Speaker 0 00:00:00 I'm Scott Schiff with the Atlas Society, welcoming our senior scholar, Richard Salzman, doing an ask me Anything. So, uh, I've got some questions and, uh, JAG probably will too. Uh, but if you have questions, feel free to raise your hand. We'll bring you up on stage. Uh, Richard, thank you so much for doing this. Um, you know, I do you wanna, uh, start with a take on the economy stock market? People aren't concerned with the inverted yield curve.
Speaker 1 00:00:32 Yeah, I've used the inverted yield curve as a forecaster of recession, but there's a longer lag time than most people think. So for those not familiar with the technical aspects of this, the yield curve is just a, uh, a graph of interest rates, and it's called a curve because it's interest rates over, you know, one month, two month, three month, all the way out to 30 years. And usually longer term interest rates are higher than shorter term interest rates. That's the norm for various reasons. But on the rare occasions, when it's the other way around, short term interest rates are higher than long bond yields or mortgage rates. And usually because the Federal Reserve has been raising interest rates, that's called an inverted yield curve. And in the last 60 years, it has perf perfectly, and I stress perfectly forecasted recessions, uh, meaning it's forecasted all eight of them, and it has never given a false signal.
Speaker 1 00:01:27 That's another important test. You don't want an indicator that you know is wrong half the time. Um, and it inverted again last October. Why? Because the Fed had spent about a year raising interest rates. So short-term interest rates are above long-term interest rates. And that's still the case today. And my firm officially forecasted a recession. Uh, the report I think was issued in, uh, March, but to begin in 2024. So the lead times from the time of inversion to when the recession start, it isn't instantaneous. It's, it usually takes about a year, year and a half. We can go into why, if anyone's interested in the q and a as to why, um, the yield curve is such a great forecaster. But, uh, that does mean there'll likely be a US recession during the election year, which doesn't happen very often. And usually bad economies are blamed on the incumbents.
Speaker 1 00:02:25 So all else equal that would hurt, uh, the incumbents, but Biden, whoever that, whoever's running from that side. Then the other issue is the timing. It takes a while for the government to say that there's been a recession. So even if one begins in January or February, it probably wouldn't be until summer that government Ians say, wow, there's a recession. And one last point, which might interest people, one of the last things that happens is unemployment. So one of the reasons economists resists saying there's a recession is they'll say, well, the job market's fine, and the unemployment rate is still low and people are still working. Uh, it's a, it's what's called a lagging indicator that, that all those employment numbers tend to go bad, um, once the recession's already begun. And, uh, recessions usually last about a year, year and a half. So it could go into 2025 if you care about the stock market.
Speaker 1 00:03:23 Uh, this is a little trickier. The stock market usually does decline during recessions and in in anticipation of recessions. And that's some of it, some of that's in my forecast as well. So, uh, then the question is just the severity of it. How bad, how bad things get. So I'll leave it at that cause it's a bit of a technical issue, but I think I have had prior clubhouses one on, um, I think one on inflation, right, Scott and another on the business cycle and forecasting the business cycle, whether there was recession or not. Say those of you who wanna dip into past clubhouses, there's been whole, uh, sessions devoted to these issues.
Speaker 0 00:04:03 Yeah, that's true. No, that's great to know that, uh, it's that you're forecasting it for next year because, uh, you know, it just, it, it seems like it's been talked about for a while now. Well, one of the, uh, not by you just in, in general,
Speaker 1 00:04:19 One of the reasons, Scott, is the evidence that I just laid out is somewhat known among professionals and economists and strategists on Wall Street. This yield, this inverted yield curve. And because it rarely happens, it gets headlines when it does happen. Here's the problem though, most people are very sketchy on measuring it, looking at how much time has to pass before recession occurs. So what typically happens is they'll see the curve invert, which it did last fall, then many of them will immediately look for recession then that would be like this year, and then no recession occurs. And then they start saying, well, I guess it's different this time. I guess the yield curve doesn't, you know, successfully forecast anymore. It's very funny. I've seen this go on for the last 20 years. The last three or four recessions, the same kind of pattern. They miscalculate the lead time and then they think the trouble has passed and then, uh, and then they get hit in the head roughly a year later.
Speaker 1 00:05:19 So me economists are not really good at forecasting recessions, cuz most of 'em, I think it's actually philosophical. If you say to any forecaster, I have a perfect signal for recessions, um, you would think they would jump on that. But it's amazing how many of them say no, it's gonna be different this time cuz the interest rates are different this time. And this time was covid and you know, last time was the mortgage meltdown. So it, the tech, the specifics of each, uh, recession and trouble are unique, but it doesn't change the forecasting power of this yield curve signal. And, uh, but there's a kind of myopia out there among forecasters who are myopia, meaning very short range in their outlook. They don't tend to look out longer range. And then also the um, I suppose the inability to think in principle and think why something would repeat for every recession since 1968. That's how far back this signal goes. The US has had eight recessions since 1968 and the inverted yield curve has forecasted all of them, uh, perfectly anyway.
Speaker 0 00:06:29 Great. Well, uh, I wanna give, uh, baby a chance to ask a question. I hope I'm pronouncing that right.
Speaker 2 00:06:35 Is that correct? Hello, Scott and Jennifer, thanks for Hello. Give me the microphone or ask question for Richard. Was listening say that you participate in your firm, uh, recession in US economy. Well, there is always, you know, there never have a consensus on on that, but, uh, I'd like to know what do you see as the grounds for recession? Cause you mentioned that, okay, yeah, unemployment is not the only factor. Say that the recession follows after that, it doesn't mean that necessarily economy gets back to normal. Thanks. I just wonder what's your, what's your, uh, your reasoning behind that?
