As Alan Greenspan's 18-year tenure as chairman of the Federal Reserve Board enters its final months, speculation is growing as to whom President Bush will nominate to succeed him. The crowds at Intrade are betting on Ben Bernanke, current chairman of the White House Council of Economic Advisers. Asked to rank potential nominees, economists polled by the Wall Street Journal gave the highest marks to Bernanke and longtime Greenspan understudy Donald Kohn, a member of the Fed's Board of Governors (the Economist also believes Kohn is "the best choice"). Harvard eminence Martin Feldstein and Federal Reserve Vice Chairman Roger Ferguson followed close behind in the Journal poll. Glenn Hubbard, the former Bush economic adviser who is now the dean at Columbia University's business school, is also in the mix.
All the above have great credentials. And while it's impossible to say how global capital markets would react to any appointment, it's a safe bet that they could easily digest any of these individuals. Unlike so many other important federal appointments that affect economics—to the Securities and Exchange Commission, the Supreme Court, the Treasury Department—there aren't fundamental disagreements about the nature of this job. There's a broad consensus among the elite, policy-minded economists that the chairman must fight inflation.
But there's no such consensus about fiscal policy. And ironically, Bush may be more focused on his nominee's attitudes toward fiscal policy than on the nominee's monetary policy. In the next few years, as Washington faces some truly monumental and uncomfortable choices about taxes, spending, and deficits, the Federal Reserve chairman could play a crucial role.
In theory, there's a neat division of labor at the federal level between fiscal policy (taxing and spending decisions) and monetary policy (decisions about short-term interest rates). The executive branch and legislative branch are responsible for fiscal policy, and the Fed is responsible for monetary policy. But that doesn't stop one group from trying to influence the other. The administration of Bush the Elder publicly complained that interest rates were too high in the early 1990s. And Greenspan emerged as an important voice in fiscal policy, convincing Robert Rubin and other Clintonites of the necessity to reduce deficits, for example. In recent years, Greenspan squandered a big chunk of his fiscal credibility by unambiguously supporting the Bush tax cuts even as deficits skyrocketed. Nonetheless, when he goes before Congress, Greenspan gets pressed by Republicans to come out in favor of tax cuts, and Democrats get on him to warn about the danger of deficits. And the markets listen to what he says. As a result, both sides want—and need—the Fed's imprimatur on their preferred policies.
The Fed chairmanship carries a four-year term. So, whoever fills Greenspan's well-worn chair in January 2006 will be running the show at least through the end of 2009. As such, the next Fed head will remain in that role for years after Bush has retired to Crawford. More important, the candidate Bush names now will be in charge when the Republican fiscal policy of the past five years starts to unwind. Remember, virtually all the tax cuts passed in recent years were designed to be temporary. The dividend and capital-gains tax cuts expire in 2008. The marginal-income-tax rate reductions expire at the end of 2010. At the same time, Bush and Congress have expanded government massively—a new prescription-drug entitlement in Medicare, pork-laden transportation bills, hundreds of billions of dollars spent in Iraq and Afghanistan—while doing nothing to deal with approaching debacles in Medicare and Social Security. Meanwhile, the Alternative Minimum Tax ensnares increasingly larger numbers of Americans each year.
As Democrats and Republicans in Congress seek to sort out these messes, they'll look to the Federal Reserve chairman for succor. So, the biggest danger for Bush is not that the next Fed chairman will be lax when it comes to fighting inflation. It's that he will use his Congressional testimony or his public speeches to speak honestly about the implications of the fiscal policy, to note that the pledges to reduce deficits and make tax cuts permanent are mutually exclusive, or to argue that the stock market can't magically cure Social Security's long-term imbalance.
Thus considered, it behooves Bush to choose the candidate least likely to speak out. Someone who, when push comes to shove, will go with partisan instincts over academic leanings and whose willingness to speak truth to power goes only so far. From this perspective, many of the potential appointees are problematic, given Bush's Manichean worldview. Ferguson was appointed by Clinton. Kohn is reportedly a Democrat. Bernanke doesn't have much of a public record when it comes to deficits, and he's a latecomer to the Bush White House. Feldstein? He's been a big supporter of Bush policies in recent years, as his writings show. But he wrote in the Financial Times in 2003 that "persistent budget deficits crowd out investment and thus reduce long-term growth." What's more, he has a troubling history of being willing to criticize his fellow Republicans over deficits, as he did in the 1980s. And none of these guys has any professional skin in the game—they were all spectators to the fiscal train wreck.
If you're Bush, you need someone who has a first-rate economic mind but the soul of a political hack. You need someone who was intimately involved in the selling of the fiscal policy in the first place and who will go to great lengths to defend it. You need someone who can argue in a textbook that deficits influence interest rates and then argue as a White House adviser that they don't—and still maintain an academic reputation. You need someone who campaigned hard for you in 2004. In other words, you need the guy Chris Suellentrop dubbed a "first-rate economist, tax-cut champion, presidential Yes Man." President Bush, you need Glenn Hubbard.
Bush recently pledged that his Fed appointee would rise above politics. "It's this independence of the Fed that gives people—not only here in America but the world—confidence," said Bush. But the Supreme Court is supposed to be an independent branch of government. And Bush didn't think twice about putting his personal lawyer there to protect his policies and look after his legacy. Bush and Hubbard aren't particularly close. There are no anecdotes of Hubbard clearing brush in Crawford or writing mash notes. But if the guy who did Bush's taxes in the 1980s wasn't available for the Fed, Glenn Hubbard may be the next best choice.