CW 832 FBF - 'The Forgotten Man: A New History of the Great Depression' with Amity Shlaes NY Times Bestselling Author

This show is produced by the Hartman Media Company. For more information and links to all our great podcasts, visit hartmanmedia.com welcome to this week's edition of Flashback Friday. Your opportunity to get some good review by listening to episodes from the past that Jason has hand picked to help you today in the present and propel you into the future. Enjoy.

Welcome to the Creating wealth show with Jason Hartman. You're about to learn a new slant on investing, some exciting techniques and fresh new approaches to the world's most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine, self made multimillionaire who's actually been there and done it. He's a successful investor, lender, developer and entrepreneur who's owned properties in 11 states, had hundreds of tenants and been involved in thousands of real estate transactions. This program will help you follow in Jason's footsteps on the road to your Financial Independence Day. You really can do it. And now, here's your host, Jason Hartman with the complete solution for real estate investors.

I want to take just a moment to tell you about Renters Warehouse, an award winning property management company that services over 13,000 investors with over 18,000 properties nationwide. They are the only residential property manager rated by Morningstar. Their centralized model with local staff provide trustworthy support across multiple markets. These experts track all aspects of your property and never try to profit from maintenance repairs. Plus you'll enjoy flat rate pricing and warrantied tenants up to 18 months. Check this out for a free 3 month property management trial exclusive to Jason HARTMAN Listeners, visit renterswarehouse.com again that's renterswarehouse.com Jason. Today we're going to talk about the Forgotten Man. Yes, the Forgotten Man. What does that mean? Well, that's the title of the book, actually. The second book I believe by Amity Schlase who will be our guest today and we will be with her in a few minutes. But before that, as is customary, wanted to just talk about a few things here. Got a stack of papers on what you shouldn't do and why you shouldn't do them and we're going to talk about that. But before we get into that, let me remind you, join us for Meet the Masters in March in beautiful Irvine, California at the Hyatt Regency Irvine. We've got a great event there coming up. A lot of you are registering, the room is filling up, but we do have a larger room this time so we're able to accommodate more people. And we did get an extension on that room block where the hotel allowed more rooms at the $99 rate. But again, I can't make any promises about how long they'll keep that up. By the way, if you're flying in the airport code is SNA for Santa Ana or John Wayne or Orange County Airport. It has three names. Really. You don't need a rental car. Shuttle is right there from the Hyatt Regency to the airport. And, you know, you could almost walk that. Not that you'd want to, but you can take a cab, too. It's. It's super close, so it's real easy. Just fly in. You'll be right there. Everything you need is at the hotel. And there are some things within walking distance of the hotel, too, so don't bother with a rental car. It's not necessary. And weather's great in Californ, so if you are in parts of the country or the world, you know, we've had people fly from around the world to this event and some of our other events where the weather isn't so nice. Take a break from that weather and call it your spring break and come to Southern California and maybe go to Disneyland. Enjoy the beaches, enjoy the nice climate there and just be glad that you don't necessarily live there because then you'd be paying ridiculous taxes and would have an incredible amount of government intervention in your life. I'm so glad I don't live there myself anymore. No offense to our California listeners, but I know you're smart because I know you listen to this show and I know you're probably thinking, when am I going to get out of the Socialist Republic of California? Because I wanted to for years. And I finally did it, and I've not looked back so far. I'm really glad I did. So, you know, we've got Dan Ammerman, as I mentioned, coming up. You know, why do I mention him? You know, if you're listening to this show for the first time today, you probably don't even know who that is. He's a really good writer and really good charter financial analyst who talks about the effects of inflation and monetary policy. And I just think he explains this stuff so well. And I recorded an interview with him. I think that was the third or fourth one for the show. We have not published it yet. But some of the stuff that we didn't talk about in that upcoming show that you'll hear, that upcoming episode that you'll hear about arbitraging Fed policies with rental housing cash flows. I just wanted to kind of Talk about some of those here for a moment and remind you of what is arbitrage? First of all, you know, when people say that, what does that really mean? Well, there are all sorts of more academic definitions to it. But like me, if you listen to my show where I talked about derivatives, the way I explain things is a simpleton. And I think that is the mark of good communication skills. If you look at President Reagan, that was one of his really great skills was communication. And he just made things simple. Stop over complicating things. And so my very silly, simple definition about derivatives, what's a derivative? Well, I said to you on several episodes ago, I said a derivative is the thing about the thing. How do you like that for a definition? It's the thing about the thing. So arbitrage is just exploiting the differences in something. So if for example, the rate of inflation is 9.5% and the interest rates at which you can borrow money is, say it's on a long term fixed rate, three decade, 30 year mortgage that you're not going to be paying off until 2042. Okay, amazing. You know, what is that? Well, you're arbitraging inflation, right? And that would be if you had to pay the debt. And so that would be on a. Unlike your own home, it's still a great deal. You get paid to borrow money. But what if you outsource the debt to a tenant and they pay the debt for you and you're still getting the arbitrage? That's like a double. I call that the double inflation arbitrage. I've referred to it that way for seven or eight years now. And what Ammerman talks about in this report that we didn't talk about in the upcoming show is some things I wanted to share with you. He concluded this report on supply, demand, rents and vacancies and points out a couple really interesting factors. And I'm going to add some of my own thoughts to this as I usually take the liberty of doing so. I'll take a little artistic license here, as I always kind of do. He says here the unprecedented low cost of mortgage payments in inflation adjusted terms is not the only rental market factor moving to increase the amount of money available on the margin to investors. There are four other key factors that affect the margin and all four are currently moving in favor of cash flow real estate investors. Now before I go into those, he has a great little chart here that shows rental cash flow factors and lists six items. And I'm going to list some more than he does actually, but he says the fundamental factors and the effects. Okay, so fundamental factor number one, record low interest rates. Cash flow effect, positive for you as the investor. Up. The arrow is pointing up. So that's good news. Number two, falling property prices. The cash flow effect. The arrow is up, it's positive for you. Number three, increase societal demand. Cash flow effect positive for you as the investor. Number four, decrease new construction. Cash flow effect, positive for you as the investor. Number five, decreased vacancy rates. Cash flow effect, positive for you as the investor. And the last one he cites, increased rents. Cash flow effect. What do you think? I'm going to say, of course that's positive for you as the investor. So he goes on to point out, number one, increasing demand. According to the Census Bureau, the maximum rate of home ownership in the