Speaker 1 00:07:25 Well, this always comes up as a, uh, you know, people wanting the specifics of what I don't know either. Like what particular sector or what particular companies, whether banks will fail or not, whether this, uh, and when you go back and look at each recession, you can find these in hindsight, what's not easier, what's not easy to do is, is identify them in foresight. I mean, the specifics, as I said before, of particular industries and companies and things like that. Uh, but I'm, what I'm stressing here is that the yield curve, um, captures trouble ahead. And then, um, the specifics of how the trouble arises as a secondary issue. But in this kind of approach, um, it's, it's kind of improper to say, well, point to me, which sector's gonna be most hurt. I mean, you can do this to some extent, but the key is to know that the broader economy is going to contract.
Speaker 1 00:08:21 And then there's plenty of history to look at. Well, when that happens, certain sectors are what's called non-cyclical. They're not, they're, they're more immunized from the downturn. Others are more cyclical, meaning they go down as much or more than the economy does. So the other thing that can be done is, you know, during a recession, equities or stocks go down in value, but bonds tend to go up in value because they're the safe investment and people race into those. So there is particular investment advice attached. That's one of the things I do with my firm. I sell investment advice around the, the business cycle. Um, but, um, that's all, I think, that's all I'll say about that. It's, it's not necessary, I think to say, give me, you know, the particular company product or, uh, sector that is going to cause the recession. The key here is, and those of you who are interested in free market economics and the Austrian School of Economics, you'll know this much that perhaps the most important prices in the economy are interest rates.
Speaker 1 00:09:25 And it's the most technical price in all of economics in terms of explaining it to people. You know, you can explain the gold price or bread prices or home prices, but when you say to someone, what is the price of lending money? Or what is the price of credit? It's not really the value, it's not really the price of money, it's the price attached to money lent over time. And, and it's the equilibrating of saving an investment. So, I mean, everything I just said, unless you're an economist that is way over people's heads and hard for them to understand. But, but to the extent saving an investment are a big part of the productive prowess of an economy. If they get messed up, if they get screwed up, if they freeze in any way, you can see why the economy will do badly. And that is what the manipulation of interest rates by the Federal Reserve does.
Speaker 1 00:10:16 I'm, I'm stressing the shape of the yield curve and the inversion of the yield curve that precedes recessions. But notice I'm also saying curve inversions occur because the Federal Reserve massively increases short term interest rates. You would not have that in a free economy. In a free economy. You'd have low and fairly stable interest rates and the yield curve would be normal and upward sloping. And that's it. There, there would be some cyclicality in the economy and natural to capitalism. And, but the way the Federal Reserve manipulates as, as mis has put it quite accurately manipulates money and credit, not for the purpose of smoothing the business cycle or facilitating the economy, but, uh, financing the government. Now just look at the recent sequence. How would you explain what the heck has happened? The Fed the, the government shuts down the economy in a very bad policy response to Covid.
Speaker 1 00:11:17 People are left home unable to pay their bills cuz they're not working. The government takes it upon itself to send checks to people. The government does not have the money to send checks to people. So the government calls up the Federal reserves and tells 'em to print money. So the Federal Reserve prints money and inflation at the end of the day is ultimately issuing too much money relative to demand prices go up, prices go up a lot. We noticed this, right? Inflation was at a 40 year highs after the Fed did this. Then what does the Fed do? It says, oh my gosh, we need to quote fight inflation. We need to damper inflation. How? Now if you look at how they cause the inflation, you just say, well, to stop the inflation is stop over printing money. Now they've done this to some extent, but their usual knee jerk reaction is to raise interest rates.
Speaker 1 00:12:09 They have a, to those of you who who may know, they have a Keynesian view of what, uh, causes inflation. And they don't really want to admit, maybe cuz they're responsible for it, they don't want to admit that they are the main cause of inflation, that their money supply increases caused it. So what they'll say is, and you hear this all the time, the economy's overheating like a car that's driving too fast. And we need to slow down the speed of this car, of this economy to, uh, stop the overheating and keep, keep prices down. You see, the, the problem here is the idea that producing too much stuff or people working too hard, or the unemployment rate being really literally low is the problem. That's not the problem at all. Those are the sources of prosperity. But if you have this Keynesian view that inflation is caused by the economy growing too fast, or the unemployment rate being quote unquote too low, then your remedy will be to slow the economy.
Speaker 1 00:13:12 And if that doesn't do it, to put it in reverse to literally jam the transmission and put it in reverse would be to contract the economy to, to create a recession. And the bizarre aspect of today's central banking, uh, interest rate manipulation system is they at the Federal Reserve and elsewhere, and I can, you can trust me on this, I've studied it for years. They actually know that raising interest rates at the short end and inverting the yield curve and basically making lending, uh, unprofitable, that's what an inverted yield curve. One of the things it does causes recessions. And if you said to them, if a congressman said to them, do you know that you're deliberate? Why are you deliberately causing a recession? They first they wouldn't admit it, but then they'd say, we're doing it to fight inflation. And so they're very timid about admitting this, but they do it on purpose. And, um, that's another reason to believe the, uh, inverted yield curve will forecast yet. Well, yet again.
