Joel Naroff is the Founder, President & Chief Economist with Naroff Economic Advisors and a member of the Newsmax Financial Braintrust Alliance. He’s also the author of, “Big Picture Economics: How to Navigate the New Global Economy.”

Naroff gives his take on the economic recovery and when he expects inflation to hit, if at all. He also discusses the effects tax cuts have on the economy.

Naroff then talks about international economic hotspots and where people should produce and sell in our global economy. He thinks certain international events can ripple through the economy and ultimately affect workers in the Midwest.

Key Takeaways:

(2:27) Little Rock Creating Wealth in Today’s Economy Boot Camp and property tour, and other announcements
(4:28) A special message from Bill Clinton
(5:01) News about Zillow’s acquisition of Trulia
(19:19) Introducing Joel Naroff
(19:55) Are we in a real economic recovery?
(22:26) Joel Naroff’s inflation forecast
(25:17) A look at the globalization of the economy and the US’ importing of deflation
(27:02) Have we exploited the world’s cheap labor yet?
(30:08) Tax policy and offshore businesses
(35:50) Why the banks aren’t lending very much
(39:37) How does the growing middle class in China affect Indiana?
(43:40) Closing comments


For more information about Joe Naroff:
For more about Joel Naroff’s research:
Or, look up Big Picture Economics on Facebook


Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm. He advises companies across the country on the risks and opportunities that economic developments may have on the organization’s operating environment.

A nationally recognized economic forecasting expert, Joel has received numerous honors. In 2011, he received the National Association for Business Economics Outlook Award as the top economic forecaster. NABE is the premier professional association for business economists. He also received the award in 2007. In 2008, he was awarded the Lawrence Klein Award for Blue Chip forecasting excellence. This is one of the oldest and most prestigious forecasting honors. Joel was the Bloomberg Business News top economic forecaster in 2008. In 2006, he was MSNBC’s top forecaster.

Joel received his bachelor degrees in economics and chemistry from the Stony Brook University and his Ph.D. in economics from Brown University. He is a member of the Board of Directors of the Economy League of Greater Philadelphia, teaches at the Central Atlantic Advanced School of Banking, is a past chairman of the American Bankers Association’s Economic Advisory Committee and is a past president of the Philadelphia Council of Business Economists.

Audio Transcription:

ANNOUNCER: 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’s 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’s your host, Jason Hartman, with the complete solution for real estate investors.

JASON HARTMAN: Welcome to the Creating Wealth Show! This is your host, Jason Hartman; this is episode #392. Yes, we’re getting near that magic 400 number quickly! And we’ve already got a bunch of great shows planned out to carry you through episode #403. So, stay tuned for those! But a couple quotes for today, about income property and real estate. And I thought they’re interesting. As John D. Rockefeller said, “the major fortunes in America have been made in land.” And as you know, I’m not really into land, per se. I’m into the packaged commodities built on the land. And those assembled commodities, those packaged commodities. That’s the type of investment I really like. Because in our deals, in our world of real estate investing, the land is almost free! It’s either free, or very close to free. It’s very inexpensive. But you get the metaphor. Land, real estate. We don’t need to split hairs over that, do we?

But Andrew Carnegie said something great too. He said, “90% of all millionaires become so through owning real estate.” And you know, it’s amazing. I don’t know when Andrew Carnegie wrote that, or said that, but certainly it was decades and decades and decades ago. How interesting is it that that is still, and always has been, true? It’s the one thing that is just the most dependable, reliable, most historically proven asset class in American history, if not all world history. So, income property. That’s the way to go. Today’s guest is Joel Naroff, and we’re gonna be talking about Big Picture Economics. I think you’ll enjoy this interview.

Little Rock Creating Wealth in Today’s Economy Boot Camp and property tour, and other announcements

JASON HARTMAN: Please join us for our Little Rock Creating Wealth in Today’s Economy Boot Camp and property tour. You know, this is a great opportunity. If you’re back east, or you’re in the Midwest, or somewhere closer in that direction to good old Little Rock, Arkansas, this is a fantastic opportunity for you to come and see our Creating Wealth in Today’s Economy Boot Camp. And we cover all of the basics in that 9-hour day. Of course we’ll have some breaks in there. But we cover all of the most important investing strategies. We cover inflation-induced debt destruction in great detail. We cover researching markets and properties in great detail. We cover how to read a pro forma in great detail.

