Creating Wealth #245 – “The Forgotten Man”

Jason Hartman interviews author, Amity Shlaes, about her book, “The Forgotten Man: A New History of the Great Depression.” Franklin D. Roosevelt spoke of the forgotten man as the man at the bottom of the economic pyramid, the poor man, the homeless man. Miss Shlaes explains that there is another forgotten man, the taxpayer, based on an algebraic description by William Graham Sumner. For more details, listen at: Jason and Miss Shlaes explore the concept that the Great Depression was man-made, that the Federal government suppressed the economy and the markets, which slowed recovery. A zombie-like economy has ensued in America, very similar to what happened with Japan’s economic downfall, which is still recovering two decades later. Miss Shlaes also shares how the collective or community aspect, particularly farms, encouraged and funded by the government, did not work because of bad stewardship – nobody cared about anything because nobody owned anything. In order for people to care and succeed, they must be allowed to own property, own businesses, and own their homes. Amity Shlaes and Jason move on to discuss “The Greedy Hand,” as it refers to taxation. As Miss Shlaes researched the history of The Greedy Hand, she found that Americans initially resisted tax withholding, that it was not just accepted. Over time, taxation has become extremely complex, and the best solution would be to simplify it again. Miss Shlaes also shares her predictions on inflation for 2012. She encourages people to read, to educate themselves and their children. Amity Shlaes is a syndicated columnist for Bloomberg and a senior fellow at the Council on Foreign Relations. In addition to writing on political economy, she writes on taxes. She is a contributor to Marketplace, the public radio show. She has appeared on numerous radio and television shows over the years. Miss Shlaes was formerly a columnist for the Financial Times and, before that a member of the editorial board of the Wall Street Journal, specializing in economics. In the early 1990s she served as the Journal’s features, or “op ed” editor. Prior to that, she followed the collapse of communism for the Wall Street Journal/Europe. Over the years she has published in the National Review, the New Republic, Foreign Affairs (on the German economy), the American Spectator, the Suddeutsche Zeitung and Die Zeit. In 2002, she contributed an article on the US tax code to the thirtieth anniversary anthology of Tax Notes, the scholarly journal.

Miss Shlaes has twice been a finalist for the Loeb Prize in commentary, her field’s best known prize. In 2002, she was co-winner of the Frederic Bastiat Prize, an international prize for writing on political economy. In 2003, she spent several months at the American Academy in Berlin as the JP Morgan Fellow for finance and economy. In 2004, she gave the Bradley lecture at the American Enterprise Institute. Her essay, titled “The Chicken vs the Eagle” looked at the effect of the National Recovery Administration on the entrepreneur in the New Deal. She is the author of The Greedy Hand (Random House/Harvest paperback), a national bestseller on America’s experience with its tax code. She is also the author of Germany: The Empire Within (Farrar, Straus), a book about German national identity. In 2004, she was, with the late Robert L. Bartley, co-author of the contribution on tax philosophy to “Turning Intellect to Influence,” an anthology chronicling the progress of free-market ideas as advanced by the Manhattan Institute. Amity Shlaes is a trustee of the American Institute in Contemporary German Studies; she sits on the jury for the American Academy’s fellows as well as the jury for the Bastiat Prize.
Be sure to check out our prior shows with Richard Kiyosaki, G. Edward Griffin, Peter Schiff, Doug Casey, Chris Mayer, T. Harv Ecker, Denis Waitley, John Stapleford, Addison Wiggin, Thomas E. Woods, and many more.

Introduction: Welcome to creating wealth with Jason Hartman. During this program, Jason is going to tell you some really exciting things that you probably haven’t thought of before and a new slant on investing. Fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible.

Jason is a genuine, self-made multi-millionaire who not only talks the talk, but walks the walk. He has been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason’s footsteps on the road to financial freedom. You really can do it, and now, here is your host, Jason Hartman with the complete solutions for real estate investors.

Jason: Welcome to the Creating Wealth show. This is your host, Jason Hartman and this is Episode #245. Today we are 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 2nd book, I believe by Amity Shlaes, who will be our guest today. 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 here on what you shouldn’t do and why you shouldn’t do them.
We are 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 for Hyatt Regency, Irvine. We have got a great event there coming up. A lot of you are registering. The room is filling up. We do have a larger room this time, so we are able to accommodate more people.