Speaker 2 00:14:10 Thank you. I agree with you with majority of things you said that, but I don't see why, of course, the only, I mean money printer is Central Bank as a company. It doesn't matter how they say, but bottoms know that, uh, flushing doesn't come from only, only government do we have if they print money in the make or your money lose lost their value. Correct. But what do you see as what, as a cause of overheat? I mean, what overheat the economy? Is it just the manipulation that
Speaker 3 00:14:50 What the federal does? Or,
Speaker 1 00:14:53 Well, I'm to be clear, baby, I'm rejecting the idea that the economy overheats. It's a false metaphor. It's a false analogy. It's the Federal Reserve's story about what causes inflation. Oh, this is what I'm, uh,
Speaker 3 00:15:08 Baby, I
Speaker 0 00:15:08 I wanna get, uh, Chris in
Speaker 1 00:15:10 Here. I I I disagree with the idea. I think you said inflation doesn't only come from the government. Yes, inflation is a decline in the value of money. And it only comes from government cuz governments are monopoly issuers of money. We no longer have a competitive monetary issuance system. We no longer have a, a system of free banking on the gold standard. We have monopoly central banks issuing national currencies. And when the value of those currencies decline, which is what inflation is, it's a decline in the purchasing power of money. And it shows up as inflation shows up as you need to spend more of those units to get the stuff you're buying. That's why prices go up. Prices go up cause the value of money goes down and the value of money goes down cuz the government's over issue create too much supply of it relative to demand.
Speaker 1 00:16:00 So it's not, the inflation is not caused by the economy growing too fast, quote unquote, or the unemployment rate being too low. That's a Keynesian myth, but it's a myth that definitely is believed by central banks. So you have to be aware of the myth because that's how they conduct monetary policy. They, they, first of all inflate and then they turn around and jam the economy with interest rate hikes and interest rate hikes definitely do slow the economy interest rates, unlike money supply interest rates are definitely something that business people investment, uh, specialists focus on. It's a, it's a price that definitely hits the bottom line. Uh, banks, uh, investment firm bond traders. Uh, so if you know anything about investments on the technical side, interest rates are super important. And all the yield curve is saying is there's a relationship between interest rates, between the maturity structure of interest rates. That's very important to how the business cycle works and how investment works. Um, so great. I'll leave it at then.
Speaker 0 00:17:04 Uh, Chris, welcome. You have a question?
Speaker 3 00:17:10 Uh, hey. Hey, Scott? Yeah, going good. Um, the question I'd like to ask to Richard, and it relates to the Russian, um, aggression towards the Ukraine.
Speaker 1 00:17:41 Yes. What's the question?
Speaker 3 00:17:44 Well, from what I understand, yeah, you are all, all for the Russian aggression. <laugh> to all do, Greg.
Speaker 1 00:17:58 Well, no, I wouldn't say I'm for the aggression, but let me, but my view is different from, uh, uh, from others views. He, here's my view in brief, and I've had, uh, just so those who want more on this, I think I've had not only a, an entire clubhouse on this, but the relevant, uh, session I think was called, uh, an egoistic Forum policy. Okay? Here's my view of starting with the US is here's my real concern. The whatever's happening there, and I'll speak to that in half a minute. Whatever's happening between Russia and Ukraine here, here's my thesis. It's of zero interest to the United States. It's of no interest whatsoever to the United States, meaning it's not in the self-interest of the United States to be involved. And I would actually go further and say it's to our, it's against our interest, uh, to be involved.
Speaker 1 00:18:54 Okay? So the first thing to notice is all over the world, all over the country, there are authoritarian regimes, there are corrupt regimes, there are regimes that are attacking each other that are in conflict with each other. It doesn't mean the United States should be involved. So that's 0.1, 0.2. Ukraine and Russia are very similar in terms of their, uh, measures of economic and political freedom and corruption. And these things are measurable. Uh, political scientists do measure them. So the second point I'd like to make is, it is just false. When people apparently from all sides of the aisle portray Zelensky and Ukraine as a free country, uh, that's been put upon, that's not true at all. They're a corrupt and status country. And that's another reason why the United States should have nothing to do with them. Now, it's interesting that Ukraine is actually not in nato, and that's not, cuz NATO isn't promiscuous.
Speaker 1 00:19:51 NATO is very promiscuous. They'll let almost anybody in. And they've been expanding to what now, 31 members ever since the Cold War ended. Uh, but one of the reasons they have not taken in Ukraine is precisely because it's so corrupt, is precisely because it's so, uh, unreliable in terms of handling weapons and other systems. Now, I believe there's a lot of evidence as to the invasion by, um, Russia in February, 2022. And, and by the way, the taking of Crimea, the annexing of Crimea in 2014, Russia, and I think justifiably has for decades opposed, especially in the last decade, the expansion of NATO to its borders, its view, I think, which is proper, is the Cold War is over. NATO was for the Cold War, the opposite Warsaw Pac, which was the Russian Pac with the other side, was dissolved after the Cold War. The US and NATO have remained, um, um, combative toward Russia for a long time unnecessarily.
Speaker 1 00:20:56 And, and Russia is opposing, Russia is trying to neutralize Ukraine. It's not, it is not as some of the NeoCon say, the beginning of a Russian, uh, revival of the Soviet Union or even the Czarist regime. It is not an imperialist venture. It is a defensive move to oppose NATO in Ukraine. And the US still to this day, has hinted that they want Ukraine in nato. And of course, anyone including Ukraine, anyone in a foreign country that lobbies to get into nato, you can see why they would, they don't have to pay for national defense. They become, in effect, a colony of the United States. Finland just did this. So Finland has an 800 mile border with Russia. I, if I'm right, that the reason for this conflict is NATO will just not stop moving, uh, eastward toward Russia. It is not solved by throwing Finland into the mix.
Speaker 1 00:21:52 Cuz now Finland is on a border with Russia, and I hope people understand what this means. NATO is basically an extension of the US military arm. That's what it is. The whole point of Article five is that if any NATO country has a conflict, the US has to go in there. And I think this has just improper. I think it is, it is like a 30 year old policy left over from the Cold War. NATO should have been dissolved when the Soviet, when the, uh, cold War ended, just as the Warsaw PAC was dissolved. Not only was NATO not dissolved at the time the Cold War ended in 1991, NATO had I think 15 members. Now it has 31 members. And the point is, the additional members are all countries bordering on, most of them are, are near or bordering on Russia. So, um, so I, I have no problem with Russia defending itself and defending its backyard against, uh, imposition, not really from Ukraine, but from nato.