US Peaked. And we've talked about this before in the show, by the way, between 2004 and 2007, reaching at least 69% in one quarter of each year. By the fourth quarter of 2011, this number had fallen to 66%. Now remember folks, this my commentary, what we've talked about before. Every 1 percentage point in home ownership rate either up or down, equates to approximately 1, actually a little bit more than 1 million renters. So what does that mean? If it goes from 69% to 66%, it's over 3 million new renters. Okay. It's probably about three and a half million new renters there. Okay, now if we turn the numbers around, the percentage of the population needing a place to rent went from 31% to 34% between the housing bubble and today. This means that there has been an increase of 10% in demand. See, remember when you flip that equation around, you look that, you look at that that way, right? And more than that, when we include population growth, there is a basic shift that has been occurring as homeownership decreases while rentals increase. This shift strongly favors real estate cash flow investors. Number two, decreased new construction. The number of new construction rental units becoming available each year remains at near record lows, along with single family housing starts and construction sector employment. This could be changing soon in some metro areas as new multifamily housing projects, in other words, apartments, begin to surge in the second half of 2011. So you see the institutional investors, my comment have gone in and they see the incredible demographics coming at rental housing over the next 10 years. But, but this is, this is an amazing thing here. They get it right? But so many people that are used to living in single family homes, they're now living in apartments. And that means for us, as largely I know, our listenership is the bread and butter of our business here. And our listeners, they're investing in single family homes. Many do. Apartments, fourplexes, duplexes, triplexes, we'll just call those plexes. But single family homes are the largest percentage of the business. So we really, really are providing an incredible source to people who are used to living in single family homes because they want to rent those. And I think those will be even more desirable in the future. So when you look at this new apartment construction that's going on, remember that's positive for us as single family home investors because we're filling a huge market need as people have been used to living in single family homes but are displaced from them through foreclosure, through lack of housing affordability, inability to obtain financing, et cetera, et cetera. And they are moving into apartments, but they want to be back in single family homes. So where are they going to come? They're going to come rent them from you and I as single family home investors. He goes on to say, however, this is a surge from a very low floor as overall bleak conditions in the housing sector have prevented what would otherwise be a flood of new units responding to increasing demand, low interest cost, falling vacancies and rising rents. All of these are great things for us as investors. Okay, number three, he cites decreasing vacancy rates. Now, I just want to say something about this. Here is a misleading thing when it comes to the type of investing most of our investors are doing. There is no really good and accurate centralized database for single family home occupancy or vacancy rates in the institutional apartment world. There are many companies that have institutional apartment owners that own large apartment complexes. They take surveys. These companies go out and they survey these large apartment complexes all over the nation and they find out what their rents are. Are they raising them, are they decreasing them? They take surveys on all sorts of vital factors. But as a single family homeowner, you don't call up some central service and some central service doesn't call you and say, hey, is your home vacant this month or is it occupied? So the only one we really have is this census that is only done every decade, every 10 years. So that's what he's citing here. So let me go back to Ammerman. Decreasing vacancy rates. Also, according to the Census Bureau, the rental vacancy rate for the nation as a whole, including single family homes that are available for rent, fell from a peak of 11.1% in 2009 to 9.4% by the fourth quarter of 2011, a decrease of 1.7%. When we look just to apartment vacancies in major metropolitan, then the vacancy rate fell to 5.2%. Now remember, folks, our performas@JasonHartman.com when you look in the properties section, we estimate our performance at 8% vacancy. In other words, one month per year. And you know, I got to tell you, in one of my rental properties, I had a tenant in there for nine years, no vacancy, raised the rent, couldn't get them to move. It's amazing. Some of, some of your properties, they will just. The tenants will just sit there, sit there, sit there. My mother, I want to get her back on the show. Remember the show I recorded with my mom? I think it's like in the number 160 range of episodes, if you want to go back and look for that one. And I talked to her about this stuff, but I did not know that she has one of her houses that the tenant has been in. I only recently learned this a couple of months ago, and I want to get her back on to talk about it, but I think that tenant has been in her house in one of her rental properties for like 20, 21 years straight. Zero vacancy. She has raised the rent over and over. Tenant has not moved. And she said to me that she hasn't even replaced the carpet. Ooh, that's kind of gross. But, hey, that's amazing. You know, if you can do that as a landlord, that's. That's pretty incredible to me. 21 years, no vacancy. I know personally, I had nine years, no vacancies myself as an investor. According to the property research firm Reis Inc. Reis Inc. This was down from a peak of 8% at the end of 2009. CEO, 8%. That's pretty good. Vacancy rates are down to 2.4% in New York City and 3.6% in San Francisco, according to the Economist magazine. Now, if you read that, it would seem like, well, gee, and this is my comment, of course, you better flock to San Francisco and New York City. That must be a good place to be an investor. Hold on, folks, hold your horses. No, that would be a terrible place to be an investor. First of all, incredibly tenant friendly and incredibly landlord unfriendly. They call it the Socialist Republic of San Francisco. And New York is the same where they have rent control. I mean, if your tenant doesn't pay in those cities, you got an uphill battle collecting your rent and evicting them because all of the courts and the whole legal system, they just favor the tenant and not the landlord. One of the things we look for when we pick markets is we look for markets that are landlord friendly, that are friendly to our cause as investors, where we can do business, where we can get paid, where we can get deadbeat tenants out of our properties if we should ever have them. So that's one reason. But what is the even more important reason than that? Well, the RV ratio, the rent to value ratio, of course, in a city like San Francisco or New York. I mean, you know that in those cities, little crummy condos cost a fortune, and the rents do not keep up in terms of a rent to value ratio. The RV ratio, they don't keep up at all. Okay, so those would be terrible places to invest. But again, to the uninformed reader, they would think, well, let's just run over to where vacancy rates are low. It must be great. Not true at all. Ammerman goes on to say, this decrease in vacancy rates is exactly what we would expect given that there is an increasing demand for units and construction is still lagging compared to historical averages. And the benefits go straight to the margin, resulting in increased owner cash flows. Number four, rising rental income. According to Reis, apartment rents rose by 2.3% during 2011. Expectations in 2012 are for increases that are potentially well above the official rate of inflation in some major metropolitan areas, such as Seattle and Washington, D.C. again, folks, those areas, they don't make much sense for investors. Okay? But it's just an interesting thing that he pointed out, putting it all together, as shown above, we are currently in the extraordinary place where six factors are working together to increase the margin I.e. owner cash flows. This is an unparalleled opportunity. So, again, incredible. Now, some of the other things that he didn't mention, one of the huge ones, and we've talked about this on the show before, so I won't belabor the point. But, folks, do not underestimate the significance of the largest demographic cohort ever in American history, and that is Generation Y, Gen Y moving right into their primary renting years. An amazing, amazing opportunity. 