In this Flashback Friday episode of the Creating Wealth podcast, from Episode 302 in February 2013, Jason Hartman spoke with investment counselor Sarah about the way that California is losing residents to other states due to their high taxes and instances of government intrusion. The pair also covered a recent real estate scam and what investors can do to avoid losing their money in these sorts of schemes.
Jason Hartman also interviewed Steve Forbes, the editor in chief of Forbes Media, on why the government is getting bigger even though it is not working efficiently. Mr. Forbes discussed the advantages of free market economy and covered topics written in his book, Freedom Manifesto: Why Free Markets Are Moral and Big Government Isn’t. He and Jason Hartman discussed why the government tends to stifle the growth of the economy, damage the education system, and create an environment of “rigidity and scarcity”.
California is Losing Residents
Jason Hartman begins the episode by announcing his interview with Steve Forbes of Forbes Media, stating that Forbes has a clear and concise way of thinking.
Before this interview, he welcomes investment counselor Sarah to the episode, mentioning that he has tried to get her on the show before, but she’d been very busy in the past.
Hartman mentions the issue in California and how it continues to lose residents to other states, and one of the reasons behind it is the high taxes driving people out. Residents of California are moving to Texas, Arizona, and Nevada.
Sarah mentions that she posted on Facebook recently that she planned to leave California, and she got quite a lot of response from other users. She notes that so many of her colleagues have left the state already and that California had a net loss of 100,000 people just last year.
Hartman points out that the more we look around, we discover that California is not the center of the universe, and explains that losing 100,000 people in one year is a lot even if it does not seem like it is to a state with a population of 40 million.
Sarah notes that the statistics show that 59,000 people moved from California to Texas, 49,000 went to Arizona, 40,000 went to Nevada, 38,000 moved to Washington, and another 40,000 relocated to Oregon.
Hartman explains that this is what happens when a state overtaxes people. He points out that we are seeing this on a national level as more people are leaving the country completely. When government intrusion and regulation is increased, there is less economic activity. People either get around it, try to beat the system, or give up and leave.
Sarah mentions that it’s sad that as a California resident, she is not incentivized to work harder. California residents give away a good deal of money to their government every year. She explains that a year ago, she was audited for a very small amount of money, and it took a lot of time and energy to handle what was happening. For such a small amount of money, the process was extremely tiring.
Hartman states that when people are put into a position where they have to defend themselves against their own government, it’s a recipe for disaster. He notes that on the show, the US gets picked on a lot, but with all things considered, we are still a pretty good country. A great thing is, we can criticize our government without too much fear of retribution.
A Recent Real Estate Scam
Hartman mentions that there has been another real estate scam in the news and advises listeners to remember the third commandment of investing, “thou shalt maintain control.” It’s important to be in control of your own money so that you don’t find yourself investing with a crook. Don’t throw your money into “pooled” investments. Stock isn’t a great option, and metals have several giant flaws that have been discussed in other episodes. The only way to properly have a metal asset is by physical possession, as hard assets are the best.
Sarah states that in the article she read, investors got into a deal where they were promised 10-15% and it never came to be. The man behind the scam is now behind bars, and these investors are out of their money.
Hartman further explains by stating that a man by the name of Russell Daniel got people to invest in his real estate company, centered around buying and flipping houses. The properties weren’t real, but he created notes for them and sold them to people; the whole ordeal was fake. He’s in federal prison for the next three years and owes the investors $3 million in restitution. Hartman mentions that in a lot of these cases, the scam artist spends the money or hides it in an off-shore account and never really pays it back.
Sarah advises listeners to maintain control of their investments. There are risks involved with any investment, but you can remove a lot of them by being direct. Ask the right questions and do not simply turn your cash over to someone that you think you can trust.
The Wealth Effect
Hartman explains that we are in a time where a lot of money is sitting on the sidelines, as it was for years during the recession. People tend to feel the wealth effect, especially when the government blew up stock by printing more fake fiat money out of thin air. Stock came back in nominal dollars, and it’s doing a bit better now. The real estate bubble is blowing up again and people are getting the feeling that things are better off than they really are.
What happens in this situation, Hartman explains, is some people get stupid with their money. They start throwing it around without paying attention. They think that they’ve got a couple million dollars in the bank and need to put it to work. While that’s a good way to think, it’s important to avoid being reckless.
