Chairman Hubbard?

Larry Kudlow
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Posted: Mar 18, 2004 12:00 AM

No one expected the Federal Reserve to change interest rates at their policy-setting meeting yesterday, so the monetary moment may seem a little low drama. But a huge monetary question is churning through the Washington rumor-mill with increasing velocity: Will the 79-year-old Alan Greenspan accept renomination as Fed chairman when President Bush offers it to him this summer?

Bush has made his decision clear. Greenspan has not. Observers have remarked on the Fed chairman's unusually active speech-making agenda in recent months. For a senior citizen, he has a lot of energy for the rubber-chicken circuit, raising eyebrows that something is up.

More, he's been vocal on a number of wide-ranging topics: He has defended his approach to the stock market bubble, advised reducing Social Security benefits, relentlessly attacked Fanny Mae and Freddie Mac, passionately supported free trade in the face of a silly-season political assault on so-called jobs outsourcing and argued -- in an unusually zealous manner -- that new spending restraint and economic growth (not tax increases) are the best ways to solve the post-9/11 budget deficit.

It's almost as though the Fed chairman is making a victory lap, one that will secure him a positive historical legacy after a 17-year, four-term run as chairman of the most powerful economic agency in the world.

Technically, Greenspan's chairmanship must end in 2006, when his seat on the Federal Reserve board expires. So if he were to accept renomination for an unprecedented fifth term, he would only be eligible for two more years. But will he take it? No one knows.

Conventional thinking has Greenspan departing in 2006 and Bush appointing Harvard economist Martin Feldstein as his successor. The former Reagan economic adviser has strong ties to the administration, dating back to Papa Bush and extending through Bush Jr.'s presidential run, when he sat on the campaign's economic-policy committee. Since then, he has frequently briefed both the president and vice president. As president of the National Bureau of Economic Research and a prolific writer, he enjoys considerable credibility inside the economic establishment.

But the recent Washington buzz is not about Feldstein -- it concerns former Bush II economic adviser Glenn Hubbard.

Hubbard returned to his teaching post at Columbia University last year after authoring the best supply-side tax cut enacted in 20 years, one that dramatically reignited both the stock market and economic growth. While in Washington, the 45-year-old Hubbard showed himself to be an adept inside player. His tax-cutting views overwhelmed the hapless former Treasury man Paul O'Neill. He even outlasted Bush adviser Lawrence Lindsey in the dramatic shakeup that followed the 2002 midterm elections.

Hubbard emerged as the principal Bush administration spokesperson and communicator. In numerous television appearances, he proved himself to be an unyielding free-market advocate. In congressional hearings, his political ear was uniquely sensitive.

Like Greenspan, Hubbard understands the crucial interaction between monetary and fiscal policy -- an essential function for any Fed chair. Lower tax rates that spur economic growth require an accommodative Fed to create efficient liquidity that will fund new work and investment incentives. This is exactly what Greenspan did nearly a year ago when the Fed eased policy once the Bush tax cuts were signed into law. In private conversations, Hubbard has indicated he would have done the same.

Supply-side doctrine -- synthesized by Nobelist Robert Mundell and economist Arthur Laffer -- has always emphasized that lower marginal tax rates increase liquidity demands while higher taxes reduce them. The Fed must react accordingly -- although Greenspan has not always done so.

Ten years ago, the estimable Greenspan properly tightened policy following passage of the Clinton tax hikes, which removed growth incentives and would have left an inflationary overhang of excess money. But his biggest mistake came in 2000, when he met a non-inflationary and liquidity-hungry economy (one that followed capital-gains tax cuts and was driven by a remarkable high-tech productivity surge) with a dearth of money. As the Fed tightened relentlessly, the long bull-market economic run was destroyed.

Greenspan has clearly learned from that mistake. So has Hubbard.

A money manager recently told me about a call he placed to a prominent speakers bureau in Washington. The investor requested Martin Feldstein, but the speech broker said, "Don't you know that everyone down here is talking about Glenn Hubbard as a replacement for Alan Greenspan?"

During the early Reagan years, Feldstein wandered far off the reservation in a panic over budget deficits. He started publicly opposing the president by recommending tax increases. Many supply-siders have never forgiven him.

As George W. Bush ponders a second-term agenda that includes reduced tax burdens on capital formation, private investment accounts for Social Security and legislation to make his first-term tax cuts permanent, surely he will want a sound thinker running the central bank.