80 million Americans. Okay, let's talk about some things you shouldn't do. There was a company that was pitching us hard, hard, hard. We have a lot of these companies. They call us up, they ask us to recommend their product, and we are pretty darn picky. You might be saying, well, Jason, I bet you say that to all the clients, right? No, it's actually true. In our Case we are very, very picky. Well, one of these companies a couple years back, maybe three years ago, as I recall, was just. I mean, they were pitching us for a long time, but they were called the Hanover companies. And you know, I got curious about them because I didn't like their deal. And the reason I remembered them is because they were so tenacious. I remember I should find this email exchange and read it to you. If I can find these emails from three, I don't, three, four years ago. They were just. It was like insulting. They were just angry with me that I would not do a deal with them. And they couldn't get into our group to. To sell their product to you, our listeners and our client base and our followers. And, you know, I just didn't like their product. I thought it was overpriced. I didn't think that the rents made enough sense compared to the other product we had. And I was worried about the fact that they were promising these rent guarantees. And let me just tell you the little scam. It's a pretty big scam, actually, that happens with these rent guarantees. Now, I'm not saying that this is a hard and fast rule that you should never do them, okay, or never buy based on them. But you got to go in to a deal with eyes wide open, being your own best advisor, being an informed investor. So here's what happens. Whenever someone is trying to sell you a property and they're making a bunch of promises about the future, here's what they do. And this is a common thing, and it's not necessarily intentional, but I think many times it is. And what they do is they sell you properties through an entity. They say things like, you know, we'll pay for your property management for two years or three years or five years, or make these great promises or. And then they say, and we'll guarantee your rent for, you know, a year or two years or three years, or we'll lease the property back from you. This is this kind of thing, folks. What they do is they have multiple entities, multiple corporations or LLCs that they do business under. A lot of times these corporations and LLCs kind of carry the same name or similar names. And, you know, that's not necessarily wrong in and of itself. Here's where it goes wrong, though. For you as the investor, when they sell you the property and the entity making this promise of the future, what they do is they sell a whole bunch of properties under this entity and then the entity just goes bankrupt and it's unable to keep its promises and you as the investor get burned because there's no guarantee of that. So I looked on the Internet and I found that there were all kinds of complaints about this. Hanover companies saying that they ripped people off and they've stolen thousands of dollars and they haven't paid. Now some of them, I do have to say though to their credit that they say they fixed some of the problems and they say they made good on some of these promises. But I don't know, I'm just saying that I just remember this company and it seemed fishy to me. It seemed like we dodged the bullet with them because they just did not to me personally, in my own opinion, did not seem like a good deal. Now here's another one of these commercial properties I've talked about. These. This is a single tenant triple net lease. Stan Johnson company. Again I'm on their email list. I get their offerings. This one, interesting. Just real quick again under the deals you shouldn't do category. Okay, just like Hanover companies or this one. This one is a Sherwin Williams paint store in Houston, Texas and it's $2.4 million and the cap rate 6.35%. This deal is junk. You can go to JasonArtman.com click on the properties section. You'll see performas there where cap rates are not lower. Well, you probably might find one here or there, but you'd be hard pressed to find a cap rate lower than 8.5%. On our website at jasonhartman.com youm'll find a lot of them that are much higher, that are in the 12% range. So there you go again under more stuff you should not do. I would not do this Central American stuff, this Nicaragua, Costa Rica stuff. Think about it folks. I hear from investors all the time that have trouble enforcing their leases, that have trouble collecting from tenants who skip out on a lease, that have trouble collecting from tenants that damage a property after moving out. What if you're a foreign country for God's sake? I mean it's tough enough to do that in America where we are the best rule of law country on earth, where you really have a strong infrastructure of court systems of credit reporting, of ways to collect from people. The US is probably the best at that where you've got rule of law. What are you gonna do in these countries with no infrastructure like Nicaragua and Costa Rica, you know, where they have huge crime problems and razor barbed wire around the houses and bars on the windows and roads that are so bad it's unbelievable. I remember when I was in Costa Rica and when I was in Belize, two of these third world countries, basically driving on those roads, it is insane. I mean these roads, the potholes are so bad, you literally, you will get whiplash. Driving on open highways, I mean, it is dangerous. And if you've been there, if you've been to these places, you know exactly what I'm talking about. Why the heck would you be silly enough to invest in these places? I mean, if you live in California and invest in Dallas and you've ever had a problem with a tenant in Texas, the place where the slogan is don't mess with Texas, the place where you can really collect and you can really throw your weight around as a landlord and demand your rights, just try doing it in Nicaragua or Belize or Costa Rica. What a joke. I wouldn't touch this stuff with a ten foot pole. Now there's something I don't know. Listen, call me up and chew me out and correct me and if you want to argue with me about it, maybe I'll even put you on the show and we can debate it out in the open forum. Okay, I'm all for open forum and having a dialogue about it, but that's just my humble opinion. You know, I told you before, on either last show or the episode before that, I told you about one of our local market specialist that was now offering one of these funds. But what I didn't tell you is I've been looking at their documents since I talked to you about that, the fund documents and here what they're offering on this, I looked at the Performa and the private placement memorandum. The private placement memorandum. I mean, just think if you can understand all this stuff, okay? It's 52 pages long of basically disclaimers. That's what they always are. And you know, all these reasons, you know, you can't sue them and you don't have recourse, right? And the subscription agreement, another 24 pages. But listen to this. The Performa, the cash on cash return here is only 9.04%. And again, it's a fund, it's a pooled asset that you do not have direct control of where you're not being a direct investor. Now another one of our local market specialists is offering this thing and they want me, you know, they want to come on the show, they want to promote it. And folks, I think it's going to be a cold day in hell before I'm promoting investments like this. But again, I'm open to having my mind changed. I just know that Commandment number three of my ten commandments that has served