By the way, I should mention, there’s a fantastic new pro forma, or a new video, just going up in our members section on how to read a property pro forma. And I recorded that, and it’s like, 27 minutes of deep analysis on property pro formas and how to analyze a property. So, check that out in the members section at But we’ll go over that at the Creating Wealth in Today’s Economy day, and that’ll be on Saturday, September 27th, I believe that is, and then on Sunday, we will do the property tour. We’ll get on the bus, and we’ll go and we’ll actually look at properties that you can buy. This is so different than all of the other real estate gurus out there. Because, you know, they’re selling very expensive educational programs, and we pretty much give our education away at zero, or nominal cost. But what we do, is we actually have properties so you can connect the dots. What we say at the Creating Wealth in Today’s Economy Boot Camp on Saturday, has to be realistic enough to come true on Sunday, because we’re going to show you actual properties that you can purchase! And that’s one of the things that makes us truly different from so many of the other players out there in the marketplace. So, come check that out. You can register at Super early bird prices. And that’ll be available to you.

A special message from Bill Clinton

BILL CLINTON: Hi. This is Bill Clinton, and I want to invite you to hang out with my friend, Jason Hartman, in my hometown of Little Rock. Jason and his interns, you know I like interns, are having his famous Creating Wealth Seminar and Property Tour here! So drop everything, including Hillary, and go register at, right now. This event is coming up soon, but, as I like to say, it depends on what the meaning of the word ‘is’ is. See ya there.

News about Zillow’s acquisition of Trulia

JASON HARTMAN: There’s some big news in the news media. It just came out today. And I was reading about it over the weekend in the Wall Street Journal, but it looks like the deal happened. And that is, Zillow—you’ve all heard of Zillow—well, they just acquired Trulia! Which you’ve probably heard of as well. I certainly have talked about those two giants in the real estate data industry on the show before. And they acquired them for an all-stock purchase of $3.5 billion. So, what does this mean to us? What does it mean to investors? Well, the answer is, we really don’t know yet. But it is a big important thing, because what’s happened historically in the real estate industry, and many years ago when I got in the business, I just constantly remember hearing and reading and seeing in practice, how realtors were so protective of the data, of that MLS data. And the multiple listing system, certainly one of the greatest inventions ever, and one of the reasons, also, that I really like United States property markets, or, you know, any markets that have multiple listing services. But the US, it’s very entrenched. Many other markets don’t have that. It’s very haphazard, in terms of investing and buying properties, because you just don’t have good, comparable data. And it’s very hard to determine property values without that data.

So, the multiple listing service, or the MLS, has always been just this protected data, where the real estate industry, the realtors, the National Association of Realtors—remember, realtor is actually not a generic term. I am not a realtor anymore. However, I used to be for many, many years. The reason I’m not a realtor anymore? It’s because I’m not a member, anymore, although I was for, I don’t know, 20 years? Close to it, almost 20 years. Of the National Association of Realtors, which gives realtors access to the data contained in the multiple listing service. And when the Internet started to really gain a foothold, the National Association of Realtors started, which is basically the MLS data regurgitated on the Internet with some data not showing up, of course, because some of it is kept behind closed doors, like the seller’s phone number to the property, or the showing instructions on that property, and so forth. I don’t really need to be a realtor anymore.

So, I’m not involved in that industry, and I do think that actually is a benefit to our clients, and you, our listeners, because I’m a little more objective, now that I’m not as steeped in that world. And, you know, I certainly have my criticisms of the National Association of Realtors, which is the largest and most powerful trade lobbying organization in the world. At least, that’s what it’s been called by many people. I’m not sure that’s actually still totally accurate, but, you know, it’s a very, very powerful lobby, believe me. They do a lot of good things for homeowners and investors and homeownership, but some of the things I really don’t agree with. One of the things I don’t agree with is their insecure attitude. They’ve got this sort of scarcity mentality. And you know, you kind of can’t blame them. If you had an industry, and you controlled all of the data and information in that industry, heck, of course you’d want to keep control of that. I mean, I can’t say I blame them. But I don’t think it’s right, either. They’re doing what’s in their self-interest, and trying to control this.

So, this big merger now, of Zillow and Trulia, I think it’s going to upset their apple cart a lot more. And the National Association of Realtors, and realtors in general—I think what they should really be focused on, is instead of trying to be so scarcity minded about this data, and so protective of it, they should be focused on, what is the real thing that they’re selling to the consumer? And in my eyes, the real thing that they’re selling to the consumer is not the data. Okay? Because they’re definitely losing control of the data. They have been for quite a while, since the mid 90s. The real thing that they’re selling, is they’re selling expertise. They’re selling service. It’s not like anybody in any industry, in any field, can just go out and get the same result doing something by themselves. I mean, there’s certainly a benefit to having experience. And making mistakes, and witnessing other people make mistakes. I mean, there’s a lot of benefits to that. No one in their right mind would really deny it. And, when realtors can bring that experience to bear, to help clients, that’s what they’re offering! That’s what they’re selling. Of course they’re selling some service, and convenience too. They can make things a little bit easier for clients, buying and selling properties, of course.

