President Bush has
famously changed the composition of the Supreme Court with the
appointments of judges John Roberts and Samuel Alito, two big
conservative victories. But equally interesting is the president’s
overhaul of the Federal Reserve, which becomes the “Bernanke
Fed” with the retirement of Alan Greenspan this week. While
the Supreme Court has loudly gone right, our central bank is quietly
doing the same.
Late last week, the
president nominated Kevin Warsh and Randall Kroszner to fill two
vacancies on the Fed’s Board of Governors. Warsh is a current
White House economic advisor and a former Morgan Stanley investment
banker. Kroszner is the University of Chicago economics professor
who served on the Council of Economic Advisors during Bush’s
first term. The two nominees are tried and true free-market, low-tax,
deregulation-inclined policy advisors.
Prior to this, Bush
appointed two other Fed board members: Susan Bies, a former Tennessee
banker, and Mark Olson, who was with Ernst & Young and U.S.
Bancorp and was a legislative assistant to former Republican congressman
Bill Frenzel of Minnesota. All told, Bush has appointed six of
the seven current board members, an incredible turnover. While
they are not all supply-siders (Donald Kohn is more of a traditional
Washington Keynesian while Roger Ferguson is a Clinton-era carryover),
I would say this Fed board is at the margin much more supply-side
-- in terms of an allegiance to low taxes and regulations -- than
prior boards.
Adding together
the shifts to the Supreme Court and the Federal Reserve, it could
be argued that the policy organs that hold sway over the judicial
and monetary influences on business are more free-market, Reaganesque,
and pro-growth than anything we’ve seen in a long time.
Ironically,
a page-one story by Greg Ip in the Wall Street Journal
carried the headline, “New Chairman Will Take Over an Increasingly
Democratic Fed.” But Ip’s piece discussed a more open
and transparent central bank. And monetary transparency is a good
thing. But the real story is that the Fed is increasingly Republican
in terms of inflation-fighting, taxes, and regulations. With little
fanfare, we have a Bush Fed that will continue to be independent
in its operations, but fortunately biased towards free-enterprise
growth in its underlying philosophy. The same, in theory, could
be true of the Supreme Court.
Clearly,
Alan Greenspan departs the Fed with a strong economic legacy intact.
During his 18-year tenure, yearly real economic growth averaged
3.1 percent, inflation 2.5 percent, and unemployment 5.5 percent.
Inflation is the cruelest tax of all on an economy. Paul Volcker
broke the back of inflation in the 1980s, and Greenspan held to
that tradition for almost two decades more.
Under Ben
Bernanke, the central bank is likely to hold to the idea that
price stability is the cornerstone of solid economic growth. Look
for Bernanke to keep the Fed focused on forward-looking commodity
and bond-market indicators in order to contain money-supply growth
and steady monetary value in pursuit of domestic price stability.
With a firm
monetary foundation, Reagan-like policies of low tax rates and
free-market deregulation will afford American entrepreneurs the
freedom and rewards that are necessary to maximize economic growth.
Without question, the private sector must be liberated so it can
effectively function as the engine of prosperity. This capitalist
model was restored and rejuvenated by President Reagan 25 years
ago and its success has been copied worldwide. Through numerous
presidential and congressional cycles, the Reagan model -- if
anything -- has been strengthened. Bush’s appointments to
the Fed and the Supreme Court are the latest testament to this.
Which leads me to say: If Bush is to complete the golden circle
of free-market economic growth, he must follow up his excellent
appointments to the Supreme Court and the Fed by pressing Congress
to make the 2003 tax cuts permanent.
Interestingly,
recent polling by the Pew Research Center shows much stronger
support for the free-enterprise model than doom-and-gloom pessimists
in the mainstream media would have us believe. Fifty percent of
those polled by Pew approve of major cuts in federal income-tax
rates, with only 38 percent disapproving. Regarding the Bush tax
cuts on capital gains and investor stock dividends, 50 percent
believe they should be extended, with only 35 percent opposed.
It would seem that not only do most folks want higher after-tax
rewards and the chance to keep more of what they earn, but that
the tax cuts themselves symbolize a move to a free-enterprise
economy.
In order
to meet this challenge, the earmark-happy Republican Congress
and an overspending White House must change their budgetary stripes
and show the nation they are capable of free-market reforms that
will preserve the Reagan legacy of economic growth and optimism
for the future. Hopefully this will be a key theme in the president’s
State of the Union message.
Lawrence
Kudlow is a former Reagan economic advisor, a syndicated columnist,
and the co-host of CNBC's Kudlow
& Company. Visit
his blog, Kudlow's Money
Politics.