me so well, and I know it has served so many of you so well, is thou shalt maintain control, be a direct investor. Don't leave yourself susceptible to the three major problems of not being a direct investor, of investing in pooled assets. Number one, you might be investing with a crook. Two, you might be investing with an idiot. Assume they're honest, assume they're competent. Number three problem, they take a huge management fee off the top for managing the. And you know what, folks, here's the other little scam about this type of stuff is that, you know, they all say their management fee is one thing, it's one number, this is what they get. And you'll think as an uninformed investor sometimes that, you know, hey, I'm only paying them x percent. I'm paying them one and a half percent. But that's not really true because they're bearing all sorts of other cost into operating the fund. All sorts of other, quote, business expenses, unquote. Travel, wining and dining people, getting incentives from the contractors that they're doling out work to. Folks, just be a direct investor, maintain control. Follow my 10 commandments of successful investing. You'll stand a much better chance of being a good successful investor. You know, it's tax time coming up here and everybody, I tell you, we have had clients over the years that are sometimes only moderately happy with their real estate investments. And they don't get it because they don't know how to keep score, they don't know how to count, they don't know how to do the math that comes with income, property investing. And one of the things that usually turns these moderately happy people around or these semi dissatisfied people that don't think it's going that well because they don't know how to keep score. You know what turns them around? Doing their taxes. When they realize that they've just invested in the most taxable favored asset in America and they've got tons of tax advantages. Or when they make a profit on a property and they want to do a 1031 tax deferred exchange into another property and they don't pay any tax on the gain like they do on a business, the sale of a business, the sale of stocks, or any other pooled money asset. Now look at this one. I got this one newsletter. Yes, I do have a little stock account and I've got hardly any money in it, but it's basically in a couple of resource funds which they haven't Done that. Great. But I'm not completely out of pooled assets, but I'm on my way. And by the way, another one of my loans paid off on my private loans the other day. Hard money loan, private lending that I do. Wow. I just love earning 12 and an 8th percent plus a little funding fee. I got paid off on this loan in like 28 days. Yeah, it was a really, really, really short term loan. But, you know, I made some good money and I got my money right back. One of the things I also want to mention about this private lending. And by the way, if you're interested, just shoot me an email directly. Jasonasonason hartman.com I'll be glad to refer you to people. And you know, one of the other things I just, just want to say about it. Bernie Madoff. Bernie Madoff was running a. Or Bernie Madoff. No, I think it's Madoff because he made off with like $60 billion. He was running a Ponzi scheme, of course, very famous one. There are many of them out there. He's not the only one. And he got the idea, he said, from our Social Security system. Isn't that funny that the government doesn't get arrested, but Bernie Madoff goes to prison. He just modeled the Social Security system because that's what it is, a Ponzi scheme. But enough snarkiness there. But what is amazing and what I'd say you need to do to protect yourself when you're doing private money lending. I outlined some good tips on the last show and, you know, do all of those. But there's one more thing I didn't mention. Every time you do a loan, I want you to take your money back. I don't want you to leave it in and roll it immediately into a new loan because this is the one assurance that you have that you make it very hard for anybody to ever run a Ponzi scheme. You take your money back every time. So every time I make a private loan or a hard money loan, I get paid off. I put the money in my bank and then I say, okay, you got another deal for me. I look at the new deal, I follow all my steps, my due diligence, and then I wire them the money for the new deal. Yes, it does have the cost of being, you know, a little, slightly bit more of a hassle. But also I have to wire the money back to them. It's out of play for the time that it's not invested, it's not deployed, it's not earning interest. During that time, which hopefully will be minimal, just a week or so, but you take your money back and by doing that, you make it very, very difficult for anyone to ever run any kind of a Ponzi scheme. Just a little other tip. I know I am incredibly paranoid, but that's what I suggest you do. Back to tax favored assets. Income, property. The most tax favored asset in America. I got this newsletter from one of these stock accounts telling you how to calculate your gain on your stocks at tax time. The most, the biggest hassle in doing your tax returns of all is your stupid stock portfolio. Any Wall street related investment. It is such a mega, mega hassle to calculate the basis, the cost basis for that stock and the gain. You've got to go back. And if you're trading, I mean, what a mess. How can you ever calculate all of those transactions? That is just unbelievably complex. I see people. You know, this one guy that used to work for me, he was a real stock investor just. And the guy just never made any money. He was in the stock markets really, really smart, very knowledgeable guy. Used to be a stockbroker in New York. You know, worked on Wall street and he'd been in the market since I think the early 1970s. And all along, all his life he invested in stocks and he used to have his stock charts out. I used to see him doing it in the office and just love stocks. Never made any real money from it. Had over a million dollars in the market, dabbled in real estate on the side. Always for some stupid silly reason like stocks more. Although it never really worked for him at all. But I used to see, I remember one time seeing him do his taxes. He'd come in the office to do it because he wasn't distracted at home. And I mean, unbelievable complexity. Just he had all of these papers and, and these stockbroker statements out and he had to calculate the basis for every stock, for every trade and the gain. I mean, unbelievable. Real estate is so simple. The little Schedule E, if you're using Property Tracker, it just makes it so easy. And if you want to get Property Tracker again, we don't make a penny off of this. We just love the software. One of our clients developed it. You heard Joel on the show, he's the developer of it. You get a discount on our site@jason hartman.com, just click on Resources and go to the Property Tracker on the Resources page. You get a month free, no obligation, and you get a discount every month thereafter. I highly recommend that you use it and the accounting for your real estate, just that alone. It's so simple. It's so much easier. Okay, enough said. Let's go to Amity Shla's and talk about the Forgotten Man. This is a very interesting book. You've probably heard of it, it's quite famous. And it's a chronicle of the Great Depression. So you're going to learn some stuff about that today, as I did. And be sure to join us for Meet the Masters in March. Again, there's still some early bird pricing. The price will increase for that very shortly. Register@JasonHartman.com in the events section. We will look forward to seeing you there. And we'll be back with Amity Shlaes in just a second. Remember, you're listening to Flashback Friday. Our our new episodes are published every Monday and Wednesday. It's my pleasure to welcome Amity Schlaiz to the show. She is the author of two books, both best selling and the one we'll talk about mostly today is entitled the Forgotten Man. It is a new history of the Great Depression. The American Enterprise Institute wrote in the National Review that the Forgotten man was the finest history of the Great Depression ever written. I think you'll really enjoy this interview with Amity. How are you, Amity?