But, the data—I think the days of trying to protect data, it’s kind of like the days of the old Soviet Union. Which may be coming back, I don’t know. It’s a whole nother topic there, in a slightly new version. But, remember the old Soviet Union? They had the government news agency. It was called the TASS news agency, and I remember when I was a kid, always hearing about the TASS news agency talking on the news about what was going on in Russia and the Soviet Union.

You can’t control this stuff, folks! The best world is a world with free markets and free people. When data is free, when information is free, then people do stuff with it! And they come up with new ideas, and new innovations. I just don’t think that the real estate industry, the National Association of Realtors—the realtor industry, I should say. Because that’s not the only part of the real estate industry. Although it’s a huge part, for sure. being protective of this data is just not where it’s at. That’s not the thing. We’ll see, as this unfolds, and I’m certain we’ll have more to talk about on upcoming episodes. But this is a big deal, folks. It matters. Huge amount of data here is now being controlled by one company. I guess really two companies, which is the National Association or Realtors,, and Zillow, who now owns Trulia. So it’s a big deal.

But one other thing I want to mention about this that’s kind of interesting, is the background. Of course our Federal Trade Commission here in the United States always looks at large companies when they’re trying to merge. Of course, remember many years ago when Microsoft tried to buy Intuit? And the merger was denied? They wouldn’t allow them to acquire that company, because they would just have too much of a market share, and too much of a monopoly. I’m definitely against monopolies. I don’t particularly like the big corporatocracy, although I’m very much pro-business, and very libertarian in my political views. But, at the same time, these huge companies, they’re not really operating in a libertarian, free market kind of way. Because they have so much insider ability to affect laws, and have lobbyists just control public policy. That’s not really free market economics, okay? Yeah, although it is big business. But big business is not real business. The real business, in the free market, takes place in the small and medium sized companies of the world.

The interesting thing to look at, though, is remember the merger a few years back of the two satellite radio companies, XM and Sirius? That one was allowed! And I kept finding it interesting, because all of the talk in the media was about the consumer. The consumer has lots of choices for radio. They have lots of choices for podcasts. Apparently, the FTC did not think, the government did not think, that was a problem. And, subscribing to satellite radio is still relatively cheap. What is it, 10 or 12 bucks a month? Okay, it’s not very expensive. So, they were looking at the consumer angle. But what they never talked about, is that that monopoly affects businesses who are advertisers. Because advertisers don’t have another choice. And I know this first hand, because many years ago, one of my companies used to advertise on XM, and Sirius. And when they were competing with each other for advertising dollars, there was a freer market. We had a choice. The advertiser had a choice as to where they could go. And I noticed as soon as that merger happened, the prices went up. Because there’s a monopoly now. Just kind of an interesting thing. They never really talk about the advertisers.

And so, what’ll happen here is, Zillow and Trulia, although they’re in competition with the realtors, they get a lot of money from those realtors out there in advertising dollars. I’m sure no one in the government really thought about that. What does that ultimately mean? Does that trickle down to the consumer in some way? Does it mean that if there are fewer—if advertising becomes more expensive on their platform, does it mean that fewer realtors advertise? Does it mean in that way the consumer ultimately has fewer choices? Does it mean that if realtors have to spend more money advertising to get listings, and to get buyers, does it mean that they will be more firm in negotiating their commissions, and try to drive commissions up? You see it how everything is so tied in, in a modern economy? It’s just amazing. It all trickles through the system. There’s always a balance.

In fact, when I talk about the three dimensions of real estate investing, I talk about how when sales are up, and properties are appreciating, typically when that happens, the non-correlating event is that rents will start to soften a little bit. And the opposite is usually true too; when sales aren’t robust, when the market is soft, when it’s a buyer’s market, as they call it, because sellers aren’t able to have pricing power in that market, typically rents will strengthen, because as long as the population is increasing, there are only three real choices. People must buy and own a home, or they must rent a home, or they must be homeless. One part of that that someone chimed in and heckled me at one of my seminars. He said, no, they can live with their parents.

And you know, that’s absolutely true, and we’re seeing that. And this is called the shadow household. So, we’ve talked on the show many times about shadow inventory. We’ve talked only a little bit about shadow households. But, Generation Y, otherwise known as the Millennial, or Boomerang, generation, because they’re like a boomerang; you know, you throw it, and the boomerang does a circle, and it comes back to you. Well, Generation Y is coming back home to live with their parents, many times, because housing is so expensive, because education is so expensive, and because they’re not really marrying very much, or they’re putting of marriage more than any other generation in history. And so, this is an interesting trend. Because eventually—you know eventually—they will get out of their parents’ houses. And that represents a big opportunity for investors. Because what will they do first? They’ll probably rent first. And then they will eventually buy. So what does that mean to investors? Of course, more renters coming into the rental market? Hey, that’s great. We’re gonna have more renters. So, we like that, because that gives us pricing power as landlords to increase rents. And what if we have more buyers? Well, that means that we have pricing power on the value of our properties. The value of properties goes up.