We did get an extension on that room block, where the hotel allowed more rooms at the $99 rate. But again, I cannot make any promises about how long they all keep that up. By the way, if you are flying in, the airport code is SNA for Santa Anna 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 can also walk that, if you want to. You know you can take a cab too, it is super close. It’s real easy, just fly in, you’ll be right there. Everything you need is at the hotel. There are somethings within walking distance of the hotel too, so don’t bother with a rental car, it’s not necessary.

The weather is great in California, so, if you are in parts of the country or the world. We have had people fly from around the world for 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. 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 would be paying ridiculous taxes and we would have an incredible amount of Government intervention in your life. I am so glad I don’t live there myself anymore. No offence to our California listeners, but I know you’re smart because I know you listen to this show. And I know you are probably thinking, hmmm, when am I going to get out of this socialist republic of California? Because, I wanted to, for years and I finally did it and I have not looked back, so far. I am really glad I did.

You know, we’ve got Dan Hammerman, as I mentioned, coming up. You know, why do I mention him? If you are listening to this show for the first time today, you probably don’t know who that is. He’s a really good writer and really good Chartered Financial Analyst, who talks about the effects of inflation and monetary policy andI just think he explains his stuff so well.

I recorded an interview with him, I think it was the 3rd or 4thone for the show. We have not published it yet, but some of the stuff that we didn’t talk about in that upcoming episode, that you’ll hear about arbitragingFed policieswith rental housingcash flows. I just want 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. Like me, if you listen to my show where I talk about derivatives, the way I explain things is a simpleton. 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 of derivatives, what’s a derivative? Well, I said to you on several episodes ago, 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 exploring the differences in something, so, if, for example, the rate of inflation is 9.5%, and the interest rates which you can borrow money is, say it’s on a long term fixed rate, three decades 30 year mortgage, that you are not going to be paying off until 2042. Amazing.Well, what is that? You’re arbitraging inflation, right? And that would be if you had to pay the debt. And so, that would be unlike your own home. It’s still a greatdeal, you get paid to borrow money. What if you outsourced the debt to a tenant and they pay the debt for you and you are still getting the arbitrage? That’s like a double inflation arbitrage. I prefer to do it that way for 7 or 8 years now.
What Hammerman talks about in this report that we didn’t talk about in the upcoming shows,some things I wanted to share with you. He concludes this report on supply, demand, whence and vacancies. It points out a couple really interesting factors and I am going to add some of my own thoughts to this, as I usually take the liberty of doing. So, I will 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 4 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 list 6 items and I am going to list some more than he does actually. He says the fundamental factors and the effects:

1. Record low interest rates – cash flow effects – positive for you as the investor, up. The arrow is pointing up, so that’s good news.

2. Falling property prices – the cash flow effect – the arrow is up. It’s positive for you.

3. Increased sociable demand – cash flow effect – positive for you as the investor

4. Decreased new construction – cash flow effect – positive for you as the investor

5. Decreased vacancy rates – cash flow effect – positive for you as the investor. And the last one he cites:

6. Increased rents – cash flow effects, what do you think I am going to say, of course, that’s positive for you, as the investor.

He goes on to point out:

1. Increase in Demand
According to the Census Bureau, the maximum rate of home ownership in the US peaked. We’ve talked about this before in the show, by the way. Before 2004 and 2007, reaching at least ¼ of each year. By the 4th quarter of 2011, this number had fallen to 66%. Now, remember folks, this, my commentary. What we talked about before. Every 1% point in home ownership rate, either up or down, equates to approximately, one, a little bit more than 1,000,000 renters. So, what does that mean, if it goes from 69% to 66%. It’s over 3,000,000 new renters. It’s probably about3,500,000 new renters there, ok?

Now, if we turned 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. Remember when you flip that equation around, you look at 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.

2. Decreased New Construction
The number of new construction rental units becoming available each year remains at year record lows, along with single family housing starts and construction sector employment. This could be changing soon in some metro areas, as some multi-family housing projects, in other words, apartments, begin to surge in the 2nd half of 2011. So, you see, the institutionalized investors might come in and have gone in and they see incredible demographics coming in rental housing over the next 10 years. But, 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 are investing in single family homes.