Speaker 1 00:22:55 There's a lot more to be said about it, but that's probably, probably enough for now. Uh, I just wanna go on, I just wanna go on record, by the way to say there are others, uh, scholars at ts, there's other people in the objectivist movement who disagree with this account. I don't think it has anything to do with me endorsing everything that Putin believes or says. But my main, my main theme has been the United States foreign policy should be selfish. It should be self-interested, it should be egoistic. And it's not in regard to Ukraine and Russia. And it's, it's yet another, what we've got more than a year. Now, I fear that it's becoming yet another, what I call these forever wars, where the Pentagon is in there forever. It's not really the Pentagon's fault, it's civil, it's civil rulers telling the Pentagon what to do.
Speaker 1 00:23:48 But the mistake was done in Vietnam. The mistake was done in Afghanistan. We've been in Syria since 2004. There are many, Iraq was a disaster. Libya was a disaster. The United States foreign policy is in complete disarray. It's driven by altruism. It's driven by the idea that we should sacrifice ourselves for the benefit of other countries, even if we have to pretend that these other countries are models of democracy and freedom, you know, turning zelinsky into a Churchill. It's just bizarre. It's just ridiculous. And so, I, I have a major disagreement with other, especially, um, liberty loving, American loving objectives, who don't,
Speaker 3 00:24:33 Can I speak,
Speaker 1 00:24:34 Who don't seem to believe that the US is engaged in a self-sacrificing, um, policy. Yeah, go ahead.
Speaker 3 00:24:42 Um,
Speaker 0 00:24:45 Chris, last point, then we're moving on. Is
Speaker 1 00:24:47 This still
Speaker 3 00:24:48 Chris? I'm, I'm, I'm sorry, Scott. Yeah, yeah. Uh, and, uh, Richard as well. Um, this idea that, um, um, Putin is, is going to use this as a way of, um, taking over Ukraine, then maybe because Poland, uh, uh, amping up their, um, military capabilities because for obviously obvious reasons. Um, okay.
Speaker 1 00:25:36 Um, yeah. Chris, Chris, before we break off on this, let me just ask you something. Okay. Cuz I think you're, I think you're questioning my take on all this. Um, what do you think is, if you can locate what would be the US national interest then? I mean, self-interest, and, and by that I mean, if America is a free country, a constitutionally limited free country, its self-interest is in preserving its liberty, its financial integrity, all the things that go with, you know, performing well, what would be the self-interest in the United States helping Ukraine?
Speaker 3 00:26:19 Um,
Speaker 0 00:26:25 Why don't you think about that? We'll actually go to Rick.
Speaker 1 00:26:29 Okay.
Speaker 0 00:26:30 Rick, thanks for your patience. Do you have a question for Richard?
Speaker 3 00:26:37 Indirect?
Speaker 0 00:26:38 Hang on a second. Go ahead Rick. I'm sorry. Well, Chris, we'll come right back to you.
Speaker 5 00:26:45 You take on the territorial dispute between the Philippines and China, and of course I read Noble House by James Clave.
Speaker 1 00:27:03 I'm not sure I heard that. Although the first part sounded like the China Philippines dispute. Is that right, Rick? Is that what you're asked about? Yes. A territorial dispute with Phil. I'm not, not. And
Speaker 7 00:27:15 He was also asking if you've read, um, James Cloves, the book novel, uh, noble House.
Speaker 1 00:27:22 Oh, I see. <laugh>. The, the answer to the second question is yes, but the, I think it was the 1980s. It was a big thick book, wasn't it? About like Hong Kong and Fi finance and stuff. The Japanese culture. Yeah, I loved it. Uh, I don't know how that relates to the question, but I am ignorant. Uh, I don't know anything about the Philippines Chinese territorial, um, dispute. So I'll have to beg off on that, although you're gonna make me go look it up after I get off the call. I didn't know. I I, it, it might be worth here saying something quickly about China too, because I have a different take on that. The, the conservatives in this country, um, well obviously more so than the Democrats are tending, tend to characterize, uh, China as not only communist, but a, uh, existential threat to the United States.
Speaker 1 00:28:17 I don't believe that either. Um, this'll sound weird cause it sound, it'll sound like I'm defending Russia and China. Uh, I'm not defending Russia and China to the extent that, you know, I think they're close to being capitalists. The key to these two countries, if you have any sense of the history of it, is they're moving in the right direction. Not every year, not in a straight line, but compared to the U S S R under Lenin, Stalin, Khrushchev, and even Gorbachev, you could say they were an existential threat to the United States. And so a different policy stance was justified in including having nato, I think, and China, same thing from 1949 until 1976 when Mao, the mass murderer ruled China. Um, you could say that China also was a major threat, although they weren't a military threat to the United States yet, I think they could still, like Cuba, be and North Korea be classified as dangerous, potentially dangerous, and definitely enemies of the United States.
Speaker 1 00:29:20 But again, not since the Cold War ended, since the Soviet Union disbanded, uh, Russia should have been an ally of the United States. Uh, not a perfect ally, but in all the years since, and there's, how many years have gone by? We're going on almost 32 years now. And China, since Mao died since 1978, when Deng Xang started liberalization, one of the reasons China is so wealthy, much wealthier today than they used to be, is that they've liberalized, but that's just another word for saying that they incorporated. And again, since 1978, that's a long time. They've incorporated more capitalist elements into that system that has not only made them closer to our system, it's made them less dangerous to us. Now interestingly, what's happened also in China is as they've become more prosperous, and this happened to the United States, when the United States became more prosperous, they've also built up a military.