Now, this isn’t a static equation, of course. Developers do something too. This is the great thing about the free market; it’s always adjusting. And so, developers will go out and create more supply. But, what we’ve seen historically that always happens, is that the supply always, always lags the demand. There’s always a shortage. And as more supply is being created, what happens? Well, labor costs go up, energy costs go up, typically there’s upward pressure on these things, and of course, most importantly, and I’ll kind of finish with this thought before we get to our guest, commodity prices go up. And, as we call ourselves real estate investors—I like the name income property investors better, but, again, the point I want you to always remember, is that in our model, what we’re really buying, is packaged commodities, or assembled commodities. We are really commodities investors.

But we do our commodities in a much better way than you can do on the Chicago Mercantile Exchange, okay? Or any commodities exchange. The way we invest in commodities, is we only use about 20-25% of our own money. We get the bank to finance the rest, on a 30-year, very historically low fixed rate mortgage, and then we tell our tenants, pay that mortgage for us, to pay our property taxes for us, to pay our insurance for us, to pay, if we have a homeowners association, pay that too, Mr. Tenant, and then, give me a little extra every month. You know? $200 extra every month on that little house would be a nice perk for the owner. That’s the way we invest in commodities. So, that is a far better deal than you’re going to get with the, I’ll call it the Wall Street method, even though I’m not specifically talking about Wall Street in commodities exchanges. That’s the way to invest in commodities, folks.

One of my friends, he wants to get into the commodities business, and he’s always telling me about commodities. And he says, why don’t you invest in commodities? And I say, I own lots of commodities! Are you kidding? I own massive amounts of lumber, concrete, steel, glass, petroleum products, copper, I’m a big copper investor. All the wires in my houses and apartment buildings are made of copper! And they have petroleum products called plastic surrounding the copper. And this is a great way to invest in commodities. It’s my little trademark terms: packaged commodities investing, or, assembled commodities investing. Packaged commodities investing, or assembled commodities investing. Call it either one. I like packaged, because they are packaged. They’re built on a piece of free land, or very inexpensive land, and you get the multi-dimensional characteristics of an income property investment when you invest in commodities in that way, as a packaged commodities investor, or an assembled commodities investor.

Anyway. Enough from me. Let’s go to our guest. We’ve got Joel Naroff, Big Picture Economics. Go to and register for our Little Rock Creating Wealth program, and our property tour, and I look forward to seeing you there in late September.

Introducing Joel Naroff

JASON HARTMAN: It’s my pleasure to welcome Joel Naroff to the show! He is the founder, president, and chief economic with Naroff Economic Advisors, and he’s author of Big Picture Economics: How to Navigate the New Global Economy. He writes for Newsmax and Financial Braintrust Alliance, and some other places as well, and it’s great to have him coming to us from just outside of Philadelphia today. Joel, how are you?

JOEL NAROFF: I’m doing great, and thanks for having me on.

JASON HARTMAN: Well, the pleasure is ours. Maybe first, there’s been a lot of talk the past couple of years, a lot of the current administration taking credit for—and I’m gonna put it in single quotes—the ‘economic recovery.’ Are we in an actual recovery? And are you optimistic about it? Or, what do you think?

Are we in an actual economic recovery?

JOEL NAROFF: We are in a recovery. Clearly, it’s been disappointing for the last five years. The recession technically ended five years ago. So, yes, we’re in a recovery. It’s been slow, it’s been disappointing. But the truth of the matter is, it’s not been surprising. Because the cause of the recession, the collapse of housing and finance, set the stage for the modest recovery. Those are the two sectors that you really need for economic growth, and it took three years before housing came back, and finance is still coming back. So, without them, it’s been tough sledding. And that’s to no small extent why we have this weak recovery. I think, though, we’re really on the verge of shifting gears and getting into a stronger recovery. And I’m pretty optimistic about the next 12-18 months.

JASON HARTMAN: Good, well I’m glad to hear some optimism here! I am sort of optimistic, in a way. Maybe we can dice that up. And I guess where my sort of optimism comes from, I guess anybody can have a recovery if you print enough fiat money, right?

