Late last week, the president nominated Kevin Warsh and Randall Kroszner to fill two vacancies on the Fed’s Board of Governors. Warsh is a current White House economic advisor and a former Morgan Stanley investment banker. Kroszner is the University of Chicago economics professor who served on the Council of Economic Advisors during Bush’s first term. The two nominees are tried and true free-market, low-tax, deregulation-inclined policy advisors.
Prior to this, Bush appointed two other Fed board members: Susan Bies, a former Tennessee banker, and Mark Olson, who was with Ernst & Young and U.S. Bancorp and was a legislative assistant to former Republican congressman Bill Frenzel of Minnesota. All told, Bush has appointed six of the seven current board members, an incredible turnover. While they are not all supply-siders (Donald Kohn is more of a traditional Washington Keynesian while Roger Ferguson is a Clinton-era carryover), I would say this Fed board is at the margin much more supply-side -- in terms of an allegiance to low taxes and regulations -- than prior boards.
Adding together the shifts to the Supreme Court and the Federal Reserve, it could be argued that the policy organs that hold sway over the judicial and monetary influences on business are more free-market, Reaganesque, and pro-growth than anything we’ve seen in a long time.
Ironically, a page-one story by Greg Ip in the Wall Street Journal carried the headline, “New Chairman Will Take Over an Increasingly Democratic Fed.” But Ip’s piece discussed a more open and transparent central bank. And monetary transparency is a good thing. But the real story is that the Fed is increasingly Republican in terms of inflation-fighting, taxes, and regulations. With little fanfare, we have a Bush Fed that will continue to be independent in its operations, but fortunately biased towards free-enterprise growth in its underlying philosophy. The same, in theory, could be true of the Supreme Court.
Clearly, Alan Greenspan departs the Fed with a strong economic legacy intact. During his 18-year tenure, yearly real economic growth averaged 3.1 percent, inflation 2.5 percent, and unemployment 5.5 percent. Inflation is the cruelest tax of all on an economy. Paul Volcker broke the back of inflation in the 1980s, and Greenspan held to that tradition for almost two decades more.
Under Ben Bernanke, the central bank is likely to hold to the idea that price stability is the cornerstone of solid economic growth. Look for Bernanke to keep the Fed focused on forward-looking commodity and bond-market indicators in order to contain money-supply growth and steady monetary value in pursuit of domestic price stability.
With a firm monetary foundation, Reagan-like policies of low tax rates and free-market deregulation will afford American entrepreneurs the freedom and rewards that are necessary to maximize economic growth. Without question, the private sector must be liberated so it can effectively function as the engine of prosperity. This capitalist model was restored and rejuvenated by President Reagan 25 years ago and its success has been copied worldwide. Through numerous presidential and congressional cycles, the Reagan model -- if anything -- has been strengthened. Bush’s appointments to the Fed and the Supreme Court are the latest testament to this. Which leads me to say: If Bush is to complete the golden circle of free-market economic growth, he must follow up his excellent appointments to the Supreme Court and the Fed by pressing Congress to make the 2003 tax cuts permanent.
Interestingly, recent polling by the Pew Research Center shows much stronger support for the free-enterprise model than doom-and-gloom pessimists in the mainstream media would have us believe. Fifty percent of those polled by Pew approve of major cuts in federal income-tax rates, with only 38 percent disapproving. Regarding the Bush tax cuts on capital gains and investor stock dividends, 50 percent believe they should be extended, with only 35 percent opposed. It would seem that not only do most folks want higher after-tax rewards and the chance to keep more of what they earn, but that the tax cuts themselves symbolize a move to a free-enterprise economy.
In order to meet this challenge, the earmark-happy Republican Congress and an overspending White House must change their budgetary stripes and show the nation they are capable of free-market reforms that will preserve the Reagan legacy of economic growth and optimism for the future. Hopefully this will be a key theme in the president’s State of the Union message.