Speaker 1 00:30:20 So that's okay. A grownup country has its own military. These NATO members basically did not build up their militaries. Why? Cause it was sourced out, uh, to the United States. So, uh, Ukraine, Poland, Romania, all these others that were reliant in Germany too, France reliant on the US military are in a very precarious situation. So China, I believe, just as nor in the normal process of you're prospering and then you're also building up your military capabilities. It doesn't necessarily mean that it's an aggressive imperialist military. I don't believe either Russia or China, uh, since the Cold War ended in, uh, and in China since, uh, liberalization are that their militaries are imperialistic or aggressive or an existential threat to the United States. But, but if the US taunts them, if the US, uh, is provocative toward Russia and China, well then of course Russia and China will respond accordingly. So I think the chances of, uh, uh, antagonisms between us and Russia and US and China are being elevated by US policy, not by Russia or China policy.
Speaker 8 00:31:40 Agreed. Alright.
Speaker 0 00:31:42 Uh, Chris, did you come up with, uh, an answer for, uh, Richard's earlier question? All right. If not, uh, we can go to Simon. Simon.
Speaker 8 00:31:57 Hi. Thank you very much. Uh, Richard, I, I, I just to say I agree with everything you've said in terms of, uh, Russia and China, um, for anybody who wants to, uh, watch a, a quality documentary, then, uh, John, I can remember it's Pol George or Ger Yeah. Uh, on the cuing war with China. Uh, and the pro provocation is, you know, how many military bases are in the South China Sea and Pacific around China. Yeah. And historically, historically, China have never been a country that's really particularly gone out there to create, uh, empires through, uh, military, you know, actions. Yeah. Right, right. So anyway, that's, that's my opinionation. But, but the question I
Speaker 1 00:32:43 Have ok. Yeah.
Speaker 8 00:32:44 The question I have, Richard, thanks very much, uh, for yourself here it is about taxation. Yeah. In relation to capitalism. Um, and you'll tell me if I'm wrong. I'm from the UK and historically we have two major parties. We've got the conservative party and the Labor Party. Um, and
Speaker 3 00:33:08 I, I, I'm back by the way,
Speaker 1 00:33:11 <laugh>. Okay, Chris, good.
Speaker 8 00:33:14 Shall I carry on?
Speaker 1 00:33:15 Yeah, go ahead Simon.
Speaker 8 00:33:16 Yeah. So, so, so, and I, I, I don't know if today they, they accurately reflect mm-hmm. Republican and Democrat, um mm-hmm. However, they've always been, one has been for lower taxes, uh, that's conservatives on the other, the labor have been for higher taxation. Right. My question is in, in, in the, in the world that we live in, cuz obviously taxation is a way for the, uh, for a government to raise its revenues. Yeah, yeah. Uh, and, and obviously with a view potentially to be, uh, putting force more social policies that cost money. Right. Um, I've always questioned, because the answer, the, the, the thing is, it's always been like capitalist, a capitalist person's answer was, well, if we raise taxation, we're gonna disincentivize those people who build businesses and create wealth. And I've always thought to myself, is this really a reality? So if, if I, if, if, if my tax went from 40 to 45% for higher rate taxpayers, yeah. Am I gonna stop being motivated to build my business? And the answer for me was always been no. Um, so what do you think on that? Because I'm, I'm cynical about that. Just it is the way it is statement.
Speaker 1 00:34:39 Great question, Simon, and thanks for participating. It's a really excellent question. The first thing I would say is there is a, there is a similarity between the Tories and the Republicans in America and labor and the Democrats in America, uh, not only on foreign po uh, not only on, uh, domestic policy, but taxes. So you're, you're right there to sense. I think you asked, is there any kind of overlap there? Uh, yes. The answer is yes. Now, the way you put it, um, to go from 40 to 45%, that is a marginal enough change to not really, uh, uh, deliver an incentive or disincentive effect. I think you're right. I think you're absolutely right there, especially when you talk about entrepreneurs who are starting businesses, have a vision, have a desire to do something, changes in tax rates at that level that you're talking about.
Speaker 1 00:35:35 And I, when I say in the margin, I mean, that's not, that's not a big change, 40 to 45%. However, art Laffer, the supply siders and the Laffer Curve, by the way, all that stuff, all the supply side stuff, very close to Ayn R's theme of Atlas Shrugged, which is that at a certain point, government policy becomes so punitive and so anti-life that people shrug meaning now in an economic sense, not gonna start that business, not gonna report my income. And if the tax rates become con confiscatory, if they become punitive, which they have in the past, there is definitely a disincentive effect. And so, um, I, I would put it to you that you're right, that going from 40 to 45% is not a big deal. But if you go say from 10% to 90%, here's the way to always look at taxes. And of course, you can have taxes on income and sales and real estate.
Speaker 1 00:36:31 So setting that aside for a moment, if the government takes 10% of every d of every pound, I'll, I'll go pounds here, Simon, for you of every pound you earn, your retention rate is 90, the incentive is high. But now if it gets to the point where the tax rate is 90, and it has been in the past, it's been that high in Britain, it's been that high in America, now you're keeping 10 cents, the retention rate goes from 90 to 10. That definitely has a disincentive effect. And going the other way, when the supply siders, uh, in the late seventies said, tax rates are punitive, tax rates are too high in the Laffer curve jargon, it's, uh, in the prohibitive range. Prohibitive, meaning you think you are raising revenues, dear government by raising the tax rates, but the tax rates are so disincentivizing that people are either not earning income or they're earning income and trying to hide it.
Speaker 1 00:37:25 That's called the underground economy. Or they're trying to delay, um, uh, uh, reporting the income, you know, into future years. All these kind of evasive tactics that are, that are done really not by wage earners at the low rates, but as at the high rates where people are rich and are able to hire tax accountants and tax advisors and are able to move their money around the world, you know, in search of lower tax rates. There, it's been demonstrated, Simon in the data and elsewhere. There's definitely that incentive and disincentive effect. One of the, one of the things the supply siders did under Reaganomics and Thatcher to some extent, although to a lesser extent, was to realize that if they could lower high marginal tax rates, like in the 70, 80, 90% range and bring them down to, well, in the US they were brought down to, they were brought down to 28% in 1986.