JOEL NAROFF: Well, that’s really true, and you can create demand. But it’s really very much, what’s interesting is that while the Fed has been extraordinarily aggressive in its monetary policy, the reality is that what they’ve done is lower interest rates and try to get the markets to work. The thing such as the excess reserves that everybody worries about, really requires the banks to start lending money before all that cash turns into demand. And I’ve worked for banks for 30 years now, and I can tell you, the likelihood that we’re going to have bankers on spring break and going wild and lending like crazy, at least for the next 12, or 24 months, is pretty slim. There’s a lot of regulations out there. So while the Fed has done a lot, we really don’t have a major threat, at least as far as inflation and excess demand comes into play, because of their actions. The banks aren’t lending that money, therefore, it’s not really turning into cash.

Joel Naroff’s inflation forecast

JASON HARTMAN: We’ve talked a lot about—and there’s a lot of theories, a lot of people postulating about why banks aren’t lending. And when we say they’re not lending, of course they are lending, it’s a figure of speech. They’re not lending as much as they could lend, is what we really mean to say. And it sounds like you think there will be moderate inflation in the future. You did mention to me before we started that you didn’t think deflation was really possible.

JOEL NAROFF: There is, obviously, a risk of inflation out there, in part because the banks do have the potential to lend a lot of money. And if my forecast is right, and I think we can have 3½ to 4% growth for the rest of this year, and then 3½ to 4% growth next year, there’s going to be a lot more good loan opportunities. So called “good loans,” I’ll put that in quotes also. The fact is, we’re gonna get some strong growth, and that’s going to trigger some additional inflation. But we’re in a global economy, and my book, Big Picture Economics, talks about the issues of how businesses can operate within the context of the global economy. And the idea that US businesses can just run out and raise prices in the US, when there are foreign firms that would love to take their market share, is somewhat unrealistic. So, while inflationary pressures may build, the global economy will keep those inflationary pressures from getting too high.

JASON HARTMAN: When you look at big picture inflation potential overall, one of the reasons we don’t have more inflation, in my opinion, is that it’s not just an issue of lending. Of course, the monetary supply has increased. The money supply, I should say, has increased dramatically. But the credit supply has actually dwindled at the same time. So, inflation or deflation, in my simpleton way of looking at it, is a function of how much money there is out there, and how much credit there is out there. So I say, M + C = I or D. So, if the credit is declining and the money is increasing, you know, what happened in the aggregate? What is the net? Do we have more ultimate money out there? When you combine credit + money?

JOEL NAROFF: I think, really, the issue is that this country runs on credit. And the world, really, to a very large extent, runs on credit. And you really have centered in on the correct way of looking at things. You can have the money out there, but if people aren’t spending it—if they’re still being cautious; if businesses are holding the cash—remember, their cash, their liquidity, is at the highest point we have ever seen it in the corporate sector. Men were not turning that cash into spending. Similarly, if banks aren’t lending the money, they can have all the cash they want sitting in their vaults. Not literally, but figuratively. And that still doesn’t turn into the spending. It’s spending that matters, and that comes down to the decisions of individuals and businesses and even the government on whether or not they’re optimistic about the future, and whether or not they’re going to turn that cash into real demand. So, you’re right in looking at the credit. If the banks aren’t lending, that’s a reflection of their cautiousness, but also the cautiousness of the borrowers. And once that changes, then I think we’ll see that demand pick up, and that’s when the issues of inflation will start to arise.

A look at the globalization of the economy and the US’ importing of deflation

JASON HARTMAN: And, one of the other issues is that when you look at the global economy—we’re talking about big picture economics here, so we have to talk about that—since globalization, what the US has really done, is it’s imported deflation to offset domestic inflationary pressures from massively irresponsible government fiscal and monetary policy. I think we could all agree on that. And so, what it’s done is, when you import so much from China, it makes the net deflationary. Because the stuff is so cheap, the labor is so cheap, and then you import cheap labor from south of the border from Mexico, and people can get cheap workers! And so, you know, we’re importing deflation, when maybe at home, the native result if we weren’t doing that would be a lot of inflation.

JOEL NAROFF: Well, I think to no small extent we are importing deflation. And that’s why businesses are going overseas and producing somewhere else and bringing it back into this country. They can do that whole process and wind up with lower prices. And that, on the inflation side, obviously keeps things well under control, and that’s why I said that I just don’t see runaway inflation by any means, because of the global impact of trade. On the other hand, what we have to recognize is that when you have all of these lower priced goods, household spending power also goes up. If you don’t have to pay as much for each of the products, you have some left over that you can spend on other things. And so, there’s a trade off. The only problem, of course, within the economy, which is not a small one, is the people who benefit from the lower priced goods are not necessarily the same people who get hurt, because the production processes have turned out to be in China, or Mexico, or Vietnam, or Indonesia, or wherever else it may be across the world.

Have we exploited the world’s cheap labor yet?

JASON HARTMAN: This is a very macro question. But, have we exploited the world’s cheap labor yet? I mean, really the only major place we could go is Africa, and Africa’s a mess in so many ways, with tribal fighting and civil war; problems there are deep and long and old. Of course there are more people in China that live in rural China that have not come into cities to work in factories yet. But, have we largely exploited the world’s cheap labor?

