Clark's Economic History of the World
One of the Big Questions, Well Set Up

Daniel Gross on Greenspan's Successor

I think Daniel Gross misjudges Glenn Hubbard.

Daniel writes:

Greenspan's Successor - Who will fill the Fed chairman's shoes? By Daniel Gross : [T]he 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%u2014and 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%u2014not 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.

Glenn Hubbard is as worried about the long-run fiscal health of the American government as... as... as I am. And the next Fed Chair will have a much harder time maintaining effective price stability if large deficits continue. Hubbard, Ferguson, Kohn, Bernanke, and Feldstein are all very good and very serious people--and they all equally understand the importance of making sure that the High Politicians know that inflation will return unless there is effective budget balance.