Many do apartments,fourplexes, duplexes, triplexes. We’ll just call thoseplexes, but single family homes are the largest percentage of the business. So, we 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 are filling a huge market need as people are used to living in single family homes, but are displaced from them through foreclosure, through lack of housing affordability, inability to obtain financing etc. And they are moving into apartments, but they want to be back in single family homes. Where are they going to come? They are going come rent them from you and I as single family home investors.

He goes on to say, however, this 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 increase in demand. Low interest cost, fall in vacancies and rising rents. All these are great things for us as investors.

3. Decrease in 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 or decreasing them. They take surveys on all sorts of vital factors. But, as a single family home owner, 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? The only one that we really have is the Census, that is only done every decade, every 10 years. So, that’s what he’s citing here.

Let me go back to Hammerman. Decrease in 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 4th quarter of 2011, a decrease of 1.7%. When we looked just to apartment vacancies, in major metropolitan areas, then the vacancy rates fell to 5.2%. Now, remember folks, our performance at, when you look in the properties section, we estimate our performance at 8% vacancy. In other words, one month per year. I got to tell you, in one of my rental properties, I had a tenant in there for 9 years. No vacancy, raised the rent, couldn’t get them to move. It’s amazing. Some of the properties, the tenants will just sit there.

My mother, I want to get her back on the show. I remember a show I recorded with my Mom, I think it’s like in the #160 range of episodes, if you want to go back and look for that one. I talk to her about this stuff. I did not know that she has one her houses that the tenants has been in. I only recently learned this a couple of months ago. I want to get her back and talk about it. But I think that tenant has been in her house, in one of her rental properties for like 21 years straight, zero vacancy. She has raised the rent, over and over, the tenant has not moved. And she said to me that she has not even replaced the carpet. Ugh, that’s kind of gross, but hey that’s amazing you know, if you do that as a Landlord, that’s pretty incredible to me. Twenty one years, no vacancy. I know personally, I had 9 years with no vacancies, myself as an investor.

According to the property research firm, Reisink, this was down from a peak of 8% at the end of 2009, see even 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, wow, 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 social 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’ve got an uphill battle collecting your rent and evicting them, because all 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 dead beat 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 value ratio, of course, in a city like San Francisco or New York.
You know that in those cities, little crummy condos cost a fortune and the rents do not keep up in terms of the rent value ratio, the RV ratio, they don’t keep up at all. So, these 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, must be great. No, not true at all.

Hammerman goes on to say, this increase in vacancy rates, is exactly what we would expect, given that there is an increase in 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.

4. Rising Rental Income
According to Reis, apartment rates 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 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 for 6 factors are working together to increase the margin that is 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 beleaguer 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 opportunity, 80,000,000 million Americans.

Ok, let’s talk about somethings you shouldn’t do. There was a company that was pitching us hard. We have a lot of these companies that 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. They were pitching us for a long time. They were called the hand over companies, and you know, I got curious about them because I didn’t like their deal and the reason I remembered them is about they were so tenacious. I remember, I should find this email exchange and read it to you, if I can find these emails from 3, 4 years ago. 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 sell their products to you, our listeners, and our client base and our followers. 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 products we had and I was worried about the fact that they were promising these rent guarantees.

Let me just tell you the little scam, it’s a pretty big scam actually, that happens with these rent guarantees. Now, I am not saying this is a hard and fast rule,that you should never do them or never buy based on them, but you got to go into a deal with your eyes wide open. Being your own best adviser, being an informed investor. So, here is what happens.

Whenever someone is trying to sell you a property and they are making a bunch of promises about the future, here is 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 2 years or 3 years or 5 years and make these great promises. And then they saywe’ll guarantee your rent for 1 year, 2 year or 3 years or we’ll lease the property back from you. Thiskind of thing folks.What they do is, they have multiple entities, multiple corporations or LOCs that they do business under. A lot of times, these corporations and LOCs kind of carry the same name or similar names. And you know, that’s not necessarily wrong, in and of itself.