JOEL NAROFF: Well, I wouldn’t say we’ve largely exploited it, but again, it’s something we do point out in big picture economics, is that the context in which decisions are being made, as far as where to do production, is changing. And changing very dramatically. You take just the situation with wages in China. Their wages are skyrocketing. And the next decade, they’re expected to move significantly higher. A lot of occupations, the wages are already becoming competitive with US wages, and as a result of that decision that was easy 10 years ago to locate your production process in China and ship back to the US, is no longer easy. And indeed, some of those decisions are now that you don’t produce in China, because looking out two, three, four years, and the increases in wages that are projected there makes it a bad decision. That doesn’t mean we’re going to have the so-called onshoring occur at a dramatic pace. It’s going to come back. And I get emails from people who’ve read the book and say, hey, here’s my experience, we’re doing the same thing. The issue with labor is that instead of being in China, it’s the next country we look for. And that next country may be Vietnam. We may get labor out of Africa. There may be some places in the Americas that you can go to. So, businesses are looking everywhere in the world. but, the context is changing, and that’s what’s critical in terms of making decisions. And as I’ve said before, that’s exactly what the book is all about.

JASON HARTMAN: And what I think is really interesting in the talk about onshoring, is the whole subject of 3D printing. It’s going to be fascinating, just fascinating, over the next 10 years, to see how that changes manufacturing in the US. Of course, even with 3D printing, you’re going to have the environmental pressures, and the OSHA, and regulatory pressures in the US. But—well, maybe that’s going to also cause some of this manufacturing to move back stateside.

JOEL NAROFF: I think you’re right. Production processes, labor issues—I spent a long time teaching in New England. I was a college professor for a long time. Used to talk about economic history there. And if you think about it, New England lost a lot of its manufacturing to the south. Why? Because southern labor was a lot cheaper than northern labor. Then what happened is the southern laborer’s wages went up, and the production went across the seas, to whether it was Europe first, and then Japan, and to the rest of Asia; now Asia is beginning to see those kinds of changes. This is the normal pattern within economics, and we’re beginning to see it, and it’s a combination of both wages and production processes that are making it more desirable to locate here, and I think that’s a real sea change that we’re going to be hopefully benefitting from.

Tax policy and offshore businesses

JASON HARTMAN: It’ll certainly be interesting. Any thoughts on tax policy? When you look at these big multinational corporations, they have so much money overseas; it seems just idiotic that our government doesn’t give them an incentive to repatriate—or, maybe I should say patriate—that money. Maybe it’s not repatriate; it was never here to begin with, possibly. But, bring some of that money back into the US. If they wouldn’t be taxed so much, it seems like there’d be an incentive, and it might create more jobs here, and just more spending here, and so forth.

JOEL NAROFF: That issue is a lot more complex that, oh, they have this money, let’s not tax and they’ll bring it back. It really goes to the heart of the structure of the tax code itself. There’s a couple things that people forget when they think about tax breaks. If a business doesn’t pay money on tax for doing something, they get a specialized tax break, and multinational companies will get these specialized tax breaks. That means everybody else—businesses and households—have to pay more. It’s not a matter of what the level of the budget is. Regardless of what you’re spending, if somebody’s not paying taxes, somebody else has to make up for that shortfall. So, we’re now into a whole discussion well beyond should they bring it in, onto what is the correct structure of taxes? That’s what it comes down to. And I think this is another example of doing things on a piecemeal basis. We’ve had a tax holiday for foreign profits once before. The studies that we’ve done show that a relatively small—no, a very small percentage of that money went to things other than buying back stock dividends or compensation. You want them to bring it back to invest, and spend in the United States. If that’s not going to be the case, why give them the incentive to bring it back?

JASON HARTMAN: Of course, I agree, but even with the greedy, crooked execs on Wall Street, right—

JOEL NAROFF: Well, I’m not saying that—

JASON HARTMAN: No, no, I’m saying it— you look at the C class in these companies, who are incredibly highly compensated. Mostly on the backs of their shareholders. And I think that is out of sync. I’m a capitalist still, but I think the system is not really capitalist, in some ways. It’s an insiders’ game, is what it really is. Even if money is repatriated, and they buy back stock, or they get bigger bonuses, or some sort of compensation, I mean, that money’s gonna trickle, right? They’re gonna spend it somewhere, or invest it somewhere.

JOEL NAROFF: But once again, there’s incentives you’re creating. Let me ask you this question in return. If you could repatriate your profits at zero tax rate, what incentive are you creating for those businesses? You’re creating an incentive for them to earn their profits outside the United States, isn’t that correct?