He mentions that in Southern California, when he was investing with prior clients, he noticed that people took their California mindset and invested in other markets across the country. Everything looks cheap from Southern California’s perspective, and it’s a recipe for disaster. Just because a property is $500,000 in California and only $100,000 in Texas is not a good reason to get overzealous.
The Scam Involving Foreign Investors
Sarah mentions that she has seen this with foreign investors as well. She was in touch with one of her investors the other day, she says, and she became aware of a group that was marking prices up on properties by adding $5,000-10,000 to the listing price and taking it off the top.
Hartman mentions that this is the South African group and that people are paying and investing in things like these with ridiculous projections.
Sarah states that she would love to see their pro formas to see if they’re considering vacancy, taxes, or other fees. She’d like to see how they’re comparing to Empowered Investor. The other companies might be missing a lot of details so that it’s hard to see their bottom lines. She reminds listeners that it’s important to have the right projections.
Hartman mentions in doing a typical comparison of what his company projects with competitors’ projections, his company is more conservative. He also notes that some of the time, people don’t know how to keep score, and when they don’t, they set themselves up for some bad mistakes.
Sarah notes that she had a call with an investor yesterday who was talking about wanting a 1031 exchange on a property, and she was wondering why he’d want to exchange it. It would have been better to refinance, stretch the loan’s years, and lower the interest rate a bit.
Upcoming Events
Hartman states that the Memphis property tour is coming up, and either Houston or Dallas will be following it. He also notes that there is a great blog on his website to check out, and a Google search on the website that works quite well. There is a great deal of content to read through.
Steve Forbes on Freedom Manifesto and the Advantages of Free Market Economy
Hartman introduces Steve Forbes to the podcast, noting that his body of work is very comprehensive as both a presidential candidate and the editor in chief of Forbes Media. He mentions that in Forbes’s newest work, Freedom Manifesto, the first chapter makes interesting points on the FedEx vs Post Office issue.
Forbes explains that he wrote the book because of the question, “Why is the government getting bigger and bigger when it doesn’t work well?” He explains that the government is highly inefficient, and it gets bigger partly because it occupies the moral high ground. Though it is inefficient, the government’s heart appears to be in the right place. It takes care of people in need, tries to help children, and more. In the book, which Forbes co-authored with Elizabeth Ames, he discusses why the advantages of free market economy are moral: because they truly meet the needs of people, while the government primarily meets its own needs.
Big Government Looks Out For Itself
He points out that during the strike involving the Chicago school system, pay was the main priority, not the welfare of children. The GM bankruptcy was the same, where the government was forcing settlements that favored unions, supporters of theirs.
Other advantages of free market economy? Free market encourages creativity while the government looks out for itself.
Hartman agrees that big government does look out for itself first and keeps its own alliances. He wonders if this is why they occupy the moral high ground.
Forbes answers that the government takes a crisis and spins it, and when a person opposes them, they accuse opposers of being heartless, calculating accountants. They ask questions like, “what do you have against the elderly/children?” In the free market, people are able to get ahead, and both earn and keep more of their own money, which adds to the advantages of free market economy. The government holds us back by taking our resources and pretending to help us.
Government vs Personal Enterprise and the Advantages of Free Market Economy
Hartman asks Forbes about his personal experience with government versus personal enterprise.
Forbes states that the government answers to himself, and if free markets did this they would not be in business for very long. Businesses have to be attentive to their customers and have to strive to be cutting edge. He mentions a story of a British historian in the 1950s who worked on a history of the British Navy. He wrote that after the war was won, the Navy was decreased in size and soldiers were sent home. The government controlling the Navy, however, got bigger only because it wanted to. The work being done had nothing to do with the size increase.
Hartman mentions one of Bill Bennet’s books where he showed a graph that compared teaching staff versus administrative staff from the 1960s to the 1990s. The equation flipped, and the system became top-heavy with administration. They continually wanted more funding, even though they were getting funding and misusing it.
Education and Administrative Bloat
Forbes states that if you don’t stop them, they’ll only get more bloated. With higher education, we’ve got more administrative bloat with way more administrative staff than professors. Students come out of higher education with a crippling debt as part of the effect.
Hartman notes that student loan debt is also not dischargeable in bankruptcy. He also points out that when you look at left and right sides in political debates, the left is often interested in instant gratification. When they wanted more loan guarantees, all that was done was the creation of the basic law of inflation. There were limited services available and money chasing it. The colleges abused these systems.