Speaker 1 00:38:20 So before Reagan got in, the top tax rate was 70. By 1986, it was down to 28. If you look at the retention number, when it was 70, you could retain 30 cents on the dollar, but when it was 28, you could retain what, that's 72 cents on the dollar. That is more a, that is more than a doubling of, of what I call the retention rate. The retention rate, meaning the after tax rate. And that had enormous incentive, positive incentive effects for business saving and investment and, and profiting, uh, in America, capital gains rates, same kind of thing. So the short answer to your question, Simon, is, uh, you won't see the incentive or disincentive effects at the kind of small changes you are talking about in, in the mid range. You know, as you said, 40 to 45%, but when the changes are much more material and substantive, um, it shows up in the data, uh, uh, quite, quite, uh, quite in a quite pronounced manner.
Speaker 8 00:39:22 So it sounds like there's almost a sweet spot.
Speaker 1 00:39:25 Yeah. Uh, well, exactly. One of the things Laer found, one of the things that, if you look it up, the Laffer curve, is that there's an optimal tax rate now. Yeah. Those of us, those of us who believe that you should, uh, earn and keep your income, regardless of whether we maximize revenues to the government, he, he, the point he's making is more of an empirical one. But yes, there's a tax rate. The way he put it is if the tax rate's zero, how much revenue will the government bring in? The answer is zero. But then he says, if the tax rate is a hundred, how <laugh>, how that's the other end of the curve. How much would the government, his view is, well, nobody would produce any income, so they, so they would get zero as well. So there's something in between, it's not necessarily 50%.
Speaker 1 00:40:10 He actually believed it was something closer to 20, 25%. So whenever you hear Steve Forbes or Art Laffer or Steve Moore or others talk about a flat tax or a low tax, a low marginal tax, it's usually in the 15 to 20% range. And I actually believe that in the US and UK case, that if the tax rates were brought down to that level, and here's the key, and the tax code was cleaned up of all the loopholes exemptions and, um, credits and deductions and things like that, which are, are really in the code to help certain special interest groups. The combination of a low flat rate and income, you know, fully exposed to that rate is the best possible combination, not only for maximizing revenues, but from, uh, for the government, but maximizing the productive prowess of the economy. We got the closest to that under Reagan and Thatcher.
Speaker 1 00:41:05 And notice that today, most political economists hate those two people and hate those two policies more than anyone. And, uh, for those who want more on this, by the way, go to my site, uh, my
[email protected]. There's a particular one in there about neoliberalism and supply side economics, which gives the history of this, the kind of the before and after of what supply side pro capitalist policies, uh, made possible for America and Britain, and how we've kind of lost that over the last 20 years. We're going in the reverse direction away from neoliberalism and supply side. Notice Bidens notice, the president just last week said, we're not gonna do trickle down anymore. That's their smear word for supply side. What he should have said was, we're abandoning Reaganomics. He doesn't quite wanna say that because people still have a memory of the Reagan years being so robust and so pro-American and so uplifting. So instead he uses the word trickle down. But that's another reason to notice that this debate is still out there, this debate about size and scope of government and then how it finances itself, and then even the tax part of it, whether they're financing themselves by punishing and soak the rich type policies, they kind of envy rid egalitarian policies or whether they're more, uh, equal protection for all flat tax, everyone pays the same rate, plus something closer to Reaganomics and, uh, Thatcherism.
Speaker 0 00:42:39 Great.
Speaker 8 00:42:39 I mean the, the, the law, the the, the, you know, there's a law in the, the uk I'm sure it's the same in the US that every man is entitled, or woman is entitled to take steps to pay the minimum amount of tax.
Speaker 1 00:42:50 Yeah.
Speaker 8 00:42:51 He's due.
Speaker 1 00:42:52 Yeah. Um, right.
Speaker 8 00:42:53 That, that's tax avoidance, not evasion if I've got Right,
Speaker 1 00:42:57 Right. That's,
Speaker 0 00:42:59 I mean, I do wanna give Chris a chance. He's been jumping answer Richard's question and we'll go to Brian and baby. Yeah, go ahead Chris.
Speaker 3 00:43:10 I would, I was gonna make the dis distinction between tax, uh, avoidance and tax evasion. Um, one is, um, legal.
Speaker 1 00:43:28 Yeah. Or,
Speaker 3 00:43:29 But it, it, it, it's, it's kinda like, uh,
Speaker 1 00:43:33 Avoidance is legal
Speaker 3 00:43:34 A a moral, uh, right infraction
Speaker 1 00:43:38 In the li in the literature evasion is usually illegal and avoidance is just, is legal and you're just trying to minimize your tax bill. Yeah, yeah.
Speaker 3 00:43:47 What, what, what is tax evasion is, is an illegal term. Yes. I,
Speaker 1 00:43:54 Yeah. Okay.
Speaker 0 00:43:55 Yeah. Thank you for that, Chris. I do wanna go to Brian now. Uh, Brian, thanks for your patience.
Speaker 9 00:44:02 Hey, thanks. Following up up on the China thing, I'll try to make it brief. I, I, I see China and America as, uh, kind of in a race and I see them trying to find that sweet spot of allowing entrepreneurial tactics and, and principles, but yet still throttling private property. And so my question is, how can they overtake us with those restrictions in place? I don't, I, I, I see them trying to really squeeze blood from a stone by, you know, still limiting private property, limiting entrepreneurship. A lot of their ip, you know, comes from a result of, of, of our, uh, you know, trying to access their markets. So yeah. Is that accurate or, or what am I missing in terms of the tactics or tools they will use to over overtake us economically?