I'm great. How are you?

Well, good. Thanks for joining us from New York City today and tell us a little bit about your work. And I guess you're working on the 4% growth project and we'd love to hear about that as well.

Well, yes, this is kind of a dark year and people are thinking dark thoughts about the economy and austerity. But there has to be some gain beside the pain for people to want to proceed to Fairforth, to create new jobs, to, you know, to work. So the 4% growth project is about what would happen if we did grow faster rather than telling ourselves that we can't grow, which is the usual mode. I know you've heard people say we can only grow 2% or 1% now here in the U.S. well, we can go 4%. And we're devoted at this project to showing how it is a project of the Bush Center. President George W. Bush, Bush 43, has created his own think tank that goes with his presidential library in Dallas.

Fantastic. And I mean, 4% growth, is that really so unreasonable if we got our act together in this country? You look at the economies of China and India and I mean they've experienced at times, I don't know, the latest, but 8% GDP growth and just seems like we're doing so many things wrong. And, you know, the old saying is those who don't learn from history are doomed to repeat it. And you have a lot of history in the forgotten man. Talk about the book a bit and tell us what lessons we should be learning from the Great Depression.

Well, one thing about the Great Depression is we failed to get back to where we had been. How do you define recovery? Well, one definition is get back where you started in terms of gdp, the estimate of the growth of the economy or the stock market. And by those measures, and also, by the way, the most important employment, took us a long time to get back in the Great Depression. So the forgotten man is a second look at the period and says, what is it about that period that made it so bad that it wouldn't have been a Great Depression even if it had been sharp? If it had been short. Right, it wouldn't. But what people remember is the duration. 10 years, 11 years. Well, in the war, what was that? So between peacetime prosperity and peacetime prosperity, you have well over a decade. And the book examines the reasons for that.

Well, it seems now that the Keynesians are out in force, the corporate socialists are out in force, and it feels like they're trying to put out the fire with gasoline. And by just throwing more money on the problem, is that the right thing to do? I have a feeling you'll say no.

Well, what is a Keynesian? You want to ask first. When we say Keynesian in the modern way, we mean an emphasis on government action and spending, particularly by government or stimuli via the tax code. Sometimes you hear about monetary stimulus as well, from the Fed, for example. So that the Keynesians are the action men, if you want to put it that way. And they tend to look at shoppers. If you look at the traditional surveys, they look at, do people want to shop? That's an instance of recovery. On television, people will hear that a lot of the economy is shopping, so people need to shop or we cannot recover. But there's another view, and indeed it was the view that prevailed in the 20s. I'm now writing the biography of Coolidge. And they had a completely different view about what a recovery is, what a downturn is, and how you manage either. And they said, well, investors matter a lot. Do you want to invest? If you don't, that's a problem. Or do you trust your bank? Then that's a problem as well. So in the, the government first got the idea that spending might be the answer. They weren't Keynesian in The modern sense, because Keynes himself had not finished his book when the Great Depression started. The book of Keynes, a modern theory that we look at, didn't come out until the mid-30s. So what was going on? Well, we had proto Keynesians in the U.S. i described some of them in the Forgotten Man. Catchings was one. And they said, spend to get growth, spend to bring the economy back. And that was the philosophy the government sometimes applied, not consistently in the New Deal period especially.

And when we talk about the forgotten man, what does that really mean, the forgotten man? I mean, the title of your book is interesting in and of itself.