He states that his mother got a degree in social welfare from Berkley in the 1960s. As a social worker, she saw that the government didn’t work. In those days, she was able to work through college, which is practically impossible to do today.
Forbes explains that colleges watched their expenses more carefully back then. There were jobs and scholarships that covered tuition in those days. It was possible to have a good education. Now, there are often six years needed before a student has a degree. He also states that that, thanks to technology, students can bypass the debt by getting a university education for $1000 a year.
Hartman notes that there is also an opportunity to learn for free at the Com Academy.
Forbes points out what life would be like if the government was in charge of cell phones. When they started, phones were the size of a shoebox and the price tag was over $3000. If the government was in charge of this, and said everyone needed cell phones, they’d still be gigantic with $9000 price tags.
The Spirit of Reagan and Obama and the Advantages of Free Market Economy
Hartman references the last chapter of Forbes’s book, the Spirit of Reagan and Obama, and Forbes explains that it points out that the free market is about optimism and the way optimism adds to advantages of free market economy. People don’t invest when they’re the last to be paid. Both former presidents Reagan and Obama came in times of crisis. Reagan had basic optimism that the country would pull through trying times. Obama was more pessimistic and didn’t convey faith in the country. It was visible in the way that he governed, with the 1% against the 99%. It was always about conflict, while Reagan had more of a benign view of the future.
Hartman mentions that history has proven many times that larger government has never created more freedom. He recalls when he saw Forbes speak at a Young Entrepreneurs event several years ago, when he said that we need the government because we are not all angels. We need some rules.
We Are Not Angels
Forbes states that James Madison said this back in his time that if we were all angels we would need no laws or government; however, we are not, so we need some form of rules. He also explained why we have divided government as our forefathers feared that a government powerful enough to have nearly complete control would be able to subdue people within the country.
He explains that the government should be in charge of our safety, dealing with disasters, and enforcing contracts, but when they run the economy, our healthcare systems, finances, and energy we are faced with less freedom and opportunity. All things considered, that makes for a miserable life.
Hartman mentions Forbes’s Twitter feed and references interesting tweets he has written. He notes that since most of his listeners are real estate investors, he asks about asset inflation and how it leads to the wealth illusion. He also asks about the tweet Forbes wrote on the housing boom in the last 30 years.
When the Government Undermines the Dollar
Forbes states that when the government undermines the value of the dollar, there are misdirected investments. This happened in the 1970s when oil went from $3 to $40 per barrel. Reagan came in and inflation stopped. The price for a barrel of oil dropped to $10 and then went to $20 from the 1980s to the last decade.
When the dollar is undermined, people tend to go for hard assets to protect what they have instead of investing. Farmland has doubled in recent years, Forbes says. Undermining the dollar is like changing the minutes in an hour. Imagine if that changed every day. It would be very confusing and lead to less opportunity to get to a higher standard. Forbes states that,
“When the government says they’re here to help, watch out!”
When asked about his prediction involving the $16 trillion over our heads and the entitlement bombshell, Forbes states that this means trouble. Bad things are going to happen, as they did in 2008 and 2009. Of the government didn’t make such errors in regulation and the creation of money, we would not have had this recession. While he explains that he can’t predict exactly what is to happen, he advises listeners to watch out.
Final Thoughts on the Economy
When asked about his other thoughts on the economy, Forbes explains that investors are in a tough place right now. With the Fed messing with the dollar, people need hard assets, but he warns listeners not to go too far as hard assets do burst. Oil did in the 1970s.
When it comes to retirement, Forbes warns against letting the motions be your enemy. If you can contribute for retirement, do so consistently. Even though the markets are turbulent, they’re better than they were 20 years ago. America always comes back, Forbes says. Don’t try to time the market but stay in and ride out the storm.
Hartman mentions that the recovery appears to be nominal, rather than real dollars. It’s from inflation, the government continues to create money out of thin air. Everything has gotten more expensive and people are not as well off as they think.
Forbes agrees that it is a weak recovery. After every sharp downturn, there has been a sharp upturn and the question is, “can you sustain it?” Forbes notes that this time we did not get the sharp snapback. He compares the economy to a car on the superhighway. It should be going 70-75 miles per hour, but it went from 20-30, and now it’s going back to 10-15. It’s a slow recovery.
Forbes Magazine and Media
In closing the episode, Forbes explains that Forbes magazine was one of the first publications to recognize the power of the internet, and that now, he has almost 1,000 contracted contributors, and on the marketing side, it is different from what it was years ago.