Speaker 1 00:44:54 You are accurate, Brian. That's a good question. That's a good point. You, you, you're right. If, if, I don't like the whole superpower overtake us, uh, uh, mindset, but I'll set that aside for a moment. If China's goal, and they are a central to, to a large degree, a centrally planned system, although there's a lot of, uh, decentralized work going on ch in Hong Kong and Shanghai and elsewhere, um, they would have a pro, they would've a capitalist system, uh, if they really wanted to be super prosperous. And, and even, you know, super militarily strong. I don't mean imperialistic, I mean just militarily strong like the US was in the fifties and sixties. Um, and so, but okay, so Brian, you're absolutely right. What, why would they not totally be that way? Because they're still semi-socialist. They're, they're part socialist and part capitalist. Now, the good news is they used to be totally socialist, actually worse than that, they used to be totally communist under mouth.
Speaker 1 00:45:50 So I interpret these two countries, Brian, I don't know if you agree with this or not. The US is moving away from capitalism towards socialism, but the halfway house is fascism. Fascism means, uh, the government is controlling the economy, but it's not nationalizing everything. It's not owning the means of production. That's what socialism requires. In the case of China, it's going in the other direction. It used to be communist, then it was socialist. Now it's indu, it's been indu introducing capitalist elements. So it's, it, it's not like they're racing, well, I guess you could say they're racing to the same place in between is this hybrid system called fascism, where there's private property in title, you know, in in title only, but not in control. And, uh, in that regard, um, that's another reason not to think that there's an existential threat between the two.
Speaker 1 00:46:44 Because when the Soviet Union was purely communist and the American system was more capitalist, there, you saw the threat because they were more distinctly different. But also the U S S R had as its goal to extinguish the United States, and that the Russia does not have that. Now, China doesn't even have that now. So I, I think the good news from the American standpoint should be, thank goodness Russia and China aren't nearly as communist socialists as they used to be for 50 years ago. Let's applaud them to the extent they're moving in any way toward more capitalism. But the main thing we have to worry about is America is moving away from capitalism. And unfortunately, things like the Trump trade wars versus China, the, these are cases where you could say the US is being combative toward China. There are lots of problems, obviously with China stealing ip.
Speaker 1 00:47:36 Someone mentioned, I think, Brian, you might have mentioned that that is certainly a problem. Yeah. I think it could be handled in, in different ways. Uh, some of the companies that go over there actually say, our IP is not being stolen at all. We're giving them IP in order to get access to market. So it's, it's certainly true. China is not a completely free trade country, but it doesn't, we don't solve that by ourselves becoming a mercantilist protectionist economy, which Trump moved the US toward. And by the way, it's the only Trump policy. Biden didn't change notice Biden has not reduced or eliminated any of the tariffs that Trump put on China and other countries. And notice when Trump put those on, he said, China will pay. I'm gonna punish China. I, I hope people realize that tariffs are just taxes, but they're taxes on Americans. I mean, tariffs on imports are paid by those who import the stuff. So Trump basically raised taxes on Americans, households and businesses that imported stuff from China. I mean, he put 'em up to 25, 30 5% or so. It's not punishing China. China can sell its stuff to other people if it doesn't sell 'em to the us. He's, he, but he's punishing Americans for wanting to buy Chinese goods. It's really, uh, another self-sacrificing, uh, policy that should be, um, eliminated.
Speaker 9 00:49:01 My, my follow up, if I could do a quick one is Sure. You know, like with, with World War ii, Japan thought that if they got the jump on us in Pearl Harbor, cripple our fleet and limit our capacity to either enter the war or, or bully us out of e even joining. Yeah. And my, if, if we are racing to the center, both, uh, US and, and China slash Russia, then that, that worries me that the threat is now there that these other countries might, um, feel that they can, uh, cripple us with like an E M P or, or some economics.
Speaker 1 00:49:41 Yeah, I think
Speaker 9 00:49:42 Military.
Speaker 1 00:49:46 Yeah. I think your, uh, connection is coming in and out, Brian, so if you can still hear me, I'll just say briefly, I think I realize what you're saying. If, if you and I agree that they're moving to quote unquote the center, meaning they're not America no longer purely capitalist moving into a mixed hybrid fascism that's not so good. But also China and Russia the same thing. The fact that we end up in the same place, I think makes war and combativeness less likely. In other words, there's less of a polar difference between the three countries. They share more. Now, it to the extent American, you know, superpower, theorists worry that China, to a lesser extent, Russia, I don't think people are worried about this with Russia. Russia's economy is like the size of Texas. I mean, it's not, I'm not even sure it's a superpower anymore, but it is a superpower because it has more nuclear weapons in that regard than any other, I believe, than any other country, including us.
Speaker 1 00:50:42 Um, those concerned about, you know, there should be a unipolar wor world where only the US is the superpower, and any other country that gains in prosperity or military prowess is a threat to us. That's a problem that that's a problem for the us. That's a myth, that's a mistake. What you have to do is identify these foreign nations, not from the standpoint of whether their economies are large and growing, not even from the extent to which their militaries are large and growing, but whether those countries are a existential threat to the United States or not. I mean, at one point I would say, like just before World War I, uh, Britain was the superpower of the world, and the US was up and coming, but Britain was no threat to the United States. And thankfully Britain at the time did not think that the US was a threat to Britain, just because the US was becoming stronger and becoming a superpower.
