At Arthur Laffer’s post-election conference in New York, a couple hundred supply-side optimists spontaneously decided to support Glenn Hubbard for the chairmanship of the Federal Reserve in the post-Greenspan period that begins in 2006. Bush administration insiders believe the choice will boil down to Hubbard or Martin Feldstein. Two smart guys with tremendous credentials.
However, many recall Feldstein’s mixed tenure as chairman of the Council of Economic Advisors under President Reagan. After writing many fine articles about the benefits of lower tax rates, and after pointing out flaws in the Social Security system and healthcare entitlements, Feldstein, upon taking office, started crusading for higher taxes in order to narrow the budget deficit.
Feldstein worked with OMB director David Stockman, White House big Richard Darman, and New York banker Pete Peterson to press for a tax-hike “solution.” It was virtually a fifth column in 1982. Reagan refused to budge on tax rates, though he did allow some tax-loophole closers in return for spending cuts that never materialized. In 1986, however, he signed tax-reform legislation that designated only two tax brackets, at 15 and 28 percent. (That’s not a bad model for George W. Bush’s second-term tax-reform quest.)
As a Harvard economics professor and president of the prestigious National Bureau of Economic Research, Feldstein’s writings over the years have been terrific. Yet there is lingering suspicion that his work out-of-office is more reliable than in-office.
Nowadays, when Fed chairmen testify on Capitol Hill, they are forced to talk at length about fiscal policy, especially budget deficits. Seldom do House or Senate members provide much ammunition to restrain spending. The conversation is almost always about raising taxes.
Greenspan has generally done a good job in fending off tax-hike proposals that would curb economic growth and actually widen the deficit. As a rule this is poorly reported in the press. The maestro has also been a strong supporter of Bush’s lower marginal tax rates on personal income, capital gains, and dividends. No one doubts that Glenn Hubbard would similarly defend pro-growth tax reform as Fed chairman.
While Bush’s top economic advisor, Hubbard was an unyielding proponent of the incentive power of lower tax rates to grow the economy. It was Hubbard who pressed harder than anyone in the White House for a reduction in the multiple taxation of investment. This made excellent sense. The stock market and business investment were hard hit by the recession Bush inherited. With the help of Hubbard, Vice President Cheney, and a number of economic advisors outside the administration, lower taxes on individual income, small business, investor dividends, and capital gains were embraced by the president and signed in the tax bill of June 2003. The results have been stellar.
In a recent Wall Street Journal op-ed, Hubbard emphasized the positive results of lower marginal tax rates on work, saving, and risk-taking, linking lower “success taxes” to entrepreneurship and innovation. Once again, his steadfast and unyielding support of supply-side tax reform commends him strongly for the Fed job.
As for the deficit problem, Hubbard agrees with Bush that the solution lies in maximizing economic growth, restraining discretionary domestic spending, and reforming major entitlement programs. While little is known about Hubbard’s monetary views, he certainly would not be tolerant of rising inflation. As a pro-market economist, Hubbard would probably make ample use of financial- and commodity-market price signals to guide his monetary strategy.
According to people close to the White House, current CEA chairman Greg Mankiw will be returning to his teaching post at Harvard come January. This leaves a key slot open in the Bush economic high command. The president would be well served by appointing Art Laffer to that post. Formerly a close advisor to President Reagan, Laffer has been a senior advisor to businesses and financial institutions for more than three decades. His hands-on real-world experience would greatly benefit the White House staff as they tackle tough questions on tax and Social Security reform. Laffer would also serve as a key liaison to Wall Street, where he is highly regarded as a prescient forecaster and strong communicator.
Washington insiders also believe that Treasuryman John Snow will remain in his post at least through mid-2005, and maybe longer. Snow was a senior member of Jack Kemp’s tax-reform commission in the ’90s and has detailed knowledge of the subject. He has long argued for lower tax burdens on saving and investment, thereby agreeing with Bush’s view that the double-taxation of capital is just plain bad for economic growth and job creation. As a former railroad CEO, Snow would likely press for reform of the increasingly uncompetitive U.S. corporate tax code.
With Hubbard, Laffer, and Snow in the mix, Bush’s ambitious second-term economic agenda will have a much greater chance of success than most inside-the-Beltway pundits believe possible.
— Larry Kudlow, NRO’s Economics Editor, is CEO of Kudlow & Co. and host with Jim Cramer of CNBC’s Kudlow & Cramer.