Forbes Editor Says Economy Imperiled by Fed’s Actions

Preaching a hands-off economic policy, business columnist and publishing scion Malcolm Forbes Jr. told an Orange County audience Thursday that the economy could suffer unless the Federal Reserve Board allows interest rates to fall.

Forbes, grandson of the founder of Forbes magazine, said the Fed’s recent inflation-fighting efforts have kept the economy from performing as well as it could.

Speaking at an economic forum sponsored by Chapman College, Forbes also warned that efforts to keep capital gains taxes at current levels could dampen what would otherwise be a prosperous decade ahead.

Forbes, president of Forbes Inc. and deputy editor-in-chief of the magazine, criticized the strategy pursued by Federal Reserve Board Chairman Alan Greenspan. Over the past year, the Fed has caused interest rates to rise about 3 percentage points in an effort to contain inflationary pressures.

“The most immediate danger to the economy isn’t the budget deficit or the trade deficit, it’s Alan Greenspan,” said Forbes, who writes a column on business and finance.

“The Fed believes inflation is caused by prosperity,” he said. “It’s not true. History shows we don’t need higher rates to ease inflation.”

Forbes, 41, said the cause of recent increases in closely watched cost-of-living indexes can be traced back several years to a dramatic decline in the value of the dollar relative to foreign currencies.

He said the dollar has since steadied, and that inflation will not spiral out of control as long as the dollar’s value remains stable.

Forbes predicted that the Fed will loosen its grip on the nation’s credit supply and allow interest rates to subside by the end of the year. “But the question is,” he said, “will it be before the economy suffers, or after?”

Forbes predicted that the 1990s will be prosperous, but he said economic growth would be enhanced by a reduction in the tax on capital gains.

Capital gains are profits realized from the sale of investment assets such as stocks. The government previously taxed those gains at a lower rate than other income, but the preference was eliminated in 1986.

Forbes praised President George Bush for asking Congress to restore the tax break. He said that reducing capital gains taxes will create new jobs and promote development of technology by stimulating investment. “As it is, we are tying our hands competitively,” he said.

Forbes said widespread concern about the nation’s budget and foreign trade deficits is misguided.

Trade deficits are common during periods of growth, he said, noting that Japan regularly recorded a deficit during the 1950s, its first years of rapid economic expansion.

Forbes said the federal budget deficit is not threatening and can be reduced further by keeping government spending increases below the rate of inflation.