Last Friday’s Wall Street Journal reported that Larry Lindsey has been added to President Bush’s short list of potential replacements for Alan Greenspan at the Federal Reserve. Martin Feldstein, Glenn Hubbard, and Ben Bernanke are the other three most prominently mentioned, with Bernanke the frontrunner on Tradesports.com.
Bernanke recently weighed in with his opinions on the economy in the Journal, and while he lauded tax cuts, free trade, and legal reform, a supply-sider he is not. His views on how tax cuts impact the economy, his odd interest in demand charts, and not to mention his discredited beliefs about “limits” to growth and “full” employment, should have Bush supporters concerned.
About taxes, Bernanke spoke of “fiscal stimulus” that has diminished “in the past few quarters.” Bernanke is clearly in the Keynesian camp on taxes, holding that they should be reduced during times of slack demand and increased when economic growth reaches its natural “limits.” While Keynesians see tax cuts through a demand-driven, short-term stimulus prism in which their impact gradually recedes, supply-siders encourage marginal rate cuts for their long-term (and continuous) incentive effects on economic activity. The distinction between the two schools of thought is crucial, particularly given the growing influence of the Fed on Capitol Hill.
Moving to the economic impact of demand, Bernanke asked how much demand in the latest quarter “appears to have been satisfied out of inventories rather than from new production.” But supply-siders don’t even consider this — they don’t because they know that products are ultimately bought with other products. “Demand” will always exist, as human wants are unlimited. But what Bernanke deems “demand” is in fact producers offering up their surpluses for those of others. In the supply-side model, what Bernanke sees as a fall in aggregate demand is in fact a fall in production — something supply-siders agree results from governmental meddling along the lines of excessive taxation, regulation, and unstable money.
Further on in his Journal editorial, Bernanke wrote about employment, and his belief that there is a “highest level of employment that can be sustained without creating inflationary pressure.” His thinking here raises many questions in that Greenspan’s unnecessary preoccupation with GDP growth “in excess of trends of potential” led to his mistaken 1999 decision to tighten (by way of repeated hikes of the fed funds rate) despite the fact that bond yields, the dollar, and gold were screaming deflation rather than inflation.
Leaving aside the ability of markets to innovate constantly around labor shortages, not to mention the static assumptions that would lead one to believe in “full” employment and “limits” to economic growth in the first place, the real concern here is that someone who could potentially oversee our monetary policy essentially sees the U.S. economy as closed beyond the importing/exporting function. Indeed, a major reason why our economy continues to outperform those of other countries has to do with the fact that just as our companies don’t limit themselves to the “available” U.S.-based labor force, they similarly are not hamstrung by the “output gap” beliefs held by Bernanke — beliefs that assume growth is limited to static estimates about our domestic production capacity.
In truth, as commentators like Lou Dobbs continuously remind us, U.S. companies regularly source jobs and manufacturing outside the United States. Assumptions about full employment and limits to growth are always a bit silly insofar as they’re based on the false notion that economic factors don’t respond to changing economic conditions. In an increasingly integrated world economy, the ideas pushed by Bernanke are downright fatuous.
Although he didn’t discuss money in the Journal editorial, a June New York Times article noted Bernanke’s belief that the gold standard made the Great Depression worse. Plus, in a 2002 speech, he lauded the ability of the government to use the printing press to “generate higher spending and hence positive inflation.” If his adherence to a Phillips Curve orthodoxy made his belief in a price-rule already seem shaky, his direct comments about money should remove all doubt.
Much right now is being made of President Bush’s historic chance to remake the Supreme Court. No doubt that’s true. Perhaps just as important will be Bush’s Federal Reserve appointments, foremost of which will be Alan Greenspan’s replacement. For his views on taxes and growth-limits alone, Bernanke would be a big step in the wrong direction. For his views on money, Bernanke has the potential to be very dangerous.
–John Tamny is a writer in Washington, D.C. He can be contacted at jtamny@yahoo.com.