Here is 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, the investor gets burned because there is no guarantee of that. So, I looked on the internet and I found that there were all kinds of complaints about this hand-over companies, saying that they rip 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 fix 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 that we dodged the bullet with him because they just did not, to me personally, in my own opinion did not seem like a good deal.

Now, here is 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, so I get some offerings from them. This one is interesting, just real quick, then again under the deals you shouldn’t do category, just like hand-over companies. This one is a Sherwin Williams paint store, in Houston Texas and it’s $2.4 million dollars and the cap rate, 6.35%. This deal is junk. You can go to, click on the properties sections. You’ll see performers there where cap rates are not lower. Well, you probably might find one here or there but you will be hard pressed to find a cap rate lower than 8.5% on our website at You’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, Costo Rico stuff. Think about it folks, I hear from investors all the time, that have trouble enforcing their leases. They have trouble collecting from their tenants who skip out on a lease. They have trouble collecting from tenants who damage their property, after moving out. What are you doing in a foreign country for God’s sake. 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 courts systems, of credit reporting, of ways to collect from people. The US is probably the best at that or you’ve got rule of law. What are you going to do in these countries that have no infrastructure, like Nicaragua and Costa Rica, where they have huge crime problems, 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 is insane. These roads, the potholes are so bad, you literally, you will get whiplash just 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 am 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 the 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 right. Just try doing that in Nicaragua or Belize or Costa Rica. What a joke. I wouldn’t touch this stuff with the 10ft. pole.

Now, if there is something I don’t know well, listen, call me up and chew me out and correct me. If you want to argue with me about it, maybe I will even put you on the show and debate it out in the open forum, ok? 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, either on the last show or the one before that, I told you that one of our local market specialists was now offering one of these funds, but what I didn’t tell you is that I’ve been looking at the documents, since I talked to you about that, the fund documents. Hear what they are offering on this, I looked at the proforma and the private placement memory. Just see if you can understand all this stuff, ok. It’s 52 pages long, of basically, disclaimers. That’s what they always are, and you know, all these reasons you can’t sue them and you don’t have recourse, right? The subscription agreement is another 24 pages. But listen to the profroma, the cash on cash return here is only 9.04% and then, it’s a fund, it’s a pooled asset, that you do not have direction control of. You are not being a direct investor. Now, another one of our local market specialists are offering this thing and they want me, they want to come on the show and promote it and folks. I think it’s going to be a cold day in hell before I’m promoting investments like this. Again, I’m open to having my mind changed.

I just know that commandment #3 of my 10 commandments that have served me so well and I know they have served so many of you so well, is that thou shalt maintain control. Be a direct investor, don’t leave yourself susceptible to the 3 major problems of not being a direct investor, of investing in pooled assets. #1, you might be investing with a crook, #2, you might be investing with an idiot. Assume they’re honest, assume they’re competent. #3 problem, they take a huge management fee off the top from managing the..

You know what folks, here is the other little scam about this kind of stuff. They all say their management fee is one thing, this is one number, this is what they get, and you’ll think, as an uninformed investor sometimes, that you know, heck, I’m only paying them x%, I’m paying them 1.5% but that’s not really true. Because they’re bearing all sorts of other costs, in the operating fund, all sorts of other “business expenses”, travel, wining and dining people, getting incentives from the contractors that they are bowing 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’ve had clients over the years that are sometimes only moderately happy with their real estate investments. 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 maths 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 they’ve just invested in the most tax favored asset in America, and they’ve got tons of tax advantages, or when they make a profit on the property and they want to do a 1031 tax preferred exchange into another property. They don’t pay any tax on the game 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 stockaccount that got hardly any money in it, but it’s basically ina 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. By the way, one of my loans paid off, my private loans. The other day, a hard money loan, a private lending that I do. Wow, I just love earning 12 and 18% plus a little funding fee. I got paid off on this loan in like 28 days. I was really short term loans, 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 are interested, just shoot me an email directly Jason at I’d be glad to refer you to people and one of the things I just want to say about it is. Bernie Madoff was running a, I think it’s Madoff, because he made off with like $60 billion dollars. He was running a Ponzi scheme of course, a 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. Snarkiness there.

What is amazing and what I’d say you need to do to protect yourself when you are doing private money lending. I outline some good tips on the last show and do all of those. But there is one more thing that I did not mention. Everytime youdo 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 everytime. So everytime 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 ok, 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 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 uninvested, 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, that’s what I suggest you do.

