No Job for an Ideologue
You'd hope that the new chairman of the Federal Reserve Board would learn not only from Alan Greenspan's successes but also from his failures. There is reason to worry that having a Fed chairman so close to President Bush's policymaking apparatus will give us something other than the best of these two worlds.
In picking Ben Bernanke, the chairman of his Council of Economic Advisers, to replace Greenspan, Bush has not chosen a classic crony. Bernanke has ample academic and policy credentials and served on the Fed's board of governors for nearly three years before taking his White House post in June.
But a Fed chairman is supposed to serve the whole economy and transcend the interests and policy predispositions of a particular administration. The Senate will need to press Bernanke hard to find out how he will manage this.
When President Bill Clinton renominated Greenspan in 1996 and again in 2000, Clinton knew he was sticking with a libertarian conservative whose political views were often at odds with the administration's. Clinton stayed with Greenspan because the economy was booming, and no savvy politician messes with success.
There was also this about Greenspan: In managing interest rates, he was largely an empiricist paying attention to facts even more than he was an ideologue peddling theories. He could admit that the new economy was something of a mystery to him, and he could learn from mistakes.
In the early 1990s, he put the brakes on the economy too hard, fearing inflation and speeding a downturn. Greenspan came to see inflation as far less of a threat in the new economy than did many of his fellow conservatives -- and some of his European central banking brethren. He let the economy grow faster, and inflation was kept at bay.
That was the side of Greenspan that won him comparisons with the Almighty. In fact, he didn't get everything as right, as we now remember. In retrospect, he could have done more to ease the negative effects of the stock market bubble he was warning against. We may come to wonder about the housing bubble as well. Still, we have pretty fond memories of the Clinton-Greenspan-Robert Rubin economy.
But Greenspan never lost his ideological side. When Bush took office, Greenspan, in an act that will always mar his tenure, suggested that there was ample room for the tax cuts Bush favored, that there might be terrible problems from paying off the debt too quickly. Greenspan became the great enabler of Bush tax policies that have produced massive deficits -- which Greenspan now dutifully condemns. When the great mechanic gave way to the flawed policymaker, the results were less than pleasing.
And that is why Bernanke gives us all reason for concern. Just last Thursday, there he was, telling Congress's Joint Economic Committee that the initial Bush tax cuts had "increased disposable income for all taxpayers, supporting consumer confidence and spending while increasing incentives for work and entrepreneurship." Later tax cuts, he said, "provided incentives for businesses to expand their capital investments and reduced the cost of capital by lowering tax rates on dividends and capital gains."
Well, a Bush appointee would say that, wouldn't he? But this is a terribly rosy view of reality. Consumer confidence has actually been going down. Disposable income is not going up for everyone (just ask General Motors employees and retirees). And Bernanke is a fan of explicit inflation targets, which Greenspan rejected in favor of a more pragmatic approach. Would inflation targets unduly hamper growth?
When Bush announced his appointment yesterday, Bernanke was careful to emphasize his desire to "maintain continuity" with Greenspan's policies. He also implied he would be independent by stressing he would play his role in the economy in cooperation with his Federal Reserve colleagues -- pointedly not mentioning the White House.
He is thus aware of the main line of questioning he will -- and should -- face from the Senate: What does he see as the best parts of the Greenspan legacy, and is he in thrall to the same economic ideology that has animated the president who chose him?
This nomination ought to spur a broad debate on the future of the economy and globalization that pays attention not just to what "the markets" are thinking but also to what is happening to Americans who do not find themselves at the top of the heap. A Fed chairman who beats inflation at the cost of middle-income living standards will not be regarded as a success.