At Art Laffer’s post-election conference in New York, where there were a couple of hundred supply-side optimists, the group spontaneously decided to support Glenn Hubbard for the Fed chairmanship in the post-Greenspan period that will begin in 2006. Bush administration insiders suggest that 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 scholarly articles about the benefits of lower tax-rates to nurture more work and investment incentives, as well as 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. It was virtually a fifth column in 1982. Feldstein worked with OMB director David Stockman, and White House big Richard Darman, along with New York banker Pete Peterson to press for a tax hike solution -- really a non-solution. Reagan, of course, refused to budge on tax-rates, and went on to get even more reform in 1986 with only two brackets at 15 percent and 28 percent. Not a bad model for George W. Bush’s tax reform quest in the second term.
But back to Feldstein. As a Harvard economics professor and president of the prestigious National Bureau of Economic Research, his writings after his stint on the Council have been terrific, both on tax-rates and Social Security reform. Yet, there is lingering suspicion that his work out of office is more dependable and reliable than in office. Nowadays, when Fed chairmen testify on Capitol Hill they are hardly ever asked to comment on monetary policy. But they are forced to talk about fiscal policy and especially budget deficits for hours on end. Seldom do House or Senate members provide much ammunition to restrain spending. It’s 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. This as a rule is poorly reported by the mainstream press, even the business press. But the maestro has been a strong supporter of George W. 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 if he were Fed chairman. During his time as President Bush’s top economic advisor, Hubbard was an unyielding proponent of the incentive power of lower tax-rates to grow the economy. More than anyone in the White House, it was Hubbard who pressed for a reduction in the multiple taxation of investment.
Since the stock market and business investment were the mail casualties of the recession Mr. Bush inherited, it made perfect sense to directly apply tax incentives to these areas. This also included a 50 percent cash bonus for the expensing of new plant and equipment purchases by business (passed in 2002 and scheduled to expire this year). With the help of Vice President Cheney and a number of economic advisors outside the administration, lower taxes on individual income, small businesses, investor dividends, and capital gains gained the President’s favor and were completed in the tax bill signed in June 2003. The results have been stellar.
Hubbard’s steadfast and unyielding support of supply-side tax reform commends him strongly for the Fed job. In a recent Wall Street Journal op-ed he emphasized the positive results of lower marginal tax-rates on work, saving, and entrepreneurial risk-taking, linking lower “success taxes” to entrepreneurship and innovation. As Fed chairman Mr. Hubbard, who is now Dean of the Columbia Business School, would be a great help to President Bush’s tax reform efforts.
As for the deficit problem, Hubbard agrees with the President that the solution lies with maximizing economic growth to throw off surplus revenues, 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, the 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. I believe the President would be well served by appointing Arthur 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. This 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 well known and highly regarded as a prescient forecaster and a strong communicator.
Washington insiders also believe that Treasuryman John Snow will remain in his post at least through the middle of next year, if not longer. As a senior member of Jack Kemp’s mid-nineties tax reform commission, Snow has detailed knowledge of the academic work done on this subject. He has long argued for lower tax burdens on all forms of saving and investment, thereby agreeing with President Bush’s strongly-held 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 a U.S. corporate tax code that has become increasingly uncompetitive in global terms. Snow’s substantial knowledge base of tax policy, as well as his unthreatening low-keyed style of operating in the back corridors of power, would be a big help in moving President Bush’s ambitious second-term economic agenda much closer to success than political pundits inside-the-beltway believe possible.