Back to tax favored assets. Income properties, the most tax favored asset in America. I got this newsletter from one of these stock accounts, telling you how to calculate your gain and your stocks. At tax time, thebiggest 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 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 know this one guy who used to work for me, he used to buy stocks and that was 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 stock broker in New York, you know, working on Wall Street and he’d been in the market since, I think, the early 1970s and all his life, he invested in stocks. He used to have his stock charts out. I used to see him doing it in the office and he just loved stocks. He never made any real money from it and he had over a million dollars in the market, dabbled in real estate on the side, always for some stupid, silly reason, he liked stocks more. Although it never really worked for him at all. But I remember one time seeing him do his taxes. He’d come in the office to do it because he was distracted at home, and I mean, unbelievable complexity. He had all of these papers and these stock brokers saying 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 leaf, if you are using property tracker, it just makes it so easy.

If you want to get property tracker, we don’t make a penny off of this. We just love the software. One of our clients developed it. You’ve heard Joel on the show, he’s the developer of it. You’ll get it discounted atour site at Just click on resources, and go to the property tracker on the resources page. You get a month free, no obligations and you get a discount every month thereafter. I highly recommend that you use it and the accounting for your real estate, just had a loan. It’s so simple, it much easier.

Ok, nuff said, let’s go to Amity Shlaes 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 are 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 at in the events section. We look forward to seeing you there.

We will be back with Amity Shlaes in just a second.

It’s my pleasure to welcome Amity Shlaes to the show. She’s the author of 2 books, both bestselling. The one we will talk mostly about 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?

Amity: I’m great. How are you?

Jason: Well, good. Thanks for joining us from New York City today and tell us a little bit about your work and I guess you are 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 in austerity but there has to be some gains beside the pain for people to want to proceed to create new jobs, 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 US. Well, we can grow 4% and we are devoted that this project to showing how it is that a project at the Bush Center, President, George W. Bush. Bush 43 has created his own Think Tank at the Presidential Library in Dallas.

Jason: Fantastic. 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. They’ve experienced it times but just 8% GDP growth. Just seems like we are 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 of that and tell us what lessons we should be learning from the great depression.

Amity: Well, one thing about the great depression, is, we failed to get back to where we’d been. How do you define recovery? Well, one definition is,get back where you started in terms of GDP, the estimated growth of the economy or the stock market and by those measures and also, by the way, most important, employment. Took us a long time to get back in the great depression. To the Forgotten Man in the second look at the period and said, 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 short, right? It wouldn’t, but what people remember is the duration. 10 years, 11 years, well, in the war. So, between peace time prosperity and peace time prosperity of well over a decade, the book examines the reasons for that.

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

Amity: Well, what are the Keynesians, you want to ask first. When we say Keynesians in the modern way, we mean an emphasis on Government action and spending specifically by Government or stimulis via the tax code. Sometimes you hear about monetary stimulus as well from the Fed, for example. So, the Keynesians are the action then, if you want to put it that way and they tend to look at shoppers. If you look at the traditional surveys, you see people want to shop, that’s the instance of recovery. And you talk to people and you hear,a lot of the economy is shopping. So people maybe shop all week to not recover. But there’s another view and indeed it was a view for you to prevail in the 20’s. I am now writing the biography of Coolidgeand 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 the problem. Do you trust your bank? Then, that’s a problem as well. So, in the 30s, the Government first got the idea that spending might be the answer. They want in Keynesians. In the modern sense Keynesians himself has not finished his book. In the great depression, the book of Keyns, the modern theory that we look, at did not come out until the mid 30s. So, what was going on, we had proto Keynesians in the US. I described some of them in the Forgotten Man. They said, spend to get growth, spend to bring the economy back and that was the velocity the Government sometimes apply, not consistently in the new geo period especially.

Jason: When we talk about the Forgotten Man, what does that really mean, the Forgotten Man? I mean, the title of your book, it is interesting in and of itself.

Amity: Well, Roosevelt spoke of the Forgotten Man at the bottom of the economic pyramid. Imagine the pyramid that the poor man, the homeless man, he was the Forgotten Man of the Roosevelt speech. He gave a wonderful speech in which 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.

