Who would Romney appoint to the Fed? Well, what does he want?

October 24, 2012

At this point, both Mitt Romney and Barack Obama's economic platforms are woefully incomplete, as neither Romney nor Obama has clarified the single most important economic decision the president is likely to make between 2013 and 2017: who will be tapped to replace Federal Reserve Chairman Ben Bernanke in 2014. 

With Obama, we at least have some precedent. In 2010, he reappointed Bernanke to the position -- a choice he could conceivably make again in 2014. But even if he chooses a new candidate, it's a safe bet that the person won't represent an overly sharp break with the policies of the Bernanke era.

Romney is a bit tougher to handicap. Which hasn't stopped various reports and economic commentators from trying -- I particularly recommend the efforts from Neil Irwin, Binyamin Appelbaum, and Felix Salmon. At base, the difficulty in predicting Romney's choice for the Fed is the same difficulty that attends to predicting most any of his policy choices: Will Romney make the choice that's most consistent with conservative orthodoxy and the bulk of his rhetoric over the last year? Or will he make the choice that's most consistent with a strong recovery as the deleveraging cycle plays itself out?

In the Fed realm, the choice is between replacing Ben Bernanke with one of the Romney advisers who is broadly Bernanke-like on monetary policy (remember that Bernanke was originally a George W. Bush appointee) like Greg Mankiw or Glenn Hubbard or replacing him with a firmer advocate of tighter money, like John Taylor. The latter really could hurt the recovery and scare the markets, but it would be much more consistent with the hard money arguments that have come to dominate the right, and which Romney (and Paul Ryan) has often professed sympathy for. 

You get questions like this in the budget realm, too. Romney has promised to cut federal spending to 20 percent of GDP in his first term and put us on a path to a balanced budget in his first term. That requires huge, quick recovery-destroying cuts -- and Romney knows it. So will he make those cuts? Or put them off?

Romney has promised to cut tax rates by 20 percent across-the-board and to pay for it by closing loopholes and expenditures. That's going to be brutally tough, and in the short term, mean a lot of economic uncertainty as individuals, companies and industries wonder what their tax burden will be, and then a lot of post-policy disruption as the housing and health care markets, to name just two likely targets, adjust to a much tougher tax environment. 

But Romney could avoid all that by cutting taxes and simply not paying the tab, or not paying some big portion of it. That's pretty much what Ronald Reagan did in the 1980s, and Republicans are convinced that it led to a massive economic boom (most economists, by contrast, see Fed policy as both the culprit and the salve for the recession of the early-80s). That would be fiscally irresponsible in the long-term, but stimulative in the short-term. So which will he do?

The answer, of course, is we just don't know. But if I had to put money on it, I'd say we see relative continuity at the Fed, a much slower path of spending cuts than Romney has promised, and a tax plan that isn't anywhere near fully paid for. Voters -- and the Republican Party -- will forgive you for a lot so long as you're the guy presiding over a recovery. Just ask Ronald Reagan. But it's unsparing if you're the guy presiding over tough time. Just ask, well, Mitt Romney.

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