JASON HARTMAN: Initially, yes. But if we—

JOEL NAROFF: Well, not initially. If I’m a corporation and I can earn 100% of my profits outside the US, and then bring it back to the US tax-free, versus only part of it in the US, where am I better off as a corporation?

JASON HARTMAN: Okay, I see what you’re saying. I guess what I’m saying is, ultimately when it comes back—

JOEL NAROFF: See, the problem with tax policy is an issue of incentives. And what kind of incentives that are you creating. The problem we have right now with the overseas profits is that we actually had a tax holiday. Before that, businesses did keep some of them outside the United States, but they also repatriated a lot of it. What happened was, we gave a tax holiday, they brought it in, they did what they did with it, whatever they may have been, and now they’ve learned that if they hold out long enough—if they absolutely don’t have to use the money—the government will once again give them a tax holiday. So, in essence, what the government has done, by having these piecemeal tax policy, is to create an incentive not to bring it into the US! Because they know, eventually the pressures will build, they’ll bring it in tax-free, then they’ll go back and keep the money outside the US until the next holiday occurs. That’s why it’s more of an issue of tax structure than tax holiday. I just don’t believe in that. I think you deal with things on a large scale basis, not on a piecemeal basis.

JASON HARTMAN: I couldn’t agree more. And you talk in your book a lot about context. And we’re talking about, in this on point, is really content, not context. So, the bigger context, and the bigger picture, as the title of your book goes, is very important, and I completely agree with you—there are so many misaligned incentives, and that just speaks to, in my opinion, the code just being way too complicated.

JOEL NAROFF: I have a joke I use when I talk to business groups when I get questions about taxation. The first thing I say is, how many people believe that those who were responsible for the tax code should be allowed to walk this earth freely? And I get a big laugh. Because everybody knows what I’m saying. The most bizarre minds are out there, messing up this tax code that’s now so terribly unfair for so many businesses. Especially small businesses, which create so many of our jobs. I’m a small business [unintelligible]. I don’t get these tax breaks that big businesses too.

JASON HARTMAN: America has been taken over by the corporatocracy. And it’s just, it’s totally wrong. It’s just, we’ve gotta get back to our roots of these small businesses that—individual effort, that’s where the incentive needs to be.

JOEL NAROFF: Absolutely.

Why the banks aren’t lending very much

JASON HARTMAN: But that’s a whole nother discussion. I want to ask you, though, because we didn’t really completely wrap up the banks not lending topic very well. And what is your theory as to why the banks aren’t lending very much?

JOEL NAROFF: Having worked with banks, you have to understand the way banks operate. That’s why I’m not worried about bankers going wild, okay? They’re not going on spring break. They’re not going to lend like crazy. The first reason why is really basic credit decisions. Banks are retrospective. They look back three years. So, they look at a corporation, or they look at an individual, they look at their financials, and think about the last six, seven years. 2008, 2009, 2010, 2011, businesses and even households were really, really stretched. If banks looked at their financials during that period of time, and it wasn’t good, they weren’t good credit risks. In the last couple years, that’s beginning to change. So, the first thing is that it’s just a matter of credit. The credit risks were really high, in both businesses and households, so normal credit standards would have meant, you know, low lending. The second thing is the weakness in the banks. A lot of banks were much more worried about rebuilding their capital base till they became strong, and the last thing they could do was make another bad loan. So if you don’t want to make a bad loan, you don’t make any loans. And the third thing was government regulations. The pendulum has swung from underregulation to overregulation, and banks are now scurrying along trying to figure out how to operate in a highly regulated environment, which is probably becoming overregulated, but that’s because we already saw the costs of underregulation; it’s the calamity that we had in the housing and finance sectors. So that’s the reasons that I give for it. As the economy gets better year after year, credit conditions are getting better; that’s why we’re seeing standards easing, and that’s why we’re seeing a slow but steady improvement in the loan making on the part of the financial sector.

JASON HARTMAN: Would it be fair to say that the banks have overcorrected?

JOEL NAROFF: I think the banks have clearly overcorrected, but in part, that’s the incentive that was given to them by the government by their regulators. If they don’t make a bad loan, they’re a lot better off than if they make a lot of loans and some of them are bad. That’s just the world they’re living in, and they’re trying to figure out, both the regulators and the industry, what’s the way to proceed at this point. It’s hard. Because nobody wants to make the same mistakes that we made in 2006, 7, and 8; at the same time, unless we have more lending, we’re not going to have a strong recovery. And that’s the fact of life, and it’s why we keep talking about the disappointing growth that we get in the economy.

JASON HARTMAN: But the banks, ultimately—I mean, what are they doing with their money? Ultimately they just want to lend! They’ve got to lend! Resources need to run!