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. He was a different Forgotten Man. He came from the philosopher, William Graham Sumner, who used a little algebra to describe the Forgotten Man. He said to imagine the letters a wants to help x. X being the man at the bottom, we all want to axe charity. X is poor, he is down there at the bottom of the pyramid. B wants to help x, a and b wants to help x and we all have that impulse. Becomes a problem when a and b band together and pass along courses. c into cofounding,into perhaps dubious projects for x, while c is the Forgotten Man, 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, who is the tax payer and 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 tax payer. We have this debate today as well. Who the right Forgotten Man?

Jason: Right, right. Talk to us a little bit about, 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 on with our leadership?

Amity: Well, everyone means well, that’s the headline. Everyone means well, and being well intentions doesn’t always get a good outcome, especially not for the economy. Stock markets did not recover until the 1950s to the 29 level, so you ask yourself, when you are 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? My theory, and the evidence that I looked at suggests that the market was too high in 29 level 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. It was more that the market was depressed in the 30s and even in 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?

Jason: What is that?

Amity: The bottom 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, to just say it like that. So, first, the Forgotten Man book started with Herbert Hoover. Hoover’s Republican.The temperament matters a lot with these people. Hoover might have been a nominal Republican or nominal Democrat.It wasn’t that hehappens to be a nominal Republican. His temperament,that was the issue. He was a control freak.

He was very famous in his day as a businessman, a candid businessman. When other people were silent, he would jump in.That was his nature. He required a great deal of admiration, interaction and he was used to the superhero, rescue hero. 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 super hero and when there was trouble in the economy, he left in as President. Many of the things he did were counter-productive, including signing aBill that hurt our friends and other countries, raising wages or more specifically, putting upwards pressure on wages at a time that employers could ill afford to pay higher wages. Two laws such as the Davis, Bacon Act, which you still hear about today. Upward pressure for payment on Government contractors, raised taxes. He was the first activist, even though he was a Republican, which is supposed to be the less activist group. He was followed by Franklin Roosevelt, who was an activist in another way, more of a democratic way, but also temperamentally an activist who brought the new deal. There were many aspects to the new deal that were likeable or even good, but many more that were counter-productive and suppressed the economy.

Jason: Depending on how you look at it, maybe three years into what some call the great recession now. We have had mass of Government intervention. I mean, many believe, I’m one of them, that 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 a sort of chronic state of a zombie economy. Would you agree with that?

Amity: Yes, a zombie is a good word. 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. And if you are waiting around because the price might change, someone might do something like the delivery might not arrive, so the price will go up, there’s not enough. Shortage of supply or there might be inflation. If you don’t know what the price is, well, you are not that eager to transact. People who are old enough will remember that in the inflation period, we have to change the way we do accounting and a lot of other things. There is a dampening effect when nobody knows what the price is going to be or whether something’s true price has been expressed. What if our houses are worth only half of what they were supposed to be worth in 2006? It might be so, it might be better to acknowledge it and to pretend they are not. The Feds have recently put out a paper to help people with their mortgages. That’s another way to slow sales.

Jason: And slow price discovery.

Amity: Price discovery doesn’t happen and nobody knows, so the reality is that everyone suspects the house is worth even 10% less, at the low price it is already at, way, way, the mortgage is way under water. 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 sale is better than to wait and pray that the price for the house will go up so your mortgage will no longer be under water. So, the zombie aspect, and I like that adjective you chose, zombie like, because we are like Japan. One of the failures of Japan that we’ve all studied, to come back withdue to the reluctance on the part of 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. They postponed everything so that they didn’t want to admit it

Jason: It’s been dragging out for two decades.

Amity: Two decades and there are many, many stimuli. Once we counted how many stimuli there were. There were over,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 have discovered. That’s kind of creepy because, they had a very large impetus on infrastructure for safety andhas stimulus for many years. They became the zombie economy because of reluctance to face political and financial reality and now we are doing the same thing.

