis of the success of the U.S. economy?

STEVE FORBES: The steel decision was a mistake. Fortunately, the administration has been moving since then to ease trade tensions and reduce trade barriers. The White House won a victory in that direction when Congress, by a very narrow vote, gave the president so-called "trade promotion authority," which will enable the president to make trade barrier-reducing agreements with other nations. President Clinton had sought such authority and had never been able to win it.

FAHLANDER: If the war starts in mid-February and ends before summer, what effect do you think it will have on the U.S. economy?

STEVE FORBES: The economic impact will be small long term, even though oil prices may temporarily spike upward. Short term, we will also be hurt by terrorist attempts to commit murderous acts. But these efforts won't slow us down for long.

GOD: How do we generate more awareness in the American people about Bush's strategies to divert attention from his administration's poor handling of the economy by bombing and killing Iraqi people?

STEVE FORBES: Fortunately the president does not see himself as God and thankfully we have a constitutional government that prevents wannabe gods from getting dictatorial powers. The president is fighting a war on terror and he has put bold proposals on the table to deal with the economy. Remember, we got the bubble under the previous president.

JUAN: What's your opinion on Latin America, and Colombia in particular?

STEVE FORBES: Colombia is facing dreadful attacks from drug-financed guerrillas. The country also has a severe challenge with so-called paramilitaries. We should, and are beginning to, provide Colombia with more assistance to fight the guerrillas. Latin America faces severe economic challenges in no small part because of bad economic advice from the International Monetary Fund. The IMF mindlessly advocates higher taxes and devaluations. Latin America needs pro-growth policies of sound money, low tax rates and the rule of law.

TRIBBLE: Consumer confidence is as low as it has been in years. Do you see any catalyst to change that or will 2003 be as bad as 2002?

STEVE FORBES: 2003 will be better than 2002, although this won't be an easy year. The stock market will move up when the Iraq crisis is resolved and the North Korea crisis is defused. Capital spending is beginning to show signs of new life. The Federal Reserve, at least recently, has been getting it right on the monetary front.

SCOTT: What business sector do you see the most potential in? Telecom, IT, manufacturing, medical?

STEVE FORBES: The vital signs of manufacturing are registering stronger signals. The FCC is finally recognizing the need to take bold actions to stop the death spiral with telecom.

PF: What effect will the city and state budget problems have on the private sector?

STEVE FORBES: The effect will be very negative. Taxes are being boosted. In New York City for example, property taxes were raised 18%. City income taxes will also be boosted. California is a disaster. Other states will be jacking up levies to meet shortfalls. Sadly, states went on a spending binge in the 1990s. State outlays, adjusted for population and for inflation, went up more than 50%. It's thus very important for Washington to enact a major tax cut that would more than overcome the tax drag that we're going to experience from states and municipalities.

TRIBBLE: Microsoft just announced a dividend. Do you see other cash-rich tech companies doing the same or is it better for those types of businesses to reinvest in R&D and continue to innovate within their category?

STEVE FORBES: Other companies will provide dividends too. Startups won't. Nor will companies that are experiencing fast growth. Microsoft today is a huge company. Its return on equity is lower than it was a few years ago. Thus it is fitting and proper for it to return money to investors who can put it to work in other areas.

ZYCON: Are you still in favor of a flat tax?

STEVE FORBES: Yes! The Russians put in a flat tax two years ago. Their rate--13%--is lower than what I proposed. I never thought a government headed by an ex-Communist and ex-KGB agent would be more radical than me on the subject of taxes. The Russian experience has been very positive. Real revenue has soared.

GIDEONARTECOM: How do you see the new administration in Brazil handling economic issues such as new labor laws and wages? How will these actions relate to our economy?

STEVE FORBES: There has been a rally in Brazil since the election of Lula. The key is for Lula to keep the IMF at arm's length--and then some. If he moves forward with internal reforms of labor laws, tax cuts and a more sensible money policy (interest rates are catastrophically high today) then Brazil will recover rapidly. If those reforms are not made, then Brazil will go the way of Argentina. I don't know Lula, but I'm keeping my fingers crossed!

DAN: Who will succeed Alan Greenspan and how should the new Fed chairman act differently from a policy standpoint?

STEVE FORBES: I think Mr. Greenspan will try to get reappointed next year. If he steps down, I hope President Bush would appoint somebody like David Malpas, now an economist at Bear Stearns. He is a former Treasury Department official. He knows the U.S. and international economies well. He would pay far more attention to the signals from commodities markets than Mr. Greenspan did, and therefore avoid the deflationary mistakes Greenspan made in recent years.

STEVE FORBES: That's all we have time for today. Thank you for your participation and please continue to visit our Web site, where you'll get moneymaking insights!