JOEL NAROFF: Well, they want to lend, and they’re trying to. What I explained is that, to the extent that they’re getting good credit ratings now versus two or three years ago when it was difficult to get good credit ratings on the part of businesses or households, they’re starting to lend more. But don’t forget, things such as big businesses with lots of cash, don’t have to go to the financial sector. Small or mid sized businesses are extraordinarily cautious right now. They’re looking at soft growth, and they’re saying, you know something? I’m not going to invest right now, because I don’t know if that investment makes sense. So, we have a situation where banks are cautious, but so are the borrowers, the households, and the businesses who are not running out and taking on debt. Nobody wants to take on debt, so you have the dual problem. Less demand, and an unwillingness to supply, and the market is soft.

JASON HARTMAN: What else did you want to talk about or say? I just want to give you a freeform opportunity to mention anything that is interesting—you have some great entries in your table of contents, I really like them. One in particular, maybe this’ll be an area you want to go, but feel free to take it wherever you want, but I love chapter 10—middle class grows in China; how does that affect Indiana?

How does the growing middle class in China affect Indiana?

JOEL NAROFF: The thing I want to talk about, and what we stress in the book, is, we give examples of what is either common knowledge where the analysis is wrong, or relationships which people simply don’t even see make sense at all. So, what’s happening in terms of the middle class in China, is the wage issues. If their wages are rising, and they are demanding it, and the middle class is not sitting around saying I’m going to work for 8 cents an hour anymore, they’re looking to get the standards of living that exist in the rest of the world, that’s going to affect business’ decisions in the Midwest, where manufacturing’s going on. That’s to some extent the onshoring issue. So, there’s a lot of relationships there. We talk about things such as, how do you evaluate whether taxes are good? Does it make sense to cut taxes, increase taxes? Things that people talk about.

And politicians have the answer. There’s always one very simple answer, that the politicians have, and whatever it is, it’s probably wrong. So like I like to say, if it’s simple, it’s probably stupid, when it comes to tax policy. So, we provide a framework for how you judge whether a tax makes sense. And some times cutting taxes which doesn’t generate any new economic activity, only means that the people who have the lower taxes benefit, but everybody else pays for it. And that was my point on the tax holiday; you gotta deal with things on whether it makes sense of not. The context in which you’re operating. When I talk about the book, I talk about the idea that you look at things and judge where you are in the economy—is it good to make a business decision now? We talk about a company that built a large plant starting in 2008, and why the person wasn’t crazy, but was really brilliant when they decided to do it then. They were looking at it in a different way than others do. And that’s what you have to keep in mind. Don’t look for simple answers, but have a framework for making your own judgment. That’s what the book provides. It’s written by an author who—my coauthor, Ron Scherer, who for 40 years was a business writer who talked to the average person every day. I gave speeches to business people every day. I don’t talk in economic terminology. I talk in real world stories. And this provides that kind of framework for making your own decisions on what to do. That’s what the book is really all about.

JASON HARTMAN: That’s most definitely the best way to communicate. In real terms, as you mentioned. It’s interesting, I just want to make sure that point wasn’t missed, about Indiana. What you’re saying, and you know, by the way, I should mention, my real estate investment company has done a lot of business in Indiana. In Indianapolis specifically, over the years. And we’ve found that to be a great market for rental housing, with a nice stable tenant base, and you know, there are other great markets around the US too. But what you’re saying is that, as the middle class rises in China, or, really, anywhere around the world, that improves the manufacturing business, or really, maybe other businesses too—ancillaries—in the US, because it causes more onshoring, right?

JOEL NAROFF: It does two things, actually. One, you have more onshoring. Plus, you have the businesses that are well entrenched in the US, have a greater market in China. China doesn’t have to be fed strictly by companies producing in China. As their middle class is growing, they’re looking for goods coming from the US. So, a firm in Indiana that makes a product, now has a much bigger market in China than they ever did before, and it actually would make sense for them to be an exporter to China. So, you have a number of different effects of the growing wages in China.

Closing comments

JASON HARTMAN: Very interesting stuff. Well, give out your website, and tell people where they can get the book as well!

JOEL NAROFF: Sure. My website is We have a Facebook page, just look up Big Picture Economics, that’ll give you information. And you can buy it on Amazon or Barnes and Noble, or any other bookselling website, and it’s called Big Picture Economics: How to Navigate the New Global Economy. And, it’s written for the average person; as one of the reviewers said, if you’re worried about reading an economics book, don’t. Because this has no jargon, it has almost no tables, it’s written for the person who wants to think about economics but doesn’t necessarily have a background in economics.

JASON HARTMAN: Fantastic. Well Joel Naroff, thank you so much for joining us today.

JOEL NAROFF: Thank you for having me.


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Transcribed by David

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