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

Amity: One of the things we discovered in researching the Forgotten Man, there’s a key book, I mean, behind every book’s book, and one key book was William Graham Sumner. I mentioned him before. His Forgotten NSA, which was from decades but another was called Government projects by a man named Banfield. Edward C. Banfield it’s obscure, basically, university citations. Government Project website, you cannot even buy it on the internet. You can find it in some places, hard to buy.
Edward Banfield, the young man, went to look at the new deal farm, an experimental farm in Casa Grande, Arizona, called something like, Casa Grande. The Government lavished resources upon this farm. It was for poor people, not as poor as the poor people in greats of wrath, but close. Migrant workers who had been displaced, who wanted to start over, 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 with pretty colors. People didn’t have running water, they got electricity and running water.

This farm would do well and could be a model. 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. The Federal Government gave them a wonderful community house for these people who were community people. What did the overseers discover after a couple years, they trashed the community. Yes, why? Why would they trash something good, given the? And the answer is that Banfieldlaid out, and so beautifully too, through interviews with the farmers who were good people, as they say. There’s a down side to enforced collecticism, which is you don’t know what you own, and therefore you don’t take care of it. We all know what that’s like, we call it a tragedy of the commons, when nobody owns something, we don’t take care of it and there is a hilarious quote. There is a poultry theme throughout the Forgotton Man, and there is a poultry scene in the Casa Grande stories told by Banfield, which I then told in Forgotton Man, in some form 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, and when you go against that theory, even with bountiful gifts, you tend to fail. So, I love that story, 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 am trying to figure out now, for my new book, which is the Vials of Calvin Coolidge, which is near the Coolidge dam, whether Casa Grande becamearablebecause of the Coolidge dam or other dams, or maybe the Hoover dam and that someone in your constituency will have to tell me why the 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?

Jason: We’ll be back in just a minute.

Well, your point is very well taken. The collective simply doesn’t work. I mean, you look everywhere on the planet and everywhere throughout history and enforced collectivism has always been a disaster. There is literally no exceptions, 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. 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 Green Peace 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 would also think, I guess, of collecticismas a left wing thing. It is 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. If you want people to care about something, let them take ownership, let them be at stake.

Amity: Well, yes. When we debate the tragedy of the commons land area, the answer is private property. When you have high school debaters, and you are talking to them and you ask them, what is the answer to when we all graze or sheep in the same place and then when there is no grass left. Well, you have some corners taken 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 managing is fascinating.

I was just completely blown away by this book by Banfield, where he went with an open mind and fountasorrow that these farmers failed. I want to mention something 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 Rex Tugwell, a famous new dealer. The right wingers always made fun of him, his name, Rexford GuyTugwell, that’s his full name. A thoughtful economist, who happened to believe altogether, too much in the economy of scale. He really crafted this farm. And to his credit, he was working, maybe teaching at the University of Chicago when Edward Banfieldwas working and he had worked on the outcome of his farm in Casa Grande. What happened to the collective formulaI, 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 the Banfield wasn’t.. 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 are very different from the right wingers who come into Government.

We are 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.

Jason: So, when you look at the Greedy Hand, and I assume that’s a take off on Adam Smith’sinvisible hand, right?

Amity: No, actually, it’s from Tom Payne.It could be, I mean, hands, economics, are all over the place, right? The Greedy Hand of Government making our prosperity from Tom Payne. He is another big name in our Anglo American heritage. Thomas Payne,and I like that because everyone knows about the greedy hands of Government when it comes to taxes. It doesn’t matter what party you are, it’s a little bit strong title. That was a book I wrote a few years ago now about the US tax code.

Jason: And so, the Government, distorts markets and distorts free markets and delay is pain, as we talked about earlier to some extent. Through fiscal policy and through monetary policy, and now we are talking on the fiscal side, the taxation side. Any thoughts or examples you want to share from the Greedy Hand about that?
Amity: Well, you know, one thing is how the Government tricks us and the fun in 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 stand in front of your pocket with their greedy hand, wow, so how do we get that? We did have some form of withholding in the civil war period, and that wasn’t too hard because soldiers got their paydocked.And of course we paid the withholding through social security but we didn’t have the income tax withholding until World War II. And they had to craft it because they were pretty sure people wouldn’t like it.

