Greenspan’s Boots

An individual who is destined to influence the livelihood of Americans — and for a long period of time — will soon face confirmation before the U.S. Senate. I am not referring to the next Supreme Court justice but to the next chairman of Federal Reserve Board of Governors.

The Fed chairman is more than the chief U.S. central banker. He is a major voice on economic public policy matters; a “comforter-in-chief” to global financial markets; and, because of globalization, effectively the key central banker to the world.

Finding the right person to replace Alan Greenspan as Fed chairman is no small task. As Princeton economists Alan Blinder and Ricardo Reis put it in a paper delivered to the recent Fed conference in Jackson Hole: “While there are some negatives in the record… we think he has a legitimate claim to being the greatest central banker who ever lived.”

Although some might disagree with such high praise, Chairman Greenspan deserves much credit for navigating some troubled economic waters — two mild recessions, the 1987 stock market crash, oil price shocks, the Asian currency flu, and the economic fallout of the 9/11 attacks — over his almost two-decade reign at the Fed. When he steps down early next year, Alan Greenspan will leave behind a durable, non-inflationary economic expansion.

What are the essential qualifications for Mr. Greenspan’s heir? Obviously, having expertise in macroeconomic policy, experience working and communicating with the global financial markets, and the ability to understand the information produced by the markets are essential.

More importantly, the Fed chairman must share the economic philosophy of the president — Republican or Democrat — who appoints him. When the Fed chairman testifies before Congress, 95% of the questions are on tax, fiscal and trade policy, not on the conduct of monetary policy per se. And because the Fed chairman has credibility on issues affecting the U.S. economy, his public statements can significantly influence the legislative debates over tax and budget matters in the Congress.

President George W. Bush should choose someone who not only shares his low-tax, free-market economic philosophy, but who agrees with the fundamental premise that supply-side economic growth does not cause inflation. As Milton Friedman postulated, inflation is caused by too much money chasing too few goods. In fact, rapid economic growth and output dampens inflationary expectations because more goods are chasing the same quantity of money.

And the best way for the Fed to determine whether there is too much or too little liquidity is to use inflation-sensitive, forward-looking market price indicators as a policy guide — what supply-siders call a price rule. Real-time market-based indicators such as the dollar exchange rate, commodity prices, and long-term interest rates — viewed in conjunction with one another — provide the most reliable signals about both the demand and supply of money. In the late 1980s and early 1990s, former Fed Vice-Chairmen Manuel H. Johnson and Wayne Angell were successful in encouraging the Greenspan Fed to focus on these inflation-sensitive indicators, ushering in the era of low inflation.

The next Fed chairman should avoid conducting monetary policy on the basis of instinct and feel rather than tangible, market-based signals. One criticism of Mr. Greenspan has been of his reliance from time to time on the “Greenspan standard,” an ad hoc, fine-tuning approach to monetary policy, which generally worked but cannot be replicated. On the other hand, the chairman must maintain some discretion and not rigidly adhere to macroeconomic models.

Who, then, has all of these essential qualities?

In my opinion, the best candidate is Manuel Johnson, a Reaganite tax-cutter and a proponent of the price rule. Dallas Fed President Robert McTeer, and former Bush economic advisor (and former Fed board member) Lawrence Lindsey have strong financial market experience and appreciate the importance of market price indicators in guiding policy decisions. Other superb free-market conservative economists who have many of the right qualities for the position include former Council of Economic Advisors Chairman Glenn Hubbard, current CEA Chairman Benjamin Bernanke, and former Senator Phil Gramm.

In the event that the Democrats regain the White House in 2008 (or 2012), a believer in free markets at the helm of the Fed for the next decade would provide an essential counterbalancing force against a lurch toward more government control of the economy. There is also an important political dimension to the choice of the next Fed chairman. By selecting an individual who will continue the current noninflationary expansion of the economy, the choice is, in essence, about President Bush’s economic legacy to the American people.

Mr. Conda, former assistant for domestic policy to Vice President Dick Cheney, is a senior fellow at FreedomWorks and a principal of Navigators LLC, a Washington-based consulting firm.

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