Well, Roosevelt spoke of the forgotten man at the bottom of the economic pyramid. So you imagine the pyramid. That's the poor man, the homeless man. He was the forgotten man of Roosevelt's speech. FDR gave a wonderful speech where he said, we won't forget the forgotten man. And some people have traced that back to liturgy. You can find in liturgy references forget not and so on. And what's interesting is that there was another forgotten man in the American philosophical discussion before Roosevelt's forgotten man, and probably not related to the liturgy. And he was a different forgotten man. He came from the philosopher William Graham Sumner, who used a little algebra to describe the forgotten man. And he said, so you imagine the letters A wants to help X. X being the man at the bottom. We all want to, that's charity. X is poor. He's down there at the bottom of the pyramid. B wants to help X. A and B want to help X. We all have that impulse comes a problem when A and B band together and pass a law that coerces C into co funding. There are perhaps good but perhaps dubious project for X. Wow. C is the forgotten man, the man who pays, the man who prays, the man who is not thought of. So that's what Sumner said. And in the 30s, they all recalled Sumner and the forgotten man was the taxpayer and debated with Roosevelt. They debated all the time with Roosevelt. You have the wrong forgotten man. It's not the poor man at the bottom, it's the taxpayer. And we have this debate today as well. Who's the right forgotten man?

Right, right. Talk to us a little bit. I mean, the book really talks about the leadership of that day. Hoover, Roosevelt. What are your thoughts looking back on the way it all played out with our leadership?

Well, everyone means well. That's the headline. Everyone means well. And being well intentioned doesn't always get a good outcome, especially not for the economy. You're talking about a period, the stock Market did not recover until the 1930s, 1950s to the 29 level. So you ask yourself, when you're thinking about wealth, was the 29 level so very high, so very much out of the framework, that we had to wait until the 1950s for the market to get back to it or what else caused this delay? And my theory, the evidence that I look at, suggests that the market was too high in 29. Indeed. But not so high that we had to wait so long all the way to the 50s for it to come back to the 29 level. More that the market was depressed in the 30s and even the 40s. So, wow, that's a big deal. That's relevant to us today. What makes the stock market fail to come back, choose to stay low?

And what is that?

I mean, the bottom line. One line. The thesis of the Forgotten man book is that it was government intervention. Government made it worse. Republican government and Democratic government, the federal government butted in too much. Just say it like that. So first, the Forgotten man book starts with Herbert Hoover, who was a Republican, supposed to be do nothing Mr. Laissez faire. He wasn't. I mean, temperament matters a lot with these people. So Hoover might have been a nominal Republican or a nominal Democrat. He happened to be a nominal Republican. But it was his temperament that was the issue. He was a control freak. He was very famous in his day as a businessman can do businessman. When other people were silent, he would jump in. That was his nature. He required a great deal of admiration in an interaction. And he was used to the superhero rescue role. He had fed starving Belgium in the period of World War I. He had rescued the south during the Great Flood. We had the Katrina of the period, Mississippi flood, 1927. He was accustomed to being the superhero. And when there was trouble in the economy, he leapt in as president. And many of the things he did were counterproductive, including signing a tariff bill that hurt our friends in other countries. Raising wages, or more specifically, putting upward pressure on wages at a time that employers could ill afford to pay higher wages through laws such as the Davis Bacon act, which you still hear about today. Upward pressure on payment for government contractors, raised taxes. So he was the first activist, even though he was a Republican, which is supposed to be the less activist group. And he was followed by Franklin Roosevelt, who was activist in another way, more of a democratic way, but also temperamentally an activist who brought the New Deal. And there were many aspects to the New Deal that were likable or even good, but many more that were counterproductive. And suppressed the economy.

Well, depending on how you look at it, maybe three years into what some call the Great Recession now, and we have had massive government intervention. I mean, many believe, and I'm one of them, that if we just took the tough medicine, the government stayed out of the way, the market would correct itself and things would recover more quickly. It seems to me that government has a way of lessening the initial blow, but making it carry on in this sort of chronic state of a. Of a zombie economy. Would you agree with that?

Yes, zombie is a good word. I mean, in economic theory, one of the things we talk about is price discovery, which sounds really technical, but what it means is if you know what the price of something is, you will trade it. If you're waiting around because the price might change because someone might do something like the delivery might not arise, so the price would go up because there's not enough shortage of supply, or there might be inflation or, or deflation even more. If you don't know what the price is, well, you're not that eager to transact. I mean, people were old enough to remember the inflation period. It had to change the way we did accounting and a lot of other things. There's a dampening effect when nobody knows what a price is going to be or whether something's true price has been expressed yet. What if our houses really are worth only half what they were supposed to be worth in 2006? It might be. So it might be better to acknowledge it than to pretend they're not. You notice the Fed just recently put out a paper to help people with their mortgages. That's another way to slow sales and slow price discovery. Price discovery doesn't happen. So nobody knows. The reality is that everyone suspects, which is that the house is worth even 10% less of the low price it's already at. Way, way way. The mortgage is way, way, way underwater. Nobody wants to say that. And that in turn makes it hard for the man who has the underwater mortgage to find a job and move on, because sometimes you just have to move on, which is to say sell and take a loss, and that that sale is better than to wait and pray that the price of the house will go up so your mortgage will no longer be underwater. So the zombie aspect, and I like that adjective you chose zombie like because we're like Japan. And one of the failures of Japan that we've all studied to come back was due to the reluctance on the part of the Japanese business and political establishments to acknowledge that the prices in Japan should be lower than they were and that many of their companies were rotten. So they postponed everything because they didn't want to admit it.

And now it's been dragging out two decades.

It's two decades, and there are many, many stimuli. Once we counted how many stimuli there were in Japan, it was two figures. They built so much infrastructure, and the infrastructure didn't help their recovery, nor did it, by the way, protect them entirely from the tsunami, as we've discovered. So that's kind of creepy because they had a very large emphasis on infrastructure for safety and as stimulus for many years. And they became a zombie economy because of their reluctance to face political economic reality. And we're now doing the same thing.

