Steve Forbes for World Bank!!! Jude Wanniski January 7, 2005

Memo To: President Bush
From: Jude Wanniski
Re: Steve's Perfect for the Job

First let me congratulate you, Mr. President, on your choice of Bob Zoellick to be Deputy Secretary of State, helping Condoleezza Rice fix up the world through diplomatic initiatives. He was an inspired choice, a fellow who practically everyone figured you would name to be president of the World Bank. But he's much better placed at State given the challenges presented – especially in the Middle East. But that gives you the World Bank post to fill, with James Wolfensohn having decided to return to private banking life when his term is up in April.

Yes, I know there are rumors that you have offered the job to former President Bill Clinton, and if so and he accepts, that would be all well and good. At least he is not a banker, although I am afraid he has such a big heart that he would be a soft touch in spending the bank's money, and not really do much to help the poor countries of world dig themselves out of the debt hole they are already in.

The really perfect American for the job would be Steve Forbes. The big problem in the Developing world, much of which has been going backward rather than developing, is the fact that they have borrowed megabucks over the years from the World Bank and the International Monetary Fund for projects that were supposed to help their economies grow. Instead, the projects fail and the countries are left with the debt, always compounding even at friendly low interest rates. When you put a banker in charge of the Bank or the IMF, no matter how hard they try to think supply-side economics to engender growth, they wind up thinking about how to get more new loans outstanding while they are trying to get more old loans paid back.

There are any number of supply-siders who know the dopey policies of the Bank and IMF have to end, with help to get their tax rates down and currencies stable, but Forbes is the only one I can think of who has the stature as well as the wisdom to make a great success of the job. You know there are plenty of conservatives who would like nothing better than to blow up the Bank and the IMF as being hopeless failures, but it makes more sense to keep the institutions and change their policies. Having run for President twice and spend a fortune of his own much greater fortune in that losing cause, he has become known to the world's leaders and is already well known to the world banking class. They might be miffed at not getting one of their own into the job, but they could not carp about Steve.

You also don't have to worry about giving Steve a post that he could use from which to make another run at the GOP nomination in 2008, if you have another preferred choice. Having been beaten badly in both 1996 and 2000, I'm sure Steve understands that he was never cut out to be a world class politician, a job that takes skills he never developed as you did. But he does have all the requisite international political skills, which he developed when he ran Radio Free Europe back during the Cold War. He's also been a great supporter of yours, on all counts, including the war in Iraq (where some of us did part company with you).

If you happened to be watching the McLaughlin Group last week, you may have caught the part where McLaughlin asks his panel to name "the most under-reported story of the year." When he got to Larry O'Donnell, one of the regular liberals, O'Donnell reminded the Group that a year ago he said that the oppressive taxation in black Africa was the most under-reported, and that for the second year in a row it is still the most under-reported. O'Donnell mentioned, as he did last year, that I'm the only guy in the world who has been reporting this diabolical situation. And I've been writing about this for more than 25 years, but until the President of the United States takes an interest in it, nothing will be done. Most recently I have been trying to get reporters who are writing about the carnage in the Sudan to at least take note that after decades of IMF/World Bank currency devaluations and tax increases, the top income-tax rate in that miserable country is 45%, which the individual worker encounters at $38 a year. A YEAR!! You can understand, if you think about it a minute, why the Sudan government gets almost no revenue from the income tax. Ordinary Sudanese citizens can't do business when capital and labor at taxed so high up the Laffer Curve. The economy stops and people kill each other in civil war to get the calories they need to survive.