Well, that’s interesting. So, they crafted it and they were given a tax amnesty that went along with it. 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 learnt 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, maybe it’s a bad idea because if you never let people see their money. If they never feel the pain because it’s too quick, well, then they don’t resist. Then, one thing about simple tax is that it’s better than complex taxes. You can see what they are, and, one problem with our rate structures, we never really know what our rate is. Our average tax rate is too complicated, we just don’t have the money to spare, right?

Jason: What, 70,000 pages or so in the tax code, no one can possibly understand it. It’s beyond ridiculous.

Amity: The one that President Bush has made, the simplification, in itself, is a good deed because people need to know what they are paying for, so they can decide whether they’d like to pay that amount. If you confuse them, they kind of give up. There are various illusions people talked about fatal illusions, fiscal illusions, where, one illusion is 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 poorand there are many illusions like that are discussed in Tax history.

There was a French man, called Deere, who said the art of taxation is plucking the goose with the least amount of hissing. You can trick people and take quite a bit from them and not itself as creepy, it’s unamerican so a simpler, clearer code is always better.

Jason: Absolutely, I couldn’t agree more. Simply, the act of simplification, would be a huge boon in and of itself, even if the rate stay the same or increased. Simplification would be nice but of course, there is 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, C. Forbes, I don’t think we are going to see that anytime soon, unfortunately.

Amity: Oh, I don’t know. I think there is 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 are going to translate it into Spanish too.

Jason: Fantastic.

Amity: Because, we did many Forgotten Man readers in Mexico. I had a great trip great trip to Mexico a couple years ago. It’s just that they don’t really, necessarily want to read a 400 page tome about American politics, which Spot Man has that aspect. So, I think, lots of people understand this really has now made one of the silver lining in the cloudy times we have now, is that people do begin to understand the beginning of the need for change.

When the Greedy Hands came out, things were going so well, that there was no urgency to a tax book. Well, we pay a lot of taxes, so we feel fine, so it’s ok. Now, the consequences of heavy taxation in Government involvement are clearer and the relative competiveness of the United States is an issue. People are willing to look at plans and find them radical a couple years ago. 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.

Jason: Well, I certainly agree with you. I guess the reason I am so pessimistic about it is that there are just so many entrenched interests and the status quo. That’s all.
You know Amity, we are starting a new year, do you have any thoughts or predictions or advice for the future for 2012? Those all being lessons coached in history and your writings and so forth. Do you thinkwe’ll see inflation?

Amity: Certainly, I’ve been looking for inflation for years and it hasn’t shown up yet.

Jason: I know.

Amity: There is working 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 that Sherman Volker, the German who brought.., was to make it clear that no one could expect inflation under him. You had to be quite dramatic to do that, right? I heard a lot, if we recall what it costs to get a mortgage.

Jason: 21%

Amity: I mean it, 20%, right?Now we know, that we’re better off and no one seems particularly worried about inflation, so eventually, inflation expectation, even if they don’t increase the amount of money, will drive interest rates up. The faster we can reduce inflation expectations by declaring the period of stimulus to monetary over, the less pain we are going to have, but right now, we are hearing from the Fed, the opposite thing. They just see low interest rates as far as the eye can see and they are not concerned.

Jason: Any other thoughts or advice for the future, for the New Year?

Amity: You know, share books with your children, read books. I am really excited about the Forgotten Man graphic. The artist is a cartoon master named Paula Reveau. She’s from Canada, has been working on this for several years. I think we can tell the story of what’s happening, then we will succeed because the story is the truth.

Jason: Because, we’ll understand the history of it too.

Amity: The record is that Government intervention is less successful than less Government intervention. So, we need to be able to convey that. Those of us who work in communication, have so far failed, so let us try with a serious endeavor.

Jason: 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. Was listening to Obama the other night, it seems like 40 new programs announced in one hour.

Amity: Well, thank you very much.

Jason: Unbelievable. Well, thanks for being on the show today. Tell people where they can get the book. Of course on Amazon, great reviews. Do you have a website?

Amity: I do and we are just creating a new website at the Bush Center, 4% growth. They could buy the Forgotten Man on Amazon. I hope you do, but especially I hope you buy Coolidge, which will be out this summer.

Jason: Fantastic. Well, Amity Shlaes, thanks for joining us today.

Amity: No, thank you Sir.

The Jason Hartman Team

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