When you talked to me earlier today for a moment, you had mentioned something in Arizona that you wanted to talk about. What was that?

Well, one of the things we discovered in researching the Forgotten man, this key book, I mean, behind every book is a book or books. And one key book was William Graham Sumner. I mentioned him before his Forgotten man essay, which was from Decades. But another was called Government Project by a man named Banfield. Edward C. Banfield is obscure. Basically a university dissertation. Government Project. What's that? You can't even buy it on the Internet. You can find it in some places. Hard to buy. Edward Banfield, A young man went to look at a New Deal farm, an experimental farm in Casa Grande, Arizona, called something like Casa Grande. And the government lavished resources upon this farm. It was for poor people. Not as poor as the poor people in Grapes of Wrath, but close migrant workers who had been displaced, who wanted to start over. And the principle was, because of the economy of scale, we all band together and share a tractor. And the basic good start the government gave with nice houses painted pretty colors to people who didn't have running water, they got electricity and running water. This farm would do well, and it could be a model. And the tragedy of this farm was the people were nice. The farm was nice. In Casa Grande, the money was nice. But the farm could not succeed. And the federal government gave them a wonderful community house for these people who were community people. And what did the overseers discover after a couple years? They trashed the community house. Why? Why would they trash something good given them? And the answer that Banfield laid out and so beautifully through interviews with the farmers who were good people, as I say, was that there's a downside to enforced collectivism, which is you don't know what you own and therefore you don't take care of it. And we all know what that's like. We call it sometimes the tragedy of the comm. When nobody owns something, we don't take care of it. And there's a hilarious quote, one of the things. There's a poultry theme throughout the Forgotten Man. And there's a poultry theme in the Casa Grande story as told by Banfield, which I then told in Forgotten Man. Some farmer or other is looking at the collective chicken coop, and he says, I like the collective chicken coop. I like the chickens. But I keep forgetting which chicken is my chicken. That is the impulse people like to own. They like to know what's theirs. And when you go against that through theory, even with bountiful gifts, you tend to fail. So I love that story. And probably that area is now a shopping mall. Casa Grande is urbanized now, but it's part of their history. And I did once talk to a librarian there. I'm trying to figure out now from my new book, which is a bio of Calvin Coolidge. This is near the Coolidge Dam, whether Casa Grande became arable because of the Coolidge Dam or other dams, maybe because of the Hoover Dam. And that someone in your constituency will have to tell me why. There were great areas that became farmable and had not been before. I think this is one of them. What was the change that made it possible to farm at all in Casa Grande?

We'll be back in just a minute. Just a reminder. You're listening to Flashback Friday. Our new episodes are published every Monday and every Wednesday. Well, your point is very well taken. The collective simply doesn't work. And I mean, you look everywhere on the planet and everywhere throughout history. And enforced collectivism has always been a disaster. There is literally no exception, at least not that I know of. Because when it's everybody's money, it's nobody's money. When it's everybody's land, it's nobody's land. And when you look at the disasters, the environmental disasters in communist countries or formerly communist countries when the Soviet Union opened up, I remember reading in a Greenpeace magazine how they just had such bad care for their land and such bad stewardship, and you would mostly think of environmentalism as a left wing thing. And you'd also think, I guess, of collectivism as a left wing thing to whatever degree you want to make it, but nobody cared about it because nobody owned it. When I was in Cuba, I remember looking around thinking how ramshackle things were and how people just littered everywhere. And if you want people to care about something, let them take ownership. Let them be at stake?

Well, yes. And when we debate the tragedy of the commons, that area, the answer is private property. When you have high school debaters and you're talking to them, what is the answer to when we all graze our sheep in the same place and then there's no grass left? Well, it's that you have some kind of stake in what happens to the quality of that grass, whether it grows back, then you begin to manage it. And that whole side of environmentalism and of resource management is fascinating. So I was just completely blown away by this book by Banfield where he went with an open mind and found his sorrow that these farmers failed. And what I want to mention something that's very interesting about regret and policy. All politicians work in agony because their policies don't get implemented the way they want them to be implemented. And yet they have to take the blame for the outcome. Right. It's a rough job being a politician. And the person who helped to create this farm was named Rex Tugwell, who was a famous New Dealer. The right wingers always made fun of him. His name Rexford Guy Tugwell was his full name. And he was a thoughtful economist who happened to believe altogether too much in the economy of scale. And he really crafted this farm. And to his credit, he was working, maybe teaching at the University of Chicago when Edward Banfield was working. And he had Edward Banfield work on the outcome of his farm in Casa Grande. What happened to the collective farm that I, as a government official, funded? Well, it's not a pretty story, and I will allow it to be told by one of my students. Essentially, that's what Banfield was. And Tugwell wrote the intro to this report on how his project failed. That's a very rare individual who will acknowledge failure and even allow it to be publicized. So I liked the New Dealers. I don't think they're very different from the right wingers who come into government. We're all fallible and so on. And one of the things in the Forgotten Man I try to convey is that we all have good intentions. The question is, do our intentions bring a good result?

So when you look at the greedy hand, and I assume that's a takeoff on Adam Smith's invisible hand, right?

No, actually, it's from Tom Paine. It could be. I mean, hands economics are all over the place, right? The greedy hand of government making our prosperity its prey was from Tom Paine. And he's another big name in our Anglo American heritage, Thomas Paine. And I like that because everyone knows about the greedy end of government. When it comes to taxes, it doesn't matter what party you are. It's a little bit of a strong title. That was a book I wrote a few years ago now about the US Tax code.