Here's part of a memo I wrote to Charlie Rangel on the topic back on October 7, 2003, when I thought he might rouse himself to do something. He hasn't done a lick, but maybe if Steve Forbes were at the World Bank, Charlie would see some possibility that his efforts would bear fruit and not be cancelled by the bankers:

Dear Charlie: I know you couldn't make it to last night's White House state dinner for Kenya President Mwai Kibaki, but I know you still have a great interest in Kenya's economic development -- as you do with all the black African countries. Your main problem, as co-chair of the Africa Trade and Investment Caucus, I think, is that your focus is on what the United States might do to spur investment and trade with Africa, i.e., lowering our tariffs or encouraging debt relief. That's awful hard to do, because domestic special interests in the U.S. fight you off to protect their own pocketbooks. I've brought this up with you before, Charlie, but the Kibaki visit offers another opportunity to bug you about the tax systems in black Africa. Here is where you can do much to help these countries expand their economies internally, in ways that don't require handouts from American special interests or American taxpayers. Instead of sending billions in "aid," send some good advice.

Kenya is a perfect example of a country that has been hammered mercilessly by the inflation of the last 32 years, since President Nixon floated the dollar in 1971. When I visited Nairobi in 1967, its economy was in great shape, and I marveled at the obvious prosperity I could see throughout the country. What wrecked it were the devaluations of the Kenyan shilling and the great inflation they produced. As it has throughout Africa, the economists at the International Monetary Fund recommended the currency devaluations. The resulting inflation dramatically increased the progressivity of the income-tax system. The IMF helped out here as well by urging the government to balance its budget by raising tax rates even higher, along with the "bracket creep" produced by the inflation. The most recent data I have at hand indicates the per capita income of Kenya's 29 million people is not much above $340.

Now look at the tax system: On the personal income tax, an individual pays a top rate of 30%. This does not sound that bad, but the taxpayer encounters the 30% at a threshold of $5,646 (at the current exchange rate). The 25% rate hits at $4,256, the 20% rate hits at $2,865. On top of these debilitating rates, Kenya has an 18 percent Value Added Tax (VAT). This is because the income tax collects so little revenue at these steep rates. There is also a raft of taxes faced by business and industry, including export duties, import duties, stamp duties, fringe-benefit taxes, etc. Local businesses pay a 30% corporate income tax and branches of foreign companies pay at a 37.5% rate. All of the taxes together produce $1.9 billion per year. That's pocket change to Bill Gates, Charlie. He could easily give Kenya that amount for several years and it could operate without a tax system! It would grow like crazy.

Then we have Botswana, a sizeable country of only 1.5 million in southern Africa. Its "showcase economy" produces ten times the per capita GDP of Kenya's 29 million people. TEN TIMES, Charlie.

Now take a look at its tax system. The top marginal rate is 25%, just five points lower than Kenya's, but the individual does not pay that rate until his taxable income is $21,413. The 20% rate hits at $17,398, the 15% rate hits at $13,383, the 10% rate at $9,368. And get this, my friend: The 5% rate hits at $5,353, which is almost where the Kenyan pays the marginal rate of 30%!!! And there is NO VAT in Botswana. Corporate tax rates are 15% for manufacturing, 25% for non-manufacturing. And all of the taxes together yield $1.3 billion in revenues! With these much lower rates and no VAT, Botswana's government gets almost as much revenue from its 1.5 million people as Kenya does from its 29 million....

[Treasury] Secretary Snow would know this, but I gather the memo I sent his chief of staff was not passed on to him, so in desperation, Charlie, I turn to you… You may realize with the wisdom of age and experience that the Nobel Prizewinners are blaming the politicians for the miseries of black Africa – and other parts of the impoverished world – because they can't admit to themselves that their demand-side economic policies have been the CAUSE of the poverty. Now that you are in your seventies, why not try something different? You've known me pretty well over the last dozen years, so you know I'm not here pleading for tax cuts to line my own pockets. I want to help you solve a problem that has been driving you crazy for decades. At least give it some thought….

Sincerely, as always,

Jude

* * * * *

PS. Be assured, Mr. President, that I have no vested interest in promoting Steve. We are not even on speaking terms, as he is still mad at me for talking him into running for President in 1995 and yelling at him when he wasn't politic. He is still a great national asset going to waste simply adding to his billions.