Speaker 1 00:51:34 And then of course, after World War I, what happened, Britain declined in prowess and in power, especially after World War ii. And, and still that didn't make for antagonism between Britain and America. Britain and America have remained allies since the revolution. Well, except for the war of 1812 <laugh>. Uh, so, uh, I wanna really, you know, encourage people to think in terms of we should be happy, welcoming that foreign countries like China and Russia to the extent they are, if the shoe fits where, if they're becoming freer, if they're becoming more capitalist, if they're becoming, um, even if they're becoming quote unquote superpowers, the key is, are they likely to be our friends and allies or our, or warring against us? I, I don't see Russia or China poised to end America. That is not their goal. That's not what they're interested in. And uh, so short of that, we should be welcoming them and not antagonizing them. We don't, you antagonize Russia by pushing NATO to the Russian border when there's no Cold War and you antagonize China by, um, protectionism.
Speaker 1 00:52:48 So don't, don't do that. And then you won't go to war with these two countries. Thank you. Unfortunately, the US is, is in a thank you, Brian. The US is in a diminished, i, i, this is sad because the US is in a diminished role model, uh, moment because it's in no position to say, here's how to have a free society, and here's how to adopt capitalist measures, and here's how to have free trade, and here's how to make sure your military is civilian controlled and stuff. See, the US is moving away from all those good things. And is is, is no longer the role model for telling other countries how to behave. Well, it's very sad, but that doesn't, that doesn't mean these other countries are an existential threat to the United States just because they're becoming richer and just because they're building up their own military.
Speaker 0 00:53:37 Great. Uh, let's try to get Steven here.
Speaker 10 00:53:41 Yeah. Um, you know, I, I'd park company with Richard A. Little bit on China. I think his analysis of Russia is correct, but when you have a country, when you have a country like China that is actively trying to, uh, steal your industrial based secrets and operates in a predatory way for market share in a way that's gonna be very damaging to your society, I don't you, you really have to. When he brought up the, the issue of Britain and the United States, there's a, there's a case where you had two major powers that shared like-mindedness in a way, and they had a cultural connection. Now the Chinese, here's something a lot of people don't know about the Chinese. They hold a lot of resentment for what they call the, um, uh, the hundred years of, uh, of, of being, uh, being just walked on. And they haven't forgotten this.
Speaker 10 00:54:44 And they're working in a way that is, is not at all the relationship that we had with Britain, or even I'd say after World War ii, the relationship we had with Germany. The Chinese are operating in a financial predatory way that's actively trying to subvert our technological edge and manufacturing and technology. And, and they make no, they make no bones about where they're trying to take this. So I think we have to view them with great skepticism and if it, if they're doing things that are actively, for instance, like you can't open a company in China without having the Communist party embedded within your company. On the other hand, Chinese companies can operate here without the same restrictions. So if you're gonna deal with someone like that, you better make sure you're dealing with them on an even handy keel or else you're gonna fall prey to them.
Speaker 1 00:55:40 Well, a couple things, Steve. I know we only have three or four minutes, right Scott? Um, thank you for that, Steve. I underst, I, I, um, I, I appreciate your challenging me on my view on China. I don't believe China's being predatory in a commercial way. The fact that they send us stuff that people wanna buy at Walmart, people are voluntarily buying this stuff. They want to buy this stuff. Um, I don't, there is a slave labor problem to some degree in China, but I think it's more of an ethnic problem with the Uyghurs. It's not that China is slave labor. China used to be based on slave labor under Mao. So that's not the issue. I I am reluctant to call it predatory just because they're underselling American manufacturers at Walmart or, uh, in the Japanese case for many years, cars, right in the eighties and nineties, Japan was hated for out-competing, um, uh, Detroit.
Speaker 1 00:56:33 I think the US problems that you're referring to when they, when you say they're subverting the us, the US problems in manufacturing, in employment, in factories, moving offshore is totally US caused, we should be blaming not China who's trying to become more like us or what we used to be. China admires the US economic prosperity story. China admires the superpower status the United States achieved. It's trying to do the same thing. It's not perfectly good at it cuz it's not capitalist enough. But the fact that China is trying to emulate what the United States was in the fifties and sixties. I mean, they're building dams. They're building coal plants, they're building fossil fuels. Uh, they, they are America from the fifties and sixties. And could I ask you
Speaker 0 00:57:23 A
Speaker 1 00:57:23 Ation, the fact that we should be, you know, worried about that or opposing that the, the us, the epa, the antitrust department, all the regulatory harassment from the United States, it's the United States Domestic Forum policy, which has courted out and suffocated American business and prosperity. It's not due to China becoming more capitalists and sending us stuff we like, and, and yet the a hundred years, I understand that a hundred years argument of being walked on. But, but China itself, if you look to China, to the extent they're not as advanced as they are, that's their legacy as well. They had Mao for what, 30 years and they, they wrecked the place and they murdered 50 million, 60 million people. So the fact that China has a residue of backwardness, which they do, I mean their economy is as big as the US but they have a billion people. We only have 330. So per capita, we're still wealthier than they are. But I think, I think, Steve, I understand your point, but they're not subverting the us us policymakers are subverting, subverting the, and so you don't, I just think, I just think we should be thankful. We should be thankful that there are foreign countries who've been moving away from socialism, poor capitalism, in however, a flawed way they're doing it, the direction is in the right place and the US direction is in the wrong direction. So,
Speaker 0 00:58:50 Great. Well, uh, I'm sorry to Steve that we ran out of time. Uh, but this was a great discussion. I had questions from Instagram we didn't even get to. Uh, next week, Wednesday, July 26th at 5:00 PM Eastern Jag, uh, we'll be interviewing Ed Dowd, the Atlas Society asks, and then, uh, next Thursday through Saturday, the Atlas Society will be in Nashville for our Gulp GUL summit. So we're very excited about that. Uh, hope to see you, uh, that are attending there. Uh, Richard, again, thanks for doing this. Thank you to everyone who participated and, uh, we'll look forward to seeing you at the next one of these. Thank you, Scott. Thanks for everyone for participating. I enjoyed it. Thank you.