And so the government distorts markets and distorts free markets and delays pain, as we talk. Talked about earlier to some extent, through fiscal policy and through monetary policy. And so now we talk on the fiscal side, the taxation side. Any thoughts or examples you want to share from the Greedy Hand about that?

Well, you know, one thing is how the government tricks us. And the fun of the greedy hand, My favorite part was the beginning. Because, you know, withholding is kind of a trick, right? You never see your money. It's already gone. They took it from their pocket with their greedy hand. Wow. So how do we get that? And we did have some form of withholding in the Civil War period. And that wasn't too hard because soldiers got their pay docked. And we, of course, created withholding through Social Security, but we didn't have income tax withholding until World War II. And they had to craft it because they were pretty sure people wouldn't like it. Wow. And that's interesting. So they crafted it, and there was even a tax amnesty that went along with it. It was. It wasn't easy to get Americans to agree to withholding. And I had never known that. I thought, well, everyone always accepted it. But there was significant resistance. So when I was writing the Greedy Hand, I learned quite a bit about American history and that withholding shouldn't be taken for granted. It's a relatively young thing. It happened towards the end of World War II, and. Wow. Well, maybe it's a bad idea, because if you never let people see their money, if you make them, if they never feel the pain because it's too quick, well, then they don't resist. And one thing about simple taxes that's better than complex taxes, you can see what they are. And one problem with our progressive rate structure is we never really know what our rate is. Our average tax rate is. It's too complicated. We just know the money disappears. Right?

Well, 70,000 pages or so in the tax code, no one can possibly understand it. It's just. It's beyond ridiculous. Of course, and this is the point.

President Bush has made, that simplification is itself a good deed. Because people need to know what they're paying so they can decide whether they like to pay that amount. And if you confuse them, they kind of give up. And there were various illusions. People Talked about fatal illusion, fiscal illusion, where the one illusion is that if you tell people all the time the rich are paying a lot, they don't mind paying some themselves. So you distract poor people by going after the rich so you can clean out the poor. And you know, there are many illusions like that that are discussed in tax history. There was a Frenchman, Colbert, who said the art of taxation is plucking the goose with the least amount of hissing. That you can trick people and take quite a bit from them. And that itself is creepy. It's un American. So a simpler, clearer code is always better.

Absolutely. I couldn't agree more. That simply the act of simplification would be a huge boon in and of itself. Even if the rates stayed the same or increased, simplification would be nice. But of course there's a whole industry and a whole complex behind the complex tax plan and hiding things and the whole industry of tax preparation and so forth. So good luck. Steve Forbes. I don't think we're going to see that anytime soon, unfortunately.

Well, I don't know. I think there's a very big discussion. We're making a graphic novel version of the Forgotten man and this is a large endeavor. It's 270 pages. We're going to translate it into Spanish too.

Fantastic.

Because we do. We did many Forgotten man readers in Mexico. We had a great, I had a great trip to Mexico a couple years ago. They don't really necessarily want to read a 400 page tome about American politics which the Forgotten man has that aspect. So I think lots of people understand this viscerally. And now one of the silver linings in the cloudy time we have now is that people do begin to understand the beginning of the need for change. When the greedy handbook came out, things were going so well that there was no urgency to a tax book. Well, we pay a lot of taxes, but we feel fine. So. So it's okay. Now the consequences of heavy taxation and government involvement are clearer. The relative competitiveness of the United States is at issue. So people are willing to look at plans that sounded radical a couple years ago. And whether it's the 999 plan that we heard about from Mr. Cain or many others, this is a good time to look at what's really wrong.

Well, I certainly agree with you. I guess the reason I'm so pessimistic about it is that there are just so many entrenched interests in the status quo. That's all. But you know, Amity, we're starting a new year. Do you have any thoughts or predictions or advice for the Future for 2012 and those all being lessons couched in history, in your writings and so forth. Do you think we'll see inflation?

Personally, I've been looking for inflation for years. It hasn't showed up yet. I know it's lurking around. One of the tricks of inflation is inflation expectation. The question of whether you imagine that inflation could be possible. So the achievement of Chairman Volcker, the old Fed chairman, who Paul Volcker sure was, to make it clear that nobody could expect inflation under him. He had to be quite dramatic to do that. Right. It hurt a lot. If we recall what it cost to get a mortgage.

21%. That's what it cost.

That was house. I mean it 20%. Right. Well, now we know that all bets are off and nobody seems to particularly worried about inflation. So eventually inflation expectation, even if they don't increase the amount of money, will drive interest rates up. And I'm concerned the faster we can reduce inflation expectation by declaring the period of stimulus through monetary over, the less pain we're going to have. But right now we're hearing from the Fed the opposite. They they just see low interest rates as far as the eye can see and are not concerned.

Any other thoughts or advice though for the future, for the new year that.

People can just, you know, share books with your children? Read books. I'm really excited about the Forgotten Man Graphic. The artist is a cartoon master named Paul Rivosch. He's from Canada. He's been working on this for several years. It's a brilliant genre and I think we can tell the story of what's happening. Then we will succeed because the story.

Is the truth, because we'll understand the history of it too.

Yeah. The record is that government intervention is less successful than less government intervention. So we need to be able to convey that. And those of us who work at communication have thus far failed. So let us try new with this serious endeavor.

Well, I couldn't agree with you more. Let's get the government out of the way and keep the government as small and lean as possible. Listening to Obama the other night, it seems like 40 new programs announced in one hour. Well, yeah.

Well, thank you very much.

Unbelievable. Well, thanks for being on the show today and tell people where they can get the book. Of course, on Amazon. Great reviews. Do you have a website as well?

I do and we're just creating a new website at the Bush Center. 4% growth. They can buy the Forgotten man on Amazon. I hope you do, but especially I hope you Buy Coolidge, which will be out this summer.

Fantastic. Well, Amity Shlaes, thanks so much for joining us today.

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